Sonoco Products Company — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparative period ended April 2, 2023. Unaudited results. Sonoco manufactures packaging products globally. Effective January 1, 2024, it moved consumer thermoformed businesses into Consumer Packaging and began accounting for recycling operations as a procurement function within Industrial Paper Packaging; prior-year segment results were recast.
Key financial results
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net sales | $1,637.5 million | $1,729.8 million |
| Gross profit / gross margin | $337.6 million / 20.6% | $374.4 million / 21.6% |
| Operating profit | $112.5 million | $229.6 million |
| Net income attributable to Sonoco | $65.2 million | $148.3 million |
| Diluted EPS | $0.66 | $1.50 |
| Adjusted diluted EPS (non-GAAP) | $1.12 | $1.40 |
| Adjusted EBITDA / margin (non-GAAP) | $244.8 million / 14.9% | $276.3 million / 16.0% |
| Cash provided by operating activities | $166.2 million | $98.0 million |
| Capital expenditures | $86.5 million | $83.4 million |
Net sales fell 5.3%, primarily from $57.1 million of lower selling prices and the change in accounting for recycling operations; volumes were flat overall, as lower volumes were offset by acquisitions. Gross profit declined $36.9 million; management cited lower volume and pricing, partly offset by $51.5 million of productivity improvement. Adjusted operating profit was $176.0 million, down 17.5% from $213.4 million.
Reported GAAP profit comparisons are affected by $72.0 million of prior-year gains from the sale of timberland and the S3 business. Excluding specified items, adjusted earnings attributable to Sonoco were $111.5 million versus $137.6 million. These non-GAAP measures exclude items including restructuring, acquisition-related costs, acquisition-intangible amortization and certain other charges; they are not substitutes for GAAP results.
Segments and material changes
- Consumer Packaging: Sales $910.6 million, down 5.0%; segment operating profit $93.0 million, down 3.6%; adjusted EBITDA $128.5 million, down 0.5%. Lower volumes and unfavorable price/cost were partly offset by productivity. Management cited inflation-related softness in some snack and confectionery markets, offset in part by aerosol growth.
- Industrial Paper Packaging: Sales $593.1 million, down 3.7%; segment operating profit $65.8 million, down 30.2%; adjusted EBITDA $95.5 million, down 21.1%. Lower index-related pricing and weakness in global converted products weighed on results. Unfavorable contract resets and price/cost pressure were partly offset by productivity and the RTS Packaging and Chattanooga Mill acquisitions.
- All Other: Sales $133.9 million, down 14.1%; operating profit $17.1 million, down 24.1%, primarily on lower volumes and negative price/cost, partly offset by productivity.
Management reported that net interest expense decreased to $27.7 million from $32.7 million, mainly due to lower average debt and interest income from cross-currency swaps. The GAAP effective tax rate was 21.3%, versus 24.3%; management attributed the decrease primarily to a deferred tax adjustment.
Cash, debt and liquidity
- Operating cash flow was $166.2 million, up $68.2 million year over year. Management attributed the improvement mainly to working-capital movements, particularly supplier payments; working capital provided $0.8 million of cash versus using $91.5 million in the prior-year quarter.
- Investing activities used $81.7 million, including $86.5 million of capital expenditures. Financing activities used $62.7 million, including $50.1 million of dividends and $9.1 million of share repurchases to satisfy employee tax withholding obligations.
- Cash and cash equivalents were $172.2 million at March 31, 2024. Total notes payable and debt, including current maturities, were approximately $3.08 billion. Current debt maturities were $453.7 million; approximately $400 million of 1.80% notes is due February 2025.
- Sonoco had no commercial paper outstanding and had the full $900 million revolving credit facility available, committed through June 2026. Management said cash, expected cash flows and borrowing capacity should cover debt maturities and other needs over the next twelve months and beyond. Debt covenants require minimum interest coverage and net worth; the company reported substantial headroom at quarter-end.
- Net capital spending for 2024 is expected to be approximately $350 million. The filing does not provide a clear numeric full-year earnings or sales guidance figure.
Outlook, risks and unusual items
- On April 1, 2024, Sonoco completed the sale of its Protexic Protective Solutions business for $81.8 million cash proceeds. It estimated a gain of approximately $3 million and said most proceeds were used to pay down debt. The sale was not treated as a discontinued operation.
- Restructuring and asset impairment charges were $31.6 million, including severance for approximately 95 employees and costs related to facility closures. The company expects approximately $5.3 million of additional charges for previously announced actions, mostly incurred and paid by year-end 2024; it expects most remaining restructuring reserves to be paid by year-end.
- Management expects approximately $16.3 million of additional pension and postretirement contributions during the rest of 2024.
- Foreign-currency translation losses of $19.3 million were recorded in accumulated other comprehensive loss. Sonoco terminated its $500 million cross-currency swaps on April 15, received $11.6 million, and entered into replacement swaps with a May 2027 maturity.
- Key stated risks include input, energy and transportation costs; customer demand, pricing and contract resets; acquisition integration; foreign exchange and commodity movements; debt and refinancing needs; restructuring execution; and legal, environmental and tax matters. Environmental contingency accruals totaled $7.2 million. Management said it did not believe the cited legal and environmental matters were reasonably likely to have a material adverse effect, while noting that some exposures cannot be reliably estimated.
- Management identified the Plastics-Medical reporting unit’s $64.0 million goodwill balance as potentially at risk of impairment in the near term if performance or its outlook deteriorates. No impairment was recorded in the quarter.
Important facts for investors to verify
- Whether pricing, volume and Industrial Paper Packaging contract resets improve, and whether productivity gains can offset pressure.
- Progress on the 2024 capital-spending plan and the timing and funding of the February 2025 debt maturity; confirm the effect of the Protexic proceeds on debt.
- Actual restructuring charges and cash payments versus management’s estimates, including facility-closure costs.
- How acquisition integration and the revised segment and recycling presentation affect comparability; review the company’s non-GAAP reconciliations alongside GAAP results.
- Whether Plastics-Medical performance supports its goodwill carrying value and whether currency, commodity or environmental exposures change materially.