Sonoco Products Company (NYSE: SON) — Q1 2022 Form 10-Q
Reporting period: Three months ended April 3, 2022; comparative period ended April 4, 2021. Interim financial statements were reviewed, not audited. Amounts below are in U.S. dollars.
Business context and results
Sonoco supplies consumer, industrial, healthcare and protective packaging. The quarter included the January 26 acquisition of Ball Metalpack, now Sonoco Metal Packaging, whose results are included in Consumer Packaging from the acquisition date. Sonoco attributed growth to higher selling prices, the acquisition and approximately 2% volume/mix growth, partly offset by the prior-year-period comparison with its divested U.S. display and packaging business and foreign exchange.
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $1,771 million | $1,353 million |
| Gross profit / margin | $372 million / 21.0% | $278 million / 20.5% |
| Operating profit | $169 million | $120 million |
| Net income attributable to Sonoco | $115 million | $72 million |
| Diluted EPS | $1.17 | $0.71 |
| Operating cash flow | $1 million | $139 million |
- Sales rose 30.9%; management attributed the $418 million increase principally to selling prices (+$275 million), acquisitions net of divestitures (+$141 million), and volume/mix (+$27 million), offset in part by currency and other effects.
- GAAP operating profit increased 40.5%. Company-defined base operating profit was $261 million versus $152 million; base diluted EPS was $1.85 versus $1.00. These non-GAAP measures exclude specified items and are not directly comparable to GAAP results.
- Segment sales and operating profit: Consumer Packaging $868 million and $174 million; Industrial Paper Packaging $699 million and $73 million; All Other $204 million and $15 million. Segment operating margins were 20.0%, 10.4% and 7.1%, respectively.
Cash flow, debt and liquidity
- Operating cash flow fell to $1 million from $139 million. The company cited a $155 million year-over-year increase in cash used by net working capital, reflecting increased activity, inflation and seasonal inventory build, including at the acquired metal packaging business.
- Investing activities used $1.416 billion, including $1.349 billion for the acquisition; capital spending was $68 million. Financing activities provided $1.393 billion, principally from debt raised to fund the acquisition.
- Cash was $152 million at April 3, 2022. Total debt was $3.171 billion, including $441 million of current debt; long-term debt was $2.730 billion. Debt increased substantially from year-end, primarily due to acquisition financing.
- Sonoco issued $1.2 billion of green bonds and drew a $300 million three-year term loan. It reported $428 million available under its $750 million revolving credit facility after outstanding commercial paper, and said it expected cash, operating flows and borrowing access to cover debt maturities and other needs over the next 12 months. It reported covenant headroom substantially above required minimums.
- Quarterly dividend was $0.45 per share; a $0.49 dividend was declared for payment in June. No shares were repurchased under the public authorization during the quarter.
Material changes, outlook and risks
- Ball Metalpack was acquired for approximately $1.349 billion net of cash acquired and contributed $171 million in sales and $14 million in net income from January 26 through April 3. Purchase accounting included a $25 million inventory step-up charge; acquisition-related costs were also significant. Purchase-price allocations remained preliminary.
- Q1 included $12 million of restructuring and asset impairment charges, including a $5.7 million impairment associated with the decision to exit Russia. Sonoco expected to complete the exit by June 30, 2022, and anticipated a further approximately $3.5 million currency-translation loss upon exit. The company also expected about $2.1 million of additional charges for previously announced restructuring actions.
- Management forecast 2022 capital spending of approximately $325 million, including approximately $260 million for the remainder of the year. The filing does not provide a clear full-year earnings or sales guidance figure.
- Management reported that most business demand was at or above pre-pandemic levels, while noting ongoing localized supply-chain and demand disruptions. Inflation in materials, energy, transportation and labor, and the ability to pass costs through to customers, remain key risks. Industrial Paper Packaging faced volume and productivity pressure; All Other operating profit declined.
- Goodwill in the Plastics–Healthcare reporting unit was identified as at risk of impairment if performance or recovery assumptions weaken. Its estimated fair value exceeded carrying value by 13.3% in the latest annual test. Sonoco also cited uncertainty from the Russia-Ukraine conflict, foreign exchange, interest rates, commodity prices, and possible Turkish hyperinflation accounting effects.
- Environmental contingencies accrued were $7.3 million. Sonoco said it did not believe resolution of disclosed environmental or other ordinary-course legal matters had a reasonable possibility of materially adversely affecting its financial statements.
Important facts for investors to verify
- Whether Ball Metalpack integration, synergies and final purchase-price allocation develop as expected, and how acquisition-related charges affect reported versus base earnings.
- Whether working capital normalizes and operating cash flow recovers after the unusually low Q1 result; monitor inventory, receivables and cash conversion.
- Debt repayment, interest expense, commercial paper refinancing and liquidity against scheduled maturities.
- Realization of pricing sufficient to offset inflation, and the volume, productivity and margin trends across segments.
- Completion and total cost of the Russia exit, including the expected currency-translation loss, and developments in Plastics–Healthcare goodwill impairment risk.
- Progress against the approximately $325 million 2022 capital spending plan and the announced restructuring charges.