Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits.
Exhibits
EX-15
q32018ex15.htm
EX-31
q32018ex31.htm
EX-32
q32018ex32.htm
Sonoco Products Earnings 2018-09-30
SON 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-11261
SONOCO PRODUCTS COMPANY
Incorporated under the laws
of South Carolina
I.R.S. Employer Identification
No. 57-0248420
1 N. Second St.
Hartsville, South Carolina 29550
Telephone: 843/383-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock at October 19, 2018:
Notes payable and current portion of long-term debt
73,899
159,327
Accrued taxes
15,589
8,979
994,384
999,970
Long-term Debt, Net of Current Portion
1,312,678
1,288,002
Pension and Other Postretirement Benefits
335,379
355,187
Deferred Income Taxes
85,473
74,073
Other Liabilities
97,790
110,429
Sonoco Shareholders’ Equity
Common stock, no par value
Authorized 300,000 shares 99,650 and 99,414 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
7,175
7,175
Capital in excess of stated value
333,853
330,157
Accumulated other comprehensive loss
(681,865)
(666,272)
Retained earnings
2,151,658
2,036,006
Total Sonoco Shareholders’ Equity
1,810,821
1,707,066
Noncontrolling Interests
22,109
22,994
Total Equity
1,832,930
1,730,060
Total Liabilities and Equity
$
4,658,634
$
4,557,721
*
The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
See accompanying Notes to Condensed Consolidated Financial Statements
3
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(Dollars and shares in thousands except per share data)
Three Months Ended
Nine Months Ended
September 30, 2018
October 1, 2017
September 30, 2018
October 1, 2017
Net sales
$
1,364,762
$
1,324,634
$
4,035,322
$
3,737,632
Cost of sales
1,105,126
1,071,755
3,248,624
3,023,397
Gross profit
259,636
252,879
786,698
714,235
Selling, general and administrative expenses
136,002
129,136
414,474
379,645
Restructuring/Asset impairment charges
22,061
511
28,691
12,519
Operating profit
101,573
123,232
343,533
322,071
Non-operating pension costs/(income)
(25)
3,150
197
41,246
Interest expense
15,989
14,741
47,001
41,649
Interest income
1,487
1,094
4,017
3,152
Income before income taxes
87,096
106,435
300,352
242,328
Provision for income taxes
18,325
35,545
71,974
78,251
Income before equity in earnings of affiliates
68,771
70,890
228,378
164,077
Equity in earnings of affiliates, net of tax
4,049
2,521
9,012
7,320
Net income
72,820
73,411
237,390
171,397
Net income attributable to noncontrolling interests
(405)
(599)
(1,508)
(1,727)
Net income attributable to Sonoco
$
72,415
$
72,812
$
235,882
$
169,670
Weighted average common shares outstanding:
Basic
100,640
100,275
100,534
100,214
Diluted
101,040
100,684
100,993
100,793
Per common share:
Net income attributable to Sonoco:
Basic
$
0.72
$
0.73
$
2.35
$
1.69
Diluted
$
0.72
$
0.72
$
2.34
$
1.68
Cash dividends
$
0.41
$
0.39
$
1.21
$
1.15
See accompanying Notes to Condensed Consolidated Financial Statements
4
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (unaudited)
(Dollars in thousands)
Three Months Ended
Nine Months Ended
September 30, 2018
October 1, 2017
September 30, 2018
October 1, 2017
Net income
$
72,820
$
73,411
$
237,390
$
171,397
Other comprehensive income/(loss):
Foreign currency translation adjustments
1,186
27,445
(40,418)
87,807
Changes in defined benefit plans, net of tax
6,961
10,301
22,200
58,311
Changes in derivative financial instruments, net of tax
1,659
(186)
394
(3,653)
Other comprehensive income/(loss)
9,806
37,560
(17,824)
142,465
Comprehensive income
82,626
110,971
219,566
313,862
Net income attributable to noncontrolling interests
(405)
(599)
(1,508)
(1,727)
Other comprehensive (income)/loss attributable to noncontrolling interests
730
(517)
2,407
(1,038)
Comprehensive income attributable to Sonoco
$
82,951
$
109,855
$
220,465
$
311,097
See accompanying Notes to Condensed Consolidated Financial Statements
5
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
Nine Months Ended
September 30, 2018
October 1, 2017
Cash Flows from Operating Activities:
Net income
$
237,390
$
171,397
Adjustments to reconcile net income to net cash provided by operating activities:
Asset impairment
2,627
1,486
Depreciation, depletion and amortization
176,895
159,130
Share-based compensation expense
9,442
9,028
Equity in earnings of affiliates
(9,012)
(7,320)
Cash dividends from affiliated companies
5,203
5,467
Net loss on disposition of assets
7,022
833
Pension and postretirement plan expense
25,736
66,245
Pension and postretirement plan contributions
(27,339)
(52,549)
Net increase/(decrease) in deferred taxes
6,097
(2,126)
Change in assets and liabilities, net of effects from acquisitions, dispositions, and foreign currency adjustments:
Trade accounts receivable
(58,187)
(70,908)
Inventories
