SONOCO PRODUCTS CO 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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 “anticipate,” “assume,” “believe,” “can,” “committed,” “consider,” “could,” “estimate,” “expect,” “forecast,” “future,” “goal,” “guidance,” “intend,” “may,” “might,” “objective,” “opportunity,” “outlook,” “plan,” “potential,” “project,” “seek," “should,” “strategy,” “target,” “will,” “would,” or the negative thereof, and similar expressions identify forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, statements regarding: • availability and supply of raw materials, and offsetting high raw material costs, including the potential impact of changes in tariffs; • potential impacts of the COVID-19 pandemic on the Company's business, operations and financial condition; • consumer and customer actions in connection with the COVID-19 pandemic; • improved productivity and cost containment; • improving margins and leveraging strong cash flow and financial position; • effects of pending and completed acquisitions and divestitures, including the acquisitions of Metal Packaging and Skjern; • realization of synergies resulting from acquisitions, including the acquisition of Metal Packaging; • 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; • strategic pricing initiatives; • statements about supply constraints or logistics challenges; • market leadership; • the efficiency, capacity, and competitiveness of the Company’s production capabilities and anticipated cost savings related thereto; • research and development spending; • expected impact and costs of resolution of legal proceedings; • extent of, and adequacy of provisions for, environmental liabilities and sustainability commitments; • commitments to reduce greenhouse gas emissions; • 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: 39 SONOCO PRODUCTS COMPANY • availability and pricing of raw materials, energy and transportation, including the impact of potential changes in tariffs or sanctions and escalating trade wars and the impact of war and other geopolitical tensions (such as the ongoing Russia-Ukraine conflict and economic sanctions related thereto), 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 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 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 to 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; • ability to execute on strategic pricing initiatives; • 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; • ability to successfully integrate newly acquired businesses, including Metal Packaging, into the Company’s operations and realize synergies and other anticipated benefits within the expected time period, or at all; • 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 or other derivatives; • changes in U.S. and foreign tariffs, tax rates, 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; 40 SONOCO PRODUCTS COMPANY • 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 costs of resolution of litigation, regulatory actions, or other legal proceedings; • liability for and anticipated costs of environmental remediation actions; • effects of environmental laws and regulations; • operational disruptions at our major facilities; • failure or disruptions in our information technologies; • failure 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; • ability to meet commitments to reduce greenhouse gas emissions; • 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 war and other geopolitical tensions, including the ongoing Russia-Ukraine conflict and the Company's withdrawal from Russian operations, terrorist activities and natural disasters; and • accelerating inflation and activities and operations in highly inflationary economies. 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 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. 41 SONOCO PRODUCTS COMPANY COMPANY OVERVIEW Sonoco is a leading provider of consumer, industrial, healthcare and protective packaging, with approximately 300 locations in 31 countries. Sonoco’s operating and reporting structure consists of two reportable segments, Consumer Packaging and Industrial Paper Packaging, with all remaining businesses reported as All Other. Prior to the divestiture of the Company’s U.S. display and packaging business on April 4, 2021, this business was included in All Other. Sonoco competes in multiple product categories, with the majority of the Company’s revenues arising 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 uncoated recycled paperboard 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. On a consolidated basis, by the end of 2021 the impacts of the COVID-19 pandemic on the Company had largely dissipated. For most of the Company ’ s business units, sales demand in 2022 has equaled or exceeded pre-pandemic levels. The Company has incurred, and expects to continue to incur for the foreseeable future, localized temporary disruptions in its supply chain and customer demand due to localized resurgences of COVID-19. However, absent a future widespread resurgence, or the emergence of a more severe COVID-19 variant of concern, the Company does not expect such impacts to have a material negative effect on the Company’s operations or financial results. Third Quarter 2022 Compared with Third Quarter 2021 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 amounts (dependent upon the applicable period), including the associated tax effects, relating to: • restructuring initiatives; • asset impairment charges; • acquisition/divestiture-related costs; • gains or losses from the divestiture of businesses; • losses from the early extinguishment of debt; • non-operating pension costs; • amortization expense on acquisition intangibles; • changes in last-in, first-out ( “ LIFO ”) inventory reserves; • certain income tax events and adjustments; and • other items, if any. The Company's management believes the exclusion of these items improves the period-to-period 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 ended December 31, 2021 under Item 7 - “ Management's Discussion and Analysis of Financial Condition and Results of Operations, ” under the heading “ Use of Non-GAAP Financial Measures. ” As previously disclosed, effective January 1, 2022, the Company modified its definition of base results to include adjustments for amortization-related expense on acquisition intangibles. Accordingly, base results for 2021 have been revised to conform with the current presentation. These non-GAAP financial measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles. Sonoco management does not, nor does it suggest that investors should, consider these non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Material limitations associated with the use of such measures include that they do not reflect all costs included in operating expenses and may not be comparable with similarly named financial measures of other companies. Furthermore, these non-GAAP financial measures are based on subjective determinations of management regarding the nature and classification of events and circumstances. 