The following table sets forth the carrying amounts and fair values of the Company’s significant financial instruments for which the carrying amount differs from the fair value.
The Company routinely enters into forward contracts or swaps to economically hedge the currency exposure of intercompany debt and existing foreign currency denominated receivables and payables. The Company does not apply hedge accounting treatment under ASC 815 for these instruments. As such, changes in fair value are recorded directly to income and expense in the periods that they occur.
While certain of the Company’s derivative contract arrangements with its counterparties provide for the ability to settle contracts on a net basis, the Company reports its derivative positions on a gross basis. There are no collateral arrangements or requirements in these agreements.
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| | | | | | | | | | | | | | | | |
Description | | Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion) | | Location of Gain or (Loss) Reclassified from Accumulated OCI Into Income (Effective Portion) | | Amount of Gain or (Loss) Reclassified from Accumulated OCI Into Income (Effective Portion) | | Location of Gain or (Loss) Recognized in Income on Derivatives (Ineffective Portion) | | Amount of Gain or (Loss) Recognized in Income on Derivatives (Ineffective Portion) |
Derivatives in Cash Flow Hedging Relationships: | | | | | | |
Nine months ended October 1, 2017 | | | | | | | | |
Foreign Exchange Contracts | | $ | 936 |
| | Net sales | | $ | 8,097 |
| | Net sales | | $ | — |
|
| | | | Cost of sales | | $ | (4,808 | ) | | | | |
Commodity Contracts | | $ | (1,957 | ) | | Cost of sales | | $ | 1,367 |
| | Cost of sales | | $ | (100 | ) |
Nine months ended October 2, 2016 | | | | | | | | |
Foreign Exchange Contracts | | $ | 1,700 |
| | Net sales | | $ | (5,217 | ) | | Net sales | | $ | — |
|
| | | | Cost of sales | | $ | 2,339 |
| | | | |
Commodity Contracts | | $ | 406 |
| | Cost of sales | | $ | (3,346 | ) | | Cost of sales | | $ | (52 | ) |
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
|
| | | | |
Description | Location of Gain or (Loss) Recognized in Income Statement | Gain or (Loss) Recognized |
Derivatives not Designated as Hedging Instruments: | |
Nine months ended October 1, 2017 | | |
Foreign Exchange Contracts | Cost of sales | $ | — |
|
| Selling, general and administrative | $ | (2,074 | ) |
Nine months ended October 2, 2016 | | |
Foreign Exchange Contracts | Cost of sales | $ | — |
|
| Selling, general and administrative | $ | 373 |
|
The following tables set forth the effect of the Company’s derivative instruments on financial performance for the nine months ended October 3, 2021 and September 27, 2020, excluding the gains on foreign currency cash flow hedges that were reclassified from accumulated other comprehensive loss to the carrying value of the capitalized expenditures: | | | | | | | | | | | | | | | | | | | | | | | | |
Description | | Amount of Gain or (Loss) Recognized in OCI on Derivatives | | Location of Gain or (Loss) Reclassified from Accumulated OCI Into Income | | Amount of Gain or (Loss) Reclassified from Accumulated OCI Into Income | | | | |
Derivatives in Cash Flow Hedging Relationships: | | | | | | |
Nine months ended October 3, 2021 | | | | | | | | |
Foreign Exchange Contracts | | $ | 156 | | | Net sales | | $ | 2,766 | | | | | |
| | | | Cost of sales | | $ | (2,129) | | | | | |
Commodity Contracts | | $ | 10,801 | | | Cost of sales | | $ | 2,626 | | | | | |
Nine months ended September 27, 2020 | | | | | | | | |
Foreign Exchange Contracts | | $ | (4,985) | | | Net sales | | $ | (6,245) | | | | | |
| | | | Cost of sales | | $ | 3,744 | | | | | |
Commodity Contracts | | $ | 640 | | | Cost of sales | | $ | (1,346) | | | | | |
| | | | | | | | | | | | | | |
Description | | Gain or (Loss) Recognized | | Location of Gain or (Loss) Recognized in Income Statement |
Derivatives not Designated as Hedging Instruments: | | | | |
Nine months ended October 3, 2021 | | | | |
Commodity Contracts | | $ | 3,295 | | | Cost of sales |
Foreign Exchange Contracts | | $ | (906) | | | Selling, general and administrative |
Nine months ended September 27, 2020 | | | | |
Commodity Contracts | | $ | (252) | | | Cost of sales |
Foreign Exchange Contracts | | $ | (3,565) | | | Selling, general and administrative |
| | | | | | | | | | | | | | | | | | | | |
| Nine months ended October 3, 2021 | | Nine months ended September 27, 2020 |
Description | Revenue | Cost of sales | | Revenue | Cost of sales |
Total amount of income and expense line items presented in the Condensed Consolidated Statements of Income | $ | 2,766 | | $ | 497 | | | $ | — | | $ | 2,398 | |
| | | | | | |
The effects of cash flow hedging: | | | | | |
| | | | | | |
| | | | | | |
| | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Gain or (loss) on cash flow hedging relationships: | | | | |
Foreign exchange contracts: | | | | | |
Amount of gain or (loss) reclassified from accumulated other comprehensive loss into net (loss)/income | $ | 2,766 | | $ | (2,129) | | | $ | (6,245) | | $ | 3,744 | |
| | | | | |
| | | | | |
Commodity contracts: | | | | | |
Amount of gain or (loss) reclassified from accumulated other comprehensive loss into net (loss)/income | $ | — | | $ | 2,626 | | | $ | — | | $ | (1,346) | |
| | | | | | |
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Note 10: Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
|
| | | | |
Level 1 – | Observable inputs such as quoted market prices in active markets; |
Level 2 – | Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |
Level 3 – | Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Assets that are calculated at Net Asset Value per share (NAV) are not required to be categorized within the fair value hierarchy.
