Sonoco Products Company — Q2 2020 Form 10-Q
Business context and period. Sonoco provides consumer, industrial and protective packaging and related services through four segments. This unaudited quarterly report covers the three and six months ended June 28, 2020, compared with periods ended June 30, 2019. Nearly all operations continued during the COVID-19 pandemic, but effects varied across markets.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $1,245.5m | $1,359.7m | $2,548.8m | $2,711.4m |
| Gross profit | $248.0m | $275.3m | $514.6m | $545.5m |
| Operating profit | $103.7m | $129.8m | $233.8m | $246.7m |
| Net income attributable to Sonoco | $55.2m | $81.2m | $135.7m | $154.8m |
| Diluted GAAP EPS | $0.55 | $0.80 | $1.34 | $1.53 |
| Base diluted EPS (non-GAAP) | $0.79 | $0.95 | $1.73 | $1.81 |
Q2 gross margin was 19.9% versus 20.2%; operating margin was 8.3% versus 9.5%. First-half gross margin was 20.2% versus 20.1%. Base results exclude specified restructuring, pension, acquisition, tax and other items; they are not GAAP measures.
- Q2 sales fell 8.4%; volume/mix contributed a $94m decline, foreign currency and other a $42m decline, and selling prices a $12m decline, partly offset by $34m of acquisition sales. First-half sales decreased 6.0%.
- Q2 GAAP net income attributable to Sonoco fell 32.0%; Base EPS fell 16.9%. First-half GAAP net income fell 12.4%; Base EPS fell 4.0%.
- Q2 segment operating profit increased 36.8% at Consumer Packaging and 1.6% at Display and Packaging, while declining 51.1% at Paper and Industrial Converted Products and 68.6% at Protective Solutions. These are company-defined non-GAAP segment measures.
Cash flow, debt and liquidity
- First-half operating cash flow was $282.0m versus $40.1m. The increase largely reflects the prior-year $190m voluntary pension contribution; Sonoco made no comparable contribution in the first half of 2020.
- Capital expenditures were $76.4m versus $102.3m. Management expected full-year 2020 net capital spending of about $195m, including planned investment in a Hartsville paper machine conversion.
- Cash and equivalents were $857.3m at June 28, 2020, up from $145.3m at year-end 2019. Total debt was $2.265bn versus $1.681bn; current debt and short-term notes were $646.6m. Financing actions included issuing $600m of 3.125% notes due 2030 and new short-term borrowings.
- After quarter-end, Sonoco repaid a $150m Wells Fargo term loan on July 20. Management cited approximately $700m of cash and $500m of committed revolver availability, and expected about $750m of debt maturities through 2021. It considered liquidity adequate; covenant measures were substantially above minimum requirements.
Outlook, risks and unusual items
- Q3 2020 Base EPS guidance was $0.73–$0.83, versus $0.97 in Q3 2019. Sonoco did not provide full-year Base EPS guidance because the pandemic’s financial impact could not be reliably estimated. Management expected the pandemic’s overall earnings effect to remain negative in Q3.
- Management expected Consumer Packaging to perform well, industrial markets to remain weak, and Protective Solutions earnings to improve from Q2 as automotive and appliance customers reopened. It expected recycled fiber prices to stabilize near July levels, potentially improving the industrial price/cost relationship versus Q2, though remaining adverse year over year.
- Q2 results faced reduced demand in display, industrial and protective markets, plus a sharp increase in recycled fiber costs. Higher food and household packaging demand and productivity and cost reductions partly offset these pressures. A late-June/July resurgence of COVID-19 could delay or reverse recovery; continued disruption could adversely affect demand, supply chains, liquidity and results.
- Restructuring and asset impairment charges were $22.9m in Q2 and $35.5m in the first half, including closures of a Canadian paper mill and a Hartsville paper machine. Sonoco expected about $2.7m of additional charges for previously announced actions, mostly by year-end.
- Termination of the inactive pension plan is expected to require about $150m of additional funding in 2021 and generate approximately $590m of noncash pretax settlement charges in 2021; actual amounts depend on settlements and market conditions. The expected funding was reducing 2020 tax payments by about $38m.
- Sonoco agreed to pay approximately $6m, including tax and interest, to settle its IRS audit dispute for tax years 2012–2013; payment was expected in the second half of 2020. Environmental contingencies accrued were $8.4m; the company did not believe their resolution was reasonably likely to materially adversely affect its financial statements.
- Potential goodwill impairment was identified as a risk if recovery weakens or is delayed, particularly for Conitex, whose estimated fair value had been approximately equal to carrying value in the 2019 test. The filing also identifies credit-loss, currency, commodity-price, pension and pandemic-related uncertainties.
Important facts for investors to verify
- Whether Q3 guidance and segment recovery assumptions were achieved, and how pandemic conditions affected demand and operating costs.
- Recycled fiber costs, pricing pass-through and margins in Paper and Industrial Converted Products.
- Debt repayment, 2021 maturities, available revolver capacity and cash generation after the quarter.
- Timing and final cash and accounting costs of the inactive pension plan termination.
- Whether Conitex or other reporting units require goodwill impairment testing or charges as outlook assumptions change.
- Final settlement and payment of the IRS audit, and developments in environmental and other contingencies.
The interim financial statements were reviewed by the independent accountant, not audited.