Sonoco Products Company — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 29, 2019. Amounts are in millions except per-share data. Interim statements are unaudited and were reviewed, not audited, by the independent accountant.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,353.9 | $1,364.8 | $4,065.4 | $4,035.3 |
| Gross profit | $265.5 | $259.6 | $810.9 | $786.7 |
| Gross margin | 19.6% | 19.0% | 19.9% | 19.5% |
| Operating profit | $138.5 | $101.6 | $385.2 | $343.5 |
| Net income attributable to Sonoco | $92.1 | $72.4 | $246.9 | $235.9 |
| Diluted EPS, GAAP | $0.91 | $0.72 | $2.44 | $2.34 |
| Base diluted EPS, non-GAAP | $0.97 | $0.86 | $2.78 | $2.53 |
Q3 adjusted base net income was $98.1 million versus $87.2 million; nine-month base net income was $280.8 million versus $255.3 million. These company-defined non-GAAP measures exclude specified restructuring, pension, acquisition and other items.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $238.8 million, down from $451.5 million, principally reflecting $200 million of voluntary U.S. pension contributions. Capital expenditure was $147.0 million; investing cash outflow was $253.6 million.
- Cash was $115.9 million at September 29, 2019. Reported current assets were $1,564.0 million and current liabilities $1,307.5 million.
- Current and long-term debt totaled approximately $1,555.0 million, compared with $1,385.2 million at year-end 2018. This includes a $200 million 364-day term loan drawn in May to fund pension contributions. A $350 million commercial-paper program is supported by a $500 million revolving credit facility committed through July 2022. The company reported substantial headroom against debt covenants.
- Cash dividends paid in the first nine months were $127.2 million; the quarterly dividend was $0.43 per share.
Material changes and management commentary
- Q3 sales declined 0.8%; nine-month sales increased 0.7%. For Q3, acquisitions added $74 million, while volume/mix reduced sales by $36 million and foreign currency and other effects by $47 million. Management cited broad volume softness and currency headwinds, partly offset by acquisitions and pricing.
- Higher profit reflected productivity, cost reductions and acquisition contributions, alongside fewer restructuring costs than in Q3 2018. Q3 included a $10 million pretax environmental-reserve release. Year-to-date base earnings growth was partly offset in GAAP results by higher pension costs and restructuring charges.
- Segment results were mixed: Q3 sales fell in Consumer Packaging, Display and Packaging, and Protective Solutions, but rose 6.9% in Paper and Industrial Converted Products. Segment operating profit improved across all four segments. The prior-year comparison for Display and Packaging benefited from exiting a low-margin Atlanta customer contract; the exit reduced comparable nine-month sales by $60.1 million.
- Sonoco acquired Corenso on August 9 for $110.6 million net of acquired cash. Corenso was added to Paper and Industrial Converted Products and is expected to generate approximately $75 million in annual sales.
Outlook, risks and unusual items
- The filing provides no specific full-year earnings or sales guidance. Capital spending for the remainder of 2019 was expected not to exceed $60 million; management expected approximately $5 million of additional 2019 pension and postretirement contributions.
- The company expects $75–$125 million of additional contributions in 2020 to settle the terminated Inactive Pension Plan, subject to plan approvals, participant elections and market conditions. Expected noncash settlement charges are $525–$575 million. Approximately 11,000 participants are affected; previously earned benefits are unchanged.
- The IRS is challenging the company’s treatment of a 2012 intercompany-note distribution for the 2013 tax year. The proposed incremental tax is approximately $89 million, excluding interest, with proposed penalties of $18 million. The matter is in IRS Appeals; Sonoco disputes the position and has recorded no additional reserve. An adverse resolution could materially affect results and financial condition.
- Environmental reserves were reduced by $10 million after favorable developments at the Spartanburg site; total environmental accruals were $8.9 million at quarter-end. Management does not believe the other disclosed environmental and legal matters are reasonably likely to have a material adverse effect.
- Goodwill impairment testing found no impairment, but Display and Packaging goodwill of $203.4 million was identified as at risk if performance or long-term assumptions weaken. Its estimated fair-value cushion was about 35%.
- Other factors include restructuring costs, softer demand, commodity and currency movements, customer concentration, pension funding and investment assumptions, and Brexit-related uncertainty. Management considered a material Brexit impact unlikely at the time of filing.
Important facts for investors to verify
- Progress and cash requirements for the Inactive Pension Plan termination, including regulatory approvals and the eventual settlement charge.
- Status and potential financial exposure of the IRS dispute, including tax, penalties and interest.
- Whether volume, pricing and productivity trends support the improvement in base earnings and segment margins, particularly in Display and Packaging.
- Corenso’s integration, realized contribution and final purchase-price adjustment; and the company’s expected capital spending and year-end cash generation.
- Changes in Display and Packaging’s customer concentration, forecasts and goodwill impairment headroom.