42 SONOCO PRODUCTS COMPANY Sonoco presents these non-GAAP financial measures to provide users with information to evaluate Sonoco’s operating results in a manner similar to how management evaluates business performance. To compensate for any limitations in such non-GAAP financial measures, management believes that it is useful in understanding and analyzing the results of the business to review both GAAP information and the related non-GAAP financial measures. Restructuring/asset impairment charges are a recurring item as the Company’s restructuring programs usually require several years to fully implement and the Company is continually seeking to take actions that could enhance its efficiency. Although recurring, these charges are subject to significant fluctuations from period to period due to the varying levels of restructuring activity and the inherent imprecision in the estimates used to recognize the impairment of assets and the wide variety of costs and taxes associated with severance and termination benefits in the countries in which the restructuring actions occur. For the three-month period ended October 2, 2022 Dollars in thousands, except per share data GAAP Restructuring/Asset Impairments Amortization of Acquisition Intangibles Acquisition/Divestiture Related Other Adjustments (1) Base Operating profit $ 181,942 $ 20,652 $ 20,690 $ 2,022 $ (215) $ 225,091 Non-operating pension costs 1,249 — — — (1,249) — Interest expense, net 25,566 — — — — 25,566 Income before income taxes 155,127 20,652 20,690 2,022 1,034 199,525 Provision for income taxes 36,824 4,862 4,938 765 (1,297) 46,092 Income before equity in earnings of affiliates 118,303 15,790 15,752 1,257 2,331 153,433 Equity in earnings of affiliates, net of tax 4,199 — — — — 4,199 Net income 122,502 15,790 15,752 1,257 2,331 157,632 Net (income)/loss attributable to noncontrolling interests (273) 186 — — — (87) Net income attributable to Sonoco 122,229 15,976 15,752 1,257 2,331 157,545 Per diluted common share* $ 1.24 $ 0.16 $ 0.16 $ 0.01 $ 0.02 $ 1.60 *Due to rounding individual items may not sum across (1) See table in “Results of Operations – Overview” below for details related to the after-tax impact of major components. For the three-month period ended October 3, 2021 Dollars in thousands, except per share data GAAP Restructuring/Asset Impairments Amortization of Acquisition Intangibles (1)(2) Acquisition/Divestiture Related Other Adjustments (1) Base Operating profit $ 126,512 $ 3,488 $ 12,257 $ 1,015 $ (8,585) $ 134,687 Non-operating pension costs 525 — — — (525) — Interest expense, net 14,219 — — — — 14,219 Income before income taxes $ 111,768 $ 3,488 $ 12,257 $ 1,015 $ (8,060) $ 120,468 Provision for income taxes 2,564 312 3,036 190 16,493 22,595 Income before equity in earnings of affiliates $ 109,204 $ 3,176 $ 9,221 $ 825 $ (24,553) $ 97,873 Equity in earnings of affiliates, net of tax 2,351 — — — — 2,351 Net income $ 111,555 $ 3,176 $ 9,221 $ 825 $ (24,553) $ 100,224 Net loss attributable to noncontrolling interests (415) — — — — (415) Net income attributable to Sonoco $ 111,140 $ 3,176 $ 9,221 $ 825 $ (24,553) $ 99,809 Diluted weighted average common shares outstanding: 99,425 — 99,425 Per diluted common share* $ 1.12 $ 0.03 $ 0.09 $ 0.01 $ (0.25) $ 1.00 *Due to rounding individual items may not sum across (1) See table in “Results of Operations – Overview” below for details related to the after-tax impact of major components. (2) Effective January 1, 2022, the Company changed its measure of base operating profit to exclude amortization of acquisition intangibles. Accordingly, base operating profit for 2021 has been revised to conform with the current presentation. 43 SONOCO PRODUCTS COMPANY RESULTS OF OPERATIONS The following discussion provides a review of results for the three-month period ended October 2, 2022 versus the three-month period ended October 3, 2021. OVERVIEW Net sales for the third quarter of 2022 increased 33.6 percent to $1.89 billion, compared with $1.42 billion in the same period last year. This improvement reflects strategic pricing performance and sales added from the January 26, 2022 acquisition of Ball Metalpack Holding, LLC, renamed Sonoco Metal Packaging (“Metal Packaging”). Net income attributable to Sonoco for the third quarter of 2022 increased to $122.2 million, or $1.24 per diluted share, compared to $111.1 million, or $1.12 per diluted share, for the same period of 2021. Net income in the current period benefited primarily from the Company ’ s strategic pricing initiatives, increases from acquisitions and operational improvements. These benefits were partially offset by higher net interest expense in 2022 related to higher borrowings resulting from the funding of the Metal Packaging acquisition. Additionally, net income in the current quarter includes net after-tax, non-base charges totaling $35.3 million, while results for the third quarter of 2021 included net after-tax, non-base income totaling $11.3 million. The se non-base items consisted of the following, after tax: Three Months Ended ($ in millions) October 2, 2022 October 3, 2021 Impairment and restructuring related charges $ 16.0 $ 3.2 Amortization of acquired intangibles 15.8 9.2 Acquisition and divestiture related costs 1.3 0.8 Net loss/(gain) on derivatives 1.1 (2.2) Turkey hyperinflationary accounting impact 0.8 — Changes in LIFO inventory reserve (0.3) — Insurance settlement gains (2.0) (1.6) Gain on divestiture of businesses — (2.2) Other non-operating pension costs 0.9 0.3 Net recognized benefit on 2017 amended U.S. income tax return — (30.0) Other non-base income tax charges 1.7 12.1 All other non-base items — (0.9) Total non-base charges/(income), after tax $ 35.3 $ (11.3) Adjusted for these items, base net income attributable to Sonoco ("base earnings") for the third quarter of 2022 increased 57.8 percent to $157.5 million, or $1.60 per diluted share, from $99.8 million, or $1.00 per diluted share, in 2021, and third-quarter base operating profit increased 67.1 percent to $225.1 million. As noted above, these improvements reflect strong strategic pricing performance and the accretive effects of the January 2022 acquisition of the Metal Packaging business. These year-over-year gains were partially offset by increased compensation and benefit costs. OPERATING REVENUE Net sales for the third quarter of 2022 increased $475 million, or 33.6 percent, from the prior-year quarter. The components of the sales change were: ($ in millions) Volume/mix $ (52) Selling prices 250 Acquisitions and divestitures, net 334 Foreign currency translation and other, net (57) Total sales increase $ 475 44 SONOCO PRODUCTS COMPANY Selling price gains were driven by a combination of passing through higher costs and benefits realized by strategic pricing initiatives aimed at