SONOCO PRODUCTS CO 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. FORWARD LOOKING STATEMENTS Statements included in this Quarterly Report on Form 10-Q that are not historical in nature, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, 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,” “aspires,” “assume,” “believe,” “can,” “committed,” “consider,” “could,” “envision,” “estimate,” “expect,” “forecast,” “future,” “goal,” “guidance,” “intend,” “may,” “might,” “objective,” “opportunity,” “outlook,” “plan,” “potential,” “project,” "seek," “re-envision,” “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 energy, and offsetting high raw material and energy costs, including the potential impact of changes in tariffs; • the effects of economic downturns, inflation, volatility and other macroeconomic factors on the Company and its industry; • the resiliency of the Company's operating model; • reduced supply chain and labor disruptions and benefits to the Company therefrom; • 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, inflation, and the Russia-Ukraine military conflict; • improved productivity and cost containment, including cost savings from the Company's investments; • improving margins and leveraging strong cash flow and financial position; • effects and timing of, and anticipated synergies and gains resulting from our pending and completed acquisitions and divestitures, including the Company's acquisitions of Ball Metalpack Holding, LLC (“Ball Metalpack”), renamed Sonoco Metal Packaging (“Metal Packaging”), S.P. Holding, Skjern A/S (“Skjern”), RTS Packaging, LLC ("RTS”), and the Company's sale of its Sonoco Sustainability Solutions (“S3”) business and the sale of South Carolina timberland properties; • costs, timing and effects of restructuring and portfolio simplification activities; • adequacy and anticipated amounts and uses of cash flows; • capital allocation, including expected amounts of capital spending and expected annualized cost savings and other benefits therefrom; • the Company's capital structure, including the incurrence of debt and the refinancing and repayment of debt; • financial and business strategies and the results expected of them, including with respect to strategic pricing initiatives, capital deployment and commercial, operational and supply chain excellence; • financial results and profitability for future periods; • producing improvements in earnings; • profitable sales growth and rates of growth; • market opportunities and anticipated growth thereof; • market leadership; • 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; • the Company's human capital management strategy • 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. 33 SONOCO PRODUCTS COMPANY 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. Such risks, uncertainties and assumptions include, without limitation: • 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 military conflict between Russia and Ukraine 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; • 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 and execute on the Company's portfolio simplification strategy 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 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; 34 SONOCO PRODUCTS COMPANY • timing of funding pension and postretirement benefit plan obligations; • cost of employee and retiree medical, health and life insurance benefits; • resolution of income tax contingencies; • foreign currency exchange rate fluctuations, interest rate and commodity price risk and the effectiveness of related hedges; • changes in U.S. and foreign tariffs, tax rates, tax laws, regulations and interpretations thereof; • the adoption of new, or changes in, accounting standards or interpretations; • challenges and assessments from tax authorities resulting from differences in interpretation of tax laws, including income, sales and use, property, value added, employment, and other taxes; • accuracy in valuation of deferred tax assets; • accuracy of assumptions underlying projections related to goodwill impairment testing, and accuracy of management’s assessment of goodwill impairment; • accuracy of assumptions underlying fair value measurements, accuracy of management’s assessments of fair value and fluctuations in fair value; • ability to maintain effective disclosure controls and internal controls, including with regard to 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 and to meet environmental, social, and governance (“ESG”) goals and other sustainability commitments; • 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 (such as the ongoing military conflict between Russia and Ukraine), terrorist activities and natural disasters; and • accelerating inflation and the 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 Quarterly Report on Form 10-Q 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, except as may be required by law. 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. 35 SONOCO PRODUCTS COMPANY COMPANY OVERVIEW Sonoco is a leading provider of consumer packaging, industrial products, and protective packaging with approximately 310 locations in 32 countries as of April 2, 2023. 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. 