Sonoco Products Company — Q2 2021 Form 10-Q
Reporting period: Quarter ended July 4, 2021; comparisons are with the quarter ended June 28, 2020. Six-month comparisons are with the six months ended June 28, 2020. Financial statements are unaudited and were reviewed, not audited, by the independent accountant.
Business context and reporting period
Sonoco supplies consumer, industrial and protective packaging and related services, operating in more than 300 locations across 34 countries. Effective January 1, 2021, it reorganized reporting into Consumer Packaging, Industrial Paper Packaging and All Other; prior-period segment results were recast. Sonoco completed its exit from display and packaging with the April 2021 U.S. business sale.
Key financial metrics
Amounts below are in millions except per-share data and percentages.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $1,382.8 | $1,245.5 | $2,736.1 | $2,548.8 |
| Gross profit | $262.7 | $248.0 | $540.6 | $514.6 |
| Gross margin | 19.0% | 19.9% | 19.8% | 20.2% |
| Operating profit (GAAP) | $135.3 | $103.7 | $255.6 | $233.8 |
| Net income (loss) attributable to Sonoco | $(334.1) | $55.2 | $(261.8) | $135.7 |
| Diluted earnings (loss) per share | $(3.34) | $0.55 | $(2.60) | $1.34 |
| Operating cash flow | — | $102.0 | $282.0 | |
| Capital expenditures | — | $100.0 | $76.4 |
Management’s non-GAAP “Base” results excluded specified items. Base diluted EPS was $0.84 in Q2, up from $0.79, and $1.74 for the first six months, up from $1.73. Base operating profit was $128.6 million in Q2 versus $126.6 million; for the first six months it was $268.3 million versus $270.5 million.
Q2 sales rose 11.0%, reflecting higher volume/mix, selling prices and favorable currency effects, partly offset by divestitures. Cost inflation outpaced price recovery: gross margin declined to 19.0% from 19.9%. Q2 segment operating results were mixed: Consumer Packaging profit fell 29.2% to $59.8 million (10.0% margin); Industrial Paper Packaging rose 74.2% to $57.9 million (9.5% margin); All Other increased 23.0% to $10.9 million (6.2% margin). These segment measures are non-GAAP.
At July 4, 2021, cash was $263.5 million, total debt was $1,598.1 million, and current debt and short-term notes were $404.0 million. Cash declined from $564.8 million at year-end 2020. The new five-year revolving facility was $750 million; $622 million was available after $128 million of commercial paper. The company reported $404.0 million of scheduled debt maturities over the next 12 months and said liquidity was sufficient. Interest coverage and net worth were substantially above covenant minimums. No debt-to-equity or net-debt ratio is stated in the filing.
Material changes versus the prior comparable period
- GAAP net loss was driven chiefly by a $547.3 million non-cash pension settlement charge, recorded after settling the inactive pension plan. The company also recorded a $20.2 million pretax loss on early debt extinguishment. After-tax non-base charges totaled $418.7 million in Q2 and $438.1 million for the six-month period.
- Despite revenue growth, Q2 Base operating profit increased only 1.6%; six-month Base operating profit declined slightly. Management cited inflation and incomplete price recovery, alongside volume/mix and productivity gains.
- Operating cash flow fell by $180.0 million year over year for the first six months, principally reflecting $133 million of pension funding, higher working-capital use and tax-related cash-flow effects.
- Financing cash use included $159.6 million of share repurchases and $90.4 million of dividends. The company also repaid its maturing €150 million loan and repurchased $63.2 million principal of its 5.75% notes for $82.0 million cash.
Outlook, commentary, risks and unusual items
- Near-term outlook: Management expected Q3 volume to remain fairly steady or improve somewhat versus Q2, but anticipated operating-profit pressure from raw-material and other inflation. It expected Consumer Packaging Q3 profit and margin to be in line with Q2 but below the prior year; Industrial Paper Packaging profit and margin were expected to be somewhat below Q2. No specific consolidated full-year earnings guidance is provided in the supplied filing text.
- Price/cost and demand: Rising recycled-fiber, resin and freight costs could exceed price increases, especially in Consumer Packaging and Industrial Paper Packaging. COVID-19 recovery supported demand, but renewed restrictions, supply-chain disruption, labor availability and shifts in consumer behavior remained risks.
- Capital spending: Full-year 2021 capital spending was expected to be approximately $300 million, including about $85 million for Project Horizon, a paper-machine and materials-handling modernization project. Planned remaining-2021 spending was approximately $200 million.
- Pension and restructuring: The inactive pension plan settlement involved $133 million of Q2 contributions and the $547.3 million non-cash pretax charge. Management expected about $7 million of additional benefit-plan contributions in the remainder of 2021. It expected approximately $2 million of future charges for previously announced restructuring actions and said further restructuring could occur.
- Goodwill and impairment: Goodwill at Conitex, Retail Packaging and Plastics–Healthcare was identified as at risk of near-term impairment if business performance, recovery, pricing or discount-rate assumptions weaken. Their estimated fair values exceeded carrying values by 6.9%, 17.3% and 11.7%, respectively. The filing also reports $4.6 million of other asset impairments for the first six months.
- Other unusual items and contingencies: The U.S. display and packaging sale generated $79.7 million of net proceeds and a $5.5 million pretax loss; final working-capital settlement was expected in Q3 and was not expected to be material. Environmental reserves totaled $7.5 million. The company settled an IRS dispute with a $5.6 million payment and said a review of foreign tax-credit utilization could result in a material benefit, with a conclusion expected within three months.
- Share repurchase: A $350 million authorization was approved in April. The $150 million accelerated repurchase was fully settled in July, after the quarter end; $196.4 million remained under the authorization at July 4.
Most important facts for investors to verify
- How much of the GAAP loss is attributable to the pension settlement and other excluded items, and whether Base performance remains representative of ongoing earnings.
- Whether selling-price increases catch up with raw-material, freight, labor and other inflation, particularly in Consumer Packaging and Industrial Paper Packaging.
- Whether operating cash flow and working capital improve while the company funds planned capital expenditures, dividends, debt maturities and any additional repurchases.
- Whether the three identified goodwill-sensitive reporting units meet management’s recovery and margin assumptions, and whether any impairment is recorded.
- Updates to the foreign tax-credit review, environmental matters, restructuring costs and the final U.S. divestiture settlement.