capturing more of the value provided by the Company's products. Net sales added by acquisitions and divestitures were driven by the Metal Packaging acquisition. COSTS AND EXPENSES Cost of goods sold increased $365.6 million, or 31.6 percent, in the third quarter of 2022 compared with the same period last year. The increase was driven primarily by inflation and incremental costs added by the acquisition of Metal Packaging. These year-over-year increases were partially offset by the translation impact of an overall stronger dollar in the current year. Gross profit was $367.1 million for the three-month period ended October 2, 2022, which was $109.4 million higher than the prior-year period. Additionally, gross profit as a percent of sales increased to 19.4 percent from 18.2 percent in the prior-year quarter as overall sales price increases more than offset higher material and other operating costs largely due to the Company's strategic pricing initiatives. GAAP selling, general and administrative ( “ SG&A ” ) expenses for the quarter increased $34.0 million, or 26.0 percent, year over year. This increase reflects higher amortization, acquisition, and normal operating SG&A expenses stemming from the Metal Packaging acquisition; higher employee compensation and benefit costs; and gains on derivatives in the prior year. Restructuring/Asset impairment charges totaled $20.7 million in the third quarter of 2022 compared with $3.5 million in the same period last year. 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. GAAP net interest expense for the third quarter of 2022 increased to $25.6 million, compared with $14.2 million during the third quarter of 2021, due primarily to higher average debt balances resulting from the financing transactions used to fund the January 26, 2022 acquisition of Metal Packaging. The 2022 third-quarter effective tax rates on GAAP and base earnings were 23.7 percent and 23.1 percent, respectively, compared with 2.3 percent and 18.8 percent, respectively, in the prior year’s quarter. The increase in the GAAP effective tax rate was primarily due to the absence of a third-quarter 2021 benefit received in association with the amendment of the Company’s 2017 tax return to report increased utilization of its foreign tax credits. The higher base tax rate is largely attributable to the 2022 absence of a release of uncertain tax position reserves upon expiration of the statute of limitations that occurred in the third-quarter of 2021. REPORTABLE SEGMENTS The Company's operating and reporting structure consists of two reportable segments, Consumer Packaging and Industrial Paper Packaging, with all remaining businesses reported as All Other. The following table summarizes net sales attributable to each of the Company’s segments and All Other for the third quarters of 2022 and 2021 ( $ in thousands ): Three Months Ended October 2, 2022 October 3, 2021 % Change Net sales: Consumer Packaging $ 1,030,549 $ 598,969 72.1 % Industrial Paper Packaging 661,452 635,230 4.1 % All Other 198,215 180,994 9.5 % Net sales $ 1,890,216 $ 1,415,193 33.6 % 45 SONOCO PRODUCTS COMPANY The following table summarizes operating profit attributable to each of the Company’s segments during the third quarters of 2022 and 2021 ( $ in thousands ): Three Months Ended October 2, 2022 October 3, 2021 % Change Operating profit: Segment operating profit: Consumer Packaging $ 127,859 $ 66,341 92.7 % Industrial Paper Packaging 81,859 55,451 47.6 % All Other 15,373 12,895 19.2 % Total segment operating profit 225,091 134,687 67.1 % Restructuring/Asset impairment charges (20,652) (3,488) Amortization of acquisition intangibles (20,690) (12,257) Other non-base charges, net (1,807) 7,570 Operating profit $ 181,942 $ 126,512 43.8 % Segment results viewed by Company management to evaluate segment performance do not include restructuring charges and income, asset impairment charges, acquisition and divestiture-related costs, 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 and All Other. Effective January 1, 2022, the Company changed its measure of segment operating profit to exclude amortization of acquisition intangibles. Accordingly, the prior year's segment operating profit has been revised to conform with the current presentation for comparability. The following table summarizes restructuring/asset impairment charges/(income) attributable to each of the Company’s segments during the third quarter of 2022 and 2021 ( $ in thousands ): Three Months Ended October 2, 2022 October 3, 2021 Restructuring/Asset impairment charges/(income): Consumer Packaging $ 4,350 $ 2,734 Industrial Paper Packaging 7,674 (1,888) All Other 18 555 Corporate 8,610 2,087 Restructuring/Asset impairment charges $ 20,652 $ 3,488 Consumer Packaging The Consumer Packaging segment primarily serves prepared and fresh food markets along with other packaging for consumer products. The products produced and sold within this segment are generally used to package a variety of consumer products and consist primarily of round and shaped rigid paper containers, steel tinplate cans and aerosol containers; thermoformed plastic trays and containers; and flexible packaging. Segment sales increased approximately 72 percent compared to the prior year ’ s quarter due primarily to the acquisition of Metal Packaging and strong strategic pricing performance. Positive volume/mix growth in the segment was driven by global rigid paper containers, where gains were seen in North America, Asia, and Latin America, and in the flexible packaging business. These gains were partially offset by the negative impacts of foreign exchange due to the stronger U.S. dollar. Segment operating profit increased 93 percent with the main driver being the Metal Packaging acquisition, along with favorable price/cos t, including the benefits of strategic pricing actions supported by positive volume/mix and p roductivity . As a result, segment operating margin improved to 12 percent in the quarter from 11 percent in the 2021 period. 