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. Sonoco’s strategy is to increase its long-term profitability and return capital to shareholders. Over the past several years, the Company has simplified our business portfolio around fewer, bigger businesses which has reduced operating complexity and improved agility. The Company is focused on efficient capital deployment into these larger, core business units to improve economic returns and improve integration effectiveness and speed for acquired strategic assets. In parallel, Sonoco continues to work on commercial, operational, and supply chain excellence programs to shift the mix of our business towards higher-valued products, improve the contracting process to better capture input costs and the value of the services provided, and increase overall productivity. First Quarter 2023 Compared with First Quarter 2022 RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES To assess and communicate the financial performance of the Company, Sonoco's management uses, both internally and externally, certain financial performance measures that are not in conformity with generally accepted accounting principles. These “non-GAAP” financial measures (referred to as “Adjusted”) reflect adjustments to the Company's GAAP results to exclude amounts, including the associated tax effects, relating to: • restructuring/asset impairment charges 1 ; • acquisition/divestiture-related costs; • gains or losses from the divestiture of businesses or other assets; • 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. 1 Restructuring and restructuring-related 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. The Company's management believes the exclusion of these amounts improves the period-to-period comparability and analysis of the underlying financial performance of the business. Non-GAAP figures previously identified by the term “Base” are now identified using the term “Adjusted,” for example, “Adjusted Operating Profit” and “Adjusted Net Income.” 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, 2022, under Item 7 - “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Use of Non-GAAP Financial Measures.” In addition to the “Adjusted” results described above, the Company also uses Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA is defined as net income excluding the following: interest expense; interest income; provision for income taxes; depreciation, depletion and amortization expense; non-operating pension costs; net income/(loss) attributable to noncontrolling interests; restructuring/asset impairment charges; changes in LIFO inventory reserves; gains/losses from the divestiture of businesses or other assets; acquisition/divestiture-related costs; derivative (gains)/losses; and other non-GAAP adjustments, if any, that may arise from time to time. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by net sales. The Company's non-GAAP financial measures are not calculated in accordance with, nor are they an alternative for, measures conforming to generally accepted accounting principles and may be different from non-GAAP financial 36 SONOCO PRODUCTS COMPANY 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 continues to provide all information required by GAAP, but it believes that evaluating its ongoing operating results may not be as useful if an investor or other user is limited to reviewing only GAAP financial measures. The Company consistently applies its non-GAAP performance measures presented herein and uses them for internal planning and forecasting purposes, to evaluate its ongoing operations, and to evaluate the ultimate performance of management and each business unit against plans/forecasts, including evaluation of the Chief Executive Officer's performance by the Board of Directors. In addition, these same non-GAAP financial measures are used in determining incentive compensation for the entire management team and in providing earnings guidance to the investing community. 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. The Company presents these non-GAAP financial measures to provide users information to evaluate Sonoco’s operating results in a manner similar to how management evaluates business performance. Material limitations associated with the use of such measures are that they do not reflect all period costs included in operating expenses and may not be comparable with similarly named financial measures of other companies. Furthermore, the calculations of these non-GAAP financial measures are based on subjective determinations of management regarding the nature and classification of events and circumstances that the investor may find material and view differently. To compensate for these limitations, management believes that it is useful in understanding and analyzing the results of the business to review both GAAP information which includes all of the items impacting financial results and the non-GAAP financial measures that exclude certain elements, as described above. Whenever reviewing a non-GAAP financial measure, readers are encouraged to review the related reconciliation to fully understand how it differs from the related GAAP measure. 