Sonoco Products Company — Q2 2022 Form 10-Q
Reporting period: Three and six months ended July 3, 2022. Unaudited interim financial statements; amounts below are in U.S. dollars.
Business context and results
Sonoco provides consumer, industrial, healthcare and protective packaging. Results include Sonoco Metal Packaging, acquired January 26, 2022, which contributed $291.3 million of Q2 sales and $462.6 million from acquisition through July 3. The acquisition expanded Consumer Packaging and was funded substantially with new debt.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $1.913 billion | $1.383 billion | $3.684 billion | $2.736 billion |
| Gross profit | $387.0 million | $262.7 million | $758.6 million | $540.6 million |
| Gross margin | 20.2% | 19.0% | 20.6% | 19.8% |
| Operating profit | $197.5 million | $135.3 million | $366.5 million | $255.6 million |
| Net income/(loss) attributable to Sonoco | $131.7 million | $(334.1) million | $247.0 million | $(261.8) million |
| Diluted GAAP EPS | $1.33 | $(3.34) | $2.50 | $(2.60) |
| Operating cash flow | Not provided by quarter in this filing | $184.5 million | $102.0 million |
Management’s non-GAAP base diluted EPS was $1.76 for Q2 and $3.61 for the first half, versus $0.93 and $1.93, respectively, in 2021. Base earnings exclude specified items and are not GAAP measures. The large 2021 GAAP loss primarily reflected a $547.3 million non-cash pension settlement charge; comparisons of GAAP earnings therefore benefit significantly from its nonrecurrence.
Material changes and operating trends
- Q2 sales rose 38.4%; management attributed the increase mainly to selling prices (+$297 million) and acquisitions (+$290 million), partly offset by foreign currency and other effects (−$44 million) and volume/mix (−$13 million). First-half sales increased 34.7%, with price increases and the acquisition as primary drivers.
- Q2 segment operating profit increased across Consumer Packaging ($139.4 million, up 113.5%) and Industrial Paper Packaging ($94.2 million, up 57.5%); All Other was $16.5 million, up 5.9%. Consumer Packaging benefited from Metal Packaging, pricing and productivity. Industrial Paper Packaging benefited from pricing, partly offset by lower volume/mix.
- Inflation raised material and operating costs and increased LIFO inventory reserves. Management said pricing and productivity more than offset cost increases at the consolidated level, improving gross margin.
- Q2 GAAP net interest expense rose to $23.2 million from $14.8 million; first-half expense rose to $42.2 million from $32.5 million, principally due to acquisition-related borrowing.
Cash, debt and liquidity
- At July 3, cash and equivalents were $175.0 million; total debt was $3.127 billion, compared with $1.611 billion at year-end 2021. Long-term debt was $2.728 billion.
- First-half operating cash flow was $184.5 million. Working capital consumed $258.5 million, including inflation-related increases and seasonal inventory build at Metal Packaging.
- Investing activities used $1.480 billion, including $1.334 billion net acquisition spending. First-half net capital expenditures were $144.1 million.
- Financing activities provided $1.303 billion, including proceeds from $1.2 billion of green bonds and a $300 million term loan used primarily to fund Metal Packaging. The term loan matures in January 2025 and bears interest at SOFR plus a rating-based margin.
- Management reported $399 million of scheduled debt maturities over the next 12 months, including $258 million of commercial paper. The $750 million revolving facility had $492 million available after commercial paper, and management said cash, expected cash flows and borrowing capacity would cover maturities and other needs. Debt covenants were reported substantially above required minimums.
- Quarterly dividend was $0.49 per share; the July 2022 declaration maintained that rate. No shares were repurchased under the public authorization in the first half.
Outlook, commentary and risks
- The filing does not provide a clear full-year earnings or sales guidance figure. Management estimated 2022 net capital spending of approximately $325 million, including approximately $180.9 million for the remainder of the year, and pension/postretirement contributions of about $38 million for the full year.
- Management expected the majority of remaining restructuring reserves to be paid by year-end and approximately $2.3 million of additional charges for previously announced actions, mostly incurred and paid by year-end. Further restructuring actions remain possible.
- Sonoco exited two small Russian tube-and-core plants on July 1, 2022, citing the Russia-Ukraine conflict; first-half impairment charges were $9.2 million. The filing also reports a $1.8 million pretax charge from applying highly inflationary accounting to Turkey in Q2.
- Management identified Plastics–Healthcare goodwill as at risk if performance, recovery, price/cost relationships or valuation assumptions weaken. Its $62.4 million goodwill had estimated fair value 13.3% above carrying value in the latest annual test.
- Key risks include raw-material, energy, labor and transportation inflation; ability to pass through costs; supply chain and customer-demand disruptions; acquisition integration and synergy execution; higher debt and interest costs; foreign exchange and geopolitical exposure; and potential impairment or environmental liabilities. Environmental contingencies accrued were $7.2 million; management did not believe the disclosed environmental or other legal matters were reasonably likely to have a material adverse effect.
Important facts for investors to verify
- How much sales and profit growth is attributable to sustainable pricing, volume, productivity and Metal Packaging, versus acquisition-related accounting and other adjustments.
- Whether working-capital investment unwinds and operating cash flow supports debt service, capital spending and dividends.
- Debt maturities, commercial-paper reliance, borrowing costs and remaining liquidity after acquisition financing.
- Progress integrating Metal Packaging, realizing expected benefits, and finalizing its preliminary purchase-price allocation.
- Developments in Plastics–Healthcare performance and goodwill valuation, inflation and cost pass-through, and remaining Russia-related or other restructuring charges.