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 (the “Exchange Act”). In addition, Sonoco Products Company (the “Company” or “Sonoco”) and its representatives may from time to time make other oral or written statements that are also “forward-looking statements.” Words such as “anticipate,” “assume,” “believe,” “can,” “consider,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “goal,” “guidance,” “intend,” “is designed to,” “likely,” “maintain,” “may,” “might,” “objective,” “ongoing,” “opportunity,” “outlook,” “plan,” “possible,” “potential,” “predict,” “seek,” “strategy,” “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; • the effects of economic downturns, inflation, volatility and other macroeconomic factors on the Company and its industry, including effects on consumers and customers; • the resiliency of the Company’s operating model; • reduced supply chain disruptions; • consumer and customer actions in connection with political, social, and economic instability, war and other geopolitical tensions; • improved productivity and cost containment, including cost savings from the Company’s investments; • leveraging strong cash flow and financial position; • costs, timing and effects of restructuring and portfolio simplification activities; • effects and timing of, and anticipated costs, synergies and gains resulting from our pending and completed acquisitions and divestitures, including the Company’s acquisitions of Ball Metalpack Holding, LLC, renamed Sonoco Metal Packaging, the remaining interest in RTS Packaging, LLC (“RTS Packaging”) and a paper mill in Chattanooga, Tennessee (the “Chattanooga Mill”), and Inapel Embalagens Ltda. (“Inapel”), and the Company’s sale of its Sonoco Sustainability Solutions (“S3”) business, its U.S. and Mexico BulkSak businesses, its South Carolina timberland properties, and its Protective Solutions business; • adequacy and anticipated amounts and uses of cash flows; • capital allocation, including expected amounts of capital spending; • the Company’s capital structure, including the incurrence of debt and the refinancing and repayment of debt; • the Company’s ability to adhere to restrictive covenants in its debt agreements; • financial and business strategies and the results expected of them; • producing improvements in earnings; • profitable sales growth and rates of growth; • market opportunities and anticipated growth thereof; • expected impact and costs of resolution of legal proceedings; • extent of, and adequacy of provisions for, environmental liabilities; • the Company’s ability to achieve its sustainability goals, including with respect to greenhouse gas emissions; • adequacy of income tax provisions, realization of deferred tax assets, outcomes of uncertain tax issues and tax rates; • goodwill impairment charges and fair values of reporting units; • future asset impairment charges and fair values of assets; • anticipated contributions to pension and postretirement benefit plans, fair values of plan assets, long-term rates of return on plan assets, and projected benefit obligations and payments; • expected impact of implementation of new accounting pronouncements; • creation of near-term and 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: • ability to manage the mix of business and execute on the Company’s portfolio simplification strategy, including with respect to divestitures; • 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; • availability, transportation 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, general regional instability and other geopolitical tensions (such as the ongoing conflict between Russia and Ukraine as well as the economic sanctions related thereto, and the ongoing conflict in Israel and Gaza), 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; • costs of labor; • work stoppages due to labor disputes; • success of new product development, introduction and sales, including successful timing of new product or product innovation introductions; • 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, including changes related to inflation and other macroeconomic factors; • ability to be the low-cost global leader in customer-preferred packaging solutions within targeted segments; • competitive pressures, including new product development, and technological market leadership, reputation for quality, 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; • collection of receivables from customers; • ability to improve margins and leverage cash flows and financial position; • 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; • 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, including the timing of funding plan obligations, and the accuracy of assumptions of underlying projections of benefit plan obligations and payments, valuation of plan assets, and projections of long-term rates of return; • foreign currency