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 in conjunction with management's analysis of the Company's results of operations. Adjusted Operating Profit, Adjusted Income Before Income Taxes, Adjusted Provision for Income Taxes, Adjusted Net Income Attributable to Sonoco, and Adjusted Diluted Earnings Per Share (“EPS”) For the three-month period ended April 2, 2023 Dollars in thousands, except per share data Operating Profit Income Before Income Taxes Provision for Income Taxes Net Income Attributable to Sonoco Diluted EPS As Reported $ 229,648 $ 193,320 $ 46,912 $ 148,319 $ 1.50 Acquisition/Divestiture-related costs 5,188 5,188 1,280 3,908 0.04 LIFO reserve change (5,425) (5,425) (1,354) (4,071) (0.04) Amortization of acquisition intangibles 21,164 21,164 5,127 16,037 0.16 Restructuring/Asset impairment charges 28,814 28,814 6,634 22,014 0.22 Gain on divestiture of business and sale of other assets (72,010) (72,010) (17,122) (54,888) (0.55) Non-operating pension costs — 3,658 909 2,749 0.03 Derivative losses 6,085 6,085 1,518 4,567 0.05 Other adjustments (43) (43) 955 (997) (0.01) Total adjustments $ (16,227) $ (12,569) $ (2,053) $ (10,681) $ (0.10) Adjusted $ 213,421 $ 180,751 $ 44,859 $ 137,638 $ 1.40 37 SONOCO PRODUCTS COMPANY For the three-month period ended April 3, 2022 Dollars in thousands, except per share data Operating Profit Income Before Income Taxes Provision for Income Taxes Net Income Attributable to Sonoco Diluted EPS As Reported $ 169,061 $ 148,672 $ 35,289 $ 115,333 $ 1.17 Acquisition/Divestiture-related costs 48,352 48,352 11,756 36,596 0.37 LIFO reserve change 19,050 19,050 4,833 14,217 0.14 Amortization of acquisition intangibles 18,800 18,800 4,630 14,170 0.14 Restructuring/Asset impairment charges 12,142 12,142 1,635 10,568 0.11 Non-operating pension costs — 1,324 383 942 0.01 Derivative gains (6,596) (6,596) (1,673) (4,923) (0.05) Other adjustments (16) (16) 4,194 (4,212) (0.04) Total adjustments $ 91,732 $ 93,056 $ 25,758 $ 67,358 $ 0.68 Adjusted $ 260,793 $ 241,728 $ 61,047 $ 182,691 $ 1.85 Adjusted EBITDA and Adjusted EBITDA Margin Three Months Ended Dollars in thousands April 2, 2023 April 3, 2022 Net income attributable to Sonoco $ 148,319 $ 115,333 Adjustments Interest expense 34,232 20,581 Interest income (1,562) (1,516) Provision for income taxes 46,912 35,289 Depreciation, depletion, and amortization 82,137 73,315 Non-operating pension costs 3,658 1,324 Net (loss)/income attributable to noncontrolling interests (55) 274 Restructuring/Asset impairment charges 28,814 12,142 Changes in LIFO inventory reserves (5,425) 19,050 Gain from divestiture of business and sale of other assets (72,010) — Acquisition/Divestiture related costs 5,188 48,352 Derivative losses/(gains) 6,085 (6,596) Other non-GAAP adjustments (43) (16) Adjusted EBITDA $ 276,250 $ 317,532 Net Sales $ 1,729,783 $ 1,770,982 Adjusted EBITDA Margin 16.0 % 17.9 % The Company does not calculate net income by segment; therefore, Adjusted EBITDA by Segment is reconciled to the closest GAAP measure of segment profitability, Segment Operating Profit, which is another method to achieve the same result. Segment Operating Profit is the measure of segment profit or loss reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance in accordance with Accounting Standards Codification 280 “Segment Reporting,” as prescribed by the Financial Accounting Standards Board. 38 SONOCO PRODUCTS COMPANY Segment results viewed by Company's management to evaluate segment performance do not include restructuring/asset impairment charges, amortization of acquisition intangibles, acquisition/divestiture-related costs, changes in LIFO inventory reserves, gains/losses from the sale of businesses, 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 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. Segment Adjusted EBITDA and All Other Adjusted EBITDA Reconciliation For the Three Months Ended April 2, 2023 Dollars in thousands Consumer Packaging segment Industrial Paper Packaging segment All Other Corporate Total Segment and Total Operating Profit $ 91,821 $ 94,367 $ 27,233 $ 16,227 $ 229,648 Adjustments: Depreciation, depletion and amortization 1 30,038 24,878 6,057 21,164 82,137 Equity in earnings of affiliates, net of tax 75 1,781 — — 1,856 Restructuring/Asset impairment charges 2 — — — 28,814 28,814 Changes in LIFO inventory reserves 3 — — — (5,425) (5,425) Acquisition/Divestiture-related costs 4 — — — 5,188 5,188 Gain from divestiture of business and other assets 5 — — — (72,010) (72,010) Derivative losses 6 — — — 6,085 6,085 Other non-GAAP adjustments — — — (43) (43) Segment Adjusted EBITDA $ 121,934 $ 121,026 $ 33,290 $ — $ 276,250 Net Sales $ 909,278 $ 615,855 $ 204,650 Segment Operating Profit Margin 10.1 % 15.3 % 13.3 % Segment Adjusted EBITDA Margin 13.4 % 19.7 % 16.3 % 1 Included in Corporate is the amortization of acquisition intangibles associated with the Consumer Packaging segment of $14,427, the Industrial Paper Packaging segment of $2,934, and All Other of $3,803. 2 Included in Corporate are restructuring/asset impairment charges associated with the Consumer Packaging segment of $1,576, the Industrial Paper Packaging segment of $24,544, and All Other of $1,157. 