SONOCO PRODUCTS COMPANY
Statements included in this Quarterly Report on Form 10-Q that are not
historical in nature, are intended to be, and are hereby identified as
"forward-looking statements" for purposes of the safe harbor provided by
Section 21E of the Securities Exchange Act of 1934, as amended. In addition, the
Company and its representatives may from time to time make other oral or written
statements that are also "forward-looking statements." Words such as "estimate,"
"project," "intend," "expect," "believe," "consider," "plan," "strategy,"
"opportunity," "commitment," "target," "anticipate," "objective," "goal,"
"guidance," "outlook," "forecast," "future," "re-envision," "assume," "will,"
"would," "can," "could," "may," "might," "aspires," "potential," or the negative
thereof, and similar expressions identify forward-looking statements.
Forward-looking statements include, but are not limited to, statements
regarding:
•availability and supply of raw materials, and offsetting high raw material
costs, including the impact of potential changes in tariffs;
•potential impacts of the COVID-19 Coronavirus on business, operations and
financial condition;
•improved productivity and cost containment;
•improving margins and leveraging strong cash flow and financial position;
•effects of acquisitions and dispositions;
•realization of synergies resulting from acquisitions;
•costs, timing and effects of restructuring activities;
•adequacy and anticipated amounts and uses of cash flows;
•expected amounts of capital spending;
•refinancing and repayment of debt;
•financial and business strategies and the results expected of them;
•financial results for future periods;
•producing improvements in earnings;
•profitable sales growth and rates of growth;
•market leadership;
•research and development spending;
•expected impact and costs of resolution of legal proceedings;
•extent of, and adequacy of provisions for, environmental liabilities;
•sustainability commitments;
•adequacy of income tax provisions, realization of deferred tax assets, outcomes
of uncertain tax issues and tax rates;
•goodwill impairment charges and fair values of reporting units;
•future asset impairment charges and fair values of assets;
•anticipated contributions to pension and postretirement benefit plans, fair
values of plan assets, long-term rates of return on plan assets, and projected
benefit obligations and payments;
•expected impact of implementation of new accounting pronouncements;
•creation of long-term value and returns for shareholders;
•continued payment of dividends; and
•planned stock repurchases.
Such forward-looking statements are based on current expectations, estimates and
projections about our industry, management's beliefs and certain assumptions
made by management. Such information includes, without limitation, discussions
as to guidance and other estimates, perceived opportunities, expectations,
beliefs, plans, strategies, goals and objectives concerning our future financial
and operating performance. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual results may differ materially from
those expressed or forecasted in such forward-looking statements. The risks,
uncertainties and assumptions include, without limitation:
•availability and pricing of raw materials, energy and transportation, including
the impact of potential changes in tariffs and escalating trade wars, and the
Company's ability to pass raw material, energy and transportation price
increases and surcharges through to customers or otherwise manage these
commodity pricing risks;
•impacts arising as a result of the COVID-19 Coronavirus global pandemic on our
results of operations, financial condition, value of assets, liquidity,
prospects, growth, and on the industries in which we operate and that we
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SONOCO PRODUCTS COMPANY
serve, resulting from, without limitation, recent and ongoing financial market
volatility, potential governmental actions, changes in consumer behaviors and
demand, changes in customer requirements, disruptions of the Company's suppliers
and supply chain, availability of labor and personnel, necessary modifications
to operations and business, and uncertainties about the extent and duration of
the pandemic;
•costs of labor;
•work stoppages due to labor disputes;
•success of new product development, introduction and sales;
•success of implementation of new manufacturing technologies and installation of
manufacturing equipment, including the startup of new facilities and lines;
•consumer demand for products and changing consumer preferences;
•ability to be the low-cost global leader in customer-preferred packaging
solutions within targeted segments;
•competitive pressures, including new product development, industry
overcapacity, customer and supplier consolidation, and changes in competitors'
pricing for products;
•financial conditions of customers and suppliers;
•ability to maintain or increase productivity levels, contain or reduce costs,
and maintain positive price/cost relationships;
•ability to negotiate or retain contracts with customers, including in segments
with concentration of sales volume;
•inventory management strategies of customers;
•timing of introduction of new products or product innovations by customers;
•collection of receivables from customers;
•ability to improve margins and leverage cash flows and financial position;
•ability to manage the mix of business to take advantage of growing markets
while reducing cyclical effects of some of the Company's existing businesses on
operating results;
•ability to maintain innovative technological market leadership and a reputation
for quality;
•ability to attract and retain talented and qualified employees, managers and
executives;
•ability to profitably maintain and grow existing domestic and international
business and market share;
•ability to expand geographically and win profitable new business;
•ability to identify and successfully close suitable acquisitions at the levels
needed to meet growth targets, and successfully integrate newly acquired
businesses into the Company's operations;
•the costs, timing and results of restructuring activities;
•availability of credit to us, our customers and suppliers in needed amounts and
on reasonable terms;
•effects of our indebtedness on our cash flow and business activities;
•fluctuations in interest rates and our borrowing costs;
•fluctuations in obligations and earnings of pension and postretirement benefit
plans;
•accuracy of assumptions underlying projections of benefit plan obligations and
payments, valuation of plan assets, and projections of long-term rates of
return;
•timing of funding pension and postretirement benefit plan obligations;
•cost of employee and retiree medical, health and life insurance benefits;
•resolution of income tax contingencies;
•foreign currency exchange rate fluctuations, interest rate and commodity price
risk and the effectiveness of related hedges;
•changes in U.S. and foreign tariffs, tax rates, and tax laws, regulations and
interpretations thereof;
•the adoption of new, or changes in, accounting standards or interpretations;
•challenges and assessments from tax authorities resulting from differences in
interpretation of tax laws, including income, sales and use, property, value
added, employment, and other taxes;
•accuracy in valuation of deferred tax assets;
•accuracy of assumptions underlying projections related to goodwill impairment
testing, and accuracy of management's assessment of goodwill impairment;
•accuracy of assumptions underlying fair value measurements, accuracy of
management's assessments of fair value and fluctuations in fair value;
•ability to maintain effective internal controls over financial reporting;
•liability for and anticipated costs of resolution of legal proceedings;
•liability for and anticipated costs of environmental remediation actions;
•effects of environmental laws and regulations;
•operational disruptions at our major facilities;
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SONOCO PRODUCTS COMPANY
•failure or disruptions in our information technologies;
•failures of third party transportation providers to deliver our products to our
customers or to deliver raw materials to us;
•substantially lower than normal crop yields;
•loss of consumer or investor confidence;
•ability to protect our intellectual property rights;
•changes in laws and regulations relating to packaging for food products and
foods packaged therein, other actions and public concerns about products
packaged in our containers, or chemicals or substances used in raw materials or
in the manufacturing process;
•changing consumer attitudes toward plastic packaging;
•ability to meet sustainability targets and challenges in implementation;
•changing climate, climate change regulations and greenhouse gas effects;
•actions of domestic or foreign government agencies and changes in laws and
regulations affecting the Company and increased costs of compliance;
•international, national and local economic and market conditions and levels of
unemployment;
•economic disruptions resulting from terrorist activities and natural disasters;
and
•accelerating inflation.