exchange rate fluctuations, interest rate and commodity price risk and the effectiveness of related hedges; • cost of employee and retiree medical, health, and life insurance benefits; • resolution of income tax contingencies; • changes in U.S. and foreign tariffs, tax rates, tax laws, regulations and interpretations thereof, including income, sales and use, property, value added, employment, and other taxes; • accuracy in valuation of deferred tax assets; • the adoption of new, or changes in, accounting standards or interpretations; • accuracy of assumptions underlying projections related to goodwill impairment testing, and accuracy of management’s assessment of goodwill impairment; 34 SONOCO PRODUCTS COMPANY • 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, to prevent or detect errors or acts of fraud; • 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, including with respect to climate change and emissions reporting and the effectiveness of the final rules adopted by the Securities and Exchange Commission to enhance public company climate disclosures; • operational disruptions at our major facilities; • failure or disruptions in our information technology systems; • 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; • changing climate and greenhouse gas effects; • ability to meet environmental, sustainability and other social and governmental goals, including with respect to greenhouse gas emissions, and challenges in implementation thereof; • actions of domestic or foreign government agencies, 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 and the ongoing conflict in Israel and Gaza), public health events (such as the COVID-19 pandemic), terrorist activities, and natural disasters; and • 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 for the year ended December 31, 2023 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 multi-billion dollar global designer, developer, and manufacturer of a variety of highly-engineered and sustainable packaging products serving multiple end markets. As of March 31, 2024, the Company had more than 300 locations in 33 countries, serving some of the world’s best-known brands in some 85 nations. 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 goal is to increase its long-term profitability and return capital to shareholders. Over the past several years, the Company has simplified its business portfolio around fewer, bigger businesses, which has reduced operating complexity and improved agility. For example, in September 2023, the Company acquired the remaining equity interest in RTS Packaging from joint venture partner WestRock Company, to further strengthen and expand the Company’s 100% recycled fiber-based packaging solutions. In addition, the Company acquired Inapel in December 2023, significantly expanding its presence in the flexibles packaging services market in Latin America. Effective January 1, 2024, the Company integrated its flexible packaging and thermoformed packaging businesses within the Consumer Packaging segment in order to streamline operations, enhance customer service and better position the business for accelerated growth. As a result, the Company changed its operating and reporting structure to reflect the way it now manages its operations, evaluates performance, and allocates resources. Accordingly, the Company’s consumer thermoformed businesses have moved from the All Other group of businesses to the Consumer Packaging segment. Also effective January 1, 2024, the Company began conducting its recycling operations, part of the Industrial Paper Packaging segment, as a procurement function. As a result, no recycling net sales are recorded and the margin from the Company’s recycling operations reduces “Cost of sales.” 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 and increase overall productivity, as well as strategic pricing initiatives to better capture input costs and the value of the services provided. First Quarter 2024 Compared with First Quarter 2023 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 (“GAAP”). These “non-GAAP” financial measures reflect adjustments to the Company’s GAAP operating results to exclude amounts, including the associated tax effects, relating to: • restructuring/asset impairment charges 1 ; • acquisition, integration and divestiture-related costs; • gains or losses from the divestiture of businesses and 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; • derivative gains/losses; • other non-operating income and losses; and • certain 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. 36 SONOCO PRODUCTS COMPANY 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 are identified using the term “Adjusted,” for example, “Adjusted Operating Profit,” “Adjusted Net Income Attributable to Sonoco” (referred to as “Adjusted Earnings”) and “Adjusted Diluted Earnings Per Share.” 