3 Included in Corporate are changes in LIFO inventory reserves associated with the Consumer Packaging segment of $6,102 and the Industrial Paper Packaging segment of $(677). 4 Included in Corporate are Acquisition/Divestiture-related costs associated with the Consumer Packaging segment of $779 and the Industrial Paper Packaging segment of $289. 5 Gains from the divestiture of business and other assets includes the sale of the Company's timberlands ($60,946) and the sale of its S3 business ($11,064), both of which are associated with the Industrial Paper Packaging segment. 6 Included in Corporate are losses on certain derivatives associated with the Consumer Packaging segment of $874, the Industrial Paper Packaging segment of $3,912, and All Other of $1,242. 39 SONOCO PRODUCTS COMPANY Segment Adjusted EBITDA and All Other Adjusted EBITDA Reconciliation For the Three Months Ended April 3, 2022 Dollars in thousands Consumer Packaging segment Industrial Paper Packaging segment All Other Corporate Total Segment and Total Operating Profit $ 173,609 $ 72,660 $ 14,524 $ (91,732) $ 169,061 Adjustments: Depreciation, depletion, and amortization 1 25,736 22,624 6,155 18,800 73,315 Equity in earnings of affiliates, net of tax (38) 2,262 — — 2,224 Restructuring/Asset impairment charges 2 — — — 12,142 12,142 Changes in LIFO inventory reserves 3 — — — 19,050 19,050 Acquisition/Divestiture related costs 4 — — — 48,352 48,352 Derivative gains 5 — — — (6,596) (6,596) Other non-GAAP adjustments — — — (16) (16) Segment Adjusted EBITDA $ 199,307 $ 97,546 $ 20,679 $ — $ 317,532 Net Sales $ 868,098 $ 699,129 $ 203,755 Segment Operating Profit Margin 20.0 % 10.4 % 7.1 % Segment Adjusted EBITDA Margin 23.0 % 14.0 % 10.1 % 1 Included in Corporate is the amortization of acquisition intangibles associated with the Consumer Packaging segment of $12,189, the Industrial Paper Packaging segment of $2,087, and All Other of $4,524. 2 Included in Corporate are restructuring/asset impairment charges associated with the Consumer Packaging segment of $2,311, the Industrial Paper Packaging segment of $7,061, and All Other of $78. 3 Included in Corporate are changes in LIFO inventory reserves associated with the Consumer Packaging segment of $20,092 and the Industrial Paper Packaging segment of $(1,042). 4 Included in Corporate are Acquisition/Divestiture-related costs are charges associated with the Consumer Packaging segment of $26,694 and the Industrial Paper Packaging segment of $1,057. 5 Included in Corporate are gains on certain derivatives associated with the Consumer Packaging segment of $(956), the Industrial Paper Packaging segment of $(4,281), and All Other of $(1,359). RESULTS OF OPERATIONS The following discussion provides a review of results for the three-month period ended April 2, 2023 versus the three-month period ended April 3, 2022. OVERVIEW Net sales for the first quarter of 2023 declined by $41.2 million or 2.3%, to $1.73 billion , compared to $1.77 billion in the same period last year. The decline was attributable to lower overall volume/mix, including acquisitions, of $116.4 million, and unfavorable foreign currency translation and other net costs totaling $22.9 million, partially offset by higher selling prices of $98.1 million. Net income attributable to Sonoco for the first quarter of 2023 increased to $148.3 million, or $1.50 per diluted share, compared to $115.3 million, or $1.17 per diluted share, for the same period of 2022. Net income in the current period continued to benefit primarily from the Company’s strategic pricing actions in the Industrial Paper Packaging segment and improving manufacturing productivity. These benefits were partially offset by higher net interest expense and lower overall volume and mix. 40 SONOCO PRODUCTS COMPANY Excluding the non-GAAP adjustments shown above, Adjusted Net Income (“Adjusted Earnings”) for the first quarter of 2023 was $137.6 million ($1.40 per diluted share), compared with $182.7 million ($1.85 per diluted share), during the same period in 2022. GAAP O perating Profit for the first quarter of 2023 was $229.6 million, an increase of 35.8% from the $169.1 million reported in the first-quarter of 2022. The increase in GAAP Operating Profit was primarily the result of gains from the divestiture of the S3 business and sale of the Company's timberland properties. Adjusted O perating Profit for the first quarter of 2023 was $213.4 million, a decrease of 18.2% from the $260.8 million reported in the same period in 2022. The declines in Adjusted Earnings and Adjusted Operating Profit were due to an unfavorable metal price overlap in the Metal Packaging business resulting from the consumption of higher-cost inventories during the first quarter of 2023, as well as lower overall volume and mix. COSTS AND EXPENSES Cost of goods sold decreased by $44.1 million, or 3.1%, in the first quarter of 2023 compared with the same period last year. The decrease was driven primarily by lower volumes and lower input costs. Gross profit was $374.4 million for the three-month period ended April 2, 2023, which was $2.9 million higher than the prior-year period. The increase in gross margin was driven by strategic pricing actions and the full-quarter impact of the Metal Packaging acquisition, which offset volume