46 SONOCO PRODUCTS COMPANY Industrial Paper Packaging The Industrial Paper Packaging segment serves a variety of customers who use its products to package their goods for transport, storage or sale or to produce similar fiber-based products. The primary products produced and sold within this segment include fiber-based tubes, cones, and cores; fiber-based protective packaging and components; reels; and recycled paperboard. Segment sales increased 4 percent from the prior year's quarter due to strong strategic pricing performance, partially offset by the negative impacts of foreign exchange and lower volume/mix globally in both paper and converted products. Segment operating profit increased 48 percent from the prior year ’ s quarter, driven by positive price/cost, including the benefits of strategic pricing actions, which was somewhat offset by lower volume/mix. As a result, segment operating profit margin improved to 12 percent in the current year's quarter from 9 percent in the prior year. During the third quarter of 2022, as part of Project Horizon, the #10 paper machine on the Company's Hartsville campus was shut down to allow for its conversion from a corrugated medium machine to an uncoated recycled paperboard ( “ URB ” ) machine. This planned shutdown resulted in an expected loss of volume and lower absorption of fixed costs. Late in the third quarter, the #10 machine began production of URB. As previously disclosed, the new URB machine was designed with the goal of being one of the largest and lowest-cost producers of URB in the world, with a targeted annual production capacity of 180,000 tons and capable of producing a wide range of high-value paper grades to service the Company's Industrial Paper Packaging businesses and external trade customers. Project Horizon is expected to drive significant annualized cost savings as production ramps through 2023 and beyond. All Other Businesses grouped as All Other include healthcare packaging, protective and retail security packaging and industrial plastic products. These businesses include the following products and services: thermoformed rigid plastic trays and devices; custom-engineered molded foam protective packaging and components; temperature-assured packaging; injection molded and extruded containers, spools and parts; retail security packaging, including printed backer cards, thermoformed blisters and heat-sealing equipment; and paper amenities. Prior to the divestiture of the Company’s U.S. display and packaging business on April 4, 2021, this business, which included point-of-purchase displays, fulfillment operations, and contract packaging, was reported in All Other. Sales for All Other improved 10 percent from the prior year’s quarter due primarily to positive strategic pricing performance. Volume/mix for the businesses in All Other was essentially flat as growth in molded foam and temperature-assured packaging was offset by declines in the plastics businesses. All Other operating profit improved 19.2 percent from the prior year's quarter due primarily to positive strategic pricing performance. Operating margin increased slightly to 7.8 percent in the quarter from 7.1 percent in 2021. Nine Months Ended October 2, 2022 Compared with Nine Months Ended October 3, 2021 RECONCILIATIONS OF GAAP TO NON-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. 47 SONOCO PRODUCTS COMPANY For the nine-month period ended October 2, 2022 Dollars in thousands, except per share data GAAP Restructuring/Asset Impairments Amortization of Acquisition Intangibles Acquisition/Divestiture Related Other Adjustments (1) Base Operating profit $ 548,480 $ 43,357 $ 60,361 $ 62,655 $ 21,183 $ 736,036 Non-operating pension costs 4,251 — — — (4,251) — Interest expense, net 67,792 — — — 136 67,928 Income before income taxes $ 476,437 $ 43,357 $ 60,361 $ 62,655 $ 25,298 $ 668,108 Provision for income taxes 116,712 7,339 14,666 15,529 9,607 163,853 Income before equity in earnings of affiliates $ 359,725 $ 36,018 $ 45,695 $ 47,126 $ 15,691 $ 504,255 Equity in earnings of affiliates, net of tax 10,151 — — — — 10,151 Net income $ 369,876 $ 36,018 $ 45,695 $ 47,126 $ 15,691 $ 514,406 Net (income) attributable to noncontrolling interests (642) 286 — — — (356) Net income attributable to Sonoco $ 369,234 $ 36,304 $ 45,695 $ 47,126 $ 15,691 $ 514,050 Per diluted common share* $ 3.74 $ 0.37 $ 0.46 $ 0.48 $ 0.16 $ 5.21 *Due to rounding individual items may not sum across (1) See table in “Results of Operations – Overview” below for details related to the after-tax impact of major components. For the nine-month period ended October 3, 2021 Dollars in thousands, except per share data GAAP Restructuring/Asset Impairments Amortization of Acquisition Intangibles (1)(2) Acquisition/Divestiture Related Other Adjustments (1) Base Operating profit $ 382,112 $ 8,889 $ 37,117 $ 12,503 $ (12,797) $ 427,824 Non-operating pension costs 562,818 — — — (562,818) — Interest expense, net 46,744 — — — 2,165 48,909 Loss from the early extinguishment of debt 20,184 — — — (20,184) — Income before income taxes $ (247,634) $ 8,889 $ 37,117 $ 12,503 $ 568,040 $ 378,915 Provision for income taxes (91,542) 2,653 9,194 2,984 166,271 89,560 Income before equity in earnings of affiliates $ (156,092) $ 6,236 $ 27,923 $ 9,519 $ 401,769 $ 289,355 Equity in earnings of affiliates, net of tax 5,701 — — — — 5,701 Net (loss)/income $ (150,391) $ 6,236 $ 27,923 $ 9,519 $ 401,769 $ 295,056 Net (income) attributable to noncontrolling interests (243) — — — — (243) Net (loss)/income attributable to Sonoco $ (150,634) $ 6,236 $ 27,923 $ 9,519 $ 401,769 $ 294,813 Diluted Weighted average common shares outstanding (3) : 100,039 468 100,507 Per diluted common share* $ (1.51) $ 0.06 $ 0.28 $ 0.09 $ 4.00 $ 2.93 *Due to rounding individual items may not sum across (1) See table in “Results of Operations – Overview” below for details related to the after-tax impact of major components. (2) Effective January 1, 2022, the Company changed its measure of base operating profit to exclude amortization of acquisition intangibles. Accordingly, base operating profit for 2021 has been revised to conform with the current presentation. (3) Due to the magnitude of certain expenses considered by management to be non-base and included in Other Adjustments, the Company reported a year-to-date GAAP Net loss attributable to Sonoco. In instances where a company has a net loss, GAAP requires that the company shall not consider any unexercised share awards or other like instruments dilutive for purposes of calculating weighted average shares outstanding. Accordingly, the Company did not consider any unexercised share awards dilutive in calculating weighted average shares outstanding for GAAP purposes in the table above, which resulted in basic weighted average shares outstanding and diluted weighted average common shares outstanding being the same. However, the Company also presents base net income attributable to Sonoco, which excludes the net non-base items. In order to maintain consistency in the computation of base diluted earnings per share, unexercised stock instruments that meet GAAP requirements for dilution were considered dilutive to the same extent they would be if GAAP net income attributable to Sonoco were equal to base net income attributable to Sonoco. 