(8,938)
(14,965)
Payable to suppliers
45,038
29,321
Prepaid expenses
(5,126)
(2,504)
Accrued expenses
35,353
1,229
Income taxes payable and other income tax items
(13,050)
(1,886)
Other assets and liabilities
22,365
(10,873)
Net cash provided by operating activities
451,516
281,005
Cash Flows from Investing Activities:
Purchase of property, plant and equipment
(135,420)
(144,738)
Cost of acquisitions, net of cash acquired
(150,995)
(383,358)
Proceeds from the sale of assets
23,444
3,743
Investment in affiliates and other, net
899
2,843
Net cash used in investing activities
(262,072)
(521,510)
Cash Flows from Financing Activities:
Proceeds from issuance of debt
202,460
436,335
Principal repayment of debt
(157,911)
(196,198)
Net change in commercial paper
(100,000)
98,000
Net (decrease)/increase in outstanding checks
(6,416)
500
Cash dividends
(120,651)
(114,368)
Shares acquired
(6,987)
(5,942)
Net cash (used in)/provided by financing activities
(189,505)
218,327
Effects of Exchange Rate Changes on Cash
(4,427)
12,860
Net Decrease in Cash and Cash Equivalents
(4,488)
(9,318)
Cash and cash equivalents at beginning of period
254,912
257,226
Cash and cash equivalents at end of period
$
250,424
$
247,908
See accompanying Notes to Condensed Consolidated Financial Statements
6
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Note 1: Basis of Interim Presentation
In the opinion of the management of Sonoco Products Company (the “Company” or “Sonoco”), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments, unless otherwise stated) necessary to state fairly the consolidated financial position, results of operations and cash flows for the interim periods reported herein. Operating results for the three and nine months ended September 30, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
With respect to the unaudited condensed consolidated financial information of the Company for the three and nine-month periods ended September 30, 2018 and October 1, 2017 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated October 31, 2018 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
Note 2: New Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15, "Intangibles - Goodwill and Other Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract," which provides guidance on capitalizing implementation cost associated with arrangements that contain a license. The Company will implement this ASU using the prospective method effective October 1, 2018. The adoption of the standard is not expected to have a material effect on the Company's consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities," which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The update to the standard is effective for periods beginning after December 15, 2018, with early adoption permitted in any interim period after issuance of this update. The Company implemented this ASU effective January 1, 2018, and recorded a cumulative adjustment to retained earnings of $176 as of that date in order to remove previously recognized ineffectiveness losses on contracts outstanding as of the date of adoption.
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires an employer to report service cost in the same line item as other compensation costs arising from employees during the period. The other components of net benefit cost as defined are required to be presented separately from the service cost component and outside a subtotal of income from operations, if one is presented, or disclosed. This update also allows only the service cost component to be eligible for capitalization when applicable and is effective for periods beginning after December 15, 2017. The amendments are to be applied retrospectively for the presentation of the components of net benefit cost in the income statement and prospectively for the capitalization of the service cost component. The Company implemented this ASU effective January 1, 2018, modifying its income statement presentation of the components of net benefit cost accordingly, including the retrospective application to previously reported results. As a result of the retrospective application, the amounts previously reported in "Cost of sales" and "Selling, general and administrative expenses" for the three months ended October 1, 2017, were reduced by $2,006 and $1,144, respectively, and "Operating profit" increased by $3,150, in order to conform to the current presentation. The comparable changes for the nine months ended October 1, 2017, were $7,273, $33,973, and $41,246, for "Cost of sales," "Selling, general and administrative expenses," and "Operating profit," respectively. No change was required to the Company's historical policy regarding the capitalization of such costs.