More information about the risks, uncertainties and assumptions that may cause
actual results to differ materially from those expressed or forecasted in
forward-looking statements is provided in the Company's Annual Report on Form
10-K under Item 1A-"Risk Factors" and throughout other sections of that report,
in this report on Form 10-Q under Part II, Item 1A - "Risk Factors," and in
other reports filed with the Securities and Exchange Commission . In light of
these various risks, uncertainties and assumptions, the forward-looking events
discussed in this report might not occur.
The Company undertakes no obligation to publicly update or revise
forward-looking statements, whether as a result of new information, future
events or otherwise. You are, however, advised to review any further disclosures
we make on related subjects, and about new or additional risks, uncertainties
and assumptions, in our future filings with the Securities and Exchange
Commission on Forms 10-K, 10-Q and 8-K.
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SONOCO PRODUCTS COMPANY
COMPANY OVERVIEW
Sonoco is a leading provider of consumer packaging, industrial products,
protective packaging and packaging supply chain services, with approximately 320
locations in 36 countries.
Sonoco competes in multiple product categories, with its operations organized
and reported in four segments: Consumer Packaging , Display and Packaging , Paper
and Industrial Converted Products, and Protective Solutions. The majority of the
Company's revenues are from products and services sold to consumer and
industrial products companies for use in the packaging of their products for
sale or shipment. The Company also manufactures paperboard, primarily from
recycled materials, for both internal use and open market sale. Each of the
Company's operating units has its own sales staff and maintains direct sales
relationships with its customers.
COVID-19
Impact on Operating Results
Around the world, Sonoco is an essential provider of consumer, industrial and
medical packaging. Sonoco associates are deemed "Essential Critical
Infrastructure Workers " under the guidance of the U.S. Department of Homeland
Security and have received similar designations by the vast majority of other
governmental agencies in the 36 countries where the Company operates. As a
result, nearly all of the Company's global operations continue to operate and
are serving our customers' critical needs. Certain customers whose products have
not been deemed "critically essential" have had to suspend operations due to the
COVID-19 pandemic, while some others have been unable to fully staff their
operations, and as a result these customers are taking temporary downtime or
furloughing employees. Sonoco is following these developments closely and
responding with appropriate changes to production capacity and schedules and
cost-reduction initiatives.
Sonoco expects the significance of the COVID-19 pandemic, including its effect
on its financial condition and results of operations, to be dictated by, among
other things, its duration, the success of efforts to contain the virus and the
impact of actions taken by governments and others in response. An extended
period of disruption to its served markets or global supply chains could
materially and adversely affect its business, results of operations, access to
sources of liquidity and overall financial condition. In addition, an extended
global recession caused by the pandemic would have an adverse impact on the
Company's operations and financial condition.
While a COVID-19 driven spike in consumer demand for certain food and household
products benefited the Company's 2020 first-quarter results, the overall impact
of the pandemic on the second quarter of 2020 is expected to be negative.
Although the Company has provided second quarter Base earnings per share (EPS)
guidance of $0.73 to $0.83 compared to Base EPS of $0.95 in the second quarter
of 2019, it is not able at this time to estimate the full-year 2020 financial
impact of the COVID-19 pandemic and has removed its full year Base EPS guidance
as a result. The wide range of second-quarter guidance reflects uncertainties
regarding the challenging macroeconomic conditions stemming from the pandemic,
including the negative impact of higher recycled fiber costs, and a stronger
U.S. dollar. We expect COVID-19 to have a mixed impact on demand for our
products with the net impact being negative to earnings compared to the second
quarter of last year. The Company expects recycled fiber prices, including those
for old corrugated containers, to continue increasing due mostly to
supply-demand dynamics related to COVID-19, which is expected to result in a
significant negative impact to our Industrial segment's earnings compared to the
second quarter of last year. Even though we are proactively increasing our
Industrial segment's pricing related to higher input and other costs, we expect
the timing of price cost changes to work against us in the near term.
We expect our consumer-related businesses to continue performing relatively well
in the second quarter as food consumption trends should continue to be driven by
stay-at-home consumers. In addition, we expect our paperboard operations in
North America to be relatively steady as increased demand for paperboard serving
the tissue and towel market should help offset declines with some of our other
industrial converted products businesses. Unfortunately, tubes, cores and cones
volumes are expected to be negatively impacted around the world, although there
are pockets of strength in certain markets, such as plastic film. As noted
above, we expect recycled fiber prices to continue to increase, possibly
reaching above $100 a ton during the second quarter of 2020, which should
benefit our recycling operations, but create a significant price/cost headwind
to our paper-based businesses until such time as we are able to achieve recovery
of those higher costs for sales made in the second half of the year. Finally,
our ThermoSafe temperature-assured packaging business is expected to continue to
produce solid results as it is supplying coolers critical for virus testing and
pharmaceutical transport. However, we expect overall second quarter earnings in
our Protective Solutions segment will
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SONOCO PRODUCTS COMPANY be negatively impacted by lower demand in our molded foam and consumer fiber businesses, which serve the automotive and appliance markets.
