Sonoco Products Company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period ended April 1, 2018. Sonoco provides consumer packaging, industrial products, protective packaging and packaging services through four reportable segments. Financial statements are unaudited and were reviewed, not audited, by the independent accounting firm.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $1,351.7 million | $1,304.2 million | +3.6% |
| Gross profit / margin | $270.1 million / 20.0% | $250.6 million / 19.2% | Margin +0.8 percentage points |
| Operating profit | $116.9 million | $110.1 million | +6.2% |
| Net income attributable to Sonoco | $73.7 million | $74.1 million | -0.5% |
| Diluted GAAP EPS | $0.73 | $0.73 | Flat |
| Operating cash flow | $92.3 million | $119.8 million | Down $27.4 million |
| Capital expenditures | $42.2 million | $41.4 million | Up slightly |
Operating cash flow less capital expenditures was approximately $50.2 million, versus $78.4 million a year earlier. Cash and cash equivalents were $124.3 million at March 31, 2019, compared with $120.4 million at year-end 2018. Current liabilities were $1,156.2 million and current assets $1,568.5 million.
Notes payable and current portion of long-term debt totaled $221.2 million; long-term debt, net of current portion, was $1,189.4 million. The company also reported $338.8 million of lease liabilities following adoption of the new lease standard. It has a $350 million commercial paper program supported by a $500 million revolving credit facility committed through July 2022. Management said covenant measures were substantially above required minimums.
Changes versus the prior period
- Sales growth reflected $90 million from acquisitions and $27 million from higher selling prices, partly offset by $18 million of lower volume/mix and $52 million of unfavorable foreign currency translation and other effects.
- Operating profit improved, but GAAP earnings were nearly flat as higher pension costs and net interest expense offset operating gains. Non-operating pension costs were $6.0 million, versus income of $0.3 million; net interest expense was $15.4 million, versus $13.4 million.
- Restructuring and asset impairment charges rose to $10.7 million from $3.1 million. Management’s non-GAAP “base” diluted EPS was $0.85, versus $0.74; base net income attributable to Sonoco was $86.2 million, versus $74.4 million.
- Segment sales increased 3.5% in Consumer Packaging and 7.7% in Paper and Industrial Converted Products, but declined 3.6% in Display and Packaging and 2.0% in Protective Solutions. Paper and Industrial Converted Products operating profit rose 21.6%; Display and Packaging profit improved partly because losses at the exited Atlanta-area customer contract did not recur.
Outlook, management commentary and risks
- Management cited improved price/cost relationships, productivity and acquisition contributions, while noting lower volume in most businesses and adverse foreign exchange effects. The filing provides no clear full-year earnings or sales guidance.
- Capital spending for the remainder of 2019 was expected not to exceed $170 million. Management expected approximately $13.5 million of additional pension and postretirement contributions over the remainder of 2019, excluding any voluntary pension de-risking contributions.
- Approximately $5.1 million of additional restructuring charges were expected for previously announced actions, with most expected to be incurred and paid by year-end. Further restructuring actions remained possible.
- A major unresolved IRS dispute concerns the characterization of a 2012 intercompany-note distribution. The IRS proposed approximately $89 million of incremental tax, excluding interest, and $18 million of penalties. Sonoco had recorded no additional reserve, disputed the IRS position and had an Appeals Division hearing scheduled for Q2 2019; an adverse outcome could materially affect results and financial condition.
- Management identified the $203.4 million goodwill balance in Display and Packaging as potentially at risk in the near term if performance or outlook does not meet expectations; sales concentration among several major customers adds exposure.
- Other risks include raw-material, energy and transportation costs; customer demand and contract retention; foreign exchange and interest rates; pension assumptions; acquisition integration; and environmental and legal matters. Environmental contingency accruals totaled $20.0 million at quarter-end.
- Adoption of the lease accounting standard added a $308.2 million operating lease right-of-use asset to the balance sheet at March 31, 2019; comparative periods were not restated. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Track whether sales growth and improved pricing persist despite weaker volumes, currency impacts and segment-level declines.
- Compare GAAP results with “base” non-GAAP results and review the nature and duration of restructuring and pension adjustments.
- Monitor operating cash conversion, working-capital requirements, capital spending, debt maturities and use of commercial-paper and revolving-credit capacity.
- Follow the IRS appeal and any change in tax reserves or disclosures; the proposed exposure is not recorded as an additional reserve in this filing.
- Assess Display and Packaging performance and customer concentration against management’s goodwill impairment assumptions.