Sonoco Products Company — Q1 2017 Form 10-Q
Reporting period: Three months ended April 2, 2017; comparisons are with the three months ended April 3, 2016 unless otherwise noted. Sonoco provides consumer and industrial packaging, protective packaging, and packaging-related services. Interim financial statements were reviewed, not audited.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Net sales | $1,172.3 million | $1,226.3 million; down 4.4% |
| Gross profit / margin | $220.2 million / 18.8% | $245.3 million / 20.0% |
| Income before interest and taxes | $90.0 million; 7.7% of sales | $101.8 million; 8.3% of sales |
| Net income attributable to Sonoco | $53.7 million; diluted EPS $0.53 | $59.9 million; diluted EPS $0.59 |
| Base net income attributable to Sonoco, non-GAAP | $59.9 million; diluted EPS $0.59 | $66.5 million; diluted EPS $0.65 |
| Cash from operations | $67.4 million | $66.4 million |
| Capital spending | $50.5 million | $55.7 million |
| Cash and cash equivalents | $212.8 million | $257.2 million at December 31, 2016 |
| Total debt | $1,253.9 million | $1,052.7 million at December 31, 2016 |
Operating cash flow less capital spending was approximately $16.9 million. Investing activities used $270.3 million, mainly reflecting $221.4 million for the Packaging Holdings acquisition. Financing activities provided $154.0 million, including borrowing to fund the acquisition. The company paid $36.8 million in dividends during the quarter. The quarterly dividend was raised from $0.37 to $0.39 per share, payable June 9, 2017.
At April 2, current assets were $1,391.3 million and current liabilities were $882.4 million. The company had $41.0 million of commercial paper outstanding and access to a $350 million commercial paper program supported by a revolving credit facility committed through October 2019. Management said it was substantially above required minimum interest-coverage and net-worth covenant levels.
Changes versus the prior-year quarter
- Sales fell $54 million. Volume and mix reduced sales by $29 million; acquisitions and divestitures reduced them by a net $34 million; selling prices added $33 million; and foreign currency translation and other factors reduced them by $24 million.
- Management attributed lower sales and earnings to divestitures, including the rigid plastic blowmolding business, lower volumes and unfavorable mix. Price increases and acquisitions partially offset these effects.
- Gross margin declined 121 basis points, principally because sharply higher old corrugated container costs outpaced customer price recovery in Paper and Industrial Converted Products. The segment reported a nearly 90% year-over-year increase in average OCC prices in U.S. and Canadian operations.
- Base diluted EPS declined from $0.65 to $0.59. Lower volumes and unfavorable mix, negative price/cost effects, and divestitures outweighed fixed-cost productivity and lower incentive costs.
- Segment sales changed as follows: Consumer Packaging down 8.6%; Display and Packaging down 20.5%; Paper and Industrial Converted Products up 4.6%; and Protective Solutions up 1.1%. Segment operating profit declined in all four segments.
Outlook, risks, and unusual items
- No specific full-year earnings or revenue guidance is stated in the provided filing text. Management expected Paper and Industrial Converted Products margins to improve from Q1 levels as scheduled contract resets and announced price actions help recover higher raw-material costs.
- Capital spending for the remainder of 2017 was expected to be approximately $140 million. Additional pension and postretirement contributions of approximately $14 million were expected during the remainder of 2017.
- A pension lump-sum and annuity election program is expected to trigger an approximately $34 million non-cash pretax settlement charge in Q2 2017.
- Approximately $1.5 million of additional restructuring charges were expected for previously announced actions, mostly incurred and paid by year-end 2017. Management said further restructuring actions are likely. It was assessing options for the corrugating medium operation, including cost reductions, partnerships, modified schedules, or possible closure.
- The IRS proposed a potential 2013 tax adjustment that Sonoco estimates could produce approximately $84 million of incremental tax, excluding interest, and separately proposed $18 million in penalties. Sonoco disputes the IRS position, has not recorded an additional reserve, and says an adverse outcome could materially affect results and financial condition.
- Goodwill impairment risk was identified for Display and Packaging and Paper and Industrial Converted Products–Europe. Display and Packaging has significant customer concentration, with the majority of sales to one customer under contract until 2021.
- Environmental contingencies accrued totaled $20.8 million at April 2, 2017. The Fox River settlement was finalized and funded in Q1, resolving related pending or threatened proceedings. Other environmental and ordinary-course legal matters remain subject to uncertainty.
Most important facts for investors to verify
- Whether scheduled customer price resets and price increases recover OCC and other input-cost inflation, and whether Paper and Industrial Converted Products margins improve.
- The final purchase-price allocation and integration results for the $221.4 million Packaging Holdings acquisition, including its contribution to sales and earnings.
- The outcome and potential financial exposure of the IRS tax dispute, including the proposed tax adjustment and penalties.
- The timing and effect of the expected $34 million Q2 pension settlement charge and remaining restructuring costs.
- Cash generation, debt levels, capital spending, pension funding needs, and compliance with debt covenants as acquisition-related borrowing is integrated.
- Customer retention and goodwill assumptions in the Display and Packaging and Paper and Industrial Converted Products–Europe reporting units.