Financial Flexibility and LiquiditySonoco has a strong, investment-grade balance sheet and has substantial liquidity available in the form of cash, cash equivalents and revolving credit facilities, as well as the ability to issue commercial paper and to access liquidity in the bank or other debt capital markets. OnMarch 18, 2020 , the Company closed and funded a new$150 million , 364-day term loan, the proceeds from which were used to repay a portion of outstanding commercial paper. OnApril 1, 2020 , the Company accessed$250 million from its revolving credit facility using$85 million of the proceeds to fully repay the then outstanding commercial paper balance. OnApril 6, 2020 , the Company borrowed$100 million , pursuant to a new 364-day term loan and onApril 22, 2020 , sold$600 million of 3.125% notes due 2030. OnMay 5, 2020 , the Company repaid the$250 million borrowed April 1, 2020 under its revolving credit facility. Following these borrowing actions, the Company currently has approximately$750 million in cash and cash equivalents on hand and$500 million in committed availability under its revolving credit facility. To further improve its financial flexibility and liquidity, the Company gave notice of its intent to exercise a conditional one-time option to extend its$200 million term loan dueMay 2020 toMay 2021 . The Company expects the required conditions will be met.Sonoco is also taking further actions to strengthen cash flow and improve liquidity. These actions include reducing planned 2020 capital spending by delaying certain projects, deferring pension-termination contributions to 2021 and closely managing working capital. Finally, the Company is taking aggressive actions to reduce operating costs and selling, general and administrative expenses. Health, Safety and Business Continuity The health and safety ofSonoco's associates, contractors, suppliers and the general public are a top priority. Included among the safety measures we have recently implemented are: conducting health screenings for personnel entering our operations, routinely cleaning high-touch surfaces, following social distancing protocols, prohibiting all non-critical business travel, and encouraging all associates who can to work from home when possible. Additionally,Sonoco has launched a dedicated COVID-19 internal microsite to keep its associates up to date on Company and health authority information, guidelines, protocols and policies, including those set by theWorld Health Organization and theU.S. Centers for Disease Control and Prevention .Sonoco has also put in place aGlobal Task Force to develop and implement business continuity plans to ensure its operations are as prepared as possible to be able to continue producing and shipping product to its customers without disruption.Sonoco has a diverse global supply chain and to date has not experienced significant raw material or other supply disruptions. First Quarter 2020 Compared with First Quarter 2019 RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES Measures calculated and presented in accordance with generally accepted accounting principles are referred to as GAAP financial measures. The following tables reconcile the Company's non-GAAP financial measures to their most directly comparable GAAP financial measures in the Company's Condensed Consolidated Statements of Income for each of the periods presented. These non-GAAP financial measures (referred to as "Base") are the GAAP measures adjusted to exclude (dependent upon the applicable period) restructuring charges, asset impairment charges, acquisition/disposition-related costs, specifically identified tax adjustments, non-operating pension costs/income and certain other items, if any, the exclusion of which the Company believes improves comparability and analysis of the underlying financial performance of the business. More information about the Company's use of Non-GAAP financial measures is provided in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 under Item 7 - "Management's discussion and analysis of financial condition and results of operations," under the heading "Use of non-GAAP financial measures." 35 --------------------------------------------------------------------------------SONOCO PRODUCTS COMPANY For
the three months ended
Restructuring/
Dollars in thousands, except per share Asset Other data GAAP Impairment Adjustments(1) Base Operating profit$ 130,103 $
12,599
7,579 - (7,579) -
Interest expense, net 16,045 - - 16,045
Income before income taxes 106,479 12,599 8,789 127,867
Provision for income taxes 26,756 3,129 3,400 33,285
Income before equity in earnings of
affiliates 79,723 9,470 5,389 94,582
Equity in earnings of affiliates, net of
tax 513 - - 513
Net income 80,236 9,470 5,389 95,095
Net loss/(income) attributable to
noncontrolling interests 209 (11) - 198
Net income attributable to Sonoco 80,445 9,459 5,389 95,293
Per diluted common share* $ 0.80 $
0.09
(1 ) Consists of non-operating pension costs and costs related to acquisitions and potential acquisitions and divestitures. Also includes non-base deferred income tax gains of$1,413 related primarily to a tax rate change. For
the three months ended
Restructuring/
Dollars in thousands, except per share Asset Other data GAAP Impairment Adjustments(1) Base Operating profit$ 116,888 $
10,672 $ 400
6,041 - (6,041) -
Interest expense, net 15,385 - - 15,385
Income before income taxes 95,462 10,672 6,441 112,575
Provision for income taxes 22,624 2,638 1,885 27,147
Income before equity in earnings of
affiliates 72,838 8,034 4,556 85,428
Equity in earnings of affiliates, net of
tax 930 - - 930
Net income 73,768 8,034 4,556 86,358
Net (income) attributable to
noncontrolling interests (105) (69) - (174)
Net income attributable to Sonoco $ 73,663 $
7,965
$ 0.73 $
0.08
(1) Consists of non-operating pension costs and costs related to acquisitions and potential acquisitions and divestitures. RESULTS OF OPERATIONS The following discussion provides a review of results for the three months endedMarch 29, 2020 versus the three months endedMarch 31, 2019 . OVERVIEW Net sales for the first quarter of 2020 decreased 3.6% to$1,303 million , compared with$1,352 million in the same period last year. This decrease reflects volume declines throughout most of the Company's businesses, lower selling prices, particularly in our industrial businesses, as well as unfavorable changes in foreign currency exchange rates. These negative factors were partially offset by sales from acquisitions. Lower overall selling prices in our industrial businesses were largely due to contracts indexed to Old Corrugated Containers (OCC), the cost of which was lower year over year. Net income attributable toSonoco for the first quarter of 2020 increased 9.2% to$80.4 million ,$0.80 per diluted share, compared to$73.7 million ,$0.73 per diluted share, reported for the same period of 2019. Current quarter net income includes after-tax, non-base charges totaling$14.8 million , while results for the first quarter of 2019 include after-tax, non-base net charges totaling$12.5 million . Earnings decreased partially due to a$1.5 million increase in after-tax restructuring and asset impairment costs associated with previously announced plant closures and organizational 36 --------------------------------------------------------------------------------SONOCO PRODUCTS COMPANY
