Sonoco Products Company — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing; fourth-quarter figures are noted separately where available. Sonoco manufactures consumer, industrial and protective packaging and provides packaging services, operating 298 locations in 33 countries across four reportable segments.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $5.037 billion | $4.783 billion |
| Gross profit / gross margin | $949.4 million / 18.8% | $937.4 million / 19.6% |
| GAAP EBIT / EBIT margin | $367.3 million / 7.3% | $492.8 million / 10.3% |
| Net income attributable to Sonoco | $175.3 million; diluted EPS $1.74 | $286.4 million; diluted EPS $2.81 |
| Base earnings (non-GAAP) | $281.8 million; diluted EPS $2.79 | $277.2 million; diluted EPS $2.72 |
| Cash from operations | $349.4 million | $398.7 million |
| Capital spending | $188.9 million | $186.7 million |
| Total debt / cash | $1.447 billion / $254.9 million | $1.053 billion / $257.2 million |
| Current ratio | 1.6 | 1.7 |
| Dividends per share | $1.54 | $1.46 |
Sales rose 5.3%, driven chiefly by higher selling prices ($182 million), acquisitions net of dispositions ($69 million) and foreign exchange ($22 million); volume/mix reduced sales by $19 million. Higher raw-material costs, unfavorable sales mix and labor and other cost inflation pushed cost of sales up faster than revenue, reducing gross margin. Management reported a positive overall price/cost relationship and productivity gains, but these did not prevent the margin decline.
Segment operating profit improved in Paper and Industrial Converted Products to $154.5 million (+19.1%) and Consumer Packaging to $250.9 million (+4.1%). Display and Packaging fell to $2.5 million (from $14.8 million), principally amid Atlanta facility startup inefficiencies. Protective Solutions declined to $42.1 million (from $51.5 million), largely on lower automotive-component volumes and related productivity losses.
Fourth-quarter 2017 net sales were $1.299 billion, gross profit $242.4 million, restructuring/asset impairment charges $25.9 million, and net income attributable to Sonoco $5.7 million (diluted EPS $0.06). Fourth-quarter earnings included the $51.3 million net tax charge related to U.S. tax reform.
Material changes, liquidity and capital allocation
- GAAP earnings declined 38.8%, while base earnings increased 1.6%. The comparison was affected by $20.2 million of after-tax pension settlement charges and a $51.3 million net Tax Act charge in 2017, versus a $49.3 million after-tax gain on the 2016 sale of rigid plastics blow molding operations.
- Operating cash flow fell $49.3 million, principally reflecting a voluntary $50 million U.S. pension contribution and timing of payments and receivable collections; lower tax payments partly offset the decline.
- Two 2017 acquisitions—Packaging Holdings and Clear Lam—cost $383.8 million net of cash acquired and were funded partly with borrowings. Management expected them to add approximately $330 million in annual Consumer Packaging sales combined.
- Total debt increased $394.6 million year over year, mainly due to acquisition financing and $124 million of commercial paper outstanding at year-end. Sonoco had a $500 million revolving facility supporting a $350 million commercial-paper program, plus approximately $203 million of unused short-term lines. Management reported substantial covenant headroom.
- Cash dividends paid totaled $153.1 million. No shares were repurchased under the public authorization in 2017; remaining authorization was approximately 3.0 million shares.
Outlook, commentary and risks
For 2018, management projected volume growth of approximately 2%, modest improvement in gross profit and base EBIT margins, and operating cash flow of $560–$580 million. It expected positive price/cost overall, with manufacturing productivity more than offsetting projected labor and other cost increases; volatile raw-material prices could make recovery through pricing difficult. Planned capital spending was approximately $220 million, pension and postretirement contributions approximately $38.5 million, and the base effective tax rate 26%–27%. Management also expected about $3 million higher net interest expense absent further acquisition borrowing. Sonoco’s longer-term stated aspirations included base EBITDA margins of 16% and return on net assets employed of at least 11% over three to four years.
- Tax matters: The Tax Act generated a provisional $76.9 million transition-tax charge, partly offset by a $25.7 million deferred-tax benefit. The company said its tax accounting remained subject to further analysis. Separately, the IRS proposed an approximately $89 million incremental tax liability, excluding interest and penalties, over a prior intercompany-note distribution; Sonoco disputed the position, filed a protest in January 2018 and had not recorded an additional reserve.
- Operating and impairment risks: Atlanta pack-center performance was below expectations. Management warned continued underperformance could lead to goodwill or long-lived-asset impairment. Display and Packaging and Paper and Industrial Converted Products—Europe were identified as the reporting units most exposed to significant future goodwill impairment if results fell short.
- Other exposures: Raw-material, energy, labor, freight, currency and interest-rate volatility; customer concentration and competition; international and regulatory risks; acquisition integration; and pension funding and actuarial assumptions. Environmental reserves were $20.3 million at year-end. The Fox River settlement was finalized and paid in 2017 from existing reserves.
- Restructuring: 2017 charges were $38.4 million, including an $17.8 million impairment of a Hartsville power facility scheduled for closure. Further costs of approximately $3.6 million were expected for previously announced actions, mostly by the end of 2018.
- Controls and audit: Management and the auditor concluded internal control over financial reporting was effective as of year-end. The two 2017 acquisitions, together representing about 4.1% of assets and 4.3% of revenue, were excluded from the internal-control assessment and audit.
Most important facts for investors to verify
- Whether acquired businesses deliver expected growth and synergies, and whether Atlanta pack-center operations improve enough to avoid impairment.
- Whether margins and operating cash flow meet 2018 expectations amid raw-material volatility and acquisition-related debt and interest costs.
- The final tax effects of the Tax Act and the outcome and potential financial impact of the IRS dispute, including interest and penalties.
- Changes in pension funding needs and expense, and whether environmental or restructuring costs exceed recorded reserves and estimates.
- How management’s non-GAAP base measures reconcile to GAAP results; base earnings exclude significant items and are not a substitute for GAAP measures.