Sonoco Products Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 29, 2020; comparisons are with the three months ended March 31, 2019. Sonoco provides consumer, industrial and protective packaging and related services. The interim financial statements are unaudited and were reviewed, not audited, by the independent accountant.
Financial performance and position
- Revenue: Net sales were $1.303 billion, down 3.6%. Lower volume/mix ($36 million), selling prices ($25 million) and foreign currency/other ($24 million) outweighed $36 million of acquisition sales.
- Profit and margins: GAAP operating profit rose 11.3% to $130.1 million; operating margin was approximately 10.0%, versus 8.6%. Gross profit was $266.6 million and gross margin increased to 20.5% from 20.0%. Net income attributable to Sonoco rose 9.2% to $80.4 million; diluted EPS was $0.80 versus $0.73. Adjusted “Base” diluted EPS was $0.94 versus $0.85.
- Segment results: Sales declined in Consumer Packaging (0.2%), Display and Packaging (11.8%), Paper and Industrial Converted Products (4.2%) and Protective Solutions (7.7%). Segment operating profit increased in each segment, supported by productivity and cost controls.
- Cash flow: Operating cash flow was $87.7 million, down from $92.3 million. Investing used $34.2 million, including $33.9 million of capital spending; financing used $62.7 million. Cash declined $21.9 million to $123.3 million at quarter-end.
- Debt and liquidity: At March 29, current notes and current debt were $452.8 million and long-term debt was $1.188 billion. Subsequent to quarter-end, Sonoco raised additional term and revolving borrowings and issued $600 million of 3.125% notes due 2030; it repaid the $250 million revolving-facility draw on May 5. Management reported approximately $750 million of cash and $500 million of revolving availability following these actions, and estimated 2021 debt maturities of approximately $871 million. It said liquidity and expected free cash flow should cover maturities and other needs; covenant headroom was described as substantial.
- Other metrics: The quarterly dividend was $0.43 per share, up from $0.41. Comprehensive loss attributable to Sonoco was $11.9 million, largely reflecting a $93.6 million foreign-currency translation loss in other comprehensive income.
Changes, outlook and notable items
- Sales fell despite acquisitions; productivity gains, lower controllable costs and lower incentive expense supported higher reported and segment profits. GAAP results included $12.6 million of restructuring and impairment charges, compared with $10.7 million a year earlier.
- COVID-19 had mixed first-quarter effects: increased demand for some food and household packaging benefited results, while some customers curtailed or suspended operations. Nearly all facilities continued operating as essential businesses, and the company reported no significant supply disruptions to date.
- Management expected the pandemic’s net effect on second-quarter earnings to be negative. It provided second-quarter Base EPS guidance of $0.73–$0.83, versus $0.95 in Q2 2019, and withdrew full-year 2020 Base EPS guidance because the impact could not be reliably estimated. Recycled-fiber costs, potentially exceeding $100 per ton, were expected to pressure paper-based business margins until pricing recovery; consumer-related demand and ThermoSafe were expected to hold up better.
- Management expected 2020 capital spending not to exceed $140 million, reflecting project delays and a planned paper-machine transformation. It also described cost reductions and working-capital management. Restructuring reserves were expected to be largely paid by year-end, with approximately $2.3 million of additional charges anticipated for previously announced actions.
- The terminated inactive pension plan is expected to require about $150 million of additional contributions in 2021 and could produce approximately $590 million of non-cash pretax settlement charges beginning in 2021; amounts depend on market conditions and settlement timing.
- A disputed IRS matter concerns a proposed approximately $89 million incremental 2013 tax liability, excluding interest, and proposed $18 million penalties. Sonoco has not recorded an additional reserve, contests the IRS position and warns an adverse outcome could materially affect future results and financial condition.
- Other watch items include the $8.7 million environmental accrual, possible future credit-loss charges if economic weakness continues, and Display and Packaging goodwill identified as potentially vulnerable to a negative change in outlook or valuation assumptions. Management reported no impairment-triggering events at quarter-end.
Investor verification points
- Track whether second-quarter demand, recycled-fiber costs and pricing recovery align with management’s outlook, and when full-year guidance can be restored.
- Reconcile subsequent financing, cash balances, debt maturities and revolving-facility availability with the stated liquidity position.
- Monitor working capital, operating cash generation and capital-spending reductions against management’s plans.
- Follow the IRS appeal, potential tax exposure and any changes to the company’s unreserved position.
- Verify pension-plan funding, settlement timing and charges, and assess developments affecting Display and Packaging goodwill and environmental liabilities.