Sonoco Products Company — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited.
Business context
Sonoco manufactures consumer, industrial and protective packaging and provides packaging services. It operated 318 locations in 33 countries across Consumer Packaging, Display and Packaging, Paper and Industrial Converted Products, and Protective Solutions. Approximately 65% of 2016 sales were generated in the United States; 35% came from outside the United States.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $4.783 billion | $4.964 billion |
| Gross profit / gross margin | $937.4 million / 19.6% | $929.4 million / 18.7% |
| GAAP operating income (EBIT) | $492.8 million / 10.3% of sales | $382.5 million / 7.7% of sales |
| Base EBIT (non-GAAP) | $436.9 million / 9.1% of sales | $412.6 million / 8.3% of sales |
| Net income attributable to Sonoco | $286.4 million; $2.81 diluted EPS | $250.1 million; $2.44 diluted EPS |
| Base earnings (non-GAAP) | $277.2 million; $2.72 diluted EPS | $256.7 million; $2.51 diluted EPS |
| Cash from operations | $398.7 million | $452.9 million |
| Capital spending | $186.7 million | $192.3 million |
| Total debt at year-end | $1.053 billion | $1.128 billion |
| Cash and cash equivalents at year-end | $257.2 million | $182.4 million |
| Current ratio | 1.7 | 1.4 |
The $104.3 million pretax gain ($49.3 million after tax) on the sale of rigid plastics blow molding operations materially lifted GAAP earnings and EBIT. Base results exclude this gain and other specified items; they are non-GAAP measures. The effective tax rate was 37.3% on GAAP earnings and 30.6% on base earnings, versus 26.8% and 31.0%, respectively, in 2015.
Fourth-quarter 2016 sales were $1.142 billion, versus $1.267 billion in fourth-quarter 2015. Fourth-quarter net income attributable to Sonoco was $104.9 million, including the $49.3 million after-tax disposal gain, compared with $56.1 million in the prior-year quarter.
Cash from operations declined $54.3 million year over year, with working-capital use, pension contributions and taxes among the factors cited. Year-end net working capital was $546.2 million. The company had a $350 million commercial paper program backed by a committed revolving facility through October 2019, no commercial paper outstanding at year-end, and approximately $113 million available under additional short-term lines.
Material changes versus 2015
- Sales fell 3.7%; reported volume/mix was essentially flat. Lower selling prices, net divestitures and foreign-currency translation—particularly a stronger U.S. dollar—reduced revenue.
- Base earnings rose 8.0%, supported by positive price/cost, productivity improvements and $12 million lower pension and postretirement expense. These benefits were partly offset by higher labor and other costs, unfavorable currency effects and volume declines in some businesses.
- All four segments reported higher operating profit: Consumer Packaging $240.9 million (+4.0%); Display and Packaging $14.8 million (+35.7%); Paper and Industrial Converted Products $129.7 million (+4.5%); Protective Solutions $51.5 million (+12.0%). Display and Packaging sales fell 14.1%; its profit increase came despite lower sales.
- The company sold its rigid plastics blow molding operations for approximately $280 million, receiving $271.8 million net cash proceeds and recording the $104.3 million gain. The sale is expected to reduce 2017 year-over-year sales by approximately $175 million.
- Four acquisitions cost $88.6 million net of cash acquired. The company also repurchased 2.03 million shares for $100 million under its authorization and paid $146.4 million in cash dividends.
Outlook, commentary and risks
- For 2017, management expected overall volume growth of approximately 2%, modest improvement in gross profit and EBIT margins excluding pension settlement charges, dispositions and restructuring, and operating cash flow of approximately $470 million. Capital spending was expected to be about $190 million.
- Management projected a 32.0% effective tax rate on base earnings for 2017 and approximately $2 million lower net interest expense absent acquisition-related borrowing. It forecast approximately $58 million of 2017 contributions to benefit plans.
- A 2017 pension-benefit settlement offer could generate a $25–$40 million noncash charge in the second quarter, depending on participant elections. Related payments were expected to come from plan assets.
- Management highlighted potential pressure from raw-material cost increases—especially resins, tinplate steel and recovered paper—and continued dollar strength. Productivity, organic growth, targeted acquisitions and manufacturing-footprint optimization were stated priorities.
- The corrugating-medium operation remained under pressure from excess North American supply and weak pricing; management was exploring options, including cost reductions, partnerships and possible closure.
- On February 15, 2017, Sonoco agreed to acquire Packaging Holdings for approximately $230 million in cash, subject to regulatory review, with expected annual sales of about $190 million. Closing was expected by the end of the second quarter of 2017.
- A key contingency is an IRS draft proposed adjustment concerning the 2013 tax year. The potential incremental tax liability was approximately $84 million, excluding interest and penalties. Sonoco disputed the proposed treatment, had not recorded an additional reserve, and stated an adverse outcome could materially affect results and financial condition.
- Environmental liabilities were accrued at $24.5 million. The Fox River Appvion claim was settled for approximately $3.3 million in January 2017; Sonoco said this resolved known pending or threatened proceedings related to the matter.
- Other principal risks include raw-material and energy availability and pricing, customer concentration and competitive pricing, international and currency exposure, pension funding and assumptions, acquisition integration, restructuring, environmental obligations, and potential goodwill impairment. Goodwill and other intangible assets totaled approximately $1.3 billion; the company recorded a $2.6 million goodwill impairment for its Brazil reporting unit.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The independent auditor gave an unqualified opinion on the financial statements and internal control.
Most important facts for investors to verify
- Whether underlying earnings and margin improvement persist after separating the disposal gain and other adjustments, and reconciling management’s non-GAAP measures to GAAP results.
- Resolution and potential cash and earnings impact of the approximately $84 million IRS proposed adjustment, including any interest or penalties.
- Whether the 2017 volume, cash-flow and margin outlook is achieved despite raw-material inflation, currency headwinds and the expected sales reduction from the blow-molding divestiture.
- Progress, final purchase terms, financing and integration of the Packaging Holdings acquisition, and returns from recent acquisitions.
- Performance and strategic outcome of the corrugating-medium operation, along with restructuring execution and possible additional charges.
- Pension funding status, 2017 settlement-charge outcome and sensitivity to discount rates and investment returns; also monitor the concentration of sales and goodwill exposure in Display and Packaging.