Sonoco Products Company — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report; selected unaudited fourth-quarter figures are included below. Sonoco manufactures consumer, industrial and protective packaging and provides packaging services through 330 locations in 34 countries.
Financial performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $4.964 billion | $5.017 billion | Down 1.0% |
| Gross profit margin | 18.7% | 18.1% | Up 0.6 percentage points |
| Income before interest and taxes (GAAP) | $382.5 million | $378.1 million | Up 1.2% |
| Net income attributable to Sonoco | $250.1 million | $225.9 million | Up 10.7% |
| Diluted EPS (GAAP) | $2.44 | $2.19 | Up 11.4% |
| Base diluted EPS (non-GAAP) | $2.51 | $2.41 | Up 3.2% |
| Cash from operations | $452.9 million | $417.9 million | Up $35.0 million |
| Capital spending | $192.3 million | $177.1 million | Up $15.2 million |
Reported sales fell despite approximately 1% volume growth. The sales bridge included +$53 million from volume/mix, −$49 million from selling price, +$228 million from acquisitions/divestitures and −$285 million from currency exchange and other effects. Management estimated the strong U.S. dollar reduced reported earnings by 4%–5%. Base measures are non-GAAP and exclude specified items; they should be considered alongside GAAP results.
Fourth quarter, unaudited: Net sales were $1.267 billion, gross profit was $239.3 million, net income attributable to Sonoco was $56.1 million, and diluted EPS was $0.55. Restructuring and asset impairment charges were $21.0 million.
Segments and material changes
- Consumer Packaging: Sales rose 8.1% to $2.123 billion and segment operating profit increased 15.5% to $231.6 million, supported by Weidenhammer and Graffo acquisitions, volume, productivity and favorable price/cost.
- Display and Packaging: Sales declined 9.1% to $606.1 million; operating profit was nearly flat at $10.9 million. A customer will take over the Irapuato, Mexico packaging-center operation, reducing annualized sales by about $90 million.
- Paper and Industrial Converted Products: Sales fell 9.1% to $1.730 billion and operating profit declined 23.5% to $124.1 million, reflecting lower volume, currency translation, and margin pressure in paper and recycling businesses.
- Protective Solutions: Sales increased 4.3% to $505.9 million and operating profit rose 35.3% to $46.0 million, helped by volume growth and favorable price/cost.
Weidenhammer, acquired in late 2014, contributed to Consumer Packaging growth; the company reported progress on integration and expected further synergies. Two 2015 acquisitions cost $21.2 million in aggregate.
Cash, debt and liquidity
- Cash and cash equivalents were $182.4 million at year-end, versus $161.2 million a year earlier. Total debt was $1.135 billion, down from $1.253 billion; long-term debt was $1.022 billion.
- Current ratio was 1.42, down from 1.50; net working capital was $384.9 million, down from $461.6 million. The $350 million revolving credit facility was committed through October 2019; no commercial paper was outstanding at year-end.
- A $75.3 million 5.625% debenture was due in June 2016. The company expected to repay it using available cash and short-term borrowings. Debt due in 2016 totaled $113.1 million.
- Operating cash flow increased, partly due to higher net income and lower pension contributions. Investing cash use decreased substantially from 2014, when the Weidenhammer acquisition drove spending. Financing activities used $256.4 million, including debt repayment and dividends.
- Dividends were $1.37 per share for 2015, up from $1.27. In February 2016, the board authorized restoration of the share-repurchase program to 5 million shares; management announced plans to repurchase up to $100 million in 2016.
Outlook, risks and unusual items
- Management expected 2016 operating cash flow of approximately $480 million and capital spending of approximately $200 million. It forecast about 2% overall volume growth before the Irapuato contract loss, gross-profit and base-EBIT margin improvement, and a base effective tax rate of approximately 31.2%. No specific 2016 EPS forecast is provided in the filing text.
- Management anticipated roughly $11 million lower pension and postretirement expense in 2016 and approximately $47 million in benefit-plan contributions. It described the global economic outlook as guarded and cited currency and commodity-price volatility as potential earnings pressures.
- 2015 restructuring and asset impairment charges were $50.6 million, versus $22.8 million in 2014. Approximately $3.3 million of additional costs were expected for announced actions. A proposed sale of a French paper mill could result in an estimated $15 million loss; if not sold, closure costs were expected to exceed $15 million.
- Finalization of a Fox River environmental settlement led to a $32.5 million reserve reversal and gain in 2015. A separate Appvion claim asserts approximately $200 million against eight defendants; Sonoco had $3.9 million reserved for its subsidiary’s remaining claim, with trial scheduled for June 2016. Sonoco said its additional exposure was limited to the subsidiary’s equity, approximately $125 million, but the outcome remained uncertain.
- Environmental-contingency accruals totaled $25.2 million at year-end, down from $59.3 million. The company warned that actual remediation costs could exceed reserves. It also reported a $12.1 million 2015 charge from Venezuela currency remeasurement and asset impairments after changing to the SIMADI exchange rate.
- Control and reporting concern: Management and the auditor concluded internal control over financial reporting was ineffective due to an unremediated material weakness in business-performance reviews of balance-sheet activity at certain domestic locations. The weakness had not caused a material misstatement of the reported financial statements; remediation testing was expected to continue through 2016. The filing also discusses an investigation of financial misstatements at the Irapuato operation and related prior-period restatement.
- Other key risks include raw-material and energy costs, the ability to pass costs through, customer concentration and contract renewals, pension funding and investment performance, foreign exchange, acquisition integration, competition, environmental liabilities, and potential goodwill impairment. Display and Packaging goodwill had an estimated fair-value cushion of about 11% after the Irapuato contract loss; management said impairment likelihood had increased.
Important facts for investors to verify
- Review remediation progress and testing of the material weakness in balance-sheet review controls, including any subsequent filings or restatements.
- Track the Irapuato transition, replacement business and effects on Display and Packaging results and goodwill valuation.
- Monitor the Appvion Fox River litigation, related reserves and the potential range of environmental liabilities.
- Assess whether 2016 cash-flow, volume, margin, pension-cost and capital-spending expectations were achieved, including the impact of currency and commodity prices.
- Compare GAAP performance with management’s non-GAAP “base” measures and examine the adjustments, including restructuring, tax items and the Fox River reserve gain.
- Verify debt repayment and refinancing, pension-plan funding, and execution of the announced share-repurchase authorization and dividend policy.