declines. Additionally, gross profit as a percent of sales increased to 21.6% from 21.0% in the prior- year quarter due to these factors. Selling, general and administrative costs decreased by $2.4 million , or 1.3% , in the first quarter of 2023 compared with the same period last year. The decrease was due to lower acquisition costs related to the Metal Packaging acquisition, which more than offset inflation increases. Restructuring/Asset impairment charges totaled $28.8 million in the first quarter of 2023, compared with $12.1 million during 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. Gain on divestiture of business and other assets of $72.0 million in the first quarter of 2023 reflects gains from the divestiture of the Company's S3 business and the sale of the Company's timberland properties. Net interest expense for the first quarter of 2023 increased to $32.7 million, compared with $19.1 million during the first quarter of 2022. The increase is primarily due to higher year-over-year average debt balances resulting from the term loan executed in December 2022 and the prior year financing of the Metal Packaging acquisition, as well as the impact of higher interest rates on the Company's variable rate debt. The effective tax rates on GAAP and Adjusted Earnings in the first quarter of 2023 were 24.3% and 24.8%, respectively, compared with 23.7% and 25.3%, respectively, in the prior year’s quarter. The increase in the GAAP effective tax rate is primarily attributable to the absence of a tax benefit received in the first quarter of 2022 associated with the acquisition of Metal Packaging. The decrease in the tax rate on Adjusted Earnings was due to a variety of small variances, mostly related to items discrete to the period in which they occurred. REPORTABLE SEGMENTS As previously disclosed, the Company's operating and reporting structure consists of two reportable segments, Consumer Packaging and Industrial Paper Packaging, with all remaining businesses reported as All Other. The following table summarizes net sales attributable to each of the Company’s segments and All Other for the first quarters of 2023 and 2022: Three Months Ended ($ in thousands) April 2, 2023 April 3, 2022 % Change Net sales: Consumer Packaging $ 909,278 $ 868,098 4.7 % Industrial Paper Packaging 615,855 699,129 (11.9) % All Other 204,650 203,755 0.4 % Net sales $ 1,729,783 $ 1,770,982 (2.3) % 41 SONOCO PRODUCTS COMPANY The following table summarizes operating profit attributable to each of the Company’s segments during the first quarters of 2023 and 2022: Three Months Ended ($ in thousands) April 2, 2023 April 3, 2022 % Change Operating profit: Consumer Packaging $ 91,821 $ 173,609 (47.1) % Industrial Paper Packaging 94,367 72,660 29.9 % All Other 27,233 14,524 87.5 % Corporate Restructuring/Asset impairment charges (28,814) (12,142) Amortization of acquisition intangibles (21,164) (18,800) Other non-GAAP charges, net 66,205 (60,790) Operating profit $ 229,648 $ 169,061 35.8 % The following table summarizes Adjusted EBITDA attributable to each of the Company’s segments during the first quarters of 2023 and 2022: Three Months Ended ($ in thousands) April 2, 2023 April 3, 2022 % Change Adjusted EBITDA: Consumer Packaging $ 121,934 $ 199,307 (38.8) % Industrial Paper Packaging 121,026 97,546 24.1 % All Other 33,290 20,679 61.0 % Adjusted EBITDA $ 276,250 $ 317,532 (13.0) % The following table summarizes restructuring/asset impairment charges attributable to each of the Company’s segments during the first quarters of 2023 and 2022: Three Months Ended ($ in thousands) April 2, 2023 April 3, 2022 Restructuring/Asset impairment charges: Consumer Packaging $ 1,576 $ 2,311 Industrial Paper Packaging 24,544 7,061 All Other 1,157 78 Corporate 1,537 2,692 Restructuring/Asset impairment charges $ 28,814 $ 12,142 Consumer Packaging 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. These products primarily serve the consumer staples market, focused on food, beverage, household, and personal products. Segment sales increased approximately 4.7% compared to the prior year’s quarter due to continued strong strategic pricing performance and acquisitions. Volume and mix were lower as compared to the prior year due to softer demand in metal packaging (aerosol) and rigid plastic food packaging. Segment operating profit declined 47.1% in the first quarter of 2023 compared to the same period last year. The decline was largely due t o an unfavorable metal price overlap in metal packaging resulting from the consumption of higher-cost inventories during the first quarter of 2023, as well as volume declines in both metal aerosols and rigid plastics food packaging. As a result, segment operating margin declined to 10.1% during the quarter from 20.0% for the same period in 2022. The impact of the unfavorable metal price overlap is expected to lessen beginning in the second quarter as the higher cost metal inventories are consumed. 