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, 2023, 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 and other assets; acquisition, integration and divestiture-related costs; other income; 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 they may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles. The Company presents these non-GAAP financial measures to provide investors with information to evaluate Sonoco’s operating results in a manner similar to how management evaluates business performance. The Company consistently applies its non-GAAP financial 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. 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. Material limitations associated with the use of such measures include 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 any limitations in such non-GAAP financial measures, management believes that it is useful in evaluating the Company’s results to review both GAAP information, which includes all of the items impacting financial results, and the related non-GAAP financial measures that exclude certain elements, as described above. Further, Sonoco management does not, nor does it suggest that investors should, consider any non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Whenever reviewing a non-GAAP financial measure, investors are encouraged to review the related reconciliation to understand how it differs from the most directly comparable 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. 37 SONOCO PRODUCTS COMPANY 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 March 31, 2024 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 $ 112,453 $ 81,496 $ 17,360 $ 65,177 $ 0.66 Acquisition, integration and divestiture-related costs 5,661 5,661 1,452 4,209 0.04 Changes in LIFO inventory reserves 431 431 108 323 — Amortization of acquisition intangibles 22,939 22,939 5,573 17,366 0.18 Restructuring/Asset impairment charges 31,618 31,618 7,067 24,584 0.25 Non-operating pension costs — 3,295 823 2,472 0.02 Net gain from derivatives (286) (286) (72) (214) — Other adjustments 3,180 3,180 5,605 (2,425) (0.03) Total adjustments 63,543 66,838 20,556 46,315 0.46 Adjusted $ 175,996 $ 148,334 $ 37,916 $ 111,492 $ 1.12 Due to rounding, individual items may not sum appropriately. 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, integration and divestiture-related costs 5,188 5,188 1,280 3,908 0.04 Changes in LIFO inventory reserves (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 Net loss from derivatives 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 Due to rounding, individual items may not sum appropriately. 38 SONOCO PRODUCTS COMPANY Adjusted EBITDA and Adjusted EBITDA Margin Three Months Ended Dollars in thousands March 31, 2024 April 2, 2023 Net income attributable to Sonoco $ 65,177 $ 148,319 Adjustments Interest expense 31,220 34,232 Interest income (3,558) (1,562) Provision for income taxes 17,360 46,912 Depreciation, depletion and amortization 90,559 82,137 Non-operating pension costs 3,295 3,658 Net income/(loss) attributable to noncontrolling interests 96 (55) Restructuring/Asset impairment charges 31,618 28,814 Changes in LIFO inventory reserves 431 (5,425) Gain on divestiture of business and other assets — (72,010) Acquisition, integration and divestiture-related costs 5,661 5,188 Net (gain)/loss from derivatives (286) 6,085 Other adjustments 3,180 (43) Adjusted EBITDA $ 244,753 $ 276,250 Net Sales $ 1,637,543 $ 1,729,783 Net Income Margin 4.0 % 8.6 % Adjusted EBITDA Margin 14.9 % 16.0 % 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 (“ASC”) 280 - “Segment Reporting,” as prescribed by the Financial Accounting Standards Board. Segment results viewed by the Company’s management to evaluate segment performance do not include the following: restructuring/asset impairment charges; amortization of acquisition intangibles; acquisition, integration and divestiture-related costs; changes in LIFO inventory reserves; gains/losses from the sale of businesses or other assets; 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. 39 SONOCO PRODUCTS COMPANY Segment Adjusted EBITDA and All Other Adjusted EBITDA Reconciliation For the Three Months Ended March 31, 2024 Dollars in thousands Consumer Packaging segment Industrial Paper Packaging segment All Other Corporate Total Segment and Total Operating Profit $ 93,027 $ 65,844 $ 17,125 $ (63,543) $ 112,453 Adjustments: Depreciation, depletion and amortization 1 35,465 28,503 3,652 22,939 90,559 Equity in earnings of affiliates, net of tax 13 1,124 — — 1,137 Restructuring/Asset impairment charges 2 — — — 31,618 31,618 Changes in LIFO inventory reserves 3 — — — 431 431 Acquisition, integration and divestiture-related costs 4 — — — 5,661 5,661 Net gains from derivatives 5 — — — (286) (286) Other adjustments — — — 3,180 3,180 Segment Adjusted EBITDA $ 128,505 $ 95,471 $ 20,777 $ — $ 244,753 Net Sales $ 910,577 $ 593,060 $ 133,906 Segment Operating Profit Margin 10.2 % 11.1 % 12.8 % Segment Adjusted EBITDA Margin 14.1 % 16.1 % 15.5 % 1 Included in Corporate is the amortization of acquisition intangibles associated with the Consumer Packaging segment of $16,102, the Industrial Paper Packaging segment of $6,631, and the All Other group of businesses of $206. 