Sonoco Products Company — Q1 2015 Form 10-Q
Business context and period: Sonoco provides consumer and industrial packaging, protective packaging, and packaging supply-chain services through four reportable segments. This unaudited quarter covers the three months ended March 29, 2015, compared with the three months ended March 30, 2014. Unless noted, dollar amounts below are in millions.
Financial performance
- Revenue: $1,203.3, up 1.5% from $1,185.6. Acquisitions added $72 million and volume/mix added $10 million; lower selling prices reduced sales by $7 million, while foreign-currency translation and other effects reduced them by $58 million.
- Profit: Gross profit was $223.4 versus $212.3; gross margin improved 66 basis points. GAAP operating income was $127.1 versus $86.6, and net income attributable to Sonoco was $87.9 ($0.86 diluted EPS) versus $52.3 ($0.50). Results included substantial one-time benefits; management’s non-GAAP “base” net income was $57.1 ($0.56 diluted EPS), compared with $53.9 ($0.52) a year earlier.
- Cash flow: Operating cash flow was $57.5 versus $45.5. Investing used $10.2, including $41.0 of capital spending and $30.7 of asset-sale proceeds. Financing used $25.2, including $32.3 of dividends. Cash increased $39.6 to $200.8.
- Liquidity and debt: Current assets were $1,425.8 and current liabilities $864.5. Debt was approximately $1.25 billion, including $51.9 of current debt and $1,200.5 of long-term debt; management described outstanding debt as $1.3 billion. No commercial paper was outstanding. The $350 million revolving credit facility is committed through October 2019; the company said it was well above its minimum debt-covenant requirements.
- Other metrics: The GAAP effective tax rate was 23.8%, versus 31.3%, principally reflecting tax benefits related to the sale of metal-ends and closures facilities. The quarterly dividend was $0.32 per share; a $0.35 dividend was declared for payment in June.
Changes and segment results
Consumer Packaging sales rose 11.8% and segment operating profit rose 12.1%, helped by Weidenhammer, pricing and productivity. Protective Solutions sales rose 5.4% and profit rose 83.2%, reflecting volume, price/cost and productivity gains. Display and Packaging sales fell 6.6% and profit fell 27.3%; foreign exchange, higher costs and a customer’s decision to bring contract-packaging work in-house weighed on results. Paper and Industrial Converted Products sales fell 7.3% and profit fell 6.6%, affected by foreign exchange, lower volume and selling prices, and weak recovered-fiber, plastics and metals markets.
Management cited favorable price/cost and productivity, partly offset by higher pension, labor, maintenance and other operating costs. Interest expense increased to $13.8 from $13.3, primarily reflecting higher average debt after the Weidenhammer acquisition. A $63.3 foreign-currency translation loss reduced other comprehensive income and contributed to accumulated other comprehensive loss.
Unusual items, outlook and risks
- Significant nonrecurring benefits: The quarter included a $32.5 pretax reversal of Fox River environmental reserves and a $7.3 pretax gain on the sale of part of the metal-ends and closures business. The sale also produced an approximately $9.2 tax benefit. These and other adjustments mean GAAP earnings materially exceeded base earnings.
- Restructuring and capital plans: The company expects approximately $3.1 of further charges for announced restructuring actions, mostly incurred and paid by year-end 2015, and approximately $0.45 for earlier actions. It expected about $210 of additional capital spending during the remainder of 2015 and approximately $19 of additional pension and postretirement contributions.
- Guidance: The supplied filing text does not provide a clear quantified full-year earnings or revenue forecast. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Environmental contingency: Following finalization of the EPA/Wisconsin settlement, $5.0 remained reserved for the Appvion Fox River claim, which asserted approximately $200 million against eight defendants. Sonoco estimated the defendants’ maximum potential liability at approximately $16 million or less, but noted the court had not ruled and actual exposure could differ. Trial was scheduled for June 2016. Total environmental accruals were $26.3, down from $59.3 at year-end.
- Other risks: The filing highlights commodity, energy and freight costs; foreign exchange, including uncertainty over Venezuelan currency conversion; pension assumptions; acquisition integration; restructuring; and legal and environmental exposures. An April 1, 2015 acquisition of a 67% interest in Brazilian flexible-packaging company Graffo for approximately $15.6 million occurred after quarter-end.
Most important facts for investors to verify
- How much of the GAAP earnings increase reflects recurring operations versus the Fox River reserve reversal, asset-sale gain and related tax benefit; compare with base EPS of $0.56.
- Whether segment trends persist, especially the strength in Consumer Packaging and Protective Solutions and weakness in Display and Packaging and Paper and Industrial Converted Products.
- Cash generation and debt levels after planned capital spending, dividends, pension contributions and restructuring payments.
- Developments in the Appvion Fox River claim, the Rockton, Illinois proceedings, and other environmental exposures.
- Integration and purchase accounting for Weidenhammer and the subsequent Graffo acquisition, including effects of currency movements.
The interim financial statements were reviewed, not audited, by the independent accountant. Management reported that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.