Sonoco Products Company — Q3 2016 Form 10-Q
Reporting period: Third quarter ended October 2, 2016; nine-month comparisons are against the period ended September 27, 2015. Financial statements are unaudited and were reviewed, not audited, by the independent accountant. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $1,208.7 million | $1,242.6 million | $3,640.7 million | $3,697.2 million |
| Gross profit | $235.4 million | $229.4 million | $722.6 million | $690.1 million |
| Gross margin | 19.5% | 18.5% | 19.8% | 18.7% |
| Income before interest and taxes | $104.8 million | $79.5 million | $298.8 million | $302.5 million |
| Net income attributable to Sonoco | $65.4 million | $43.9 million | $181.6 million | $194.1 million |
| Diluted EPS attributable to Sonoco | $0.64 | $0.43 | $1.78 | $1.90 |
| Base diluted EPS, non-GAAP | $0.72 | $0.65 | $2.11 | $1.87 |
Q3 base earnings were $73.5 million, compared with $66.7 million a year earlier. Nine-month base earnings were $214.7 million, compared with $191.2 million. The company defines “base” results by excluding specified restructuring, impairment, acquisition, tax and other items; these measures are not GAAP.
- Cash flow: Operating cash flow for the first nine months was $348.7 million, up from $318.1 million. Investing activities used $165.2 million and financing activities used $204.3 million.
- Capital spending: Purchases of property, plant and equipment were $142.1 million year to date. The company expected approximately $60 million of additional capital spending in the remainder of 2016.
- Debt and liquidity: Cash was $159.3 million at October 2, versus $182.4 million at year-end 2015. Total debt was approximately $1.09 billion, versus $1.13 billion at year-end. No commercial paper was outstanding; a $350 million commercial-paper program is supported by a $350 million revolving facility committed through October 2019. Management said covenant measures were substantially above required minimums.
- Shareholder returns: Nine-month cash dividends were $109.8 million. The quarterly dividend was $0.37 per share. The company repurchased 1.24 million shares for $58.9 million and expected to spend a further $41 million on repurchases during 2016.
Changes and segment performance
- Q3 sales declined 2.7%; management attributed the decline primarily to divestitures, lower selling prices, foreign currency effects and the discontinuation of Irapuato, Mexico contract packaging activity. Volume/mix was approximately flat.
- Q3 GAAP net income rose 48.9%, but included lower restructuring and impairment charges than the prior-year quarter. Base diluted EPS increased 10.8%, supported by Consumer Packaging and Paper and Industrial Converted Products, productivity, favorable price/cost and lower pension costs.
- For nine months, sales declined 1.5% and GAAP net income attributable to Sonoco declined 6.4%. Base diluted EPS increased from $1.87 to $2.11. The prior-year comparison included, among other items, Fox River reserve reversals and asset-sale gains.
- Q3 segment operating profit increased 15.3% in Consumer Packaging and 2.9% in Paper and Industrial Converted Products; it declined 4.7% in Display and Packaging and 2.6% in Protective Solutions. Protective Solutions was the only segment with year-over-year Q3 sales growth, up 1.5%.
- Corrugating medium remained under pressure from excess North American supply; management cited a $4.0 million year-over-year reduction in Q3 product-line profitability and a nearly $16 million reduction year to date. Potential responses include schedule changes, cost reductions, partnerships or closure.
Outlook, material events and risks
- No specific consolidated full-year earnings guidance is stated in the supplied filing text. Management anticipated Consumer Packaging margins would decline from current levels over the coming year because of expected price/cost pressure, including contract renegotiations.
- The company agreed to sell its rigid plastics blow molding operations to Amcor for $280 million, with closing expected in early November 2016. The business, classified as held for sale rather than discontinued operations, was expected to reduce annual sales by approximately $205 million; management estimated sales-comparison impacts of about $30 million in Q4 2016 and $175 million in 2017, with no notable effect on segment margin percentages.
- Subsequent to quarter-end, Sonoco completed the $64.5 million cash acquisition of Plastic Packaging Inc. (PPI), expected to contribute approximately $42 million in annual sales to Consumer Packaging. The filing also reports 2016 acquisitions in temperature-assurance packaging and medical packaging.
- Restructuring and asset impairment charges were $41.5 million for the first nine months, including losses on the France paperboard mill and Puerto Rico business sales and a $2.6 million goodwill impairment for the Brazil industrial converting reporting unit. Management expected approximately $2.7 million of further charges for previously announced actions, mostly incurred and paid by year-end; additional restructuring actions were considered likely.
- Goodwill impairment exposure remains sensitive to assumptions. Display and Packaging goodwill was approximately $203 million and Europe Paper and Industrial Converted Products goodwill approximately $92 million; management identified these as the reporting units with greatest future impairment risk. Display and Packaging has significant customer concentration and contract-renewal risk.
- Environmental accruals totaled $24.4 million. A remaining Fox River CERCLA claim seeks approximately $200 million from eight defendants; Sonoco had $3.2 million reserved and could not estimate potential exposure beyond the reserve. Trial was set for 2017. The company stated its maximum additional exposure was limited to U.S. Mills’ equity position, approximately $129 million, while noting uncertainty and possible adverse effects.
- Other identified risks include raw-material, energy and freight costs; labor and customer-contract risks; foreign exchange and economic conditions; pension obligations; and tax uncertainties. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Completion, final proceeds and accounting effects of the $280 million blow molding sale, and the actual sales and margin impact.
- Progress integrating PPI and the other acquisitions, including realized sales and returns versus management estimates.
- Whether productivity and favorable price/cost trends continue, particularly as Consumer Packaging contract terms reset and corrugating medium remains under pressure.
- Cash generation, debt levels, planned capital spending, share repurchases and dividend payments relative to stated plans.
- Developments in the Fox River litigation, environmental reserves and goodwill assumptions for customer-concentrated and European reporting units.