42 SONOCO PRODUCTS COMPANY Consumer Packaging segment operating profit and Adjusted EBITDA decreased by 47.1% and 38.8% , respectively, due to the previously discussed unfavorable metal price overlap and volume declines in metal aerosols and rigid plastics food packaging, which were partially offset by positive manufacturing productivity. Industrial Paper Packaging The primary products produced and sold within the Industrial Paper Packaging segment include goods produced from recycled fiber including paperboard tubes, cones, and cores; paper-based protective packaging; and uncoated recycled paperboard for high-end applications such as folding cartons, can board and laminated structures. Products across this segment support multiple end markets in industrials (construction and building products, and industrial distribution), consumer staples (food and beverage, food distribution, household and personal products), and consumer discretionary (home building, appliances, apparel, and home furnishings), as well as various other end markets. Segment sales decreased 11.9% from the prior year's quarter due to continued volume and mix declines across a variety of end markets as well as declines due to divestitures and the exit from the corrugated medium market. Segment operating profit increased 29.9% from the prior year’s quarter, primarily due to strategic pricing actions which were partially offset by lower volume and mix . As a result, segment operating profit margin improved to 15.3% in the current year's quarter from 10.4% in the prior year. Industrial Paper Packaging segment operating profit and Adjusted EBITDA improved 29.9% and 24.1%, respectively, primarily due to the benefits of strategic pricing actions and lower material costs, which more than offset lower volumes. Segment operating profit margin improved to 15.3% in the first quarter of 2023 from 10.4% in the same period last year. All Other 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 serving a wide variety of end markets including consumer staples, consumer discretionary, industrial and pharmaceuticals. Sales for All Other improved 0.4% from the prior year’s quarter due to strategic pricing actions, which were partially offset by volume and mix declines. All Other operating profit improved 87.5% in the first quarter of 2023 compared to the same period last year, primarily due to strategic pricing performance and strong productivity. As a result, operating margin increased to 13.3% in the current year's quarter from 7.1% in the prior year's quarter. All Other Adjusted EBITDA improved by 61.0% due to the previously mentioned reasons. Financial Position, Liquidity and Capital Resources Cash generated from operations for the first three months of 2023 was $98.0 million, compared with $1.1 million in the same period of 2022, an increase of $96.9 million. GAAP net income increased by $32.7 million year over year, reflecting the non-cash gains from the sales of the Company's S3 business and timberland properties during the first quarter of 2023. Net working capital used $91.5 million of cash in the first three months of 2023, compared with $185.5 million in the same period of 2022, for a year-over-year decrease in the use of cash of $94.0 million. Beginning in the first quarter of 2022, inventory levels increased to mitigate supply chain uncertainty caused by lack of availability and shipment delays. While inventories at April 2, 2023 were higher than at April 3, 2022, they decreased during the first quarter of 2023 and increased during the same period last year. Conversely, changes in accounts payable effectively offset the changes in inventory, as we worked to right-size inventory and the cost of inputs declined, most notably for steel and old corrugated containers. Lastly, while accounts receivable increased during the first quarter of 2023, the increase was much smaller than experienced during the first quarter of 2022, when growing volumes and higher selling prices increased accounts receivable significantly. 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. Cash contributions to the Company's retirement plans were $4.9 million in the first quarter of 2023, compared with $28.1 million in the same period last year. The contributions in the prior year included the final Sonoco Retirement Contribution (“SRC”), the non-elective component of the Sonoco Savings Plan. The SRC was terminated as of December 31, 2021. Changes in accrued expenses and other assets and liabilities used $18.9 million in the three-month period ended April 2, 2023, compared with using $2.5 million in the same period last year. The $16.4 million additional use of cash was largely driven by the higher year over year payout of management incentive compensation. Investing activities used $3.0 million of cash in the first three months of 2023, compared with $1,415.8 million in the same period last year. The lower year-over-year use of cash was primarily attributable to the Metal Packaging acquisition on January 26, 2022 for a total of $1,348.6 million. Capital expenditures during the first three months of 2023 were $83.4 43 SONOCO PRODUCTS COMPANY million, $15.9 million higher than the same period last year. The year-over-year increase was largely driven by increased strategic investments in growth and productivity projects in the Consumer Packaging segment and the Industrial Packaging segment, including spend on Project Horizon. Proceeds from the sale of businesses added $13.8 million of cash in the first three months of 2023 as the Company received