Sonoco Products Company — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended October 1, 2017; comparisons are to the periods ended October 2, 2016. Unaudited interim statements were reviewed, not audited. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,324.6 | $1,208.7 | $3,737.6 | $3,640.7 |
| Gross profit / margin | $250.9 / 18.9% | $235.4 / 19.5% | $707.0 / 18.9% | $722.6 / 19.8% |
| Income before interest and taxes | $120.1 | $104.8 | $280.8 | $298.8 |
| Net income attributable to Sonoco | $72.8 | $65.4 | $169.7 | $181.6 |
| Diluted EPS | $0.72 | $0.64 | $1.68 | $1.78 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $282.1 | $348.7 |
- Q3 sales rose 9.6%; management attributed the increase mainly to higher selling prices, acquisitions net of dispositions, and foreign exchange. Volume/mix was slightly negative. Q3 GAAP diluted EPS increased, while adjusted “base” diluted EPS rose 5.6% to $0.76 from $0.72.
- For the first nine months, sales increased 2.7%, but GAAP diluted EPS fell 5.6%. Adjusted base diluted EPS declined 1.9% to $2.07 from $2.11.
- Gross margin contracted in both comparisons. Management cited pass-through of higher material costs, volume/mix pressure, and, in Q3, currency translation; productivity partly offset the pressure.
- Q3 segment sales / operating profit versus prior year: Consumer Packaging $565.8 / $67.9 (sales +8.9%, profit +6.4%); Display and Packaging $135.6 / $2.0 (+2.7%, profit −61.9%); Paper and Industrial Converted Products $483.4 / $42.2 (+13.8%, profit +26.8%); Protective Solutions $139.9 / $11.3 (+5.7%, profit −10.4%).
Cash, debt and liquidity
- Cash was $247.9 at October 1, 2017, versus $257.2 at year-end 2016. Nine-month operating cash flow was $282.1, down $66.6 year over year; capital expenditures were $144.7.
- Investing cash use was $522.6, including $383.4 for the Packaging Holdings and Clear Lam acquisitions. Financing provided $218.3; cash declined $9.3 over the nine months.
- Total debt was $1,426.1, versus $1,052.7 at December 31, 2016; cash less total debt implies net debt of approximately $1,178.2. The company entered a $750 million credit facility in July, including a $500 million five-year revolver supporting its commercial-paper program and a $250 million five-year term loan. Management reported covenant measures substantially above required minimums.
- Quarterly dividend was $0.39 per share; nine-month dividends paid totaled $114.4.
Outlook, commentary and material risks
- The filing provides no quantified full-year earnings guidance. Management expected approximately $45 million of capital spending and approximately $55 million of additional pension and postretirement contributions for the rest of 2017; the latter included a $50 million voluntary pension contribution made October 25.
- Management said the corrugating-medium operation continued to underperform long-term expectations amid excess North American supply. Potential responses include schedule changes, cost reductions, partnerships, or closure.
- The IRS proposed a 2013 tax adjustment that Sonoco estimates could create about $84 million of incremental tax, excluding interest, plus proposed penalties of $18 million. Sonoco disputes the IRS position, has not recorded an additional reserve, and warns an adverse outcome could materially affect results and financial condition.
- Goodwill testing found no impairment, but Display and Packaging and Paper and Industrial Converted Products–Europe were identified as the units at greatest risk if actual results fall short. Display and Packaging has significant sales concentration in two customers; its estimated fair value exceeded carrying value by about 37%. The Europe unit’s excess was about 29%.
- Other exposures include raw-material, energy, transportation, currency and labor costs; customer retention and volume/mix; acquisition integration; pension funding; environmental remediation; and potential restructuring. Management expects about $1.5 million of additional charges for previously announced restructuring actions, mostly by year-end.
Most important facts for investors to verify
- Whether Q3 price increases and productivity can sustain earnings while gross margins remain below the prior-year level.
- How acquisitions contribute to organic growth, margins, integration costs and the higher debt balance.
- Progress on the underperforming corrugating-medium operation and weaker Display and Packaging and Protective Solutions results.
- Developments in the IRS dispute, including any final notice, appeal, reserve change, interest or penalty exposure.
- Cash-flow conversion, planned capital spending, pension contributions and compliance with debt covenants.