2 Included in Corporate are restructuring/asset impairment charges associated with the Consumer Packaging segment of $4,925, the Industrial Paper Packaging segment of $22,603, and the All Other group of businesses of $1,148. 3 Included in Corporate are changes in LIFO inventory reserves associated with the Consumer Packaging segment of $92 and the Industrial Paper Packaging segment of $339. 4 Included in Corporate are acquisition, integration and divestiture-related costs associated with the Consumer Packaging segment of $(124) and the Industrial Paper Packaging segment of $655. 5 Included in Corporate are net gains on derivatives associated with the Consumer Packaging segment of $(43), the Industrial Paper Packaging segment of $(190), and the All Other group of businesses of $(53). 40 SONOCO PRODUCTS COMPANY 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 $ 96,494 $ 94,367 $ 22,560 $ 16,227 $ 229,648 Adjustments: Depreciation, depletion, and amortization 1 32,549 24,878 3,546 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, integration and divestiture-related costs 4 — — — 5,188 5,188 Gain from divestiture of business and other assets 5 — — — (72,010) (72,010) Derivatives losses 6 — — — 6,085 6,085 Other adjustments — — — (43) (43) Segment Adjusted EBITDA $ 129,118 $ 121,026 $ 26,106 $ — $ 276,250 Net Sales $ 958,008 $ 615,855 $ 155,920 Segment Operating Profit Margin 10.1 % 15.3 % 14.5 % Segment Adjusted EBITDA Margin 13.5 % 19.7 % 16.7 % 1 Included in Corporate is the amortization of acquisition intangibles associated with the Consumer Packaging segment of $16,226, the Industrial Paper Packaging segment of $2,934, and the All Other group of businesses of $2,004. 2 Included in Corporate are restructuring/asset impairment charges associated with the Consumer Packaging segment of $2,680, the Industrial Paper Packaging segment of $24,544, and the All Other group of businesses of $53. 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, integration and divestiture-related costs associated with the Consumer Packaging segment of $779 and the Industrial Paper Packaging segment of $289. 5 Included in Corporate are gains from the sale of the Company’s timberland properties in the amount of $(60,945) and the sale of its S3 business in the amount of $(11,065), both of which are associated with the Industrial Paper Packaging segment. 6 Included in Corporate are losses on derivatives associated with the Consumer Packaging segment of $946, the Industrial Paper Packaging segment of $3,912, and the All Other group of businesses of $1,170. RESULTS OF OPERATIONS The following discussion provides a review of results for the three-month period ended March 31, 2024 versus the three-month period ended April 2, 2023. OVERVIEW Net sales for the first quarter of 2024 declined by $92.2 million or 5.3%, to $1.64 billion, compared to $1.73 billion in the same period last year. The decline was primarily driven by lower selling prices of $57.1 million and the treatment of recycling operations as a procurement function beginning January 1, 2024. Volumes remained flat as lower volumes were offset by the impact of acquisitions. 41 SONOCO PRODUCTS COMPANY Net income attributable to Sonoco for the first quarter of 2024 decreased to $65.2 million, or $0.66 per diluted share, compared to $148.3 million, or $1.50 per diluted share, for the same period of 2023. This decrease was primarily due to the absence of a $72.0 million benefit from the sale of the Company’s timberland properties and the divestiture of the S3 business in the first quarter of 2023, as well as lower volumes and pricing, which were partially offset by higher productivity. Adjusted Earnings for the first quarter of 2024 were $111.5 million ($1.12 per diluted share), compared with $137.6 million ($1.40 per diluted share) for the same period in 2023. GAAP o perating profit for the first quarter of 2024 was $112.5 million, a decrease of 51.0% from the $229.6 million reported in the first quarter of 2023. T he decrease in GAAP operating profit was primarily due to the absence of a $72.0 benefit from the sale of the Company’s timberland properties and the divestiture of the S3 business in the first quarter of 2023, as well as lower volumes and pricing, which were partially offset by higher productivity. Adjusted Operating Pro fit for the first quarter of 2024 was $176.0 million, a decrease of 17.5% from the $213.4 million reported for the same period in 2023. COSTS AND EXPENSES Cost of