restructuring activities. Additionally, after-tax non-operating pension costs
increased
First quarter 2019 Base net income attributable toSonoco (Base earnings) increased 10.6% to$95.3 million ,$0.94 per diluted share, from$86.2 million ,$0.85 per diluted share, in 2019. This increase was driven by a 12.5 percent increase in Base operating profit which was partially offset by a higher effective tax rate. Net interest expense was slightly higher year-over-year. Productivity improvements and acquisitions drove the year-over-year increase in operating profit, but were partially offset by volume declines and a negative price cost relationship as the Company was not able to fully pass on the impact of rising material costs and other general inflation. OPERATING REVENUE Net sales for the first quarter of 2020 decreased$48 million , or 3.6 percent, from the prior-year quarter. The components of the sales change were: ($ in millions) Volume/mix $ (36) Selling prices (25) Acquisitions 36 Foreign currency translation and other, net (24) Total sales decrease $ (48) COSTS AND EXPENSES Cost of goods sold decreased$44.9 million , or 4.1%, and the gross profit margin percentage increased to 20.5% for the first quarter of 2020 compared to 20.0% in the prior-year's first quarter. The decrease in cost of goods sold was driven primarily by lower volume, the translation impact of a stronger dollar, and productivity gains. These productivity gains were primarily responsible for the nearly 50 basis point increase in the gross profit margin. Selling, general and administrative ("SG&A") costs for the quarter decreased$18.7 million , or 13.1%, year over year due to a significant focus across the business on reducing controllable costs as well as lower management incentive expenses. Those reductions were partially offset by the addition of expenses from acquisitions. As noted in the segment discussions below, the COVID-19 pandemic is expected to continue triggering higher demand in some of our businesses, but result in lower demand in others. The net overall impact for the Company is expected to be negative for at least the second quarter. As a result, the Company will seek to reduce costs at manufacturing locations expected to experience sustained declines in volume and aggressively pursue reductions in overall selling, general and administrative costs. Restructuring costs and asset impairment charges totaled$12.6 million for the first quarter of 2020 compared with$10.7 million in the same period last year. The year-over-year increase was mostly driven by an increase in severance costs related to increased restructuring activity around staffing at various businesses and a$2.3 million asset impairment charge related to the Company's decision to close the No. 3 uncoated recycled board paper machine at itsHartsville, South Carolina , paper mill. Additional information regarding restructuring and asset impairment charges is provided in Note 5 to the Company's Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Non -operating pension costs increased$1.5 million for the quarter, compared to the prior-year's period, due primarily to lower expected returns on plan assets stemming from actions in the previous year to de-risk theU.S. plan's portfolio by increasing the allocation of pension assets to fixed-income investments. Net interest expense for the first quarter increased to$16.0 million , compared with$15.4 million during the first quarter of 2019. The increase was primarily due to higher debt balances, partially offset by the impact of lower interest rates. The 2020 first-quarter effective tax rates on GAAP and Base earnings were 25.1% and 26.0%, respectively, compared with 23.7% and 24.1%, respectively, in the prior year's quarter. The higher 2020 GAAP and Base effective tax rates are attributable largely to a valuation allowance recorded against net operating losses for which realization is not currently expected. 37 -------------------------------------------------------------------------------- SONOCO PRODUCTS COMPANY
REPORTABLE SEGMENTS The following table recaps net sales attributable to each of the Company's segments for the first quarters of 2020 and 2019 ($ in thousands):
Three Months Ended
%
March 29, 2020 March 31, 2019 Change
Net sales:
Consumer Packaging $ 588,417 $ 589,716 (0.2) %
Display and Packaging 121,356 137,554 (11.8) %
Paper and Industrial Converted Products 474,970 496,037 (4.2) %
Protective Solutions 118,553 128,398 (7.7) %
Consolidated $ 1,303,296 $ 1,351,705 (3.6) %
The following table recaps operating profit attributable to each of the
Company's segments during the first quarters of 2020 and 2019 ($ in thousands):
Three Months Ended
%
March 29, 2020 March 31, 2019 Change
Operating profit:
Segment operating profit:
Consumer Packaging $ 67,801 $ 62,115 9.2 %
Display and Packaging 8,094 6,454 25.4 %
Paper and Industrial Converted Products 54,013 48,387 11.6 %
Protective Solutions 14,004 11,004 27.3 %
Restructuring/Asset impairment charges (12,599) (10,672)
Other, net (1,210) (400)
Consolidated $ 130,103 $ 116,888 11.3 %
Segment results viewed by Company management to evaluate segment performance do
not include restructuring charges, asset impairment charges, acquisition-related
charges, non-operating pension costs/income, or certain other items, if any, the
exclusion of which the Company believes improves the comparability and analysis
of the ongoing operating performance of the business. Accordingly, the term
"segment operating profit" is a non-GAAP measure and is defined as the segment's
portion of "operating profit" excluding those items. All other general corporate
expenses have been allocated as operating costs to each of the Company's
reportable segments.
The following table recaps restructuring/asset impairment charges attributable
to each of the Company's segments during the first quarter of 2020 and 2019 ($
in thousands):
Three Months Ended
March 29, 2020 March 31, 2019
Restructuring/Asset impairment charges:
Consumer Packaging $ 2,362 $ 7,255
Display and Packaging 2,880
375
Paper and Industrial Converted Products 5,356 874 Protective Solutions 473 442 Corporate 1,528 1,726 Consolidated$ 12,599 $ 10,672 38
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SONOCO PRODUCTS COMPANY
Consumer Packaging
The Consumer Packaging segment includes the following products and services:
round and shaped rigid containers and trays (both composite and thermoformed
plastic); extruded and injection-molded plastic products; printed flexible
packaging; global brand artwork management; and metal and peelable membrane ends
and closures.
