Sonoco Products Company (NYSE: SON) — 2023 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2023; it is not a standalone fourth-quarter report. Sonoco designs and manufactures packaging, operating in approximately 310 locations across 33 countries. Its reporting groups were Consumer Packaging, Industrial Paper Packaging, and All Other. Effective January 1, 2024, certain flexible and thermoforming businesses move into Consumer Packaging.
Financial performance
| Metric | 2023 | 2022 |
|---|---|---|
| Net sales | $6.781 billion | $7.251 billion |
| Gross profit / gross margin | $1.436 billion / 21.2% | $1.440 billion / 19.9% |
| Operating profit | $715.8 million | $675.4 million |
| Net income attributable to Sonoco | $475.0 million | $466.4 million |
| Diluted EPS | $4.80 | $4.72 |
| Adjusted net income / adjusted diluted EPS | $519.9 million / $5.26 | $639.5 million / $6.48 |
| Adjusted EBITDA / margin | $1.068 billion / 15.7% | $1.162 billion / 16.0% |
| Cash from operating activities | $882.9 million | $509.0 million |
| Capital expenditures | $363.1 million | $328.8 million |
Revenue declined 6.5%, principally on lower volume/mix (down $574 million); acquisitions and divestitures net added $104 million. Lower steel and recovered-paper input costs helped lift gross margin. Operating cash flow improved substantially, aided by a $547.5 million year-over-year working-capital swing, especially inventory reductions. Operating cash flow less capital expenditures was approximately $519.8 million in 2023 (calculated from reported figures; not presented as a company-defined free-cash-flow measure).
Segments
- Consumer Packaging: Sales fell 3.7% to $3.627 billion; segment operating profit fell 27.4% to $382.1 million and margin declined to 10.5% from 14.0%. Lower volumes/mix and approximately $35 million of unfavorable metal-price overlap weighed on results; productivity partly offset the pressure.
- Industrial Paper Packaging: Sales fell 11.6% to $2.374 billion; operating profit declined 3.0% to $317.9 million. Lower volumes and index-related pricing were partly offset by strategic pricing.
- All Other: Sales fell 2.2% to $780.2 million, while operating profit rose 57.1% to $103.7 million, supported by pricing, productivity, and structural improvements.
Balance sheet, liquidity, and capital allocation
- Cash and cash equivalents were $151.9 million at year-end, versus $227.4 million in 2022. Current assets were $2.050 billion and current liabilities $1.165 billion; the current ratio improved to 1.8 from 1.4.
- Total debt was $3.083 billion, down from $3.222 billion. The company reported $900 million available under its revolving credit facility; scheduled 2024 debt maturities were $47.1 million. Management said cash, credit availability, and expected cash flows should cover expected needs.
- Net interest expense increased to $126.3 million from $97.0 million, reflecting higher average debt and interest rates on variable-rate borrowings. Debt covenants include minimum interest-coverage and net-worth requirements; the company reported substantial headroom.
- Dividends paid totaled $197.4 million; dividends per share were $2.02, versus $1.92. No shares were repurchased under the public program in 2023; approximately $138.0 million remained authorized. Reported share repurchases were for employee tax withholding.
- Capital spending is expected to be approximately $350 million in 2024. Defined-benefit plan contributions are expected to be approximately $19 million in 2024.
Material changes, outlook, and unusual items
- GAAP net income and EPS edged higher, but adjusted net income fell 18.7% and adjusted EPS declined from $6.48 to $5.26. Management cited portfolio-wide volume weakness, retail inflation pressure in Consumer Packaging, and unfavorable index pricing in Industrial Paper Packaging.
- 2023 included $78.9 million of gains on divestitures and asset sales, including a $60.9 million timberland-sale gain. Other income of $39.7 million included a $44.0 million gain from remeasuring Sonoco’s previously held RTS Packaging interest, partly offset by a contract-settlement loss. These items materially distinguish reported GAAP results from adjusted results.
- Sonoco acquired the remaining interest in RTS Packaging and the Chattanooga Mill, and acquired Brazil-based Inapel; total 2023 acquisition cash costs were $372.6 million. It sold S3 and its U.S. and Mexico BulkSak businesses, and sold approximately 55,000 acres of timberland. A January 2024 agreement to sell Protective Solutions for an estimated $80 million was expected to close in the first half of 2024, subject to customary conditions.
- Restructuring and asset-impairment charges were $56.9 million, similar to 2022. The company expected approximately $2.3 million of additional charges related to actions underway, mostly incurred and paid by the end of 2024. It also permanently closed its Sumner, Washington uncoated paperboard mill in 2024.
- For 2024, management expected sales to be up modestly year over year, with negative price/cost impacts. It emphasized cost control, productivity, portfolio simplification, and realizing acquisition synergies, while noting global volume uncertainty. No precise earnings or EPS guidance is provided in the supplied filing text.
Risks and contingencies
- Key exposures include economic weakness and customer destocking, input and energy costs, the ability to pass through cost increases, competitive and packaging-format shifts, customer and supplier concentration, and execution/integration risks from acquisitions and restructuring.
- Debt, floating-rate borrowing costs, refinancing access, foreign exchange, and pension funding are financial risks. The net underfunded position of pension and postretirement plans was reported as $127 million, versus $98 million in 2022.
- Environmental remediation reserves were $7.3 million; the company cautions that actual costs could exceed reserves, although it did not believe resolution of the disclosed matters had a reasonable possibility of materially adversely affecting the financial statements.
- Goodwill totaled $1.811 billion. No reporting unit failed the 2023 impairment test, but Plastics-Medical goodwill of $64.2 million was identified as at risk if results or valuation assumptions weaken. Its estimated fair value exceeded carrying value by 29.9% in the 2023 test.
- Other risks include climate and sustainability regulation and target execution, geopolitical instability, highly inflationary economies, cybersecurity, and tax uncertainties. Sonoco reported no material cybersecurity incident in 2023. The independent auditor issued an unqualified opinion; acquired RTS Packaging, the Chattanooga Mill, and Inapel were excluded from the internal-control assessment, representing 1.3% of revenue and 3.0% of assets.
Important facts for investors to verify
- Whether the 2024 modest-sales-growth outlook and expected negative price/cost impact are borne out, and how volumes, pricing, and margins develop by segment.
- How adjusted earnings compare with GAAP results after considering the sizeable 2023 gains and the company’s recurring exclusions from non-GAAP measures.
- Progress in reducing debt and interest expense, liquidity and covenant headroom, and the effect of variable rates and upcoming maturities.
- Integration, synergy, and valuation outcomes for the 2023 acquisitions; completion and proceeds of the Protective Solutions sale; and any further portfolio actions.
- Whether the Plastics-Medical reporting unit meets forecast assumptions, and whether environmental, pension, restructuring, or tax exposures change materially.