goods sold decreased by $55.4 million, or 4.1%, in the first quarter of 2024 compared with the same period last year. The decrease was primarily driven by lower volumes, partially offset by cost of sales related to the acquisitions of Inapel, the Chattanooga mill and the remaining interest in RTS Packaging. Gross profit was $337.6 million for the three-month period ended March 31, 2024, which was $36.9 million lower than the prior-year period. The decrease in gross profit was driven by volume and pricing declines, which were partially offset by a $51.5 million benefit from improved productivity. Gross profit as a percent of sales decreased to 20.6% from 21.6% in the prior-year quarter. Selling, general and administrative costs increased by $5.5 million, or 2.9%, in the first quarter of 2024 compared with the same period last year, primarily due to incremental costs associated with the prior year acquisitions of Inapel, the remaining interest in RTS Packaging and the Chattanooga Mill. Restructuring/Asset impairment charges totaled $31.6 million in the first quarter of 2024, compared with $28.8 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. See Note 3 to the Company’s Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. Non-operating pe nsion costs were $0.4 million lower year over year primarily attributable to settlement costs in Canada in the prior year related to the Company’s defined benefit plan liabilities. Additional information regarding costs of the Company’s retirement plans is provided in Note 11 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Net interest expense for the first quarter of 2024 decreased to $27.7 million, compared with $32.7 million during the first quarter of 2023. The decrease of $5.0 million was primarily due to lower year over year average debt balances and interest income from the Company’s cross-currency swap entered into in December 2023. The effective tax rates reflected in GAAP net income and Adjusted Earnings in the first quarter of 2024 were 21.3% and 25.6%, respectively, compared with 24.3% and 24.8%, respectively, in the corresponding prior year quarter. The decrease in the GAAP rate was primarily due to a 2024 benefit from a deferred tax adjustment. The increase in the effective tax rate on Adjusted Earnings was due to variances in tax rates between the jurisdictions in which the respective income and charges were taxed. 42 SONOCO PRODUCTS COMPANY REPORTABLE SEGMENTS The Company’s operating and reporting structure consists of two reportable segments, Consumer Packaging and Industrial Paper Packaging, with all remaining businesses reported as All Other. The following table summarizes net sales attributable to each of the Company’s segments and the All Other group of businesses for the first quarters of 2024 and 2023: Three Months Ended (Dollars in thousands) March 31, 2024 April 2, 2023 % Change Net sales: Consumer Packaging $ 910,577 $ 958,008 (5.0) % Industrial Paper Packaging 593,060 615,855 (3.7) % Total reportable segments $ 1,503,637 $ 1,573,863 (4.5) % All Other 133,906 155,920 (14.1) % Net sales $ 1,637,543 $ 1,729,783 (5.3) % The following table summarizes operating profit attributable to each of the Company’s reportable segments, the All Other group of businesses, and Corporate-related activity during the first quarters of 2024 and 2023: Three Months Ended (Dollars in thousands) March 31, 2024 April 2, 2023 % Change Operating profit: Consumer Packaging $ 93,027 $ 96,494 (3.6) % Industrial Paper Packaging 65,844 94,367 (30.2) % Segment operating profit $ 158,871 $ 190,861 (16.8) % All Other 17,125 22,560 (24.1) % Corporate Restructuring/Asset impairment charges (31,618) (28,814) Amortization of acquisition intangibles (22,939) (21,164) Gains from divestiture of business and other assets — 72,010 Other operating charges, net (8,986) (5,805) Operating profit $ 112,453 $ 229,648 (51.0) % The following table summarizes Adjusted EBITDA attributable to each of the Company’s reportable segments and the All Other group of businesses during the first quarters of 2024 and 2023: Three Months Ended (Dollars in thousands) March 31, 2024 April 2, 2023 % Change Adjusted EBITDA: Consumer Packaging $ 128,505 $ 129,118 (0.5) % Industrial Paper Packaging 95,471 121,026 (21.1) % All Other 20,777 26,106 (20.4) % Adjusted EBITDA $ 244,753 $ 276,250 (11.4) % 43 SONOCO PRODUCTS COMPANY The following table summarizes restructuring/asset impairment charges attributable to each of the Company’s reportable segments, the All Other group of businesses, and Corporate-related activity during the first quarters of 2024 and 2023: Three Months Ended (Dollars in thousands) March 31, 2024 April 2, 2023 Restructuring/Asset impairment charges: Consumer Packaging $ 4,925 $ 2,680 Industrial Paper Packaging 22,603 24,544 All Other 1,148 53 Corporate 2,942 1,537 Restructuring/Asset impairment charges $ 31,618 $ 28,814 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 applications; and high-barrier flexible packaging. These products primarily serve the consumer staples market, focused on food, beverage, household, personal, and pharmaceutical products. Segment sales decreased approximately 5.0% compared to the corresponding prior year quarter as volumes continued to be impacted by lower consumer purchases from inflationary pricing impacts, primarily in snacks and confectionary markets, partially offset by year over year growth in aerosol volumes. Segment operating profit and Adjusted EBITDA decreased by 3.6% and 0.5%, respectively. The decline was largely due to lower volumes across the segment and negative price/cost. These declines were partially offset by continued strong productivity throughout the segment. 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 folding cartons, can board and laminated structures. Products across this segment support multiple end markets, primarily in paper, textile, and films. Segment sales decreased 3.7% from the corresponding prior year quarter due to lower index-related pricing, continued weakness in global converted products, and the conduct of recycling as a procurement function, partially offset by higher demand in paper and the benefit of the acquisitions of the remaining interest in RTS Packaging and the Chattanooga Mill. Segment operating profit and Adjusted EBITDA decreased 30.2% and 21.1%, respectively, as continued price/cost pressures were only partially offset by strong productivity and the benefit from acquisitions. Segment operating profit margin decreased to 11% in the first quarter of 2024 from 15% in the same period last year, and Segment Adjusted EBITDA margin declined to 16% in the first quarter compared to 20% in the same period last year, in each case due to unfavorable resets in commercial contracts with certain customers and suppliers tied to indices. These declines were partially offset by manufacturing productivity improvements due primarily to higher utilization in our paper mills and optimization of the operations footprint. All Other The primary products produced within 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, and industrial. Sales declined 14.1% from the same quarter of the prior year primarily due to lower volumes. Operating profit and Adjusted EBITDA dropped by 24.1% and 20.4%, respectively, in the first quarter of 2024 compared to the same period last year, primarily due to lower volumes and negative price/cost, partially offset by higher productivity. As a result, operating margin decreased to 12.8% in the first quarter of 2024 compared to 14.5% in the same quarter last year. 44 SONOCO PRODUCTS COMPANY Financial Position, Liquidity and Capital Resources Cash generated from operations for the first three months of 2024 was $166.2 million, compared with $98.0 million in the same period of 2023, a year-over-year increase of $68.2 million. While GAAP net income decreased by $83.0 million year over year, this decline was primarily attributable to the absence of non-cash gains from the sales of the Company’s S3 business and timberland properties during the first quarter of 2023. Net working capital provided $0.8 million of cash in the first three months of 2024, while using $91.5 million in the same period last year, for a year-over-year increase in operating cash flow of $92.3 million driven primarily by a year-over-year increase in cash provided by payable to suppliers of $97.3 million. Purchasing activity in the first quarter of 2023 was lower than normal due to abnormally high levels of certain inventory items that were maintained at the end of 2022 as a result of supply chain challenges, whereas inventory and purchasing activity returned to more normalized levels in the current period. Accounts receivable used $9.8 million more cash during the first three months of 2024 than in the same period last year as a result of the impact of changing mix in customer payment terms more than offsetting lower sales volumes. The Company continues to actively manage all components of net working capital by managing inventories and reviewing payment terms with customers and suppliers to appropriately address risk and balance economic benefit. Changes in accrued expenses and other assets and liabilities used $7.1 million in the three-month period ended March 31, 2024, compared with using $18.9 million in the same period last year. The $11.8 million lower use of cash in the current year was largely driven by the lower year-over-year payout of management incentive compensation. Cash contributions to the Company’s retirement plans were $4.0 million in the first three months of 2024, compared with $4.9 million in the same period last year. Investing activities used $81.7 million of cash in the first three months of 2024, compared with $3.0 million