48 SONOCO PRODUCTS COMPANY RESULTS OF OPERATIONS The following discussion provides a review of results for the nine-month period ended October 2, 2022 compared with the nine-month period ended October 3, 2021. OVERVIEW Net sales for the first nine months of 2022 increased 34.3 percent to $5.6 billion, compared with $4.2 billion in the same period last year. This improvement reflects increases from strong pricing performance and sales added from the Janu ary 26, 2022 acquisition of Metal Packaging. These benefits were partially offset by the negative impact of foreign currency translation and the April 2021 U.S. display and packaging divestiture. Net income/(loss) attributable to Sonoco for the first nine months of 2022 increased to $369.2 million, or $3.74 per diluted share, compared to $(150.6) million, or $(1.51) per diluted share, reported for the same period of 2021. These GAAP results include net after-tax, non-base charges totaling $144.8 million and $445.4 million in the first nine months of 2022 and 2021, respectively. The major components of these non-base amounts are shown below: Nine Months Ended ($ in millions) October 2, 2022 October 3, 2021 Other net restructuring and asset impairment charges $ 27.1 $ 6.2 Loss from exiting Russia 9.2 — Amortization of acquisition intangibles 45.7 27.9 Amortization of fair value adjustments to Metal Packaging inventory 24.7 — Acquisition and divestiture-related costs 22.4 9.5 Changes in LIFO inventory reserve 18.7 — Turkey hyperinflationary accounting impact 0.8 — Net gain on other derivatives (1.7) (2.2) Insurance settlement gains (2.1) (4.4) Loss from the early extinguishment of debt — 15.0 Loss on divestiture of businesses — 1.2 Refund of foreign VAT and applicable interest — (3.1) Euro derivative gain related to euro loan repayment — (3.3) Other non-operating pension costs 3.1 11.8 Pension settlement charges (Inactive Plan) — 406.5 Other non-base income tax (gains)/charges (3.0) 11.9 Net recognized benefit on 2017 amended U.S. income tax return — (30.0) All other non-base gains (0.1) (1.6) Total non-base charges, after tax $ 144.8 $ 445.4 Adjusted for these items, base earnings for the nine-month period ending October 2, 2022 increased 74 percent to $514.1 million, or $5.21 per diluted share, from $294.8 million, or $2.93 per diluted share, in the same period in 2021. The increase in base earnings of $219.2 million is largely attributable to strong pricing performance, earnings from the Metal Packaging acquisition, and productivity improvements. These gains were partially offset by the 2021 divestiture of the Company’s U.S. display and packaging business, higher interest expense related to the financing of the Metal Packaging acquisition, and increased compensation and benefit costs. 49 SONOCO PRODUCTS COMPANY OPERATING REVENUE Net sales for the first nine months of 2022 increased $1.4 billion from the same period in 2021. The components of the sales change were: ($ in millions) Volume/mix $ (39) Selling prices 823 Acquisitions and divestitures, net 765 Foreign currency translation and other, net (126) Total sales increase $ 1,423 Selling price gains were driven by a combination of passing through higher costs and benefits realized by strategic pricing initiatives aimed at capturing more of the value provided by the Company’s products. Net sales added by acquisitions and divestitures were driven by the January 26, 2022 acquisition of Metal Packaging. COSTS AND EXPENSES Cost of goods sold increased $1,095.9 million, or 32.7 percent, while the Company ’ s gross profit margin percentage increased to 20.2 percent for the first nine months of 2022, compared to 19.2 percent in the prior-year period. The increase was driven primarily by inflation, which also had the impact of increasing the Company’s LIFO inventory reserves, and costs added by the acquisition of Metal Packaging, including expensing the acquisition-date fair value adjustments to finished goods inventory. Gross profit margin improved due to positive price/cost relationship and productivity improvements. GAAP SG&A costs for the first nine months of 2022 increased $129.3 million, or 31.9 percent, year over year. The year-over-year increase was largely driven by h igher acquisition and divestiture transaction costs, increased amortization of acquisition intangibles, increased compensation and other benefit costs, and absence of non-recurring gains from 2021 life insurance gains and a 2021 foreign VAT refund. Net restructuring costs and asset impairment charges totaled $43.4 million in the first nine months of 2022, compared with $8.9 million of net charges in the same period last year. The year-over-year increase was driven by higher year-over-year restructuring activity in the current year, including a $9.2 million im pairment charge resulting from the Company’s exit from its Russian operations. Prior year restructuring costs were offset by gains recorded in 2021 for the sale of buildings at previously closed facilities. 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 decreased $558.6 million year over year due to the settlement in the second quarter of 2021 of the Inactive Plan and the resulting $547.3 million settlement charge . Additional information regarding pension settlement charges is provided in Note 11 to the Company’s Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Additionally, in the second quarter of 2021 the Company recognized a loss on the early extinguishment of debt totaling $20.2 million. This loss was pursuant to a tender offer through which the Company retired a portion of its 5.750% notes due November 2040. See Note 8 to the Company’s Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information. GAAP net interest expense for the first nine months of 2022 increased to $67.8 million, compared with $46.7 million during the first nine months of 2021. The increase was primarily due to higher debt balances related to the financing transactions used to fund the Metal Packaging acquisition in January 2022. The effective tax rates on GAAP and Base earnings in the first nine months of 2022 were 24.5 percent and 24.5 percent, respectively, compared with 37.0 percent and 23.6 percent for the GAAP loss and Base earnings, respectively, in the prior-year period. The decrease in the 2022 GAAP rate was largely driven by the absence of the 2021 pension settlement charge and the 2022 release of valuation allowances on the Company’s state net operating loss carryforwards. The base rate was higher than in the prior year due largely to the 2022 absence of a release of uncertain tax position reserves upon expiration of the statute of limitations that occurred in 2021. 50 SONOCO PRODUCTS COMPANY REPORTABLE SEGMENTS The following table summarizes net sales attributable to each of the Company’s segments during the first nine months of 2022 and 2021 ( $ in thousands ): Nine-Month Period Ended October 2, 2022 October 3, 2021 % Change Net sales: Consumer Packaging $ 2,888,630 $ 1,779,525 62.3 % Industrial Paper Packaging 2,087,981 1,809,159 15.4 % All Other 597,919 562,567 6.3 % Net sales $ 5,574,530 $ 4,151,251 34.3 % The following table summarizes operating profit attributable to each of the Company’s segments during the first nine months of 2022 and 2021 ( $ in thousands ): Nine-Month Period Ended October 2, 2022 October 3, 2021 % Change Operating profit: Segment operating profit: Consumer Packaging $ 440,889 $ 212,997 107.0 % Industrial Paper Packaging 248,721 167,568 48.4 % All Other 46,426 47,259 (1.8) % Total segment operating profit 736,036 427,824 72.0 % Restructuring/Asset impairment charges (43,357) (8,889) Amortization of acquisition intangibles (60,361) (37,117) Other non-base charges, net (83,838) 294 Operating profit $ 548,480 $ 382,112 43.5 % Segment results viewed by Company management to evaluate segment performance do not include restructuring charges and income, asset impairment charges, acquisition and divestiture-related charges, 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 and All Other. Effective January 1, 2022, the Company changed its measure of segment operating profit to exclude amortization of acquisition intangibles. Accordingly, the prior year's segment operating profit has been revised to conform with the current presentation for comparability. The following table summarizes restructuring/asset impairment charges/(income) attributable to each of the Company’s segments during the first nine months of 2022 and 2021 ( $ in thousands ): Nine-Month Period Ended October 2, 2022 October 3, 2021 Restructuring/Asset impairment charges/(income): Consumer Packaging $ 9,459 $ 6,150 Industrial Paper Packaging 19,194 (4,827) All Other (399) 5,474 Corporate 15,103 2,092 Restructuring/Asset impairment charges $ 43,357 $ 8,889 Consumer Packaging Segment sales increased 62.3 percent year to date compared to the prior-year period driven by increased selling prices, largely implemented to recover increased raw material and other operating costs, sales added by the acquisition of Metal Packaging, and increased volume. 51 SONOCO PRODUCTS COMPANY Year-to-date segment operating profit increased 107.0 percent driven by the Metal Packaging acquisition along with favorable price/cos t, including the benefits of strategic pricing initiatives, and productivity gains. As a result, segment operating profit margin increased 329 basis points to 15.3 percent. Industrial Paper Packaging Segment sales increased 15.4 percent year to date versus the prior-year period due to increased selling prices, largely implemented to recover increased raw material and other operating costs, partially offset by a negative volume/mix impact and a negative impact from foreign currency translation. Segment operating profit increased 48.4 percent from the prior-year period driven by price/cost gains, including the benefits of strategic pricing initiatives . These gains were partially offset by somewhat lower volume and a negative impact from foreign exchange. As a result, segment operating margins were up 265 basis points to 11.9 percent. All Other Sales for All Other increased 6.3 percent year to date due primarily to increased selling prices, which were implemented to recover increased costs, and increased volume. These gains were reduced by the impact of the 2021 U.S. display and packaging divestiture. Excluding that divestiture, volume/mix for businesses grouped in All Other improved approximately 2.7 percent, driven primarily by demand improvements in several businesses, most notably molded foam and temperature-assured packaging businesses. All Other operating profit declined 1.8 percent year to date due to the impact of the divested display and packaging business and a negative impact from foreign exchange. These were partially offset by a positive price/cost relationship. Segment operating margin declined to 7.8 percent year to date from 8.4 percent in 2021. Financial Position, Liquidity and Capital Resources Cash generated from operations for the first nine months of 2022 was $322.1 million, compared with $220.1 million in the same period of 2021, an increase of $102.0 million. GAAP net income increased by $520.3 million year over year, as prior year net income included non-cash, after-tax pension settlement charges totaling $406.5 million from the settlement of the Inactive Plan. Cash contributions to the Company's retirement plans were $33.5 million in 2022, significantly lower than the $165.3 million of contributions in the prior year, due to contributions required in 2021 to fully fund the Inactive Plan prior to settlement. Net working capital used $317.0 million of cash in the first nine months of 2022, compared with $74.6 million in the same period of 2021. While current-year inflation was a key driver of that increase, seasonal inventory build in both the Company's plastics food businesses and newly-acquired Metal Packaging business also contributed to the change. The Company continues to actively manage all components of net working capital in an effort to minimize the impact on cash utilization while also supporting the needs of our customers and mitigating stock-out risk. Changes in accrued expenses and other assets and liabilities provided $15.7 million in the nine-month period ended October 2, 2022 compared with using $8.5 million in the same period last year. The $24.3 million increased provision of operating cash flow was largely driven by higher interest accruals stemming from debt issued in connection with the Metal Packaging acquisition and higher year-over-year management incentive accruals. Investing activities used $1.6 billion of cash in the first nine months of 2022, compared with $50.9 million in the same period last year. The higher year-over-year use of cash was primarily attributable to acquisition spending, which increased $1.3 billion from the prior year due to the acquisition of Metal Packaging on January 26, 2022. Net capital expenditures during the first nine months of 2022 were $230.7 million, $84.7 million higher than the same period last year. While spending continued for Project Horizon, the modernization of the Company's Hartsville paper mill complex which began in 2020, the year-over-year increase was largely driven by increased strategic investments in growth and productivity projects in the Consumer Packaging segment, including incremental capital spending associated with the acquisition of Metal Packaging. Capital spending for the remainder of 2022 is expected to be approximately $69 million, bringing total 2022 net capital spending to approximately $300 million, compared to $242.9 million in 2021. Proceeds from the sale of businesses added $91.6 million of cash in the first nine months of 2021 as the Company received cash from the sale of its U.S. display and packaging business as well as from the working capital settlement and release of escrow from the 2020 sale of its European contract packaging business. Other net investing proceeds, primarily insurance proceeds received in 2021, were $8.8 million lower year over year. Financing activities provided $1.3 billion of cash in the nine-month period ended October 2, 2022, while using $563.2 million in the corresponding prior-year period, a year-over-year increase of $1.8 billion. The increase was driven by higher net debt proceeds/repayments, which provided $1.7 billion more cash year over year. Current-year borrowings include $1.2 billion of net proceeds from the issuance of unsecured notes and $300 million of proceeds from the Term 