Item 1. Financial Statements
Item 1. Financial Statements.
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars and shares in thousands)
April 2,
2023 December 31, 2022*
Assets
Current Assets
Cash and cash equivalents $ 209,651 $ 227,438
Trade accounts receivable, net of allowances 903,424 862,712
Other receivables 89,554 99,492
Inventories, net:
Finished and in process 472,641 453,981
Materials and supplies 610,364 641,577
Prepaid expenses 76,693 76,054
2,362,327 2,361,254
Property, Plant and Equipment, Net 1,717,615 1,710,399
Goodwill 1,679,547 1,675,311
Other Intangible Assets, Net 717,784 741,598
Deferred Income Taxes 47,867 29,878
Right of Use Asset-Operating Leases 289,017 296,781
Other Assets 247,277 237,719
Total Assets $ 7,061,434 $ 7,052,940
Liabilities and Equity
Current Liabilities
Payable to suppliers $ 746,118 $ 818,885
Accrued expenses and other 382,560 405,671
Notes payable and current portion of long-term debt 447,601 502,440
Accrued taxes 33,211 16,905
1,609,490 1,743,901
Long-term Debt, Net of Current Portion 2,717,891 2,719,783
Noncurrent Operating Lease Liabilities 243,714 250,994
Pension and Other Postretirement Benefits 118,163 120,084
Deferred Income Taxes 127,674 107,293
Other Liabilities 38,937 38,088
Commitments and Contingencies
Sonoco Shareholders’ Equity
Common stock, no par value
Authorized 300,000 shares
97,955 and 97,645 shares issued and outstanding
at April 2, 2023 and December 31, 2022 , respectively
7,175 7,175
Capital in excess of stated value 138,008 140,539
Accumulated other comprehensive loss ( 395,084 ) ( 430,083 )
Retained earnings 2,448,299 2,348,183
Total Sonoco Shareholders’ Equity 2,198,398 2,065,814
Noncontrolling Interests 7,167 6,983
Total Equity 2,205,565 2,072,797
Total Liabilities and Equity $ 7,061,434 $ 7,052,940
* 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 (the “United States” or “U.S.”).
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)
3
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(Dollars and shares in thousands except per share data)
Three Months Ended
April 2, 2023 April 3, 2022
Net sales $ 1,729,783 $ 1,770,982
Cost of sales 1,355,355 1,399,417
Gross profit 374,428 371,565
Selling, general and administrative expenses 187,976 190,362
Restructuring/Asset impairment charges 28,814 12,142
Gain on divestiture of business and other assets 72,010 —
Operating profit 229,648 169,061
Non-operating pension costs 3,658 1,324
Interest expense 34,232 20,581
Interest income 1,562 1,516
Income before income taxes 193,320 148,672
Provision for income taxes 46,912 35,289
Income before equity in earnings of affiliates 146,408 113,383
Equity in earnings of affiliates, net of tax 1,856 2,224
Net income 148,264 115,607
Net loss/(income) attributable to noncontrolling interests 55 ( 274 )
Net income attributable to Sonoco $ 148,319 $ 115,333
Weighted average common shares outstanding:
Basic 98,167 97,924
Diluted 98,615 98,554
Per common share:
Net income attributable to Sonoco:
Basic $ 1.51 $ 1.18
Diluted $ 1.50 $ 1.17
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)
4
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (unaudited)
(Dollars in thousands)
Three Months Ended
April 2, 2023 April 3, 2022
Net income $ 148,264 $ 115,607
Other comprehensive income:
Foreign currency translation adjustments 31,808 706
Changes in defined benefit plans, net of tax 916 191
Changes in derivative financial instruments, net of tax 2,514 2,550
Other comprehensive income $ 35,238 $ 3,447
Comprehensive income: 183,502 119,054
Less: Net loss/(income) attributable to noncontrolling interests 55 ( 274 )
Less: Other comprehensive income attributable to noncontrolling interests ( 239 ) ( 891 )
Comprehensive income attributable to Sonoco $ 183,318 $ 117,889
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)
5
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN TOTAL EQUITY (unaudited)
(Dollars and shares in thousands)
Total
Equity Common Shares Capital in
Excess of
Stated Value Accumulated
Other
Comprehensive
Loss Retained
Earnings Noncontrolling
Interests
Outstanding Amount
December 31, 2021 $ 1,849,541 97,370 $ 7,175 $ 119,690 $ ( 359,425 ) $ 2,070,005 $ 12,096
Net income 115,607 115,333 274
Other comprehensive income/(loss):
Translation gain/(loss) 706 ( 185 ) 891
Defined benefit plan adjustment, net of tax 191 191
Derivative financial instruments, net of tax 2,550 2,550
Other comprehensive loss $ 3,447 $ 2,556 $ 891
Dividends ( 44,124 ) ( 44,124 )
Issuance of stock awards 377 182 377
Shares repurchased ( 3,410 ) ( 60 ) ( 3,410 )
Share-based compensation 10,689 10,689
Purchase of noncontrolling interest ( 13,196 ) ( 7,080 ) ( 6,116 )
April 3, 2022 $ 1,918,931 97,492 $ 7,175 $ 120,266 $ ( 356,869 ) $ 2,141,214 $ 7,145
Total Equity Common Shares Capital in
Excess of
Stated Value Accumulated
Other
Comprehensive
Loss Retained
Earnings Noncontrolling
Interests
Outstanding Amount
December 31, 2022 $ 2,072,797 97,645 $ 7,175 $ 140,539 $ ( 430,083 ) $ 2,348,183 $ 6,983
Net income/(loss) 148,264 148,319 ( 55 )
Other comprehensive income:
Translation gain 31,808 31,569 239
Defined benefit plan adjustment, net of tax 916 916
Derivative financial instruments, net of tax 2,514 2,514
Other comprehensive income $ 35,238 $ 34,999 $ 239
Dividends ( 48,203 ) ( 48,203 )
Issuance of stock awards 472 485 472
Shares repurchased ( 10,576 ) ( 175 ) ( 10,576 )
Share-based compensation 7,573 7,573
April 2, 2023 $ 2,205,565 97,955 $ 7,175 $ 138,008 $ ( 395,084 ) $ 2,448,299 $ 7,167
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)
6
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
Three Months Ended
April 2, 2023 April 3, 2022
Cash Flows from Operating Activities:
Net income $ 148,264 $ 115,607
Adjustments to reconcile net income to net cash provided by operating activities:
Asset impairments 18,616 5,511
Depreciation, depletion and amortization 82,137 73,315
Share-based compensation expense 7,573 10,689
Equity in earnings of affiliates, net ( 1,856 ) ( 2,224 )
Cash dividends from affiliated companies 1,875 350
Net (gain)/loss on disposition of assets ( 60,615 ) 190
Net gain on divestiture of business ( 11,065 ) —
Pension and postretirement plan expense 4,408 2,232
Pension and postretirement plan contributions ( 4,931 ) ( 28,095 )
Increase in net deferred tax liabilities 1,588 4,613
Change in assets and liabilities, net of effects from acquisitions and foreign currency adjustments:
Trade accounts receivable ( 33,485 ) ( 129,670 )
Inventories 13,549 ( 116,169 )
Payable to suppliers ( 71,553 ) 60,356
Prepaid expenses 350 ( 6,954 )
Income taxes payable and other income tax items 22,030 13,786
Accrued expenses and other assets and liabilities ( 18,883 ) ( 2,477 )
Net cash provided by operating activities 98,002 1,060
Cash Flows from Investing Activities:
Purchases of property, plant and equipment ( 83,401 ) ( 67,507 )
Cost of acquisitions, net of cash acquired — ( 1,348,589 )
Proceeds from the sale of business, net 13,839 —
Proceeds from the sale of assets, net 71,405 183
Other net investing activities ( 4,810 ) 145
Net cash used in investing activities ( 2,967 ) ( 1,415,768 )
Cash Flows from Financing Activities:
Proceeds from issuance of debt 9,621 1,530,145
Principal repayment of debt ( 84,162 ) ( 33,117 )
Net change in commercial paper 12,000 ( 27,000 )
Net increase (decrease) in outstanding checks 2,670 ( 15,759 )
Cash dividends ( 47,731 ) ( 43,747 )
Purchase of noncontrolling interest — ( 14,474 )
Payments for share repurchases ( 10,576 ) ( 3,410 )
Net cash (used in)/provided by financing activities ( 118,178 ) 1,392,638
Effects of Exchange Rate Changes on Cash 5,356 2,629
Net Decrease in Cash and Cash Equivalents ( 17,787 ) ( 19,441 )
Cash and cash equivalents at beginning of period 227,438 170,978
Cash and cash equivalents at end of period $ 209,651 $ 151,537
Certain prior year amounts reported within net cash provided by operating activities have been revised to conform with the current presentation.
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)
7
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. Certain amounts within “Cash Flows from Operating Activities” in the Condensed Consolidated Statements of Cash Flows for the three-month period ended April 3, 2022 have been reclassified to conform to the current year presentation . Operating results for the three-month period ended April 2, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. 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, 2022.
Note 2: New Accounting Pronouncements
In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-04 “Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” The amendments in this ASU require that a buyer in a supplier finance program disclose qualitative and quantitative information about its supplier finance programs in each annual reporting period, including a description of key payment terms, amounts outstanding, and a rollforward of the outstanding obligation. In each interim reporting period, the amount outstanding requires disclosure. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. The Company adopted this standard in the first quarter of 2023, with the exception of the amendment on rollforward information, which will be adopted in the first quarter of 2024. The adoption of the new standard did not have a material effect on the consolidated financial statements.
During the three-month period ended April 2, 2023, there have been no other newly issued or newly applicable accounting pronouncements that have had, or are expected to have, a material impact on the Company’s financial statements. Further, at April 2, 2023, there are no other pronouncements pending adoption that are expected to have a material impact on the Company’s consolidated financial statements.
Note 3: Acquisitions and Divestitures
Acquisitions
As previously disclosed, on November 9, 2022, the Company entered into a definitive agreement to purchase the remaining equity interest in RTS Packaging, LLC (“RTS”), from joint venture partner WestRock Company (“WestRock”) and one WestRock paper mill in Chattanooga, Tennessee, for $ 330,000 in cash, subject to customary pricing adjustments. In January 2023, both the Company and WestRock received a request for additional information and documentary material from the Antitrust Division of the U.S. Department of Justice. The Company anticipates completing the transaction in the second half of 2023, subject to the satisfaction or waiver of the closing conditions contained in the purchase agreement, including the expiration or early termination of waiting periods or extensions thereof under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Upon completion of the transaction, the Company will own 100 % of RTS, which is currently operated as a joint venture between Sonoco ( 35 % ownership interest) and WestRock ( 65 % ownership interest). The RTS joint venture was formed in 1997 and combined the former protective packaging operations of WestRock and the Company to market solid fiber partitions from recycled paperboard to glass container manufacturers and producers of wine, liquor, food, and pharmaceuticals. The transaction will give the Company full ownership of fourteen converting operations, including ten in the United States, two in Mexico, and two in South America and one paper mill in the United States. Upon completion of the transaction, approximately 1,100 individuals will become employees of the Company. The Company expects to fund the acquisition with new borrowings from lenders and cash on hand .
8
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
On November 15, 2022, the Company completed the acquisition of S.P. Holding, Skjern A/S (“Skjern”), a privately owned manufacturer of paper based in Skjern, Denmark for $ 88,647 , net of cash acquired. Skjern produces high-grade paperboard from recycled paper for rigid paper containers, tubes and cores, and other applications. Goodwill for Skjern, none of which is expected to be deductible for income tax purposes, consists of increased access to certain markets and existing customer relationships. Skjern's financial results are included in the Company's Industrial Paper Packaging segment.
The Company's initial fair value estimates of the assets acquired and the liabilities assumed in the Skjern acquisition, as well as updated preliminary fair value allocations reflecting adjustments made during the measurement period, are as follows:
Initial Estimate Measurement Period Adjustments Preliminary Allocation
Trade accounts receivable $ 8,055 $ — $ 8,055
Other receivables 193 — 193
Inventories 2,595 14 2,609
Prepaid expenses 349 — 349
Property, plant and equipment 24,334 4,921 29,255
Right of use asset - operating leases 28 — 28
Other intangible assets 42,818 ( 3,488 ) 39,330
Goodwill 29,059 ( 1,447 ) 27,612
Payable to suppliers ( 3,466 ) — ( 3,466 )
Accrued expenses and other ( 1,173 ) — ( 1,173 )
Taxes payable ( 576 ) — ( 576 )
Noncurrent operating lease liabilities ( 20 ) — ( 20 )
Deferred income taxes ( 13,549 ) — ( 13,549 )
Total purchase price, net of cash acquired $ 88,647 $ — $ 88,647
The allocation of the purchase price of Skjern to the tangible and intangible assets acquired and liabilities assumed, as reflected under the heading “Preliminary Allocation” in the table above, is based on the Company's preliminary allocations of their fair value, based on information currently available. Management is continuing to finalize its valuation of certain assets and liabilities including, but not limited to: inventory; property, plant and equipment; goodwill; other intangible assets; and deferred income taxes, and expects to complete its valuations within one year of the date of acquisition.
The Company has accounted for this acquisition as a business combination under the acquisition method and has included the results of operations of the acquired business in the Company's Condensed Consolidated Statements of Income from the date of acquisition.
On January 26, 2022, the Company completed the acquisition of Ball Metalpack Holding, LLC, renamed Sonoco Metal Packaging (“Metal Packaging”), a leading supplier of sustainable metal packaging for food and household products and the largest aerosol can producer in North America, for $ 1,348,589 , net of cash acquired. Prior to the Company's acquisition of Metal Packaging, Ball Metalpack Holding, LLC was a joint venture formed in 2018 and owned by Platinum Equity ( 51 %) and Ball Corporation ( 49 %). Metal Packaging consists of eight manufacturing plants in the United States and a headquarters facility in Broomfield, Colorado.
9
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
During the three-month period ended April 2, 2023, the Company finalized its valuations of the assets and liabilities assumed in the acquisition of Metal Packaging. As a result, the following measurement period adjustments were made to the previously disclosed provisional fair values of assets acquired and liabilities assumed:
Measurement Period Adjustments Three Months Ended April 2, 2023
Inventories $ ( 73 )
Property, plant and equipment ( 247 )
Goodwill 439
Accrued expenses and other ( 119 )
Additional cash consideration $ —
Factors comprising goodwill include increased access to certain markets as well as the value of the assembled workforce. Approximately 81 % of the goodwill is expected to be deductible for income tax purposes. Metal Packaging's financial results are included in the Company's Consumer Packaging segment.
The Company has accounted for this acquisition as a business combination under the acquisition method and has included the results of operations of the acquired business in the Company's Condensed Consolidated Statements of Income from the date of acquisition.
The following table presents the unaudited financial results for Metal Packaging from the prior year date of acquisition through the end of the reporting period ending April 3, 2022:
Supplemental Information (unaudited) January 26 to
Metal Packaging April 3, 2022
Net sales $ 171,228
Net income $ 14,019
The following table presents the Company’s estimated unaudited pro forma consolidated results for the three-month period ended April 3, 2022, assuming the acquisition of Metal Packaging had occurred on January 1, 2021. This unaudited pro forma information is presented for informational purposes only and does not purport to represent the results of operations that would have been achieved if the acquisition had been completed at the beginning of 2021, nor is it necessarily indicative of future consolidated results.
Pro Forma Supplemental Information (unaudited) Three Months Ended
Consolidated April 3, 2022
Net sales $ 1,820,570
Net income attributable to Sonoco $ 164,881
The unaudited pro forma information above does not project the Company’s expected results for any future period and gives no effect to any future synergistic benefits that may result from the combination or the costs of integrating the acquired operations with those of the Company. Unaudited pro forma information for the three-month period ended April 3, 2022 includes adjustments to depreciation, amortization, and income taxes based upon the final fair value allocation of the purchase price to Metal Packaging's tangible and intangible assets acquired and liabilities assumed as though the acquisition had occurred on January 1, 2021. Interest expense on the additional debt issued by the Company to fund the acquisition and retention bonuses incurred related to the acquisition are also included in the unaudited pro forma information as if the acquisition had occurred on January 1, 2021.
Acquisition-related costs of $ 22,284 were recognized during the three-month period ended April 3, 2022 and charges related to fair value adjustments to acquisition-date inventory of $ 25,000 were recognized during the three-month period ended April 3, 2022. These costs are excluded from 2022 unaudited pro forma net income as though the acquisition had occurred on January 1, 2021.
10
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Divestiture of Business
On January 26, 2023, the Company completed the sale of its Sonoco Sustainability Solutions (“S3”) business, a provider of customized waste and recycling management programs and part of the Company's Industrial Paper Packaging segment, to Northstar Recycling Co. (“Northstar”), for total cash proceeds of $ 13,839 . An additional $ 1,500 of proceeds are being held in escrow and will be released to the Company, pursuant to any indemnification claims, 20 months following the date of the divestiture. These escrow proceeds are included in “Other Assets” in the Company’s Condensed Consolidated Balance Sheets as of April 2, 2023. The Company wrote off net assets totaling $ 4,274 as part of the divestiture of the business, including $ 3,042 of allocated goodwill, and recognized a pretax gain of $ 11,065 during the three-month period ended April 2, 2023, which is included in “Gain on divestiture of business and other assets” in the Company’s Condensed Consolidated Statements of Income. The Company is also entitled to receive additional proceeds of $ 3,200 in the second quarter of 2024 if certain conditions are met. This contingent consideration will be recognized as additional gain on the sale at the point the contingencies are resolved.
In addition, the Company purchased a 2.7 % equity interest in Northstar for $ 5,000 . This investment is being accounted for under the measurement alternative (i.e., cost less impairment, adjusted for any qualifying observable price changes).
The Company continually assesses its operational footprint as well as its overall portfolio of businesses and may consider the divestiture of plants and/or business units it considers to be suboptimal or nonstrategic.
Sale of Assets
With the completion of Project Horizon, the Company's project to convert the corrugated medium machine in Hartsville, South Carolina, to produce uncoated recycled paperboard, the Company now produces paper exclusively from recycled fibers and no longer requires natural tree fiber for production. Accordingly, on March 29, 2023, the Company sold its timberland properties, approximately 55,000 acres, to Manulife Investment Management for net cash proceeds of $ 70,802 . The Company disposed of assets with a net book value of $ 9,857 as part of the sale, and recognized a pretax gain from the sale of these assets of $ 60,945 during the three months ended April 2, 2023, which is included in “Gain on divestiture of business and other assets” in the Company’s Condensed Consolidated Statements of Income.
Acquisition and Divestiture-Related Costs
Acquisition- and divestiture-related costs totaled $ 5,188 during the three-month period ended April 2, 2023. These costs include legal and professional fees, investment banking fees, and other transaction costs that are included in “Selling, general and administrative expenses” in the Company’s Condensed Consolidated Statements of Income.
Acquisition-related costs totaled $ 48,352 during the three months ended April 3, 2022 primarily related to the acquisition of Metal Packaging. These charges included the partial amortization of the fair value step-up of finished goods inventory of $ 25,000 , included in “Cost of sales” in the Company's Condensed Consolidated Statements of Income, and other acquisition-related charges of $ 23,352 . These other charges consisted primarily of investment banking fees, representation and warranty insurance premiums, legal and professional fees, and other transaction costs and are included in “Selling, general and administrative expenses” in the Company’s Condensed Consolidated Statements of Income.
11
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Note 4: Shareholders' Equity
Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended
April 2, 2023 April 3, 2022
Numerator:
Net income attributable to Sonoco $ 148,319 $ 115,333
Denominator:
Weighted average common shares outstanding:
Basic 98,167 97,924
Dilutive effect of share-based compensation 448 630
Diluted 98,615 98,554
Net income attributable to Sonoco per common share:
Basic $ 1.51 $ 1.18
Diluted $ 1.50 $ 1.17
Cash dividends $ 0.49 $ 0.45
No adjustments were made to “Net income attributable to Sonoco” in the computations of net income attributable to Sonoco per common share.
Anti-dilutive Securities
Potentially dilutive securities are calculated in accordance with the treasury stock method, which assumes the proceeds from the exercise of all dilutive stock appreciation rights (“SARs”) are used to repurchase the Company’s common stock. Certain SARs are not dilutive because either the exercise price is greater than the average market price of the stock during the reporting period or assumed repurchases from proceeds from the exercise of the SARs were anti-dilutive. These SARs may become dilutive in the future if the market price of the Company's common stock appreciates.
The average numbers of SARs that were anti-dilutive and, therefore, not included in the computation of diluted earnings per share during the three-month periods ended April 2, 2023 and April 3, 2022 were as follows (in thousands):
Three Months Ended
April 2, 2023 April 3, 2022
Anti-dilutive stock appreciation rights 343 401
Stock Repurchases
On April 20, 2021, the Company's Board of Directors (the “Board”) authorized the repurchase of the Company's common stock in an aggregate amount of up to $ 350,000 . Following several repurchase transactions in 2021, a total of $ 137,972 remained available for share repurchases under this authorization as of December 31, 2021. No shares were repurchased under this authorization during the year ended December 31, 2022 or the three-month period ended April 2, 2023.
The Company regularly repurchases shares of its common stock to satisfy employee tax withholding obligations in association with certain share-based compensation awards. These repurchases, which are not part of a publicly announced plan or program, totaled 175 shares during the three-month period ended April 2, 2023, at a cost of $ 10,576 , and 60 shares during the three-month period ended April 3, 2022, at a cost of $ 3,410 .
Dividend Declarations
On February 8, 2023, the Board of Directors declared a regular quarterly dividend of $ 0.49 per share. This dividend was paid on March 10, 2023 to all shareholders of record as of February 22, 2023.
On April 19, 2023, the Board of Directors declared a regular quarterly dividend of $ 0.51 per share. This dividend is payable on June 9, 2023 to all shareholders of record as of May 10, 2023.
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SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Noncontrolling interests
In April 2015, the Company acquired a 67 % controlling interest in Graffo Paranaense de Embalagens S/A (“Graffo”). Prior to March 31, 2022, the Company consolidated 100% of Graffo, with the partner's 33 % share included in “Noncontrolling Interests” within the equity section of the balance sheet. On March 31, 2022, the Company paid $ 14,474 in cash to acquire the remaining 33 % ownership interest from the three noncontrolling partners, which resulted in a $ 6,116 reduction in noncontrolling interest, a $ 7,080 charge to capital in excess of stated value, and a $ 1,278 reduction to accrued expenses and other on the Company's Condensed Consolidated Balance Sheet as of April 3, 2022.
Note 5: Restructuring and Asset Impairments
Due to its geographic footprint and the cost-competitive nature of its businesses, the Company is continually seeking the most cost-effective means and structure to serve its customers and to respond to fundamental changes in its markets. As such, restructuring costs have been, and are expected to be, a recurring component of the Company's operating costs. The amount of these costs can vary significantly from quarter to quarter and from year to year depending upon the scope and location of the restructuring activities.
Following are the total restructuring and asset impairment charges, net of adjustments, recognized during the periods presented:
Three Months Ended
April 2, 2023 April 3, 2022
Restructuring and restructuring-related asset impairment charges $ 28,814 $ 5,753
Other asset impairments — 6,389
Restructuring and asset impairment charges $ 28,814 $ 12,142
The table below sets forth restructuring and restructuring-related asset impairment charges by type incurred:
Three Months Ended
April 2, 2023 April 3, 2022
Severance and termination benefits $ 5,516 $ 2,099
Asset impairments 19,193 445
Other costs 4,105 3,209
Restructuring and restructuring-related asset impairment charges $ 28,814 $ 5,753
The table below sets forth restructuring and restructuring-related asset impairment charges by reportable segment:
Three Months Ended
April 2, 2023 April 3, 2022
Consumer Packaging $ 1,576 $ 1,635
Industrial Paper Packaging 24,544 1,348
All Other 1,157 78
Corporate 1,537 2,692
Restructuring and restructuring-related asset impairment charges $ 28,814 $ 5,753
Restructuring and restructuring-related asset impairment charges are included in “Restructuring/Asset impairment charges” in the Company's Condensed Consolidated Statements of Income.
13
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The following table sets forth the activity in the restructuring accrual included in “Accrued expenses and other” on the Company’s Condensed Consolidated Balance Sheets:
Severance
and
Termination
Benefits Asset
Impairments/
Disposal
of Assets Other
Costs Total
Accrual Activity
Liability at December 31, 2022
$ 14,677 $ — $ 1,392 $ 16,069
2023 charges 5,516 19,193 4,105 28,814
Cash payments ( 6,380 ) ( 166 ) ( 2,378 ) ( 8,924 )
Asset writedowns/disposals — ( 19,027 ) — ( 19,027 )
Foreign currency translation 14 — 11 25
Liability at April 2, 2023
$ 13,827 $ — $ 3,130 $ 16,957
“Severance and Termination Benefits” during the first three months of 2023 includes the cost of severance for approximately 159 employees whose positions were eliminated in conjunction with the Company's ongoing organizational effectiveness efforts and severance related to the closure of the Company's paper mill in Hutchinson, Kansas, part of the Industrial Paper Packaging segment.
“Asset Impairments/Disposal of Assets” during the first three months of 2023 consists primarily of asset impairment charges related to the closure of the Company's paper mill in Hutchinson, Kansas.
“Other Costs” during the first three months of 2023 consists primarily of consulting services, costs related to the closure of the Hutchinson, Kansas paper mill, and the cost of earlier plant closures, including equipment removal, utilities, plant security, property taxes and insurance.
The Company expects to pay the majority of the remaining restructuring reserves by the end of 2023 using cash generated from operations. The Company also expects to recognize future additional charges totaling approximately $ 5,200 in connection with previously announced restructuring actions and believes that the majority of these charges will be incurred and paid by the end of 2023. The Company continually evaluates its cost structure, including its manufacturing capacity, and additional restructuring actions are likely to be undertaken.
Other Asset Impairments
Total other asset impairment charges of $ 6,389 were incurred during the three months ended April 3, 2022, which includes $ 5,713 of impairment charges related to the Company's decision to exit its operations in Russia, part of the Industrial Paper Packaging segment, as a result of the ongoing Russia-Ukraine conflict, and $ 676 of fixed asset impairments in the Company's plastics foods operations, part of the Consumer Packaging segment.
The assets were impaired as the value of their projected undiscounted cash flows was determined to no longer be sufficient to recover their carrying value. These impairment charges are included in “Restructuring/Asset impairment charges” in the Company’s Condensed Consolidated Statements of Income.
14
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Note 6: Accumulated Other Comprehensive Loss
The following table summarizes the components of accumulated other comprehensive loss and the changes in the balances of each component of accumulated other comprehensive loss, net of tax as applicable, for the three-month periods ended April 2, 2023 and April 3, 2022:
Foreign
Currency
Items Defined
Benefit
Pension Items Cash
Flow Hedges Accumulated
Other
Comprehensive
Loss
Balance at December 31, 2022
$ ( 338,316 ) $ ( 90,973 ) $ ( 794 ) $ ( 430,083 )
Other comprehensive income/(loss) before reclassifications 31,569 ( 393 ) 2,645 33,821
Amounts reclassified from accumulated other comprehensive loss to net income — 1,309 ( 431 ) 878
Amounts reclassified from accumulated other comprehensive loss to fixed assets — — 300 300
Other comprehensive income 31,569 916 2,514 34,999
Balance at April 2, 2023
$ ( 306,747 ) $ ( 90,057 ) $ 1,720 $ ( 395,084 )
Balance at December 31, 2021
$ ( 269,076 ) $ ( 91,397 ) $ 1,048 $ ( 359,425 )
Other comprehensive (loss)/income before reclassifications ( 185 ) ( 971 ) 5,119 3,963
Amounts reclassified from accumulated other comprehensive loss to net loss — 1,162 ( 2,654 ) ( 1,492 )
Amounts reclassified from accumulated other comprehensive loss to fixed assets — — 85 85
Other comprehensive (loss)/income ( 185 ) 191 2,550 2,556
Balance at April 3, 2022
$ ( 269,261 ) $ ( 91,206 ) $ 3,598 $ ( 356,869 )
15
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The following table summarizes the effects on net income of significant amounts reclassified from each component of accumulated other comprehensive loss for the three-month periods ended April 2, 2023 and April 3, 2022:
Amount Reclassified from Accumulated
Other Comprehensive Loss
Three Months Ended
Details about Accumulated Other
Comprehensive
Loss Components April 2,
2023 April 3,
2022 Affected Line Item in
the Condensed Consolidated
Statements of Income
Gains/(losses) on cash flow hedges
Foreign exchange contracts $ 1,062 $ 566 Net sales
Foreign exchange contracts ( 454 ) ( 695 ) Cost of sales
Commodity contracts ( 32 ) 3,850 Cost of sales
576 3,721 Income before income taxes
Income tax impact ( 145 ) ( 1,067 ) Provision for income taxes
431 2,654 Net income
Defined benefit pension items
Effect of settlement loss (a)
( 686 ) ( 356 ) Non-operating pension costs
Amortization of defined
benefit pension items (a)
( 1,071 ) ( 1,171 ) Non-operating pension costs
( 1,757 ) ( 1,527 ) Income before income taxes
Income tax impact 448 365 Provision for income taxes
( 1,309 ) ( 1,162 ) Net income
Total reclassifications for the period $ ( 878 ) $ 1,492 Net income
(a) See Note 11 for additional details.
16
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The following table summarizes the before and after tax amounts for the various components of other comprehensive (loss)/income for the three-month periods ended April 2, 2023 and April 3, 2022:
Three months ended
April 2, 2023
Three months ended
April 3, 2022
Before Tax
Amount Tax
(Expense)
Benefit After Tax
Amount Before Tax
Amount Tax
(Expense)
Benefit After Tax
Amount
Foreign currency items:
Net other comprehensive income/(loss) from foreign currency items $ 31,569 $ — $ 31,569 $ ( 185 ) $ — $ ( 185 )
Defined benefit pension items:
Other comprehensive (loss)/income before
reclassifications ( 760 ) 367 ( 393 ) ( 1,276 ) 305 ( 971 )
Amounts reclassified from accumulated other
comprehensive loss to net income (a)
1,757 ( 448 ) 1,309 1,527 ( 365 ) 1,162
Net other comprehensive income/(loss) from
defined benefit pension items 997 ( 81 ) 916 251 ( 60 ) 191
Gains and losses on cash flow hedges:
Other comprehensive income/(loss) before
reclassifications 3,536 ( 891 ) 2,645 7,179 ( 2,060 ) 5,119
Amounts reclassified from accumulated other
comprehensive loss to net income (b)
( 576 ) 145 ( 431 ) ( 3,721 ) 1,067 ( 2,654 )
Amounts reclassified from accumulated other
comprehensive loss to fixed assets 401 ( 101 ) 300 117 ( 32 ) 85
Net other comprehensive income/(loss) from
cash flow hedges 3,361 ( 847 ) 2,514 3,575 ( 1,025 ) 2,550
Other comprehensive income/ (loss) $ 35,927 $ ( 928 ) $ 34,999 $ 3,641 $ ( 1,085 ) $ 2,556
(a) See Note 11 for additional details.
(b) See Note 9 for additional details.
17
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Note 7: Goodwill and Other Intangible Assets
Goodwill
A summary of the changes in goodwill for the three-month period ended April 2, 2023 is as follows:
Consumer
Packaging Industrial Paper Packaging All Other Total
Goodwill at December 31, 2022 $ 898,625 $ 394,826 $ 381,860 $ 1,675,311
Dispositions — ( 3,042 ) — ( 3,042 )
Foreign currency translation 2,145 5,520 621 8,286
Measurement period adjustments 439 ( 1,447 ) — ( 1,008 )
Goodwill at April 2, 2023 $ 901,209 $ 395,857 $ 382,481 $ 1,679,547
Goodwill activity reflected under the caption “Dispositions” relates to the sale of the Company's S3 business on January 25, 2023. Goodwill activity reflected under the caption “Measurement period adjustments” relates to the prior year acquisitions of Metal Packaging and Skjern. See Note 3 for additional information.
The Company assesses goodwill for impairment annually during the third quarter, or from time to time when warranted by the facts and circumstances surrounding individual reporting units or the Company as a whole. The Company completed its most recent annual goodwill impairment testing during the third quarter of 2022 and analyzed certain qualitative and quantitative factors in determining whether a goodwill impairment existed. The Company's assessments reflected a number of significant management assumptions and estimates including the Company's forecast of sales growth, gross profit margins, and discount rates. Changes in these assumptions could materially impact the Company's conclusions. Based on its assessments, the Company concluded that there was no impairment of goodwill for any of its reporting units.
Although no reporting units failed the annual impairment test, in management’s opinion the goodwill balances of the Plastics - Healthcare and Protexic reporting units are at risk of impairment in the near term if each reporting unit's operations do not perform in line with management's expectations, or if there is a negative change in the long-term outlook for the business or in other factors such as the discount rate. At April 2, 2023, the t otal goodwill associated with the Plastics - Healthcare reporting uni t was $ 62,963 and the tot al goodwill associated with the Protexic reporting unit w as $ 29,051 .
During the time subsequent to the annual evaluation, and at April 2, 2023, the Company considered whether any events and/or changes in circumstances had resulted in the likelihood that the goodwill of any of its reporting units may have been impaired. It is management's opinion that no such events and/or changes in circumstances have occurred.
18
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Other Intangible Assets
A summary of other intangible assets as of April 2, 2023 and December 31, 2022 is as follows:
April 2,
2023 December 31,
2022
Other Intangible Assets, gross:
Patents $ 29,301 $ 29,303
Customer lists 1,093,534 1,092,232
Trade names 32,940 34,220
Proprietary technology 56,851 57,720
Other 6,276 6,721
Total Other Intangible Assets, gross $ 1,218,902 $ 1,220,196
Accumulated Amortization:
Patents $ ( 18,296 ) $ ( 17,889 )
Customer lists ( 438,067 ) ( 417,034 )
Trade names ( 16,568 ) ( 15,892 )
Proprietary technology ( 25,709 ) ( 25,113 )
Other ( 2,478 ) ( 2,670 )
Total Accumulated Amortization $ ( 501,118 ) $ ( 478,598 )
Other Intangible Assets, net $ 717,784 $ 741,598
Other intangible assets are amortized using the straight-line method over their respective useful lives when management has determined that the straight-line method approximates the pattern of consumption of the respective intangible assets. These lives generally range from three to forty years . The Company has no intangible assets with indefinite lives.
Aggregate amortization expense was $ 21,164 and $ 18,800 for the three-month periods ended April 2, 2023 and April 3, 2022, respectively. Amortization expense on other intangible assets is expected to total approximately $ 81,900 in 2023, $ 74,000 in 2024, $ 64,900 in 2025, $ 61,600 in 2026 and $ 60,100 in 2027.
Note 8: Supply Chain Financing
The Company facilitates voluntary supply chain financing programs (the “SCF Programs”) to provide certain of its suppliers with the opportunity to sell receivables due from the Company to the participating financial institutions in the programs. Such sales are conducted at the sole discretion of both the suppliers and the financial institutions on a nonrecourse basis at a rate that leverages the Company's credit rating and thus might be more beneficial to the supplier. No guarantees are provided by the Company or any of its subsidiaries under the SCF Programs. The Company's responsibility under the agreements is limited to making payment to the financial institutions for confirmed invoices based on the terms originally negotiated with its suppliers. Both the Company and the financial institutions have the right to terminate the SCF Programs by providing 30 days prior written notice to the other party. The Company does not enter into any agreements with suppliers regarding their participation in the SCF Programs.
The following table sets forth the balance sheet location and values of the Company’s SCF Program obligations at April 2, 2023 and December 31, 2022:
Balance Sheet Line Item April 2, 2023 December 31, 2022
Payable to suppliers (a)
$ 51,884 $ 52,415
Notes payable and current portion of long-term debt (b)
$ 1,350 $ 63,448
(a) The payment of these obligations is included in net cash provided by operating activities in the Company's Consolidated Statements of Cash Flows.
19
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
(b) The payment of these obligations is included in net cash used in financing activities in the Company's Consolidated Statements of Cash Flows .
Note 9: Financial Instruments and Derivatives
The following table sets forth the carrying amounts and fair values of the Company’s significant financial instruments for which the carrying amount differs from the fair value.
April 2, 2023 December 31, 2022
Carrying
Amount Fair
Value Carrying
Amount Fair
Value
Long-term debt, net of current portion $ 2,717,891 $ 2,551,610 $ 2,719,783 $ 2,477,884
The carrying value of cash and cash equivalents and short-term debt approximates fair value. The fair value of long-term debt is determined based on recent trade information in the financial markets of the Company’s public debt or is determined by discounting future cash flows using interest rates available to the Company for issues with similar terms and maturities which is considered a Level 2 fair value measurement.
Cash Flow Hedges
At April 2, 2023 and December 31, 2022, the Company had derivative financial instruments outstanding to hedge anticipated transactions and certain asset and liability related cash flows. These contracts, w hich have maturities ranging to December 2024, qualify as cash flow hedges under U.S. GAAP. For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item.
Commodity Cash Flow Hedges
Certain derivative contracts entered into to manage the cost of anticipated purchases of natural gas and aluminum have been designated by the Company as cash flow hedges. At April 2, 2023, these contracts included natural gas swaps covering approximately 0.1 million metric million British thermal units (“MMBTUs”). These contracts represented approximately 1 % of anticipated usage in North America for both 2023 and 2024. The Company also has certain natural gas hedges that it does not treat as cash flow hedges. See “Non-Designated Derivatives” below for a discussion of these hedges. At April 2, 2023, the Company has also designated swap contracts covering 715 metric tons of aluminum as cash flow hedges. The fair value of the Company’s commodity cash flow hedges netted to a loss position of $( 218 ) and $( 172 ) at April 2, 2023 and December 31, 2022, respectively. The amount of the loss included in accumulated other comprehensive loss at April 2, 2023 expected to be reclassified to the income statement during the next twelve months is $( 178 ).
Foreign Currency Cash Flow Hedges
The Company has entered into forward contracts to hedge certain anticipated foreign currency denominated sales, purchases, and capital spending expected to occur in 2023 and 2024. The net positions of these contracts at April 2, 2023 were as follows (in thousands):
Currency Action Quantity
Colombian peso purchase 23,959,866
Mexican peso purchase 419,558
Polish zloty purchase 93,474
Czech koruna purchase 60,331
Canadian dollar purchase 18,828
Euro purchase 9,974
Turkish lira purchase 7,478
Brazilian real purchase 5,202
British pound purchase 4,701
20
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The fair value of foreign currency cash flow hedges related to forecasted sales and purchases netted to a gain position of $ 2,560 and a loss position of $( 299 ) at April 2, 2023 and December 31, 2022, respectively. Gains of $ 2,560 are expected to be reclassified from accumulated other comprehensive income to the income statement during the next twelve months. In addition, the Company has entered into forward contracts to hedge certain foreign currency cash flow transactions related to construction in progress. As of April 2, 2023 and December 31, 2022, the net position of these contracts was $( 16 ) and $( 564 ), respectively. During the three-month period ended April 2, 2023, losses from these hedges of $( 401 ) were reclassified from accumulated other comprehensive loss and included in the carrying value of the capitalized expenditures. Losses of $( 22 ) are expected to be reclassified from accumulated other comprehensive loss and included in the carrying value of the related fixed assets acquired during the next twelve months.
Non-Designated Derivatives
The Company routinely enters into other derivative contracts which are not designated for hedge accounting treatment under ASC 815. As such, changes in fair value of these non-designated derivatives are recorded directly to income and expense in the periods that they occur.
Foreign Currency Hedges
The Company routinely enters into forward contracts or swaps to economically hedge the currency exposure of intercompany debt and foreign currency denominated receivables and payables. The net currency positions of these non-designated contracts at April 2, 2023, were as follows (in thousands):
Currency Action Quantity
Indonesian rupiah purchase 23,069,325
Colombian peso purchase 20,729,300
Mexican peso purchase 563,953
Turkish lira purchase 11,394
Canadian dollar purchase 8,104
Commodity Hedges
The Company has entered into non-designated derivative contracts to manage the cost of anticipated purchases of natural gas. At April 2, 2023, these contracts consisted of natural gas swaps covering approximately 8.3 million MMBTUs and represented approximately 78 % and 54 % of anticipated usage for 2023 and 2024, respectively.
Interest Rate Hedges
Pursuant to the registered public offering of unsecured 2.850 % notes with a principal amount of $ 500,000 maturing on February 1, 2032, the Company entered into treasury lock derivative instruments with two banks, with a notional principal amount of $ 150,000 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 $ 5,201 . The gain is included in “Selling, general and administrative expenses” on the Company's Condensed Consolidated Statements of Income for t he three-month period ended April 3, 2022.
The fair value of the Company’s non-designated derivatives position was a loss of $( 14,691 ) and $( 8,692 ) at April 2, 2023 and December 31, 2022, respectively.
21
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The following table sets forth the location and fair values of the Company’s derivative instruments at April 2, 2023 and December 31, 2022:
Description Balance Sheet Location April 2, 2023 December 31, 2022
Derivatives designated as hedging instruments:
Commodity Contracts Prepaid expenses $ 11 $ 10
Commodity Contracts Other assets $ — $ 8
Commodity Contracts Accrued expenses and other $ ( 189 ) $ ( 155 )
Commodity Contracts Other liabilities $ ( 39 ) $ ( 35 )
Foreign Exchange Contracts Prepaid expenses $ 5,176 $ 1,251
Foreign Exchange Contracts Other assets $ 6 $ —
Foreign Exchange Contracts Accrued expenses and other $ ( 2,637 ) $ ( 2,114 )
Derivatives not designated as hedging instruments:
Commodity Contracts Prepaid expenses $ 13 $ 5
Commodity Contracts Other assets $ 85 $ 251
Commodity Contracts Accrued expenses and other $ ( 13,456 ) $ ( 8,599 )
Commodity Contracts Other liabilities $ ( 1,389 ) $ ( 295 )
Foreign Exchange Contracts Prepaid expenses $ 109 $ 115
Foreign Exchange Contracts Accrued expenses and other $ ( 54 ) $ ( 169 )
While certain of the Company’s derivative contract arrangements with its counterparties provide for the ability to settle contracts on a net basis, the Company reports its derivative positions on a gross basis. There are no collateral arrangements or requirements in these agreements.
The following tables set forth the effect of the Company’s derivative instruments on financial performance for the three-month periods ended April 2, 2023 and April 3, 2022, excluding the amount of foreign currency cash flow hedges that were reclassified from accumulated other comprehensive loss to the carrying value of the capitalized expenditures:
Description Amount of Gain or
(Loss) Recognized
in OCI on
Derivatives Location of Gain
or (Loss)
Reclassified from
Accumulated OCI
Into Income Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI Into Income
Derivatives in Cash Flow Hedging Relationships:
Three-month period ended April 2, 2023
Foreign Exchange Contracts $ 3,613 Net sales $ 1,062
Cost of sales $ ( 454 )
Commodity Contracts $ ( 77 ) Cost of sales $ ( 32 )
Three-month period ended April 3, 2022
Foreign Exchange Contracts $ 955 Net sales $ 566
Cost of sales $ ( 695 )
Commodity Contracts $ 6,224 Cost of sales $ 3,850
Description Gain or (Loss)
Recognized Location of Gain or (Loss) Recognized in
Income Statement
Derivatives not Designated as Hedging Instruments:
Three-month period ended April 2, 2023
Commodity Contracts $ ( 9,708 ) Cost of sales
Foreign Exchange Contracts $ 2,137 Selling, general and administrative
Three-month period ended April 3, 2022
Commodity Contracts $ 6,992 Cost of sales
Foreign Exchange Contracts $ 1,343 Selling, general and administrative
22
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Three-month period ended April 2, 2023 Three-month period ended April 3, 2022
Description Revenue Cost of
sales Revenue Cost of
sales
Total amount of income and expense line items presented in the Condensed Consolidated Statements of Income $ 1,062 $ ( 486 ) $ 566 $ 3,155
Gain or (loss) on cash flow hedging relationships:
Foreign exchange contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive loss into net income $ 1,062 $ ( 454 ) $ 566 $ ( 695 )
Commodity contracts:
Amount of gain reclassified from accumulated other comprehensive loss into net income $ — $ ( 32 ) $ — $ 3,850
23
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Note 10: Fair Value Measurements
Fair value is defined as an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
Level 1 – Observable inputs such as quoted market prices in active markets;
Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3 – Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
Assets that are calculated at Net Asset Value per share (NAV) are not required to be categorized within the fair value hierarchy.
The following table sets forth information regarding the Company’s financial assets and financial liabilities, excluding retirement and postretirement plan assets, measured at fair value on a recurring basis:
Description April 2, 2023 Assets measured
at NAV Level 1 Level 2 Level 3
Hedge derivatives, net:
Commodity contracts $ ( 217 ) $ — $ — $ ( 217 ) $ —
Foreign exchange contracts $ 2,545 $ — $ — $ 2,545 $ —
Non-hedge derivatives, net:
Commodity contracts $ ( 14,747 ) $ — $ — $ ( 14,747 ) $ —
Foreign exchange contracts $ 55 $ — $ — $ 55 $ —
Description December 31, 2022 Assets measured
at NAV Level 1 Level 2 Level 3
Hedge derivatives, net:
Commodity contracts $ ( 172 ) $ — $ — $ ( 172 ) $ —
Foreign exchange contracts $ ( 863 ) $ — $ — $ ( 863 ) $ —
Non-hedge derivatives, net:
Commodity contracts $ ( 8,638 ) $ — $ — $ ( 8,638 ) $ —
Foreign exchange contracts $ ( 54 ) $ — $ — $ ( 54 ) $ —
Interest rate lock contract $ — $ — $ — $ — $ —
As discussed in Note 9, the Company uses derivatives to mitigate the effect of commodity fluctuations, foreign currency fluctuations and, from time to time, interest rate movements. Fair value measurements for the Company’s derivatives are classified under Level 2 because such measurements are estimated based on observable inputs such as interest rates, yield curves, spot and future commodity prices and spot and future exchange rates.
None of the Company’s financial assets or liabilities are measured at fair value using significant unobservable inputs. There were no transfers in or out of Level 1 or Level 2 fair value measurements during the three-month period ended April 2, 2023.
The Company measures certain non-financial assets and non-financial liabilities at fair value on a recurring basis. See Note 3 for a discussion of assets acquired and liabilities assumed in acquisitions and Note 5 for a discussion of asset impairments associated with restructuring activities. The fair value of assets determined based on third-party appraisals and classified as Level 3 measurements due to the use of significant unobservable inputs was not material at April 2, 2023 or December 31, 2022.
24
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Note 11: Employee Benefit Plans
Retirement Plans and Retiree Health and Life Insurance Plans
The Company provides non-contributory defined benefit pension plans for certain of its employees in the United States, Mexico, Belgium, Germany, Greece, France, and Turkey. The Company also sponsors contributory defined benefit pension plans covering certain of its employees in the United Kingdom, Canada and the Netherlands, and provides postretirement healthcare and life insurance benefits to a limited number of its retirees and their dependents in the United States and Canada, based on certain age and/or service eligibility requirements.
The components of net periodic benefit cost/(income) include the following:
Three Months Ended
April 2, 2023 April 3, 2022
Retirement Plans
Service cost $ 687 $ 826
Interest cost 4,294 2,710
Expected return on plan assets ( 2,444 ) ( 2,865 )
Amortization of prior service cost 219 221
Amortization of net actuarial loss 1,045 1,135
Effect of settlement loss 686 356
Net periodic benefit cost $ 4,487 $ 2,383
Retiree Health and Life Insurance Plans
Service cost $ 62 $ 82
Interest cost 130 64
Expected return on plan assets ( 79 ) ( 112 )
Amortization of net actuarial gain ( 193 ) ( 185 )
Net periodic benefit income $ ( 80 ) $ ( 151 )
Settlement Charges
The Company recognized settlement ch arges of $ 686 and $ 356 during the three-month periods ended April 2, 2023 and April 3, 2022, respectively. These charges resulted from payments made to certain participants in the Company's non-union Canadian pension plan who elected a lump sum distribution option upon retirement. Additional settlement charges related to the Canadian pension plans may be recognized over the remainder of 2023 as a result of ongoing lump-sum distributions.
Contributions
The Company made aggregate contributions of $ 4,931 and $ 6,147 to its defined benefit retirement and retiree health and life insurance plans during the three-month periods ended April 2, 2023 and April 3, 2022, respectively. The Company expects to make additional aggregate contributions of approximately $ 10,300 to its defined benefit retirement and retiree health and life insurance plans over the remainder of 2023.
Sonoco Retirement and Savings Plan
The Sonoco Retirement and Savings Plan is a defined contribution retirement plan provided for certain of the Company’s U.S. employees. The plan is comprised of both an elective and non-elective component.
The elective component of the plan, which is designed to meet the requirements of Section 401(k) of the Internal Revenue Code, allows participants to set aside a portion of their wages and salaries for retirement and encourages saving by matching a portion of their contributions with contributions from the Company. The plan provides for participant contributions of 1 % to 100 % of gross pay. Effective December 31, 2021, the Company’s match on elective contributions to the plan increased from 50 % of the first 4 % of compensation contributed by participants to 100 % of the first 6 % as a result of changes to the plan, described below.
25
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The non-elective component of the plan, the Sonoco Retirement Contribution (“SRC”), was eliminated effective December 31, 2021. The SRC provided for an annual Company contribution equal to 4 % of the participant's eligible pay plus 4 % of eligible pay in excess of the social security wage base to eligible participant accounts. The Company made SRC contributions totaling $ 21,948 during the three-month period ended April 3, 2022 related to the 2021 fiscal year. No additional SRC contributions will occur.
Note 12: Income Taxes
The Company’s effective tax rates for the three-month periods ended April 2, 2023 and April 3, 2022 were 24.3 % and 23.7 %, respectively. The Company's effective tax rates varied from the U.S. statutory rate due primarily to rate differences between U.S. and non-U.S. jurisdictions and the relative amounts earned in those jurisdictions, state income taxes, and discrete tax adjustments that were not consistent year over year. The higher 2023 rate was primarily driven by the absence of a first quarter 2022 deferred tax benefit related to the Metal Packaging acquisition.
The Company and/or its subsidiaries file federal, state and local income tax returns in the United States and various foreign jurisdictions. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years prior to 2017.
The Company’s reserve for uncertain tax benefits has increased by $ 798 since December 31, 2022 due primarily to an increase in reserves related to existing tax positions. The Company believes that it is reasonably possible that the amount reserved for unrecognized tax benefits at April 2, 2023 could increase by approximately $ 260 over the next twelve months. Although the Company’s estimate for the potential outcome for any uncertain tax issue is highly judgmental, management believes that any reasonably foreseeable outcomes related to these matters have been adequately provided for. However, future results may include favorable or unfavorable adjustments to estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which earnings or deductions are realized may differ from current estimates. As a result, the Company’s effective tax rate may fluctuate significantly on a quarterly basis. The Company has operations and pays taxes in many countries outside of the U.S. and taxes on those earnings are subject to varying rates. The Company is not dependent upon the favorable benefit of any one jurisdiction to an extent that the loss of such benefit would have a material effect on the Company’s overall effective tax rate.
Note 13: Leases
The Company routinely enters into leasing arrangements for real estate (including manufacturing facilities, office space, and warehouses), transportation equipment (automobiles, forklifts, and trailers), and office equipment (copiers and postage machines). The assessment of the certainty associated with the exercise of various lease renewal, termination, and purchase options included in the Company's lease contracts is performed after contemplating all the relevant facts and circumstances in accordance with guidance under ASC 842 - Leases. Most real estate leases, in particular, include one or more options to renew, with renewal terms that typically extend the lease term in increments from one to five years . The Company's leases do not have any significant residual value guarantees or restrictive covenants.
As the implicit rate in the Company's leases is normally not readily determinable, the Company generally calculates its lease liabilities using discount rates based upon the Company’s incremental secured borrowing rate, which contemplates and reflects a particular geographical region’s interest rate for the leases active within that region of the Company’s global operations. The Company further utilizes a portfolio approach by assigning a “short” rate to contracts with lease terms of 10 years or less and a “long” rate for contracts greater than 10 years.
The Company completed the acquisition of Metal Packaging on January 26, 2022, which included the acquisition of $ 33,910 in operating lease liabilities and $ 46,687 in finance lease liabilities as of the date of acquisition.
26
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The following table sets forth the balance sheet location and aggregate values of the Company’s lease assets and lease liabilities at April 2, 2023 and December 31, 2022:
Classification Balance Sheet Location April 2, 2023 December 31, 2022
Lease Assets
Operating lease assets Right of Use Asset - Operating Leases $ 289,017 $ 296,781
Finance lease assets Other Assets 102,216 103,467
Total lease assets $ 391,233 $ 400,248
Lease Liabilities
Current operating lease liabilities Accrued expenses and other $ 51,537 $ 52,306
Current finance lease liabilities Notes payable and current portion of debt 19,606 19,015
Total current lease liabilities $ 71,143 $ 71,321
Noncurrent operating lease liabilities Noncurrent Operating Lease Liabilities $ 243,714 $ 250,994
Noncurrent finance lease liabilities Long-term Debt, Net of Current Portion 81,732 83,905
Total noncurrent lease liabilities $ 325,446 $ 334,899
Total lease liabilities $ 396,589 $ 406,220
Certain of the Company’s leases include variable costs. Variable costs include lease payments that were volume or usage-driven in accordance with the use of the underlying asset, and also non-lease components that were incurred based upon actual terms rather than contractually fixed amounts. In addition, variable costs are incurred for lease payments that are indexed to a change in rate or index. Because the right of use assets recorded on the balance sheet were determined based upon factors considered at the commencement date of the leases, subsequent changes in the rate or index that were not contemplated in the right of use asset balances recorded on the balance sheet result in variable expenses being incurred when paid during the lease term.
The following table sets forth the components of the Company’s total lease cost for the three-month periods ended April 2, 2023 and April 3, 2022:
Three Months Ended
Lease Cost April 2, 2023 April 3, 2022
Operating lease cost (a) $ 13,411 $ 12,797
Finance lease cost:
Amortization of lease asset (a) 3,270 2,711
Interest on lease liabilities (b) 1,194 966
Variable lease cost (a) (c) 9,378 7,355
Total lease cost $ 27,253 $ 23,829
(a) Production-related and administrative amounts are included in cost of sales and selling, general and administrative expenses, respectively.
(b) Included in interest expense.
(c) Also includes short term lease costs, which are deemed immaterial .
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SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The following table sets forth certain lease-related information for the three-month periods ended April 2, 2023 and April 3, 2022:
Three Months Ended
April 2, 2023 April 3, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used by operating leases $ 13,561 $ 13,152
Operating cash flows used by finance leases $ 1,194 $ 966
Financing cash flows used by finance leases $ 4,581 $ 2,643
Noncash investing and financing activities:
Leased assets obtained in exchange for new operating lease liabilities $ 6,513 $ 19,520
Leased assets obtained in exchange for new finance lease liabilities $ 2,805 $ 5,910
Modification to leased assets for increase in operating lease liabilities $ 3,957 $ 1,484
Modification to leased assets for increase in finance lease liabilities $ — $ 290
Termination reclasses to decrease operating lease assets $ ( 2,029 ) $ ( 1,913 )
Termination reclasses to decrease operating lease liabilities $ ( 2,090 ) $ ( 1,828 )
Termination reclasses to decrease finance lease assets $ ( 962 ) $ —
Termination reclasses to decrease finance lease liabilities $ ( 12 ) $ —
28
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Note 14: Revenue Recognition
The Company records revenue when control is transferred to the customer, which is either upon shipment or over time in cases where the Company is entitled to payment with margin for products produced that are customer specific without alternative use. The Company recognizes over time revenue under the input method as goods are produced. Revenue that is recognized at a point in time is recognized when the customer obtains control of the goods. Customers obtain control either when goods are delivered to the customer facility, if the Company is responsible for arranging transportation, or when picked up by the customer's designated carrier. The Company commonly enters into Master Supply Arrangements with customers to provide goods and/or services over specific time periods. Customers submit purchase orders with quantities and prices to create a contract for accounting purposes. Shipping and handling expenses are included in “Cost of Sales,” and freight charged to customers is included in “Net Sales” in the Company's Condensed Consolidated Statements of Income.
The Company has rebate agreements with certain customers. These rebates are recorded as reductions of revenue and are accrued using sales data and rebate percentages specific to each customer agreement. Accrued customer rebates are included in “Accrued expenses and other” in the Company’s Condensed Consolidated Balance Sheets.
Payment terms under the Company's sales arrangements are short term, generally no longer than 120 days. The Company does provide prompt payment discounts to certain customers if invoices are paid within a predetermined period. Prompt payment discounts are treated as a reduction of estimated revenue and are determinable within a short time period following the sale.
The following table sets forth the effects of contract assets and liabilities from contracts with customers. Contract assets and liabilities are reported in “Other receivables” and “Accrued expenses and other,” respectively, on the Company’s Condensed Consolidated Balance Sheets.
April 2, 2023 December 31, 2022
Contract Assets $ 60,047 $ 56,008
Contract Liabilities $ ( 23,538 ) $ ( 22,423 )
Significant changes in the contract assets and liabilities balances during the three-month period ended April 2, 2023 and the year ended December 31, 2022 were as follows:
April 2, 2023 December 31, 2022
Contract
Asset Contract
Liability Contract
Asset Contract
Liability
Beginning Balance $ 56,008 $ ( 22,423 ) $ 51,106 $ ( 18,993 )
Acquired as part of a business combination — — 8,107 ( 5,418 )
Revenue deferred or rebates accrued — ( 14,142 ) — ( 57,510 )
Recognized as revenue 3,128 18,201
Rebates paid to customers — 9,899 — 41,297
Increases due to rights to consideration for customer specific goods produced, but not billed during the period 60,047 — 56,008 —
Transferred to receivables from contract assets recognized at the beginning of the period and acquired as part of business combinations ( 56,008 ) — ( 59,213 ) —
Ending Balance $ 60,047 $ ( 23,538 ) $ 56,008 $ ( 22,423 )
29
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Contract assets represent goods produced without alternative use for which the Company is entitled to payment with margin prior to shipment. Upon shipment, the Company is entitled to bill the customer, and therefore amounts included in contract assets will be reduced with the recording of an account receivable as they represent an unconditional right to payment. Contract liabilities represent revenue deferred due to pricing mechanisms utilized by the Company in certain multi-year arrangements, volume rebates, and receipts of advance payments. For multi-year arrangements with pricing mechanisms, the Company will generally defer revenue during the first half of the arrangement and will release the deferral over the back half of the contract term. Contract assets and liabilities are generally short in duration given the nature of products produced by the Company.
The following tables set forth information about revenue disaggregated by primary geographic regions for the three-month periods ended April 2, 2023 and April 3, 2022. The tables also include a reconciliation of disaggregated revenue with reportable segments. The Company’s reportable segments are aligned by product nature as disclosed in Note 15 .
Three-month period ended April 2, 2023 Consumer Packaging Industrial Paper Packaging All Other Total
Primary Geographical Markets:
United States $ 696,098 $ 360,780 $ 168,820 $ 1,225,698
Europe 114,606 107,808 22,285 244,699
Canada 28,803 26,952 — 55,755
Asia 24,136 58,831 330 83,297
Other 45,635 61,484 13,215 120,334
Total $ 909,278 $ 615,855 $ 204,650 $ 1,729,783
Three-month period ended April 3, 2022 Consumer Packaging Industrial Paper Packaging All Other Total
Primary Geographical Markets:
United States $ 654,414 $ 417,286 $ 166,074 $ 1,237,774
Europe 120,170 116,827 24,125 261,122
Canada 31,208 27,170 — 58,378
Asia 25,634 73,619 292 99,545
Other 36,672 64,227 13,264 114,163
Total $ 868,098 $ 699,129 $ 203,755 $ 1,770,982
Note 15: Segment Reporting
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 products produced and sold within the Consumer Packaging segment are generally used to package a variety of consumer pro ducts and consist primarily of round and shaped rigid paper, steel and plastic containers; metal and peelable membrane ends, closures, and components; thermoformed plastic trays; and high-barrier flexible packaging.
The primary products produced and sold within the Industrial Paper Packaging segment include paperboard tubes, cones, and cores; paper-based protective packaging; and uncoated recycled paperboard.
The primary products produced with the All Other group of businesses consist of a variety of packaging materials, including plastic, paper, foam, and various other specialty materials.
30
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The following table sets forth net sales, intersegment sales and operating profit for the Company’s reportable segments and All Other group of businesses. “Segment operating profit” is defined as the segment’s portion of operating profit excluding restructuring/asset impairment charges, acquisition/divestiture-related expenses, amortization of acquisition intangibles, changes in last-in, first-out (“LIFO”) inventory reserves, gains/losses from the divestiture of businesses or other assets, and certain other items, if any, the exclusion of which the Company believes improves comparability and analysis of the financial performance of the business. General corporate expenses have been allocated as operating costs to each of the Company’s reportable segments and All Other.
SEGMENT FINANCIAL INFORMATION
Three Months Ended
April 2, 2023 April 3, 2022
Net sales:
Consumer Packaging $ 909,278 $ 868,098
Industrial Paper Packaging 615,855 699,129
All Other 204,650 203,755
Net sales $ 1,729,783 $ 1,770,982
Intersegment sales:
Consumer Packaging $ 2,055 $ 1,411
Industrial Paper Packaging 38,720 33,638
All Other 3,272 2,701
Intersegment sales $ 44,047 $ 37,750
Operating profit:
Consumer Packaging $ 91,821 $ 173,609
Industrial Paper Packaging 94,367 72,660
All Other 27,233 14,524
Corporate
Restructuring/Asset impairment charges ( 28,814 ) ( 12,142 )
Amortization of acquisition intangibles ( 21,164 ) ( 18,800 )
Other non-GAAP income/(charges), net 66,205 ( 60,790 )
Operating profit $ 229,648 $ 169,061
Note 16: Commitments and Contingencies
Pursuant to U.S. GAAP, accruals for estimated losses are recorded at the time information becomes available indicating that losses are probable and that the amounts are reasonably estimable. As is the case with other companies in similar industries, the Company faces exposure from actual or potential claims and legal proceedings from a variety of sources. Some of these exposures, as discussed below, have the potential to be material.
Environmental Matters
The Company is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which it operates.
Spartanburg
In connection with its acquisition of Tegrant in November 2011, the Company identified potential environmental contamination at a site in Spartanburg, South Carolina. Since the acquisition, the Company has spent a total of $ 2,005 on remediation of the Spartanburg site. At April 2, 2023 and December 31, 2022, the Company's accrual for environmental contingencies related to the Spartanburg site totaled $ 5,395 and $ 5,425 , respectively.
The Company cannot currently estimate its potential liability, damages or range of potential loss, if any, beyond the amounts accrued with respect to this exposure. However, the Company does not believe that the resolution of this matter has a reasonable possibility of having a material adverse effect on the Company's financial statements.
31
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Other environmental matters
The Company has been named as a potentially responsible party at several other environmentally contaminated sites. All of the sites are also the responsibility of other parties. The potential remediation liabilities are shared with such other parties, and, in most cases, the Company’s share, if any, cannot be reasonably estimated at the current time. However, the Company does not believe that the resolution of these matters has a reasonable possibility of having a material adverse effect on the Company's financial statements. At April 2, 2023 and December 31, 2022, the Company's accrual for these other sites totaled $ 1,790 and $ 1,840 , respectively.
Summary
As of April 2, 2023 and December 31, 2022, the Company (and its subsidiaries) had accrued $ 7,185 and $ 7,265 , respectively, related to environmental contingencies. These accruals are included in “Accrued expenses and other” on the Company’s Condensed Consolidated Balance Sheets.
Other Legal Matters
In addition to those matters described above, the Company is subject to other various legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters could differ from management’s expectations, the Company does not believe the resolution of these matters has a reasonable possibility of having a material adverse effect on the Company’s financial statements.
32
SONOCO PRODUCTS COMPANY
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.