in the same period last year, a higher year-over-year use of cash of $78.8 million. While capital expenditures during the first three months of 2024 were $86.5 million, $3.1 million higher than the same period last year, this use of cash was partially offset in the prior year by proceeds from the sale of assets of $71.4 million, primarily from the March 2023 sale of the Company’s timberland properties. In addition, proceeds from the sale of the Company’s S3 business provided $13.8 million of cash in the first three months of 2023. Investments in affiliated companies used $5.0 million of cash during the three-month period ended April 2, 2023 as a result of the Company’s purchase of a 2.7% equity interest in Northstar Recycling Co. Other net investing activities provided $4.9 million more cash year over year, primarily as a result of higher life insurance proceeds received in the current year. Net capital spending for 2024 is expected to be approximately $350 million compared to $283 million in 2023. Financing activities used $62.7 million of cash in the three-month period ended March 31, 2024, while using $118.2 million in the corresponding prior-year period, a year-over-year decrease of $55.5 million. The decrease was largely driven by higher debt repayments in the prior year. Cash used to pay dividends increased by $2.4 million year over year reflecting the increase in the quarterly dividend payment from $0.49 per share to $0.51 per share approved by the Company’s Board of Directors in April 2023. 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 $9.1 million in the three-month period ended March 31, 2024, compared to $10.6 million in the same period last year. The C ompany’s cash balances are held in numerous locations throughout the world. At March 31, 2024 and December 31, 2023, approximatel y $114.0 million and $93.8 million, respectively, of the Company’s reported cash and cash equivalents balances of $172.2 million and $151.9 million, respectively, were held outside of the United States by its foreign subsidiaries. Cash held outside of the U nited 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 March 31, 2024 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 cash deposit and borrowing positions. 45 SONOCO PRODUCTS COMPANY During the three-month period ended March 31, 2024, the Company reported a net decrease in cash and cash equivalents of $1.6 million due to currency translation adjustment s resulting from a stronger U.S. d ollar relative to certain foreign currencies in which cash and cash equivalents were held. The Company operates a $500 million commercial paper program, supported by a $900 million unsecured revolving credit facility with a syndicate of banks that is committed through June 2026. T he 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. At March 31, 2024, the Company had scheduled debt maturities of approximately $454 million over the next twelve months, including $400 million aggregate principal amount of its 1.80% notes due February 2025. As the Company ha d no commercial paper balances outstanding at March 31, 2024 , all of the $900 million in committed capacity under its revolving credit f acility was available for draw down. The Company believes that cash and cash equivalents on hand and expected net cash flows generated from operating and investing activities, together with available capacity under the Company’s existing borrowing arrangements and the potential for additional borrowings or the issuance of new debt securities, will provide sufficient liquidity to cover debt maturities and other cash flow needs of the Company over the next twelve months 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 March 31, 2024 , the Company’s interest coverage and net worth were substantially above the minimum levels required under these covenants. On April 1, 2024, subsequent to the end of the first quarter, the Company completed the sale of Protexic , part of the All Other group of businesses, to Black Diamond Capital Management, LLC for cash proceeds of $82 million. The Company used the majority of these proceeds to pay down debt. The Company continually explores strategic acquisition opportunities that 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 existing credit facilities or additional borrowings. The Company anticipates making additional contributions to its other pension and postretirement plans of approximately $16 million durin g the remainder of 2024, resulting in expected total contributions to these plans of approximately $20 million in 2024. Future funding requirements beyond the current year will vary depending largely on investment performance, 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-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 uses 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. 