52 SONOCO PRODUCTS COMPANY Loan Facility, which were used primarily to fund the Metal Packaging acquisition. The Company used cash of $14.5 million to purchase a noncontrolling interest in the first quarter of 2022. Cash used to repurchase the Company's common stock was $4.1 million in the first nine months of 2022 compared to $159.7 million in the same period last year. The higher share repurchases in the prior year were primarily the result of an accelerated share repurchase executed pursuant to an authorization approved by the Company's Board of Directors in April 2021. Cash and cas h equivalents totaled $182.2 million and $171.0 million at October 2, 2022 and December 31, 2021, respectively. Of these totals, approximately $149.6 million and $154.4 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 liquidity needs, or for capital expenditures, acquisitions, and other offshore growth opportunities. Reflecting the financing actions described above, the Company believes it has ample domestic liquidity from a combination of cash on hand, expected future operating cash flow, 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 the bank 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 nine-month period ended October 2, 2022, the Company reported a net decrease in cash and cash equivalents of $11.2 million due to currency translation adjustments resulting from a stronger U.S. dollar relative to certain foreign currencies in which cash and cash equivalents were held. The Company operates a $500 million commercial paper program, supported by a $750 million unsecured revolving credit facility with a syndicate of eight banks. The revolving credit facility is committed through June 2026. If circumstances were to prevent the Company from issuing commercial paper, it has the contractual right to draw funds on the underlying revolving credit facility. On January 21, 2022, the Company completed a registered public offering of green bonds with an aggregate principal amount of $1.20 billion. The unsecured notes (the "Notes") consisted of the following (dollars in thousands): Principal Amount Issuance Costs and Discounts Net Proceeds Interest Rate Maturity 2025 Notes $ 400,000 $ (2,356) $ 397,644 1.800% February 1, 2025 2027 Notes 300,000 (2,565) 297,435 2.250% February 1, 2027 2032 Notes 500,000 (5,220) 494,780 2.850% February 1, 2032 Total $ 1,200,000 $ (10,141) $ 1,189,859 The Notes are senior unsecured obligations and rank equal in right of payment to the Company’s other senior unsecured debt from time to time outstanding. The indenture governing the Notes contains certain covenants with respect to the Company that, among other things, restrict the entry into additional secured indebtedness, sale and leaseback transactions and certain mergers, consolidations and transfers of all or substantially all of the Company’s assets. The Company used an amount equal to the net proceeds from the Notes to partially fund the Metal Packaging acquisition. Also on January 21, 2022, the Company entered into a $300 million three-year term loan facility (the "Term Loan Facility") with a syndicate of eight banks. The full $300 million was drawn from this facility on January 26, 2022, and the proceeds used to partially fund the acquisition of Metal Packaging. Interest is assessed at the Secured Overnight Financing Rate ("SOFR") plus a margin based on a pricing grid that uses the Company’s credit ratings. The current SOFR margin is 122.5 basis points. There is no required amortization and repayment can be accelerated at any time without penalty at the Company's discretion. Borrowings under the Term Loan Facility mature on January 27, 2025. At October 2, 2022, the Company had scheduled debt maturities of approximately $417 million over the next twelve months, including $285 million of outstanding commercial paper balances. Also at October 2, 2022, the Company had $182 million in cash and cash equivalents on hand and $750 million in committed capacity under its revolving credit facility, of which $465 million was available for draw down net of outstanding commercial paper balances. The Company 53 SONOCO PRODUCTS COMPANY believes these amounts, combined with expected net cash flows generated from operating and investing activities, will provide ample liquidity to cover these debt maturities and other cash flow needs of the Company over the course of the next twelve months. 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 October 2, 2022, the Company’s interest coverage and net worth were substantially above the minimum levels required under these covenants. On September 23, 2022, the Company entered into a definitive agreement to acquire S.P. Holding, Skjern A/S ("Skjern"), a privately owned manufacturer of paper based in Skjern, Denmark. The estimated $88 million (purchase price subject to foreign currency fluctuations) all-cash transaction is expected to be completed in the fourth quarter of 2022, subject to customary closing conditions, and is expected to be funded using cash on hand and available borrowing capacity. 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. The Company anticipates making additional contributions to its other pension and postretirement plans of approximately $4 million during the remainder of 2022, which would result in total contributions to these plans of approximately $38 million in 2022. Future funding requirements beyond the current year will vary depending largely on actual investment returns, future actuarial assump tions, 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 from time to time uses 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 likely to improve in the foreseeable future. Further deterioration could result in the recognition of an impairment charge or a deconsolidation of the Company's Venezuelan subsidiary. At October 2, 2022, the carrying value of the Company's net investment in its Venezuelan operations was approximately $2.0 million . In addition, at October 2, 2022, 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 the Venezuelan operations. During the first quarter of 2022, the three-year cumulative rate of inflation in Turkey rose above 100 percent, the threshold at which it is deemed to be a highly inflationary economy under U.S. GAAP. Accordingly, effective as of the beginning of the second quarter of 2022, the Company considers the U.S. dollar to be the functional currency of its operations in Turkey and has remeasured monetary assets and liabilities denominated in Turkish lira to U.S. dollars with changes recorded through earnings. The impact of applying highly inflationary accounting to Turkey through the end of the third quarter of 2022 was a pretax charge of approximately $2.8 million (approximately $2.1 million after tax). The magnitude of future earnings impacts is uncertain as such impacts are dependent upon unpredictable movements in the Turkish lira relative to the U.S. dollar. In addition to remeasurement-related