7
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” eliminating the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under ASU 2017-04, goodwill impairment testing is performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted, and should be applied on a prospective basis. The Company elected early adoption of the standard effective January 1, 2018. Any future goodwill impairment, should it occur, will be determined in accordance with this ASU.
In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory," which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset upon transfer other than inventory, eliminating the current recognition exception. Prior to this ASU, GAAP prohibited the recognition of current and deferred income taxes for intra-entity asset transfers until the asset was sold to an outside party. The recognition prohibition was an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP. This guidance became effective for the Company on January 1, 2018, and did not have a material effect on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments," providing clarification on eight cash flow classification issues, including 1) debt prepayment or debt extinguishment costs, 2) settlement of relatively insignificant debt instruments, 3) contingent consideration payments, 4) insurance claim settlements, 5) life insurance settlements, 6) distributions received from equity method investees, 7) beneficial interests in securitization transactions, and 8) separately identifiable cash flows. This guidance, which applies to both interim and annual periods, became effective for the Company on January 1, 2018. As a result of the retrospective application, insurance proceeds totaling $1,104 received during the nine months ended October 1, 2017 previously reported in "Cash Flows from Operating Activities" were reclassified to "Cash Flows from Investing Activities." Otherwise, adoption of the standard did not have a material effect on the Company's consolidated financial statements, as the Company either did not realize any cash flows from these types of activities, such amounts were immaterial, or the prescribed guidance did not differ from its current practice.
In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," which provides guidance on recording revenue on a gross basis versus a net basis based on the determination of whether an entity is a principal or an agent when another party is involved in providing goods or services to a customer. The amendments in this update effect the guidance in ASU No. 2014-09 and are effective in the same time frame as ASU 2014-09 as discussed below.
In February 2016, the FASB issued ASU 2016-02, "Leases" (“ASU 2016-02”) which primarily requires lessees to recognize on the balance sheet a right-of-use asset and lease liability for all long-term leases. ASU 2016-02 also requires disclosure of key information about leasing arrangements to increase transparency and comparability among organizations. The accounting for lessors does not fundamentally change except for changes to conform and align guidance to the lessee guidance and the newly adopted revenue recognition standard. The Company has elected to adopt the standard using the modified retrospective transition approach with a January 1, 2019 effective date of initial application. Under the modified retrospective transition method, we will recognize a cumulative effect adjustment to retained earnings as of the effective date in the period of adoption. Consequently, comparative financial information and disclosures provided for dates and periods before January 1, 2019 will not be updated in the Company’s future filings. The Company established a cross-functional team to implement certain software solutions as part of its newly integrated enterprise-wide lease management system. The team is progressing through the implementation plan and developing business processes, accounting systems, and internal controls to ensure the Company meets the reporting and disclosure requirements of the new standard. The Company is still assessing the impact on its consolidated financial statements, but expects the adoption of ASU 2016-02 to have a material impact on its consolidated balance sheet for the initial recognition of the right-of-use asset and lease liability associated with operating leases that are not currently recognized on the balance sheet under present U.S. GAAP. The impact on the Company’s consolidated statement of income continues to be evaluated.
In May 2014, the FASB issued ASU 2014-09, "Revenue From Contracts With Customers," which changes the definitions/criteria used to determine when revenue should be recognized from being based on risks and rewards to being based on control. Among other changes, ASU 2014-09 changes the manner in which variable consideration is recognized,
8
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
requires recognition of the time value of money when payment terms exceed one year, provides clarification on accounting for contract costs, and expands disclosure requirements. The Company adopted ASU 2014-09 in the first quarter of 2018 following the modified retrospective transition method and, as such, recorded a cumulative adjustment of $1,721 to beginning retained earnings for the period. The most significant impacts to the Company's financial statements from the adoption of this ASU are the acceleration of revenue recognition compared to prior standards for arrangements under which the Company is producing customer-specific products without alternative use and would be entitled to payment for work completed, including a reasonable margin, and the recognition of material customer contract rights for certain agreed-upon future price concessions.