46 SONOCO PRODUCTS COMPANY Because the economy in Venezuela is considered highly inflationary under U.S. GAAP, 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 March 31, 2024, the carrying value of the Company’s net investment in its Venezuelan operations was approximately $2.1 million. In addition, at March 31, 2024, 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 also 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 cumulative impact of applying highly inflationary accounting to Turk ey has been a pretax charge to earnings of $7.6 million ($5.8 million after tax), including $1.1 million ($0.8 million after tax) during th e three-month period ended March 31, 2024. Th e 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 approximat ely $18.1 million as of March 31, 2024. 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 March 31, 2024, 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 6.6 million metric million British thermal units (“MMBTUs”) and aluminum swaps totaling 355 metric tons. These contracts have various maturity dates ranging through December 2024. The total fai r market value of these instruments resulted in a net loss position of $6.6 million and $6.8 million at March 31, 2024 and December 31, 2023, respectively. 47 SONOCO PRODUCTS COMPANY 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 rangi n g from April 2024 through Decembe r 2024. T he total market value of these instruments resulted in net gain positions of $1.5 million and $1.5 million at March 31, 2024 and December 31, 2023, respectively. In addition, at March 31, 2024, the Company had various currency contracts outstanding to hedge the currency exposure of intercompany debt and foreign currency denominated receivables and payables. Although placed as economic hedges, the Company does not apply hedge accounting to these instruments. As such, changes in fair value are recorded directly to income and expense in the periods that they occur. During the fourth quarter of 2023 , the Company became party to cross-currency swap agreements with a total notional amount of $500 million to effectively convert a portion of the Company’s fixed-rate U.S. dollar-denominated debt, including the semi-annual interest payments, to fixed-rate euro-denominated debt. The swap agreements provide for the Company to receive semi-annual interest payments in U.S. dollars at a fixed rate and to make semi-annual interest payments in euros at a fixed rate. The risk management objective of entering into such agreements is to manage foreign currency risk relating to net investments in certain European subsidiaries denominated in euros. The agreements are designated as net investment hedges for accounting purposes. The gain or loss on the net investment hedge derivative instrument is included in the foreign currency translation component of accumulated other comprehensive loss until the net investment is sold, diluted, or liquidated. Interest payments received for the cross-currency swap are excluded from the net investment hedge effectiveness assessment and are recorded in interest expense. At March 31, 2024, the fair value of the Company’s net investment hedges was a gain position o f $4.9 million, and a translation gain of $3.6 million (net of income taxes o f $1.2 million) wa s reported as a component of “Accumulated other comprehensive loss” within “Foreign currency items.” During the first three months of 2024, the U.S. dollar strengthened against most of the functional currencies in which the Company’s foreign investments are held, including the euro, the Canadian dollar, the British pound, the Brazilian real, and the Danish krone. The net impact of these changes, and the changes in the net investment hedge discussed above, resulted in net translation losses of $19.3 million being recorded in “Accumulated other comprehensive loss” during the three-month period ended March 31, 2024. As a result of continued strengthening of the U.S. dollar against the euro, as well as a reduction in the differential between U.S. and European interest rates, the fair value of the Company’s net investment hedge continued to appreciate into the month of April. On April 15, 2024, subsequent to the end of the quarter, the Company terminated the swap agreements and received a cash settlement of $11.6 million. The foreign currency translation gain of approximately $3.1 million, net of tax, will be included as a component of “Accumulated other comprehensive loss” in the second quarter of 2024. Following the unwind of the swaps, the Company entered into new cross-currency swap agreements with a total notional amount of $500 million to effectively convert a portion of the Company’s fixed-rate U.S. dollar-denominated debt, including the semi-annual interest payments, to fixed-rate euro-denominated debt. The new swap agreements have a maturity of May 1, 2027. 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.