cash from the sale of its S3 business and proceeds from the sale of assets were $71.2 million higher year over year, primarily due to proceeds from the sale of the Company's timber lands in March 2023. Other net investing activities used $5.0 million more cash year over year, primarily as a result of the Company's purchase of a 2.7% equity interest in Northstar during the three-month period ended April 2, 2023. Net capital spending for 2023 is expected to be approximately $305 million, compared to $319 million in 2022. Financing activities used $118.2 million of cash in the three-month period ended April 2, 2023, while providing $1,392.6 million in the corresponding prior-year period, a year-over-year decrease of $(1.5) billion. The decrease was largely driven by higher debt proceeds in the prior year used primarily to fund the Metal Packaging acquisition. These included $1.2 billion of net proceeds from the issuance of unsecured notes and $300 million of proceeds from a three-year term loan facility. The Company used cash of $14.5 million to purchase a noncontrolling interest in Graffo in the first quarter of 2022. Cash used to repurchase the Company's common stock to satisfy employee tax withholding obligations in association with the exercise of certain share-based compensation awards was $10.6 million in the three-month period ended April 2, 2023, compared to $3.4 million in the same period last year. The C ompany's cash balances are held in numerous locations throughout the world. At April 2, 2023 and December 31, 2022, approximately $190.5 million and $170.1 million, respectively, of the Company's reported cash and cash equivalents balances of $209.7 million and $227.4 million, respectively, were held outside of the United States by its 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. As the Company has maintained sufficient domestic liquidity through a combination of operating cash flow generation and access to bank and capital market borrowings, management 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, as of April 2, 2023 the Company is not providing for taxes on these amounts for financial reporting purposes. Computation of the potential deferred tax liability associated with unremitted earnings considered to be indefinitely reinvested is not practicable. The Company uses a notional pooling arrangement with an international bank to help manage global liquidity requirements. Under this pooling arrangement, the Company and its participating subsidiaries may maintain either a cash deposit or borrowing position through local currency accounts with the bank, so long as the aggregate position of the global pool is a notionally calculated net cash deposit. Because it maintains a security interest in the cash deposits, and has the right to offset the cash deposits against the borrowings, the bank provides the Company and its participating subsidiaries favorable interest terms on both. The Company operates a $500 million commercial paper program, supported by a $750 million unsecured revolving credit facility with a syndicate of banks. The revolving credit facility is committed through June 2026. The Company has the contractual right to draw funds directly on the underlying revolving credit facility, which could possibly occur if there were a disruption in the commercial paper market. Recent events in the banking sector have caused the Company to review and assess risk with respect to our banking partners, including the syndicate of nine banks that participate in our term loan facilities and revolving credit facilities. All of our banks are considered Large Financial Institutions and subject to higher reporting and stress testing requirements, and six of the nine banks are considered Globally Systemically Important Banks (“GSIB”) and subject to the highest stress testing and capital requirements. All of the banks that participate in our term loans and the $750 million revolving credit facility which backstops our commercial paper program are of the highest credit. The Company generally does not hold cash deposits with banks in excess of operational needs, and our operating balances across the world are held in a well-diversified group of international banks. During the three-month period ended April 2, 2023, the Compa ny reported a net increase in cash and cash equivalents of $5.4 million due to currency translation adjustments resulting from a weaker U.S. dollar relative to certain foreign currencies in which cash and cash equivalents were held. At April 2, 2023, the Company had scheduled debt maturities of approximately $448 million over the next twelve months, including $12 million of outstanding commercial paper balances. Also at April 2, 2023, the Company had approximately $210 million in cash and cash equivalents on hand and $750 million in committed capacity under its revolving credit facility, of which $738 million was available for draw down net of outstanding commercial paper balances. The Company believes these amounts, combined with expected net cash flows generated from operating and 44 SONOCO PRODUCTS COMPANY investing activities, provide ample liquidity to cover these debt maturities and other cash flow needs of the Company over the remainder of 2023 and beyond. 