During the three- and nine-month periods ended September 30, 2018, there have been no other newly issued nor newly applicable accounting pronouncements that have had, or are expected to have, a material impact on the Company’s financial statements. Further, at September 30, 2018, there were no other pronouncements pending adoption that are expected to have a material impact on the Company’s consolidated financial statements.
Note 3: Changes in Accounting Policy
Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.
The Company adopted ASC 606, "Revenue from Contracts with Customers," effective January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed in Note 14.
The Company applied ASC 606 using the cumulative effect method by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of equity at January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be reported under ASC 605.The details of the significant changes and quantitative impact of the changes are set out below.
December 31, 2017 As Reported
Adjustments
January 1, 2018 Adjusted
Assets
Current Assets
Trade accounts receivable, net of allowances
$
725,251
$
3,636
$
728,887
Other receivables
64,561
41,351
105,912
Inventories:
Finished and in process
196,204
(37,447)
158,757
Total Assets
$
4,557,721
$
7,540
$
4,565,261
Liabilities and Equity
Current Liabilities
Accrued expenses and other
283,355
5,215
288,570
999,970
5,215
1,005,185
Deferred Income Taxes
74,073
604
74,677
Sonoco Shareholders’ Equity
Retained earnings
2,036,006
1,721
2,037,727
Total Sonoco Shareholders’ Equity
1,707,066
1,721
1,708,787
Total Equity
1,730,060
1,721
1,731,781
Total Liabilities and Equity
$
4,557,721
$
7,540
$
4,565,261
9
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The following table summarizes the impact of the adoption of ASC 606 on the Company's Condensed Consolidated Balance Sheet as of September 30, 2018:
September 30, 2018 as reported
Adjustments
Balances without Adoption of ASC 606
Assets
Current Assets
Trade accounts receivable, net of allowances
$
775,054
(5,744)
$
769,310
Other receivables
93,470
(44,698)
48,772
Inventories:
Finished and in process
157,920
42,051
199,971
Total Assets
$
4,658,634
$
(8,391)
$
4,650,243
Liabilities and Equity
Current Liabilities
Accrued expenses and other
321,842
(5,998)
315,844
994,384
(5,998)
988,386
Deferred Income Taxes
85,473
(622)
84,851
Sonoco Shareholders' Equity
Retained earnings
2,151,658
(1,771)
2,149,887
Total Sonoco Shareholders’ Equity
1,810,821
(1,771)
1,809,050
Total Equity
1,832,930
(1,771)
1,831,159
Total Liabilities and Equity
$
4,658,634
$
(8,391)
$
4,650,243
The following table summarizes the impact of the adoption of ASC 606 on the Company's Condensed Consolidated Statement of Income for the three- and nine-months ending September 30, 2018:
Three Months Ended
Nine Months Ended
September 30, 2018 as reported
Adjustments
Balances without Adoption of ASC 606
September 30, 2018 as reported
Adjustments
Balances without Adoption of ASC 606
Net sales
$
1,364,762
$
(648)
$
1,364,114
$
4,035,322
$
(4,673)
$
4,030,649
Cost of sales
1,105,126
(1,731)
1,103,395
3,248,624
(4,605)
3,244,019
Gross profit
259,636
1,083
260,719
786,698
(68)
786,630
Operating profit
101,573
1,083
102,656
343,533
(68)
343,465
Income before income taxes
87,096
1,083
88,179
300,352
(68)
300,284
Provision for income taxes
18,325
281
18,606
71,974
(18)
71,956
Income before equity in earnings of affiliates
68,771
802
69,573
228,378
(50)
228,328
Net income
72,820
802
73,622
237,390
(50)
237,340
Net income attributable to Sonoco
$
72,415
$
802
$
73,217
$
235,882
$
(50)
$
235,832
10
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The following table summarizes the impact of the adoption of ASC 606 on the Company's Condensed Consolidated Statement of Comprehensive Income for the three- and nine-month periods ending September 30, 2018: