Sonoco Products Company — Q3 2022 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended October 2, 2022. Sonoco supplies consumer, industrial, healthcare and protective packaging across approximately 300 locations in 31 countries. Its reportable segments are Consumer Packaging and Industrial Paper Packaging; remaining businesses are reported as All Other.
Financial results and key metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1.890 billion | $1.415 billion | $5.575 billion | $4.151 billion |
| Gross profit / margin | $367.1 million / 19.4% | $257.7 million / 18.2% | $1.126 billion / 20.2% | $798.3 million / 19.2% |
| Operating profit | $181.9 million | $126.5 million | $548.5 million | $382.1 million |
| Net income (loss) attributable to Sonoco | $122.2 million | $111.1 million | $369.2 million | $(150.6) million |
| Diluted earnings (loss) per share | $1.24 | $1.12 | $3.74 | $(1.51) |
Q3 sales rose 33.6%; management attributed the increase mainly to pricing and the Metal Packaging acquisition, partly offset by lower volume/mix and currency translation. Q3 GAAP net income increased about 10%. Management’s non-GAAP “base” diluted EPS was $1.60 versus $1.00; base net income was $157.5 million versus $99.8 million. These measures exclude selected costs and other items and are not substitutes for GAAP results.
For the first nine months, GAAP earnings improved from a loss to profit, while base diluted EPS increased to $5.21 from $2.93. The comparison is affected substantially by the 2021 noncash pension settlement charge of $547.3 million before tax. 2022 results also included acquisition-related charges, including $33.2 million of acquisition-date inventory fair-value costs, and higher amortization of acquired intangibles.
Cash flow and liquidity. Nine-month operating cash flow was $322.1 million, compared with $220.1 million. Working capital used $317.0 million of cash, with inflation and seasonal inventory builds contributing. Investing activities used $1.570 billion, primarily reflecting the Metal Packaging acquisition; capital expenditures were $236.8 million. Financing activities provided $1.271 billion. Cash at October 2 was $182.2 million.
Total debt was $3.140 billion, up from $1.611 billion at year-end 2021; long-term debt was $2.723 billion. The increase primarily funded the Metal Packaging acquisition, including $1.2 billion of green bonds and a $300 million term loan. The company reported approximately $417 million of scheduled debt maturities over the following 12 months, including $285 million of commercial paper. It had a $750 million revolving facility, with $465 million available after commercial paper balances. Management said liquidity was ample and debt-covenant measures were substantially above minimum requirements. Q3 net interest expense was $25.6 million, versus $14.2 million.
Material changes and segment performance
- Consumer Packaging: Q3 sales rose 72.1% to $1.031 billion and segment operating profit rose 92.7% to $127.9 million, primarily reflecting Metal Packaging and pricing. Segment margin was 12%, versus 11%.
- Industrial Paper Packaging: Q3 sales rose 4.1% to $661.5 million and segment operating profit rose 47.6% to $81.9 million, reflecting pricing and favorable price/cost, partly offset by weaker volume/mix and foreign exchange. Margin was 12%, versus 9%.
- All Other: Q3 sales rose 9.5% to $198.2 million; segment operating profit rose 19.2% to $15.4 million. For the first nine months, segment operating profit declined 1.8%, with the divested display and packaging business and currency effects weighing on results.
- Balance-sheet growth reflected acquisitions: total assets were $6.976 billion versus $5.073 billion at December 31, 2021. Goodwill was $1.642 billion and net intangible assets $709.7 million at quarter-end.
- Foreign currency translation reduced other comprehensive income by $151.6 million for the first nine months; accumulated other comprehensive loss increased to $512.5 million.
Outlook, commentary, risks and unusual items
- The filing provides no clear full-year earnings or EPS guidance. Management expected approximately $300 million of net capital spending for 2022, including about $69 million during the remainder of the year.
- Project Horizon’s converted Hartsville paper machine began producing uncoated recycled paperboard late in Q3. It is designed for targeted annual capacity of 180,000 tons; management expects cost savings as production ramps through 2023 and beyond, without quantifying the savings here.
- Sonoco expected to incur approximately $8.2 million of additional charges for previously announced restructuring actions, mostly by year-end 2022. It said further restructuring actions were likely. Nine-month restructuring charges included costs associated with eliminating approximately 180 positions.
- The company completed its exit from two small Russian tube-and-core plants on July 1, 2022 and recorded $9.2 million of impairment charges. It also recorded approximately $2.8 million pretax of Turkey hyperinflation-related charges through Q3; future impact depends on Turkish-lira movements.
- On September 23, Sonoco agreed to acquire Danish paper manufacturer Skjern for an estimated $88 million in cash, subject to customary closing conditions, with completion expected in Q4 2022. The Metal Packaging acquisition’s purchase-price allocation remained preliminary.
- Management cited inflation and raw-material, energy and transportation costs; the ability to pass costs through; labor and supply-chain disruption; volume and customer demand; foreign exchange and interest rates; acquisition integration and synergies; and geopolitical conditions among material risks. Management identified Plastics–Healthcare and Protexic goodwill as at risk of impairment in the near term if performance or outlook weakens, although no reporting unit failed the 2022 annual impairment test.
- Environmental contingencies accrued were $7.1 million. The company said it could not estimate potential exposure beyond amounts accrued for certain matters, but did not believe the identified environmental or other ordinary-course legal matters were reasonably likely to have a material adverse effect.
- PwC performed a review, not an audit, of the interim financial statements and reported that it was not aware of material modifications needed for GAAP conformity. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported sales and earnings growth reflects Metal Packaging, pricing, volume/mix, and foreign exchange, and whether acquisition integration and anticipated synergies are tracking expectations.
- Whether pricing continues to offset inflation and whether inventory and receivables growth ease; working capital was a significant cash use in the first nine months.
- Debt maturities, commercial-paper refinancing, interest expense and available revolving-credit capacity, particularly as the company funds acquisitions and capital spending.
- Execution, capacity ramp and savings from Project Horizon, alongside the expected 2022 capital-spending level and further restructuring costs.
- Completion and funding of the Skjern acquisition, final Metal Packaging purchase accounting, and potential impairment exposure at Plastics–Healthcare and Protexic.
- Effects of currency movements, Turkey’s highly inflationary accounting, and other geopolitical or commodity-price changes on earnings and liquidity.