Sonoco Products Company (NYSE: SON) — 2020 Form 10-K
Business context and reporting period. This is an annual report for the fiscal year ended December 31, 2020, not a standalone fourth-quarter filing. Sonoco manufactures consumer, industrial and protective packaging and provides packaging services, operating approximately 320 locations in 34 countries. Results are reported in four segments: Consumer Packaging; Paper and Industrial Converted Products; Protective Solutions; and Display and Packaging. The COVID-19 pandemic increased demand for some food and household packaging while weakening industrial-related demand.
Financial results and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $5.237 billion | $5.374 billion |
| Gross profit / gross margin | $1.046 billion / 20.0% | $1.058 billion / 19.7% |
| GAAP operating profit / margin | $357.8 million / 6.8% | $467.1 million / 8.7% |
| Net income attributable to Sonoco | $207.5 million; diluted EPS $2.05 | $291.8 million; diluted EPS $2.88 |
| Base earnings attributable to Sonoco (non-GAAP) | $345.5 million; diluted EPS $3.41 | $357.2 million; diluted EPS $3.53 |
| Cash from operations | $705.6 million | $425.9 million |
| Capital expenditures | $194.1 million | $195.9 million |
| Cash and total debt at year-end | $564.8 million / $1.700 billion | $145.3 million / $1.681 billion |
| Current ratio / debt to total capital | 1.2 / 47.1% | 1.1 / 48.1% |
| Annual dividends per share | $1.72 | $1.70 |
Operating cash flow rose largely because the $200 million voluntary U.S. pension contribution made in 2019 did not recur, alongside working-capital and tax-timing effects. Year-end liquidity also included $500 million of committed revolving-credit availability. Debt due in 2021 was approximately $455.8 million; management expected to fund maturities with cash and additional borrowing.
Material changes versus 2019
- Sales declined 2.5%; volume/mix decreased about 2.4%, selling prices fell, and foreign currency translation reduced reported sales. Acquisitions net of divestitures added $110 million.
- GAAP net income attributable to Sonoco fell 28.9%. The decline reflected weaker operating profit, higher net interest expense, increased restructuring and impairment charges, and a loss on the sale of the European contract packaging business.
- Base operating profit was essentially flat at $527.0 million, while base operating margin increased to 10.1% from 9.8%, supported by productivity and improved gross margin.
- Consumer Packaging segment operating profit increased 27.2% to $290.5 million, benefiting from food-packaging demand and acquisitions. Paper and Industrial Converted Products operating profit fell 29.6% to $154.3 million amid lower volumes and negative price/cost. Display and Packaging and Protective Solutions operating profit increased modestly despite lower sales.
- Restructuring and asset impairment charges rose to $145.6 million from $59.9 million, including $77.9 million of other asset impairments, primarily in perimeter-of-the-store thermoforming operations.
- Sonoco acquired Can Packaging and a small tube-and-core operation for net cash cost of $49.4 million, and sold its European contract packaging business. The sale generated $105.9 million in net cash proceeds at closing and a $14.5 million pretax loss.
Outlook, commentary and risks
- For 2021, management projected sales of approximately $5.2 billion, organic volume growth of about 2%, gross margin improvement of approximately 0.8% as stated in the filing, base operating margin of about 10.1%, and operating cash flow of approximately $585 million. Management expected net interest expense to decrease about $12 million and the base tax rate to be approximately 25.4%.
- Management expected higher recycled-fiber, resin and freight costs to create negative price/cost pressure. Productivity gains were expected to offset a significant portion of these and other cost increases. Demand was expected to recover unevenly, with industrial markets weak but improving and consumer packaging demand and mix evolving as pandemic effects receded.
- The 2021 comparison was expected to include a full year of Can Packaging but exclude the sold European contract packaging business; management estimated a combined year-over-year revenue impact of negative $240 million and diluted EPS impact of negative $0.14.
- Termination of the Inactive Plan was expected to result in approximately $560 million of noncash pretax pension settlement charges in 2021 and an approximately $150 million cash contribution. Management anticipated a GAAP net loss for 2021 because of the settlement charges; it did not provide projected GAAP earnings.
- Project Horizon, a planned $114 million conversion of the Hartsville corrugated-medium machine to uncoated recycled paperboard, was expected to be completed in 2022 and generate approximately $30 million in annualized savings. Capital spending was projected at approximately $300 million in 2021.
- Other material risks include COVID-19 effects on demand and supply chains; raw-material, energy, freight and labor costs; customer concentration and competitive pricing; foreign-exchange and trade-policy exposure; leverage and refinancing; and environmental and pension liabilities. Environmental reserves were $8.1 million. Display and Packaging and Conitex goodwill were identified as potentially at risk if performance or outlook deteriorates.
- Sonoco planned to report in two segments beginning in 2021—Consumer Packaging and Industrial Paper Packaging—with remaining businesses in “All Other.” The auditor gave an unmodified opinion on the financial statements and internal controls; management also concluded controls were effective, excluding acquired Can Packaging from its assessment.
Important facts for investors to verify
- Review the reconciliation of GAAP earnings to “base” non-GAAP earnings and the recurring nature of restructuring and pension adjustments.
- Track whether 2021 volume, price/cost, margin and cash-flow guidance is achieved, particularly as recycled-fiber and freight costs change.
- Confirm the timing and cash cost of the Inactive Plan settlement, the estimated $560 million noncash charge, and the $150 million contribution.
- Monitor 2021 debt maturities, refinancing, liquidity, and the distinction between year-end cash and cash available for operations.
- Assess goodwill headroom and customer concentration in Display and Packaging and Conitex, and follow the execution and expected savings of Project Horizon.