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 April 2, 2023, the Company’s interest coverage and net worth were substantially above the minimum levels required under these covenants. During the three-month period ended April 2, 2023, the Company received net cash proceeds totaling approximately $13.8 million and $70.8 million from the sales of its S3 business and timberland properties, respectively. The Company used these proceeds for general Corporate purposes. 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 $10 million during the remainder of 2023, which would result in total contributions to these plans of approximately $15 million in 2023. Future funding requirements beyond the current year will vary depending largely on actual investment returns, future actuarial assumptions, 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 facilities 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 foreign currency forward contracts and other risk management instruments to manage exposure to changes in foreign currency cash flows and the translation of monetary assets and liabilities on the Company's condensed consolidated financial statements by hedging a portion of forecasted transactions that are denominated in foreign currencies, foreign currency assets and liabilities, or its net investment in foreign subsidiaries. The Company’s foreign operations are exposed to political, geopolitical, and cultural risks, but these 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 are no indications 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 subsidiary. At April 2, 2023, the carrying value of the Company's net investment in its Venezuelan operations was approximately $2.1 million. In addition, at April 2, 2023, 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. Turkey has been deemed to be a highly inflationary economy under U.S. GAAP since the first quarter of 2022. Accordingly, 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 has not been significant to the Company's earnings. The magnitude of future earnings impacts, however, 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 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 was approximately $17.7 million as of April 2, 2023. 45 SONOCO PRODUCTS COMPANY The Company is a purchaser of various raw material inputs such as recovered paper, energy, steel, aluminum, and plastic resin. The Company generally does not engage in significant hedging activities for these purchases other than for energy and, from time to time, aluminum, because there is usually a high correlation between the primary input costs and the ultimate selling price of its products. Inputs are generally purchased at market or at fixed prices that are established with individual suppliers as part of the purchase process for quantities expected to be consumed in the ordinary course of business. On occasion, where the correlation between selling price and input price is less direct, the Company may enter into derivative contracts such as futures or swaps to manage the effect of price fluctuations. In addition, the Company may occasionally use traditional, unleveraged interest-rate swaps to manage its mix of fixed and variable rate debt and control its exposure to interest rate movements within select ranges. At April 2, 2023, t he Company had derivative contracts outstanding to hedge the prices on a portion of anticipated natural gas and aluminum purchases. These contracts, some of which qualify as cash flow hedges, include natural gas swaps totaling approximately 8.4 million metric million British thermal units (“MMBTUs”) and aluminum swaps totaling 715 metric tons. These contracts have various maturity dates ranging through December 2024. The total fair market value of these instruments resulted in a net loss position of $15.0 million and $8.8 million at April 2, 2023 and December 31, 2022, respectively. The Company routinely enters into derivative currency contracts to mitigate the risk of unfavorable fluctuations in the exchange rate on certain anticipated foreign currency cash flows. These contracts qualify as cash flow hedges and have various maturity dates ranging through May 2024. The total market value of these instruments resulted in a net gain position of $2.6 million at April 2, 2023 and a net loss position of $0.9 million at December 31, 2022. In addition, the Company had various currency contracts to mitigate the risk of unfavorable fluctuations in the exchange rate on certain foreign currency assets and liabilities as of April 2, 2023 . During the first three months of 2023, the U.S. dollar w eakened against the euro, the British pound, the Brazilian real, the Canadian dollar, and the Mexican peso, which are the functional currencies in which a majority of the Company's foreign investments are held. The net impact of t hese changes resulte d in a translation gain of $31.6 million being recorded in “Accumulated other comprehensive loss” during the three-month period ended April 2, 2023. 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. 46 SONOCO PRODUCTS COMPANY OTHER ITEMS Critical Accounting Policies and Estimates See Part II, Item 7, "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2022.