Sonoco Products Company — Q1 2016 10-Q
Business context and period. Sonoco supplies consumer and industrial packaging, protective packaging, and packaging services through four reportable segments. This unaudited quarter ended April 3, 2016; the comparable 2015 quarter ended March 29, 2015. Q1 2016 had six additional calendar days, including three more business days for most operations.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $1,226.3 million | $1,206.1 million |
| Gross profit / margin | $245.3 million / 20.0% | $220.4 million / 18.3% |
| Income before interest and taxes | $101.8 million | $124.1 million |
| Net income attributable to Sonoco | $59.9 million; $0.59 diluted EPS | $85.8 million; $0.84 diluted EPS |
| Base net income attributable to Sonoco (non-GAAP) | $66.5 million; $0.65 diluted EPS | $55.0 million; $0.54 diluted EPS |
| Operating cash flow | $66.4 million | $60.3 million |
| Capital expenditures | $55.7 million | $41.0 million |
- Sales increased 1.7%; management attributed the change to volume/mix (+$78 million), lower selling prices (−$16 million), acquisitions and divestitures (+$4 million), and currency and other effects (−$46 million). Higher volume/mix included the benefit of additional operating days.
- Base diluted EPS rose 20.5%, with improvement in all four segments. Management cited favorable price/cost, productivity, lower pension costs, and volume/mix; labor, maintenance, other costs, currency translation, and higher taxes partly offset gains.
- GAAP net income fell year over year, in part because 2015 included a $32.5 million pretax Fox River reserve reversal and plant-sale gains. Q1 2016 included $9.2 million of restructuring and asset impairment charges. The effective tax rate was 33.2%, versus 23.7% in 2015; the prior-year rate benefited from tax attributes related to plant sales.
- Total debt was approximately $1.13 billion at April 3, 2016, broadly unchanged from year-end. Cash was $152.3 million, down from $182.4 million at December 31, 2015. Current liabilities were $916.3 million and current assets $1,320.5 million.
- Cash used in investing was $53.0 million and cash used in financing was $40.0 million; cash declined by $30.1 million during the quarter. The company paid $35.4 million in dividends and repurchased $15.3 million of shares under its authorization.
Segments, outlook, and material items
- Segment sales and operating profit: Consumer Packaging $527.3 million and $62.9 million; Display and Packaging $144.3 million and $3.3 million; Paper and Industrial Converted Products $423.1 million and $33.3 million; Protective Solutions $131.6 million and $12.0 million. Segment profit improved in each segment year over year.
- Management expected approximately $150 million of additional capital spending and $85 million of additional share repurchases during the remainder of 2016. It expected about $22 million of additional pension and postretirement contributions during the year. The filing provides no clear full-year earnings guidance.
- The Board declared a quarterly dividend of $0.37 per share, payable June 10, 2016; the quarter’s declared and paid dividend was $0.35 per share.
- A prospective buyer submitted a non-binding proposal for the French paper mill, subject to environmental review and due diligence. A sale on proposed terms could result in an estimated $12 million loss; if not sold, closure could entail more than $15 million of additional costs.
- Environmental contingencies totaled $24.8 million accrued. A remaining Fox River claim seeks approximately $200 million from eight defendants; Sonoco reserved $3.6 million and stated it could not estimate potential liability beyond reserves. The Village of Rockton actions were dismissed with prejudice after quarter-end, with no financial statement impact.
- Goodwill at Display and Packaging and Paper and Industrial Converted Products-Europe was identified as more exposed to future impairment if results disappoint. A major Display and Packaging customer declined to renew a Mexico packaging-center contract; the reassessment found no impairment, but negotiations on remaining business continued.
Investor facts to verify
- Whether volume, pricing, productivity, and segment margin trends persist after accounting for the quarter’s additional operating days and lower input costs.
- Execution and cash costs of restructuring, the French mill outcome, and the planned capital spending and repurchases.
- Resolution and potential exposure from the Fox River claim, and whether environmental reserves remain adequate.
- Retention or replacement of the concentrated Display and Packaging customer business and the related goodwill impairment risk.
- Remediation of the disclosed material weakness: management said disclosure controls were ineffective at April 3, 2016 and expected to complete testing and remediation during fiscal 2016.
- Debt maturities and liquidity: $75.3 million of 5.625% debentures were due June 15, 2016, with repayment expected through available cash and short-term borrowing; the $350 million revolving credit facility was committed through October 2019, with no commercial paper outstanding.
The interim financial statements received an independent accountant’s review, not an audit. Management cautioned that quarterly results are not necessarily indicative of full-year results.