Segment sales decreased 0.2 percent compared to the prior year's quarter due to
lower volume/mix, the negative impact of foreign exchange and lower selling
prices, all of which was mostly offset by additional sales from the TEQ
acquisition described below. Global Rigid Paper Containers sales volume was down
driven by declines in North America and Europe , partially offset by growth in
emerging markets of Asia and Latin America . These overall weaker volumes were
partially offset by higher selling prices. Flexible Packaging volume improved
during the quarter but was offset by a negative mix of business and the closure
of a forming films operation in 2019. In Global Plastics, sales prices declined
due to lower resin costs and volume was flat as gains in served food markets
were largely offset by declines in industrial and specialty markets. However,
Global Plastics sales increased overall due to the December 31, 2019 acquisition
of Thermoform Engineered Quality (TEQ), a global medical packaging business.
Segment operating profit increased 9.2 percent compared to the prior year's
quarter as the benefits of strong productivity improvements, particularly in
Flexible Packaging and Rigid Paper Containers, and cost controls more than
offset the impact of lower volume/mix. Despite the volume declines and negative
price/cost relationship, segment operating margin improved to 11.5 percent in
the quarter from 10.5 percent in 2019.
The COVID-19 pandemic is expected to have a mixed impact on this segment in the
near term due to increased demand for food and household goods packaging driven
by stay-at-home consumers and declines in non-food categories due to temporary
business closures and the impact of higher unemployment. The Company will seek
to reduce costs at locations that experience sustained declines in volume.
Display and Packaging
The Display and Packaging segment includes the following products and services:
designing, manufacturing,
assembling, packing and distributing temporary, semi-permanent and permanent
point-of-purchase displays; supply chain management services, including contract
packing, fulfillment and scalable service centers; retail packaging, including
printed backer cards, thermoformed blisters and heat sealing equipment; and
paper amenities, such as coasters and glass covers.
Sales declined 11.8 percent compared to last year's quarter due to lower volume
in domestic displays and retail security packaging, indirectly related to the
exit of a pack center contract in 2018, along with the negative impact of
foreign exchange. Segment operating profit improved $1.6 million due to strong
productivity improvements and cost controls, partially offset by lower
volume/mix. Segment operating margin improved to 6.7 percent in the quarter up
from 4.7 percent in 2019.
Increased food and household products demand from stay-at-home consumers and
COVID-19 preparedness is expected to continue benefiting the Company's
fulfillment operations, but lower overall economic activity is expected to
negatively impact the segment's manufactured materials and retail security
businesses. The Company will seek to reduce costs at locations that experience
sustained declines in volume. As the profitability of certain packaging center
business is not highly sensitive to volume, a COVID-19 driven decline in
activity would not be expected to have a commensurate impact on related
operating results.
Paper and Industrial Converted Products
The Paper and Industrial Converted Products segment includes the following
products: paperboard tubes, cones and cores; fiber-based construction tubes;
wooden, metal and composite wire and cable reels and spools; and recycled
paperboard, linerboard, corrugating medium, recovered paper and material
recycling services.
Segment sales decreased 4.2 percent from the prior year's quarter as lower
selling prices, declining volume/mix and the negative impact of foreign exchange
more than offset sales from the acquisition of Corenso Holdings in August 2019 .
The lower volume/mix was driven by weakness in global tubes, cores and cones
which was partially offset by improved volume/mix in North America paper and
recycling operations.
Segment operating profit improved 11.6 percent above the prior year's quarter as
earnings from productivity improvements and the Corenso acquisition more than
offset general inflation and lower volume/mix. Segment operating margin improved
162 basis points to 11.4 percent.
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SONOCO PRODUCTS COMPANY
As a result of COVID-19, the Company expects to see increased demand in the near
term for paperboard serving the tissue and towel market which should help offset
volume declines in some of our other industrial converted products businesses.
The Company expects recycled fiber prices to continue to increase during the
second quarter, possibly reaching more than $100 a ton during the second quarter
of 2020. This should benefit our recycling operations, but create a significant
price/cost headwind to our paper-based businesses until such time as we are able
to achieve recovery of those higher costs for sales made in the second half of
the year. The Company will seek to reduce costs at locations that experience
sustained declines in volume.
Protective Solutions
The Protective Solutions segment includes the following products:
custom-engineered, paperboard-based and expanded foam protective packaging and
components; and temperature-assured packaging.
Segment sales for the quarter declined 7.7 percent due to lower volume/mix
driven by declines in molded foam automotive components and consumer fiber
packaging for appliances. Despite the sales decline, segment operating profit
improved on strong productivity improvements and cost controls, partially offset
by lower volume/mix. Segment operating margin, compared to the prior-year's
quarter, improved 324 basis points to 11.8 percent.
The ThermoSafe temperature-assured packaging business should continue to produce
solid results in the second quarter of 2020 as it is supplying coolers critical
for virus testing and pharmaceutical transport. However, we expect
second-quarter earnings in our Protective Solutions segment will be negatively
impacted by lower demand in our molded foam and consumer fiber businesses, which
serve the automotive and appliance markets. The Company will seek to reduce
costs at locations that experience sustained declines in volume.
OTHER ITEMS
Critical Accounting Policies and Estimates
Income taxes
As previously disclosed, the Company received a draft Notice of Proposed
Adjustment ("NOPA") from the Internal Revenue Service ("IRS") in February 2017
proposing an adjustment to income for the 2013 tax year based on the IRS's
recharacterization of a distribution of an intercompany note made in 2012, and
the subsequent repayment of the note over the course of 2013, as if it were a
cash distribution made in 2013. In March 2017 , the Company received a draft NOPA
proposing penalties of $18 million associated with the IRS's recharacterization,
as well as an Information Document Request ("IDR") requesting the Company's
analysis of why such penalties should not apply. The Company responded to this
IDR in April 2017 . On October 5, 2017 , the Company received two revised draft
NOPAs proposing the same adjustments and penalties as in the prior NOPAs. On
November 14, 2017 , the Company received two final NOPAs proposing the same
adjustments and penalties as in the prior draft NOPAs. On November 20, 2017 , the
Company received a Revenue Agent's Report ("RAR") that included the same
adjustments and penalties as in the prior NOPAs. At the time of the distribution
in 2012, it was characterized as a dividend to the extent of earnings and
profits, with the remainder as a tax free return of basis and taxable capital
gain. As the IRS proposes to recharacterize the distribution, the entire
distribution would be characterized as a dividend. The incremental tax liability
associated with the income adjustment proposed in the RAR would be approximately
$89 million , excluding interest and the previously referenced penalties. On
January 22, 2018 , the Company filed a protest to the proposed deficiency with
the IRS . The Company received a rebuttal of its protest from the IRS on July 10,
2018 , and the matter has now been referred to the Appeals Division of the IRS .
