Sonoco Products Company — Q3 2023 Form 10-Q
Reporting period: Third quarter and first nine months ended October 1, 2023, compared with periods ended October 2, 2022. Unaudited results; dollar amounts below are in millions unless noted.
Business context
Sonoco is a global packaging company reporting Consumer Packaging, Industrial Paper Packaging, and All Other. During the quarter, it acquired WestRock’s remaining 65% interest in RTS Packaging and the Chattanooga paper mill, adding both to Industrial Paper Packaging. The company also continued portfolio simplification through business and asset sales.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $1,710 | $1,890 | $5,145 | $5,575 |
| Gross profit | $364 | $367 | $1,096 | $1,126 |
| Gross margin | 21.3% | 19.4% | 21.3% | 20.2% |
| Operating profit | $163 | $182 | $580 | $548 |
| Net income attributable to Sonoco | $131 | $122 | $394 | $369 |
| Diluted EPS | $1.32 | $1.24 | $3.98 | $3.74 |
| Adjusted diluted EPS | $1.46 | $1.60 | $4.24 | $5.21 |
| Adjusted EBITDA | $280 | $288 | $832 | $917 |
| Adjusted EBITDA margin | 16.4% | 15.2% | 16.2% | 16.4% |
Q3 sales fell 9.5%, primarily on lower volumes and mix, lower selling prices, and customer destocking. GAAP net income rose partly because of a $44.0 million gain from remeasuring Sonoco’s previous RTS Packaging stake; adjusted earnings declined. Q3 adjusted operating profit was $213 million versus $225 million. For the first nine months, GAAP operating profit included $78.8 million of gains on business and asset sales and $36.9 million of other income, including the RTS remeasurement gain net of a Chattanooga Mill contract settlement loss.
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $617 million, up from $322 million. Working capital provided $67 million of cash, compared with using $317 million in the prior-year period, largely reflecting inventory reductions.
- Investing activities used $460 million, including $313 million for acquisitions and $255 million of capital expenditures. Financing activities used $129 million. Cash increased by $31 million to $258 million.
- Total debt was $3.255 billion at October 1, 2023, versus $3.222 billion at year-end 2022. Long-term debt, net of current portion, was $3.212 billion. Net interest expense increased to $94.7 million for the nine-month period from $67.8 million.
- Sonoco had no commercial paper outstanding and reported all $900 million of revolving-credit capacity available; scheduled debt maturities over the next 12 months were approximately $42 million. Management said cash, expected cash flows, and available credit provided ample liquidity. Debt covenants were reported substantially above minimum requirements.
- The company drew $870 million under a new term loan facility, with borrowings due in August 2028, and increased its revolving-credit commitments to $900 million. The term loan bears a floating rate; its current margin plus SOFR adjustment was 1.90%.
Material changes and management commentary
- Q3 sales declined across Consumer Packaging (8.9%), Industrial Paper Packaging (12.3%), and All Other (3.1%). Consumer Packaging operating profit fell 12.4%; Industrial Paper Packaging fell 8.4%; All Other rose 65.9%.
- Management cited volume and mix declines, customer destocking, and price/cost pressure, partly offset by strategic pricing and productivity. Industrial Paper Packaging margins improved with contract resets and operational efficiencies. Consumer Packaging faced unfavorable price/cost, including metal-price overlap.
- Nine-month adjusted EPS declined 18.6%, with lower volumes and $26.9 million higher net interest expense among the principal factors. Strong productivity and acquisitions partly offset these pressures.
- The company sold its timberland properties for $70.8 million of proceeds and recorded a $60.9 million gain. It also sold its S3 and U.S. BulkSak businesses, recording gains of $11.1 million and $6.8 million, respectively. The Mexico BulkSak sale had not closed by quarter-end.
- Restructuring and asset-impairment charges were $53.0 million for the first nine months, including actions involving plant closures and approximately 300 eliminated positions. Management expected about $2.3 million of additional charges for previously announced actions, most by year-end, and said further restructuring actions are likely.
Outlook, risks and contingencies
- Net capital spending for 2023 was expected to be approximately $250 million. The filing provides no clear full-year revenue or earnings guidance value.
- Management identified risks including demand and customer inventory levels, inflation and raw-material, energy and labor costs, ability to pass through cost increases, competitive conditions, integration of acquisitions, floating interest rates, foreign exchange and commodity movements, and geopolitical and economic uncertainty.
- No goodwill impairment was recorded in the third-quarter annual test. The Plastics-Medical reporting unit was identified as at risk of near-term impairment if performance or the long-term outlook weakens; its estimated fair value exceeded carrying value by 29.9% using a 12% discount rate.
- Environmental contingencies accrued were $7.0 million. The company said it could not estimate potential exposure beyond recorded amounts for certain matters; other ordinary-course legal proceedings were not considered reasonably likely to have a material adverse effect.
- Other notable exposures include highly inflationary Turkey, which generated a $3.4 million pretax charge in the first nine months, and Venezuela, where worsening conditions could lead to impairment or deconsolidation. The company also noted uncertainty in tax estimates and pension costs.
Important facts for investors to verify
- How much of the gap between GAAP and adjusted earnings reflects recurring costs or gains, and whether adjusted measures remain comparable across periods.
- Whether volume, destocking, and Consumer Packaging price/cost pressures improve, and whether productivity offsets persist.
- Debt, floating-rate interest exposure, and post-acquisition cash generation relative to dividend and capital-spending needs.
- Integration and returns from RTS Packaging and the Chattanooga Mill, including completion of provisional purchase-price valuations.
- Performance of Plastics-Medical against the assumptions underlying its goodwill valuation, and developments in environmental, tax, pension, and geopolitical exposures.