charges, significant deterioration in the 54 SONOCO PRODUCTS COMPANY Turkish economy could result in the recognition of future impairment charges. However, the Company believes its exposure is limited to its net investment in Turkey which as of October 2, 2022, approximated $16.3 million . The Company routinely enters into derivative currency contracts 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 $1.5 million at October 2, 2022 and a net unfavorable position of $0.1 million at December 31, 2021. These contracts qualify as cash flow hedges and have maturities ranging to September 2023. In addition, at October 2, 2022, 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 which was not material at October 2, 2022 and December 31, 2021. The Company routinely enters into derivative commodity contracts to fix the cost of a portion of anticipated raw materials and energy-related purchases. The total net fair market value of these instruments was a favorable position of $4.3 million and $2.2 million at October 2, 2022 and December 31, 2021, respectively. Natural gas contracts covering approximately 8.8 million MMBTUs were outstanding at October 2, 2022. These contracts, some of which are designated as cash flow hedges, have maturities ranging to December 2024. Pursuant to the registered public offering of unsecured 2.850% notes with a principal amount of $500.0 million maturing on February 1, 2032, the Company entered into treasury lock derivative instruments with two banks, with a notional principal amount of $150.0 million each on December 29, 2021. These instruments had the risk management objective of reducing exposure to the Company of increases in the underlying Treasury index up to the date of pricing of the notes. The derivatives were settled when the bonds priced on January 11, 2022, with the Company recognizing a gain on the settlement of $5.2 million. During the first nine months of 2022, the U.S. dollar strengthened against the euro, the British pound, the Canadian dollar, the Brazilian real, and the Mexican peso, the functional currencies in which a majority of the Company's foreign investments are held. The net impact of these changes resulted in a translation loss of $155.2 million being recorded in "Accumulated other comprehensive loss" for the nine-month period ended October 2, 2022. Restructuring and Impairment Information 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. 55 SONOCO PRODUCTS COMPANY OTHER ITEMS Critical Accounting Policies and Estimates Goodwill Impairment Evaluation The Company assesses its goodwill for impairment annually and from time to time when warranted by the facts and circumstances surrounding individual reporting units or the Company as a whole. If the fair value of a reporting unit exceeds the carrying value of the reporting unit’s assets, including goodwill, there is no impairment. If the carrying value of a reporting unit exceeds the fair value of that reporting unit, an impairment charge to goodwill is recognized for the excess. The Company's reporting units are the same as, or one level below, its operating segments, as determined in accordance with ASC 350. The Company completed its most recent annual goodwill impairment testing during the third quarter of 2022. For testing purposes, the Company performed an assessment of each reporting unit using either a qualitative evaluation or a quantitative test. The Company’s assessments, whether qualitative or quantitative, incorporate management’s expectations for the future, including forecasted growth rates and/or margin improvements. Therefore, should there be changes in the relevant facts and circumstances and/or expectations, management’s conclusions regarding goodwill impairment may change as well. In considering the level of uncertainty regarding the potential for goodwill impairment, management has concluded that any such impairment would, in most cases, likely be the result of adverse changes in more than one assumption. Management considers the assumptions used to be its best estimates across a range of possible outcomes based on available evidence at the time of the assessment. Other than in the Plastics - Healthcare and Protexic reporting units, which are discussed below, there is no specific singular event or single change in circumstances management has identified that it believes could reasonably result in a change to expected future results in any of its reporting units sufficient to result in goodwill impairment. In management’s opinion, a change of such magnitude would more likely be the result of changes to some combination of the factors identified above, a general deterioration in competitive position, introduction of a superior technology, significant unexpected changes in customer preferences, an inability to pass through significant raw material cost increases, and other such items as identified in “Item 1A. Risk Factors” on pages 9-19 of the Company's 2021 Annual Report on Form 10-K. Sensitivity Analysis In the annual goodwill impairment analys is completed during the third quarter of 2022, projected future cash flows for the Plastics - Healthcare reporting unit were discounted at 9.8% and its estimated fair value was determined to exceed its carrying value by approximately 18.0%. Based on the discounted cash flow model and holding other valuation assumptions constant, the discount rate would have to be increased to 11.0% in order for the estimated fair value of the reporting unit to fall below carrying value. Total goodwill associated with this reporting unit was $60.7 million at October 2, 2022. The projected future cash flows for the Protexic reporting unit were discounted at 9.5% and its estimated fair value was determined to exceed its carrying value by approximately 18.3%. Based on the discounted cash flow model and holding other valuation assumptions constant, the discount rate would have to be increased to 11.5% in order for the estimated fair value of the reporting unit to fall below carrying value. Total goodwill associated with this reporting unit was $29.1 million at October 2, 2022. Other Asset Impairments - Russia The Company recognized asset impairment charges totaling $9.2 million during the nine-month period ended October 2, 2022 as a result of exiting its operations in Russia due to the ongoing Russia-Ukraine conflict. The impairment charges included $3.7 million of cumulative currency translation adjustment losses that were reclassified from accumulated other comprehensi ve income upon completion of the Company’s exit from Russia on July 1, 2022. The impairment charges are reflected in “Restructuring/Asset impairment charges” in the Company's Condensed Consolidated Statements of Income for the nine-month period ended October 2, 2022. These operations consisted of two small tube and core plants in our Industrial Paper Packaging segment w ith approximately 70 employees and annual sales in 2021 of approximately $21 million.