The Company had a pre-conference hearing with IRS Appeals during the second
quarter of 2019, and has had continued discussions with IRS Appeals since that
time. If the matter is not resolved in IRS Appeals , the next step would be to
file a petition in Tax Court. The Company strongly believes the position of the
IRS with regard to this matter is inconsistent with the applicable tax laws and
existing Treasury regulations, and that the Company's previously reported income
tax provision for the year in question is appropriate. However, there can be no
assurance that this matter will be resolved in the Company's favor. Regardless
of whether the matter is resolved in the Company's favor, the final resolution
of this matter could be expensive and time consuming to defend and/or settle.
While the Company believes that the amount of tax originally paid with respect
to this distribution is correct, and accordingly has not provided additional
reserve for tax uncertainty, there is still a possibility that an adverse
outcome of the matter could have a material effect on its future results of
operations and financial condition.
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Pension Plan Termination
As previously disclosed, the Company terminated the Sonoco Pension Plan for
Inactive Participants, a tax-qualified defined benefit plan (the "Inactive
Plan"), effective September 30, 2019 . Once approval is received from the Pension
Benefit Guaranty Corporation ("PBGC"), and following completion of a limited
lump-sum offering, the Company is expected to settle all remaining liabilities
under the Inactive Plan in 2021 through the purchase of annuity contracts. The
Company intends to apply to the PBGC for an extension of the distribution
deadline and expects to make additional contributions to the Inactive Plan of
approximately $150 million ($112 million after tax) in 2021 in order to be fully
funded on a termination basis at the time of the annuity purchase. However, the
actual amount of the Company's long-term liability when it is transferred, and
the related required cash contribution, will depend upon the nature and timing
of participant settlements, as well as prevailing market conditions. Non-cash,
pretax settlement charges resulting from the lump sum payouts and annuity
purchases are currently expected to total approximately $590 million . The
termination of the Inactive Plan will apply to participants who have separated
service from Sonoco and to nonunion active employees who no longer accrue
pension benefits. There is no change in the cumulative benefit previously earned
by the approximately 11,000 impacted participants as a result of these actions,
and the Company will continue to manage and support the Sonoco Pension Plan,
comprised of approximately 600 active participants who continue to accrue
benefits in accordance with a flat-dollar multiplier formula.
Financial Position, Liquidity and Capital Resources
Operating cash flows totaled $87.7 million in the three months ended March 29,
2020 compared with $92.3 million during the same period last year, a decrease of
$4.6 million . Accounts Receivable consumed $64.9 million of operating cash in
the first three months of 2020 compared with $40.0 million in the same period
last year as both periods experienced increased business activity following
seasonally lower year-end activity. Similarly, inventories consumed $12.2
million of cash in the first three months of 2020 compared with $20.6 million in
the same period last year. Trade accounts payable consumed $6.8 million of cash
during the three months ended March 29, 2020 compared to providing $14.8 million
in the same reporting period last year.
Changes in accrued expenses provided $16.3 million of operating cash in the
three months ended March 29, 2020 while consuming $16.9 million in the same
period last year. The greater source of cash this year is primarily due to lower
management incentives paid in the first three months of 2020 compared to the
first three months of 2019 as well as the timing of payroll and other payments.
Changes in other assets and liabilities provided $16.8 million less cash in the
first three months of 2020 compared to 2019, due to the receipt in the prior
year quarter of insurance proceeds associated with clean-up and other repair
costs related to Hurricane Florence. The impact of income taxes, net payables
and deferred items provided $1.3 million more cash in the quarter versus the
prior year.
Cash used in investing activities was $34.2 million in the three months ended
March 29, 2020 , compared with $41.0 million in the same period last year, a
lower year-over-year use of cash of $6.8 million . Acquisition spending was $3.5
million higher year over year with the Company having acquired a tubes and cores
operation in Jacksonville, Florida in the first three months of 2020. In the
first quarter of 2019, a small amount of cash was used to settle final purchase
price adjustments related to the 2018 Conitex and Compositub acquisitions.
Proceeds from the sale of assets provided $3.2 million in the three months ended
March 29, 2020 , compared to $0.5 million in the same period last year. The
year-over-year increase was due primarily to net proceeds of $2.4 million
received in February 2020 for the sale of equipment at a metal ends operation in
Canton, Ohio . Capital spending during the first three months of 2020 was $33.9
million , approximately $8 million lower year over year. Capital spending for the
remainder of 2020 is not expected to exceed $140 million , reflecting reductions
in planned spending of $45 million from delaying certain projects in response to
the economic uncertainty related to COVID-19, and increases in planned spending
of approximately $15 million from beginning work on the transformation of the
corrugated medium paper machine in Hartsville, South Carolina , into a low-cost,
state-of-the-art uncoated recycled paperboard machine.
Cash used in financing activities totaled $62.7 million in the three months
ended March 29, 2020 , compared with $47.8 million in the same period last year,
a change of $14.8 million . The Company used $185 million during the first
quarter of 2020 to pay down its outstanding commercial paper, largely funded by
proceeds from a $150 million term loan entered into in March 2020 , creating a
net use of cash of $35 million , compared to $31 million provided by commercial
paper in the prior year's quarter. The year-over-year increase in outstanding
checks was $17.6 million and resulted primarily from the timing of payroll
payments. The Company received proceeds of $14.5 million from the settlement of
a cross-currency swap in March 2020 and, during the three months ended March 29,
2020 , paid cash dividends of $43.2 million , an
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SONOCO PRODUCTS COMPANY
increase of $2.1 million over the same period last year. Cash used to repurchase
the Company's common stock was lower year over year by $3.5 million .
The Company operates a $500 million commercial paper program, supported by a
$500 million revolving credit facility with a syndicate of eight banks. The
revolving bank credit facility is committed through July 2022 . If circumstances
were to prevent the Company from issuing commercial paper, it has the
contractual right to draw funds directly on the underlying revolving bank credit
facility. Borrowings under the credit facility may be prepaid at any time at the
discretion of the Company.
The Company has taken several actions in March and April 2020 to secure
liquidity in light of volatility in the credit markets and economic uncertainty
being caused by the COVID-19 pandemic.
On March 18, 2020 , the Company closed and funded a 364-day, $150 million term
loan with Wells Fargo Bank, National Association , and the proceeds were used to
repay a portion of outstanding commercial paper. Interest is assessed at the
London Interbank Offered Rate (LIBOR) plus a margin based on a pricing grid that
uses the Company's credit ratings. The margin above LIBOR at March 29, 2020 was
125 basis points. There is no required amortization and repayment can be
accelerated at any time at the discretion of the Company.
On April 1, 2020 , subsequent to quarter end, the Company accessed $250 million
from its revolving credit facility. On April 6, 2020 , the Company borrowed $100
million , pursuant to a new 364-day term loan with U.S. Bank, National
Association . The Company used $85 million of the proceeds to fully repay its
outstanding commercial paper balance and the remaining proceeds were invested in
short term cash equivalents with maturities of 30 days or less. Interest is
assessed at LIBOR plus a margin based on a pricing grid that uses the Company's
credit ratings. The margin above LIBOR at April 6, 2020 was 125 basis points.
There is no required amortization and repayment can be accelerated at any time
at the discretion of the Company.
On April 22, 2020 , the Company sold through a public offering $600 million of
3.125% notes due May 1, 2030 . The offering was made pursuant to an effective
shelf registration statement. This action was taken largely to mitigate the risk
of possible future credit market dislocations triggered by the economic impact
of the COVID-19 pandemic. The net proceeds from the offering of approximately
$594.2 million are available for general corporate purposes, including repayment
of outstanding debt. On May 5, 2020 , the Company repaid the $250 million
borrowed April 1, 2020 under the Company's revolving credit facility.
To further improve its financial flexibility and liquidity, the Company gave
notice in March 2020 of its intent to exercise a conditional one-time option to
extend its $200 million term loan with Wells Fargo Bank, National Association ,
due May 2020 , for an additional 364 days to May 2021 . The Company expects the
required conditions will be met.
As a result of these borrowing actions, the Company currently expects debt
maturities of approximately $871 million in 2021. The Company currently has
approximately $750 million in cash and cash equivalents on hand and $500 million
in committed availability under its revolving credit facility. The Company
believes these amounts, combined with expected free cash flow generation,
provide ample liquidity to cover the 2021 debt maturities and other cash flow
needs of the Company.
Certain of the Company's debt agreements impose restrictions with respect to the
maintenance of financial ratios and the disposition of assets. The most
restrictive covenants currently require the Company to maintain a minimum level
of interest coverage and a minimum level of net worth, as defined in the
agreements. As of March 29, 2020 , the Company's interest coverage and net worth
were substantially above the minimum levels required under these covenants.
The Company continually explores strategic acquisition opportunities which may
result in the use of cash. Given the nature of the acquisition process, the
timing and amounts of such expenditures are not always predictable. The Company
expects that any acquisitions requiring funding in excess of cash on hand would
be financed using available borrowing capacity.
Although there are approximately 3.0 million shares of common stock remaining
available for open-market repurchase under a 2016 Board of Directors
authorization, the Company currently has no intention of making any such
repurchases in the near term.
Cash and cash equivalents totaled $123.3 million and $145.3 million at March 29,
2020 and December 31, 2019 , respectively. Of these totals, approximately $97.7
million and $115.0 million , respectively, were held outside of the United States
by the Company's foreign subsidiaries. Cash held outside of the United States is
available to meet local
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SONOCO PRODUCTS COMPANY
liquidity needs, or for capital expenditures, acquisitions, and other offshore
growth opportunities. Reflecting the financing actions described above, the
Company has ample domestic liquidity from a combination of cash on hand,
operating cash flow generation and access to bank and capital markets
borrowings. The Company has generally considered its foreign unremitted earnings
to be indefinitely invested outside the United States and currently has no plans
to repatriate such earnings, other than excess cash balances that can be
repatriated at minimal tax cost. Accordingly, the Company is not providing for
taxes on these amounts for financial reporting purposes. Computation of the
potential deferred tax liability associated with unremitted earnings considered
to be indefinitely reinvested is not practicable.
The Company uses a notional pooling arrangement with an international bank to
help manage global liquidity requirements. Under this pooling arrangement, the
Company and its participating subsidiaries may maintain either a cash deposit or
borrowing position through local currency accounts with the bank, so long as the
aggregate position of the global pool is a notionally calculated net cash
deposit. Because it maintains a security interest in the cash deposits, and has
the right to offset the cash deposits against the borrowings, the bank provides
the Company and its participating subsidiaries favorable interest terms on both.
During the three months ended March 29, 2020 , the Company reported a net
decrease in cash and cash equivalents of $12.8 million due to an overall
stronger U.S. dollar relative to most foreign currencies.
The Company anticipates making additional contributions to its pension and
postretirement plans of approximately $15 million during the remainder of 2020,
which would result in total 2020 contributions of approximately $40 million ,
excluding potential immaterial cash funding related to restructuring actions. As
discussed in "Other Items," the Sonoco Pension Plan for Inactive Participants
was terminated effective September 30, 2019 . Upon approval by the Pension
Benefit Guaranty Corporation ("PBGC"), and following completion of a limited
lump-sum offering, the Company is expected to settle all remaining liabilities
under the Inactive Plan through the purchase of annuities. The Company intends
to apply to the PBGC for an extension of the distribution deadline and expects
to make additional contributions to the Inactive Plan of approximately $150
million ($112 million , after tax) in 2021 in order to be fully funded on a
termination basis at the time of the annuity purchase. Any such contributions in
excess of cash on hand are expected to be financed using available borrowing
capacity. Future funding requirements beyond the current year will vary
depending largely on actual investment returns, future actuarial assumptions,
the nature and timing of participant settlements, and legislative actions.
Fair Value Measurements, Foreign Exchange Exposure and Risk Management
Certain assets and liabilities are reported in the Company's financial
statements at fair value, the fluctuation of which can impact the Company's
financial position and results of operations. Items reported by the Company at
fair value on a recurring basis include derivative contracts and pension and
deferred compensation related assets. The valuation of the vast majority of
these items is based either on quoted prices in active and accessible markets or
on other observable inputs.
As a result of operating globally, the Company is exposed to changes in foreign
exchange rates. The exposure is well diversified, as the Company's operations
are located throughout the world, and the Company generally sells in the same
countries where it produces with both revenue and costs transacted in the local
currency. The Company monitors these exposures and may use traditional currency
swaps and forward exchange contracts to hedge a portion of forecasted
transactions that are denominated in foreign currencies, foreign currency assets
and liabilities or net investment in foreign subsidiaries. The Company's foreign
operations are exposed to political, geopolitical and cultural risks, but the
risks are mitigated by diversification and the relative stability of the
countries in which the Company has significant operations.
Due to the highly inflationary economy in Venezuela , the Company considers the
U.S. dollar to be the functional currency of its Venezuelan operations and uses
the official exchange rate when remeasuring the financial results of those
operations. Economic conditions in Venezuela have worsened considerably over the
past several years and there is no indication that conditions are due to improve
in the foreseeable future. Further deterioration could result in the recognition
of an impairment charge or a deconsolidation of the subsidiary. At March 29,
2020 , the carrying value of the Company's net investment in its Venezuelan
operations was approximately $2.1 million . In addition, at March 29, 2020 , the
Company's Accumulated Other Comprehensive Loss included a cumulative translation
loss of $3.8 million related to its Venezuelan operations which would need to be
reclassified to net income in the event of a complete exit of the business or a
deconsolidation of these operations.
The Company has operations in the United Kingdom and elsewhere in Europe that
could be impacted by the exit of the U.K. from the European Union (Brexit). Our
U.K. operations have made contingency plans regarding potential customs
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SONOCO PRODUCTS COMPANY
clearance issues, tariffs and other uncertainties resulting from Brexit.
Although it is difficult to predict all of the possible impacts to our supply
chain or in our customers' downstream markets, the Company has evaluated the
potential operational impacts and uncertainties of Brexit and at this time
believes that the likelihood of a material impact on our future results of
operations is low. Although there are some cross-border sales made out of and
into the U.K. , most of what we produce in the U.K. is also sold in the U.K. and
the same is true for continental Europe . In some cases, companies that have been
importing from Europe into the U.K. are now seeking local sources, which has
actually been positive for our U.K. operations. Annual sales of our U.K.
operations totaled approximately $120 million in 2019.
At March 29, 2020 , the Company had commodity contracts outstanding to fix the
cost of a portion of anticipated raw materials and natural gas purchases. The
total net fair market value of these instruments was an unfavorable position of
$(2.9) million and $(1.6) million at March 29, 2020 and December 31, 2019 ,
respectively. Natural gas and aluminum hedge contracts covering an equivalent of
4.0 million MMBTUs and 1,089 metric tons, respectively, were outstanding at
March 29, 2020 . Additionally, the Company had various currency contracts
outstanding to fix the exchange rate on certain anticipated foreign currency
cash flows. The total market value of these instruments was a net unfavorable
position of $(3.6) million at March 29, 2020 and a net favorable position of
$1.1 million at December 31, 2019 . These contracts qualify as cash flow hedges
and mature within twelve months of their respective reporting dates.
In addition, at March 29, 2020 , the Company had various currency contracts
outstanding to fix the exchange rate on certain foreign currency assets and
liabilities. Although placed as an economic hedge, the Company does not apply
hedge accounting to these contracts. The fair value of these currency contracts
were immaterial at March 29, 2020 and December 31, 2019 .
In January 2020 , the Company entered into a cross-currency swap agreement with a
notional amount of $250 million to effectively convert a portion of the
Company's fixed-rate, U.S. dollar denominated debt, including the semi-annual
interest payments, to fixed-rate euro-denominated debt. The swap agreement had
an original maturity of November 1, 2024 and provided for the Company to receive
semi-annual interest payments in U.S. dollars at a rate of 5.75% and pay
interest in euros at a rate of 3.856%. The risk management objective was to
manage foreign currency risk relating to net investments in certain European
subsidiaries denominated in foreign currencies. As a result of significant
strengthening of the U.S. dollar, as well as a reduction in the differential
between U.S. and European interest rates, the fair market value of the swap
position appreciated significantly during the first quarter of 2020. In March
2020 , the Company terminated the agreement and received a net cash settlement of
$14.5 million .
At March 29, 2020 , the U.S. dollar had strengthened against most of the
functional currencies of the Company's foreign operations compared to
December 31, 2019 , resulting in a net translation loss of $93.6 million being
recorded in accumulated other comprehensive loss at March 29, 2020 .
As a result of the weakening global economy due to the COVID-19 pandemic, the
Company increased its allowance for cumulative expected credit losses by $0.6
million as of March 29, 2020 . Continued weakness in the economy may require
additional charges to be recognized in future periods. The magnitude of such
charges cannot be estimated at this time.
Restructuring and ImpairmentInformation regarding restructuring charges and restructuring-related asset impairment charges is provided in Note 5 to the Company's Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Form 10-Q.
New Accounting Pronouncements
Information regarding new accounting pronouncements is provided in Note 2 to the
Company's Condensed Consolidated Financial Statements, included in Part I, Item
1 of this Form 10-Q.
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