The following table sets forth information regarding the Company’s financial assets and financial liabilities, excluding retirement and postretirement plan assets, measured at fair value on a recurring basis: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Description | | October 3, 2021 | | Assets measured at NAV | Level 1 | | Level 2 | | Level 3 |
Hedge derivatives, net: | | | | | | | | | |
Commodity contracts | | $ | 7,530 | | | $ | — | | $ | — | | | $ | 7,530 | | | $ | — | |
Foreign exchange contracts | | $ | (394) | | | $ | — | | $ | — | | | $ | (394) | | | $ | — | |
Non-hedge derivatives, net: | | | | | | | | | |
Commodity contracts | | $ | 2,861 | | | $ | — | | $ | — | | | $ | 2,861 | | | $ | — | |
Foreign exchange contracts | | $ | 256 | | | $ | — | | $ | — | | | $ | 256 | | | $ | — | |
| | | | | | | | | |
Description | | December 31, 2020 | | Assets measured at NAV | Level 1 | | Level 2 | | Level 3 |
Hedge derivatives, net: | | | | | | | | | |
Commodity contracts | | $ | (647) | | | $ | — | | $ | — | | | $ | (647) | | | $ | — | |
Foreign exchange contracts | | $ | 602 | | | $ | — | | $ | — | | | $ | 602 | | | $ | — | |
Non-hedge derivatives, net: | | | | | | | | | |
Commodity contracts | | $ | 484 | | | $ | — | | $ | — | | | $ | 484 | | | $ | — | |
Foreign exchange contracts | | $ | 115 | | | $ | — | | $ | — | | | $ | 115 | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | |
Description | | October 1, 2017 | | Assets measured at NAV | Level 1 | | Level 2 | | Level 3 |
Hedge derivatives, net: | | | | | | | | | |
Commodity contracts | | $ | (33 | ) | | $ | — |
| $ | — |
| | $ | (33 | ) | | $ | — |
|
Foreign exchange contracts | | $ | (2,471 | ) | | $ | — |
| $ | — |
| | $ | (2,471 | ) | | $ | — |
|
Non-hedge derivatives, net: | | | | | | | | | |
Foreign exchange contracts | | $ | 124 |
| | $ | — |
| $ | — |
| | $ | 124 |
| | $ | — |
|
Deferred compensation plan assets | | $ | 255 |
| | $ | — |
| $ | 255 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | |
Description | | December 31, 2016 | | Assets measured at NAV | Level 1 | | Level 2 | | Level 3 |
Hedge derivatives, net: | | | | | | | | | |
Commodity contracts | | $ | 3,636 |
| | $ | — |
| $ | — |
| | $ | 3,636 |
| | $ | — |
|
Foreign exchange contracts | | $ | (185 | ) | | $ | — |
| $ | — |
| | $ | (185 | ) | | $ | — |
|
Non-hedge derivatives, net: | | | | | | | | | |
Foreign exchange contracts | | $ | (696 | ) | | $ | — |
| $ | — |
| | $ | (696 | ) | | $ | — |
|
Deferred compensation plan assets | | $ | 349 |
| | $ | — |
| $ | 349 |
| | $ | — |
| | $ | — |
|
As discussed in Note 9, the Company uses derivatives to mitigate the effect of raw material and energy cost fluctuations, foreign currency fluctuations and, from time to time, interest rate movements. Fair value measurements for the Company’s derivatives are classified under Level 2 because such measurements are estimated based on observable inputs such as interest rates, yield curves, spot and future commodity prices and spot and future exchange rates.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Certain deferred compensation plan liabilities are funded by assets invested in various exchange traded mutual funds. These assets are measured using quoted prices in accessible active markets for identical assets.
The Company does not currently have any non-financial assets or liabilities that are recognized or disclosed at fair value on a recurring basis. None of the Company’s financial assets or liabilities are measured at fair value using significant unobservable inputs. There were no transfers in or out of Level 1 or Level 2 fair value measurements during the three- and nine-monthnine-month periods ended October 1, 2017.3, 2021.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Note 11: Employee Benefit Plans
Retirement Plans and Retiree Health and Life Insurance Plans
The Company provides non-contributory defined benefit pension plans to certain of its employees in the United States, and certain of its employees in Mexico and Belgium. The Company also sponsors contributory defined benefit pension plans covering the majority of its employees in the United Kingdom, Canada, and the Netherlands. In addition, the Company provides postretirement healthcare and life insurance benefits to a limited number of its retirees and their dependents in the United States and Canada, based on certain age and/or service eligibility requirements.
The Company froze participation in its U.S. qualified defined benefit pension plan for newly hired salaried and non-union hourly employees effective December 31, 2003. To replace this benefit, the Company provides non-union U.S. employees hired on or after January 1, 2004, withare provided an annual contribution, called the Sonoco Retirement Contribution (SRC), to their participant accounts in the Sonoco Retirement and Savings Plan. The SRC is equal to 4% of the participant's eligible pay plus 4% of eligible pay in excess of the social security wage base. Also eligible for the SRC are former participants of the U.S. qualified defined benefit pension plan who elected to transfer out of that plan under a one-time option effective January 1, 2010.
On February 4, 2009, the U.S. qualified defined benefit pension plan was further amended to freeze plan benefits for all active, non-union participants effective December 31, 2018. Remaining active participants in the U.S. qualified plan will becomebecame eligible for SRC contributions effective January 1, 2019. In October 2021, the Company's Board of Directors approved a resolution authorizing amendments to the Sonoco Retirement and Savings Plan to eliminate the SRC contribution and increase the Company's match on elective contributions to the Plan from 50% of the first 4% of compensation contributed by participants to 100% of the first 6%. These amendments will be effective January 1, 2022.
The components of net periodic benefit cost include the following: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 |
Retirement Plans | | | | | | | | |
Service cost | | $ | 968 | | | $ | 881 | | | $ | 2,949 | | | $ | 2,966 | |
Interest cost | | 2,287 | | | 12,785 | | | 22,051 | | | 38,015 | |
Expected return on plan assets | | (3,361) | | | (12,427) | | | (21,672) | | | (37,234) | |
Amortization of prior service cost | | 226 | | | 245 | | | 687 | | | 742 | |
Amortization of net actuarial loss | | 1,600 | | | 7,136 | | | 14,849 | | | 21,270 | |
Effect of curtailment loss | | — | | | — | | | — | | | 31 | |
Effect of settlement loss | | 21 | | | — | | | 547,652 | | | 661 | |
Net periodic benefit cost | | $ | 1,741 | | | $ | 8,620 | | | $ | 566,516 | | | $ | 26,451 | |
| | | | | | | | |
Retiree Health and Life Insurance Plans | | | | |
Service cost | | $ | 93 | | | $ | 89 | | | $ | 282 | | | $ | 265 | |
Interest cost | | 49 | | | 84 | | | 149 | | | 249 | |
Expected return on plan assets | | (111) | | | (92) | | | (335) | | | (275) | |
Amortization of prior service credit | | — | | | (70) | | | — | | | (207) | |
Amortization of net actuarial gain | | (186) | | | (208) | | | (563) | | | (620) | |
Net periodic benefit income | | $ | (155) | | | $ | (197) | | | $ | (467) | | | $ | (588) | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | October 1, 2017 | | October 2, 2016 | | October 1, 2017 | | October 2, 2016 |
Retirement Plans | | | | | | |
Service cost | | $ | 4,626 |
| | $ | 4,938 |
| | $ | 13,835 |
| | $ | 14,760 |
|
Interest cost | | 13,716 |
| | 14,842 |
| | 42,085 |
| | 45,152 |
|
Expected return on plan assets | | (20,297 | ) | | (21,201 | ) | | (60,833 | ) | | (64,633 | ) |
Amortization of prior service cost | | 228 |
| | 188 |
| | 683 |
| | 569 |
|
Amortization of net actuarial loss | | 9,625 |
| | 9,958 |
| | 29,585 |
| | 29,514 |
|
Effect of settlement loss | | 476 |
| | — |
| | 31,550 |
| | — |
|
Net periodic benefit cost | | $ | 8,374 |
| | $ | 8,725 |
| | $ | 56,905 |
| | $ | 25,362 |
|
Retiree Health and Life Insurance Plans | | | | | | | | |
Service cost | | 70 |
| | 77 |
| | 234 |
| | 233 |
|
Interest cost | | 123 |
| | 120 |
| | 347 |
| | 364 |
|
Expected return on plan assets | | (408 | ) | | (393 | ) | | (1,228 | ) | | (1,191 | ) |
Amortization of prior service credit | | (124 | ) | | (124 | ) | | (374 | ) | | (376 | ) |
Amortization of net actuarial gain | | (189 | ) | | (166 | ) | | (569 | ) | | (503 | ) |
Net periodic benefit income | | $ | (528 | ) | | $ | (486 | ) | | $ | (1,590 | ) | | $ | (1,473 | ) |
The Company made aggregate contributions of $38,483$142,615 and $26,594$12,292 to its defined benefit retirement and retiree health and life insurance plans during the nine months ended October 1, 20173, 2021 and October 2, 2016,September 27, 2020, respectively. The Company expects to make additional aggregate contributions of approximately $55,000$6,500 to its defined benefit retirement and retiree health and life insurance plans over the remainder of 2017, which includes2021.
Plan Termination and Settlement
As disclosed in previous filings, the Company terminated the Sonoco Pension Plan for Inactive Participants (the "Inactive Plan"), a $50,000 voluntary contribution to its U.S. qualifiedtax-qualified defined benefit pension plan, made on October 25, 2017.effective September 30, 2019. The Company settled the liabilities of the Inactive Plan in the second quarter of 2021 through a combination of lump-sum payments and the purchase of group
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
annuity contracts. In February 2017,order for the Inactive Plan to be fully funded upon final settlement, the Company initiated a program through which it offered certain terminated vested participants incontributed $133,000 to the U.S. qualified retirement plansInactive Plan during the opportunity to receive their benefits early as either a lump sum or an annuity. This population comprised approximately 15%second quarter of the projected benefit obligation of these plans. At the close of the election period, approximately 51% of the eligible participants elected to take the early payment. These payments were distributed from plan assets in May and June 2017. As a result of settling these obligations, the Company recognized a non-cash,2021. Non-cash, pre-tax settlement charge of $31,074charges totaling $547,291 were recognized in the second quarter of 2017.2021 as the lump sum payouts and annuity purchases were made.
Settlements and Curtailments
The Company recognized additional settlement charges of $361 and $661 during the nine months ended October 3, 2021 and September 27, 2020, respectively. These charges resulted from payments made to certain participants in the Company's non-union Canadian pension plan who elected a lump sum distribution option upon retirement. Additional settlement charges related to the Canadian pension plans may be recognized over the remainder of $4762021 as a result of ongoing lump-sum distributions and restructuring actions. In addition, curtailment charges totaling $31 related to the closure of a paper mill in Canada were recognized induring the third quarter of 2017 for settlements to certain plan participants who were eligible to select a lump sum payment option upon retirement.
nine months ended September 27, 2020.
Sonoco Retirement Contribution (SRC)
The SRC contributions, which isare funded annually in the first quarter, totaled $14,066$22,665 during the nine months ended October 1, 2017,3, 2021, and $13,352$22,503 during the nine months ended October 2, 2016.September 27, 2020. No additional SRC contributions are expected during the remainder of 2017.2021. The Company recognized expense related to the SRC of $3,239$5,456 and $3,682$5,589 for the quartersthree months ended October 1, 20173, 2021 and October 2, 2016,September 27, 2020, respectively, and $10,930$17,290 and $10,277$17,283 for the nine-month periodsnine months ended October 1, 20173, 2021 and October 2, 2016,September 27, 2020, respectively.
Note 12: Income Taxes
The Company’s effective tax rate for the three- and nine-month periods ending October 1, 2017, was 33.4% and 32.3%, respectively, and its effective rate for the three- and nine-month periods ending October 2, 2016, was 32.1% and 32.3%, respectively. The rates for the three- and nine-month periods of both years variedended October 3, 2021 were 2.3% and 37.0%, respectively, and its effective tax rates for the three- and nine-month periods ended September 27, 2020 were (0.8)% and 18.6%, respectively. The Company's effective tax rates vary from the U.S. statutory rate due primarily to a $30,000 net recognized benefit associated with the favorable effectamendment of certain international operations that are subjectthe Company's 2017 U.S. income tax return to report increased utilization of its foreign tax credits in the third quarter of 2021 and a $20,355 write-down of a deferred tax liability related to classifying the Company's European contract packaging business as "held for sale" in the third quarter of 2020. To a lesser extent the Company's effective tax rates generally lower thanvary from the U.S. rate. The 2017 year-to-date rate also varied from the statutory rate due to state taxes, taxes on operations in international jurisdictions with effective tax rates different than the Company's January 1,U.S. statutory rate, the release or build of reserves for uncertain tax positions and various other tax adjustments.
As previously disclosed, in February 2017 adoptionthe Company received a Notice of ASU 2016-09 regarding accounting for share-based compensation, which requires excessProposed Adjustment (“NOPA”) from the Internal Revenue Service (“IRS”) proposing adjustments to the 2012 and 2013 tax benefitsyears. In 2018, the Company filed a protest to be utilized as an offsetthe proposed deficiency and the matter was referred to tax expensethe Appeals Division of the IRS. In the second quarter of 2021, the Company paid $5,613 in taxes and was not requiredinterest to be applied retrospectively.settle the dispute.
The Company and/or its subsidiaries file federal, state and local income tax returns in the United States and various foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, or non-U.S., income tax examinations by tax authorities for years before 2012. With respect to state and local income taxes, the Company is no longer subject to examination for years prior to 2012, with few exceptions. The Company is currently under audit by the Internal Revenue Service for the 2012 and 2013 tax years.2015.
The Company’s reserve for uncertain tax benefits has decreasedincreased by approximately $2,400$7,300 since December 31, 2016,2020 due primarily to the settlementrecording of a prior year's audit.reserve related to the benefit associated with the amendment of the Company's 2017 tax return to report increased utilization of its foreign tax credits, partially offset by the release of reserves related to the expiration of the statute of limitations for tax years 2012 and 2013 which were previously extended. The Company believes that it is reasonably possible that the amount reserved for unrecognized tax benefits at October 1, 2017 will increase3, 2021 could decrease by approximately $200$600 over the next twelve months. This change includes the anticipated increase in reserves related to existing positions offset by settlements of issues currently under examination and the release of existing reserves due to the expiration of the statute of limitations. Although the Company’s estimate for the potential outcome for any uncertain tax issue is highly judgmental, management believes that any reasonably foreseeable outcomes related to these matters have been adequately provided for. However, future results may include favorable or unfavorable adjustments to estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which earnings or deductions are realized may differ from current estimates. As a result, the Company’s effective tax rate may fluctuate significantly on a quarterly basis. The Company has operations and pays taxes in many countries outside of the U.S. and taxes on those earnings are subject to varying rates. The Company is not dependent upon the favorable benefit of any one jurisdiction to an extent that the loss of those benefitssuch benefit would have a material effect on the Company’s overall effective tax rate.
As previously disclosed, the Company received a draft Notice of Proposed Adjustment (“NOPA”) from the Internal Revenue Service (IRS) in February 2017 proposing an adjustment to income for the 2013 tax year based on the IRS's recharacterization of a distribution of an intercompany note made in 2012, and the subsequent repayment of the note over the course of 2013, as if it were a cash distribution made in 2013. In March 2017, the Company received a draft NOPA proposing penalties of $18,000 associated with the IRS’s recharacterization, as well as an Information Document Request (“IDR”) requesting the Company’s analysis of why such penalties should not apply. The Company responded to this IDR in April 2017. On October 5, 2017, the Company received two revised draft NOPAs proposing the same adjustments and penalties as in the prior NOPAs. At the time the distribution was paid in 2012, it was characterized as a dividend to the extent of earnings and profits, with the remainder as a tax free return of basis and taxable capital gain. As the IRS
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Note 13: Leases
proposes to recharacterizeThe Company routinely enters into leasing arrangements for real estate (including manufacturing facilities, office space, and warehouses), transportation equipment (automobiles, forklifts, and trailers), and office equipment (copiers and postage machines). The assessment of the distribution, the entire distribution would be characterized as a dividend. The incremental tax liabilitycertainty associated with the income adjustment proposed in the NOPA would be approximately $84,000, excluding interestexercise of various lease renewal, termination, and the previously referenced penalties. Should a final NOPA be issued, the Company intends to file a protest to the proposed deficiency with the IRS, which will cause the matter to be referred to the Appeals Division of the IRS. The Company strongly believes the position of the IRS with regard to this matter is inconsistent with applicable tax laws and existing Treasury regulations, and that the Company's previously reported income tax provision for the year in question is appropriate. However, there can be no assurance that this matter will be resolvedpurchase options included in the Company's favor. Regardless of whetherlease contracts is at the matter is resolvedCompany's sole discretion. Most real estate leases, in particular, include one or more options to renew, with renewal terms that can extend the lease term from one to 50 years. The Company's leases do not have any significant residual value guarantees or restrictive covenants.
As the implicit rate in the Company's favor, the final resolution of this matter could be expensive and time consuming to defend and/or settle. Whileleases is not readily determinable, the Company believescalculates its lease liabilities using discount rates based upon the Company’s incremental secured borrowing rate, which contemplates and reflects a particular geographical region’s interest rate for the leases active within that the amount of tax originally paid with respect to this distribution is correct, and accordingly has not provided additional reserve for tax uncertainty, there is still a possibility that an adverse outcomeregion of the matter could haveCompany’s global operations. The Company further utilizes a material effectportfolio approach by assigning a “short” rate to contracts with lease terms of 10 years or less and a “long” rate for contracts greater than 10 years.
The following table sets forth the balance sheet location and values of the Company’s lease assets and lease liabilities at October 3, 2021 and December 31, 2020: | | | | | | | | | | | | | | | | | |
Classification | | Balance Sheet Location | | October 3, 2021 | December 31, 2020 |
Lease Assets | | | | | |
Operating lease assets | | Right of Use Asset - Operating Leases | | $ | 269,855 | | $ | 296,020 | |
Finance lease assets | | Other Assets | | 47,154 | | 36,267 | |
Total lease assets | | | | $ | 317,009 | | $ | 332,287 | |
| | | | | |
Lease Liabilities | | | | | |
Current operating lease liabilities | | Accrued expenses and other | | $ | 44,588 | | $ | 52,138 | |
Current finance lease liabilities | | Notes payable and current portion of debt | | 6,236 | | 4,663 | |
Total current lease liabilities | | | | $ | 50,824 | | $ | 56,801 | |
| | | | | |
Noncurrent operating lease liabilities | | Noncurrent Operating Lease Liabilities | | $ | 236,590 | | $ | 262,048 | |
Noncurrent finance lease liabilities | | Long-term Debt, Net of Current Portion | | 45,101 | | 33,280 | |
Total noncurrent lease liabilities | | | | $ | 281,691 | | $ | 295,328 | |
| | | | | |
Total lease liabilities | | | | $ | 332,515 | | $ | 352,129 | |
Certain of the Company’s leases include variable costs. Variable costs include lease payments that were volume or usage-driven in accordance with the use of the underlying asset, and also non-lease components that were incurred based upon actual terms rather than contractually fixed amounts. In addition, variable costs are incurred for lease payments that are indexed to a change in rate or index. Because the right of use assets recorded on its resultsthe balance sheet were determined based upon factors considered at the commencement date of operationsthe leases, subsequent changes in the rate or index that were not contemplated in the right of use asset balances recorded on the balance sheet result in variable expenses being incurred when paid during the lease term.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and financial condition.shares in thousands except per share data)
(unaudited)
The following table sets forth the components of the Company's total lease cost for the three- and nine- month periods ended October 3, 2021 and September 27, 2020: | | | | | | | | | | | | | | | | | |
| | Three Months Ended | Nine Months Ended |
Lease Cost | | October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 |
Operating lease cost | (a) | $ | 11,623 | | $ | 18,192 | | $ | 36,720 | | $ | 46,903 | |
Finance lease cost: | | | | | |
Amortization of lease asset | (a) | 1,476 | | 1,061 | | 4,133 | | 5,999 | |
Interest on lease liabilities | (b) | 367 | | 258 | | 997 | | 721 | |
Variable lease cost | (a) (c) | 6,796 | | 7,455 | | 19,569 | | 29,316 | |
| | | | | |
Total lease cost | | $ | 20,262 | | $ | 26,966 | | $ | 61,419 | | $ | 82,939 | |
| | | | | |
(a) Production-related and administrative amounts are included in cost of sales and selling, general and administrative expenses, respectively.
(b) Included in interest expense.
(c) Also includes short term lease costs, which are deemed immaterial.
The following table sets forth certain lease-related information for the nine months ended October 3, 2021 and September 27, 2020: | | | | | | | | | | | |
| | Nine Months Ended |
| | October 3, 2021 | September 27, 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows used by operating leases | $ | 38,757 | | $ | 43,858 | |
Operating cash flows used by finance leases | $ | 997 | | $ | 721 | |
Financing cash flows used by finance leases | $ | 3,375 | | $ | 6,440 | |
Noncash investing and financing activities: | | | |
Leased assets obtained in exchange for new operating lease liabilities | $ | 12,230 | | $ | 84,578 | |
Leased assets obtained in exchange for new finance lease liabilities | $ | 7,071 | | $ | 19,122 | |
Modification to leased assets for increase/(decrease) in operating lease liabilities | $ | 12,059 | | $ | (3,977) | |
Modification to leased assets for increase in finance lease liabilities | $ | 9,586 | | $ | 19,194 | |
Termination reclasses to decrease operating lease assets | $ | (4,971) | | $ | (4,232) | |
Termination reclasses to decrease operating lease liabilities | $ | (5,278) | | $ | (4,611) | |
Termination reclasses to decrease finance lease assets | $ | (33) | | $ | (19,994) | |
Termination reclasses to decrease finance lease liabilities | $ | (40) | | $ | (20,121) | |
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Note 14: Revenue Recognition
The Company records revenue when control is transferred to the customer, which is either upon shipment or over time in cases where the Company is entitled to payment with margin for products produced that are customer specific without alternative use. The Company recognizes over time revenue under the input method as goods are produced. Revenue that is recognized at a point in time is recognized when the customer obtains control of the goods. Customers obtain control either when goods are delivered to the customer facility, if the Company is responsible for arranging transportation, or when picked up by the customer's designated carrier. The Company commonly enters into Master Supply Arrangements with customers to provide goods and/or services over specific time periods. Customers submit purchase orders with quantities and prices to create a contract for accounting purposes. Shipping and handling expenses are included in "Cost of Sales," and freight charged to customers is included in "Net Sales" in the Company's Condensed Consolidated Statements of Income.
The Company has rebate agreements with certain customers. These rebates are recorded as reductions of revenue and are accrued using sales data and rebate percentages specific to each customer agreement. Accrued customer rebates are included in "Accrued expenses and other" in the Company's Condensed Consolidated Balance Sheets.
Payment terms under the Company's sales arrangements are short term, generally no longer than 120 days. The Company does provide prompt payment discounts to certain customers if invoices are paid within a predetermined period. Prompt payment discounts are treated as a reduction of revenue and are determinable within a short time period following the sale.
The following tables set forth the effects of contract assets and liabilities from contracts with customers. Contract assets and liabilities are reported in "Other receivables" and "Accrued expenses and other," respectively, on the Company's Condensed Consolidated Balance Sheets. | | | | | | | | | | | | | | |
| | October 3, 2021 | | December 31, 2020 |
| | | | |
Contract Assets | | $ | 49,377 | | | $ | 48,390 | |
Contract Liabilities | | $ | (19,148) | | | $ | (16,687) | |
Significant changes in the contract assets and liabilities balances during the nine months ended October 3, 2021 and the year ended December 31, 2020 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | October 3, 2021 | | December 31, 2020 | | | | | | | | | | | | |
| | Contract Asset | | Contract Liability | | Contract Asset | | Contract Liability | | | | | | | | | | | | |
Beginning Balance | $ | 48,390 | | | $ | (16,687) | | | $ | 56,364 | | | $ | (17,047) | | | | | | | | | | | | | |
Revenue deferred or rebates accrued | — | | | (28,142) | | | — | | | (32,512) | | | | | | | | | | | | | |
Recognized as revenue | | | 5,110 | | | | | 9,189 | | | | | | | | | | | | | |
Rebates paid to customers | — | | | 20,571 | | | — | | | 23,683 | | | | | | | | | | | | | |
Increases due to rights to consideration for customer specific goods produced, but not billed during the period | 49,377 | | | — | | | 48,390 | | | — | | | | | | | | | | | | | |
Transferred to receivables from contract assets recognized at the beginning of the period | (48,390) | | | — | | | (56,364) | | | — | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Ending Balance | $ | 49,377 | | | $ | (19,148) | | | $ | 48,390 | | | $ | (16,687) | | | | | | | | | | | | | |
Contract assets and liabilities are generally short in duration given the nature of products produced by the Company. Contract assets represent goods produced without alternative use for which the Company is entitled to payment with margin prior to shipment. Upon shipment, the Company is entitled to bill the customer, and therefore amounts included in contract assets will be reduced with the recording of an account receivable as they represent an unconditional right to payment. Contract liabilities represent revenue deferred due to pricing mechanisms utilized by the Company in certain multi-year arrangements, volume rebates, and payments received in advance. For multi-year arrangements with pricing mechanisms, the Company will generally defer revenue during the first half of the arrangement and will release the
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
deferral over the back half of the contract term. The Company's reportable segments are aligned by product nature as disclosed in Note 15.
The following tables set forth information about revenue disaggregated by primary geographic regions for the three-month periods ended October 3, 2021 and September 27, 2020. The tables also include a reconciliation of disaggregated revenue with reportable segments. | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended October 3, 2021 | Consumer Packaging | | Industrial Paper Packaging | | All Other | | Total |
Primary Geographical Markets: | | | | | | | |
United States | $ | 408,295 | | | $ | 370,659 | | | $ | 145,029 | | | $ | 923,983 | |
Europe | 109,566 | | | 99,573 | | | 24,033 | | | 233,172 | |
Canada | 31,612 | | | 24,187 | | | — | | | 55,799 | |
Asia | 20,728 | | | 81,097 | | | 393 | | | 102,218 | |
Other | 28,768 | | | 59,714 | | | 11,539 | | | 100,021 | |
Total | $ | 598,969 | | | $ | 635,230 | | | $ | 180,994 | | | $ | 1,415,193 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Three months ended September 27, 2020 | Consumer Packaging | | Industrial Paper Packaging | | All Other | | Total |
Primary Geographical Markets: | | | | | | | |
United States | $ | 387,658 | | | $ | 293,968 | | | $ | 166,878 | | | $ | 848,504 | |
Europe | 96,698 | | | 78,780 | | | 100,418 | | | 275,896 | |
Canada | 22,131 | | | 17,749 | | | — | | | 39,880 | |
Asia | 19,710 | | | 61,463 | | | 147 | | | 81,320 | |
Other | 20,011 | | | 38,409 | | | 8,294 | | | 66,714 | |
Total | $ | 546,208 | | | $ | 490,369 | | | $ | 275,737 | | | $ | 1,312,314 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The following tables set forth information about revenue disaggregated by primary geographic regions for the nine-month periods ended October 3, 2021 and September 27, 2020. The tables also include a reconciliation of disaggregated revenue with reportable segments. | | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended October 3, 2021 | Consumer Packaging | | Industrial Paper Packaging | | All Other | | Total |
Primary Geographical Markets: | | | | | | | |
United States | $ | 1,219,666 | | | $ | 1,042,249 | | | $ | 461,996 | | | $ | 2,723,911 | |
Europe | 334,995 | | | 300,495 | | | 67,371 | | | 702,861 | |
Canada | 87,948 | | | 69,218 | | | — | | | 157,166 | |
Asia | 60,256 | | | 232,657 | | | 914 | | | 293,827 | |
Other | 76,660 | | | 164,540 | | | 32,286 | | | 273,486 | |
Total | $ | 1,779,525 | | | $ | 1,809,159 | | | $ | 562,567 | | | $ | 4,151,251 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended September 27, 2020 | Consumer Packaging | | Industrial Paper Packaging | | All Other | | Total |
Primary Geographical Markets: | | | | | | | |
United States | $ | 1,194,067 | | | $ | 863,514 | | | $ | 470,583 | | | $ | 2,528,164 | |
Europe | 276,848 | | | 237,599 | | | 261,458 | | | 775,905 | |
Canada | 74,708 | | | 64,322 | | | — | | | 139,030 | |
Asia | 53,993 | | | 170,046 | | | 535 | | | 224,574 | |
Other | 60,327 | | | 112,405 | | | 20,690 | | | 193,422 | |
Total | $ | 1,659,943 | | | $ | 1,447,886 | | | $ | 753,266 | | | $ | 3,861,095 | |
| | | | | | | |
Note 13:15: Segment Reporting
The Company reportschanged its financial resultsoperating and reporting structure in fourJanuary 2021 and, as a result, realigned certain of its reportable segments:segments effective January 1, 2021. The revised structure consists of 2 reportable segments, Consumer Packaging and Industrial Paper Packaging, with all remaining businesses reported as "All Other."
The Company's former Protective Solutions and Display and Packaging Papersegments have been eliminated and Industrial Converted Products,the underlying businesses and Protective Solutions.their results have been realigned into All Other or, in certain cases, subsumed into the remaining two segments.
The Consumer Packaging segment primarily serves prepared and fresh food markets along with other packaging for direct consumer products and includes the following products and services: round and shaped rigid containers and trays (both composite and thermoformed plastic); extruded and injection-molded plastic products; printed flexible packaging; global brand artwork management; andpaper containers; metal and peelable membrane ends and closures. This segment also included blow-moldedclosures; thermoformed plastic bottlestrays and jars through November 7, 2016, when the Company completed the sale of its rigid plastics blow molding operations.containers; printed flexible packaging; and global brand artwork management.
The Display andIndustrial Paper Packaging segment, includes the following products and services: point-of-purchase displays; supply chain management services; retail packaging, including printed backer cards, thermoformed blisters and heat sealing equipment; and paperboard specialties, such as coasters and glass covers.
Thepreviously called Paper and Industrial Converted Products, segment includes the following products: paperboardfiber-based tubes, cones, and cores; fiber-based construction tubestubes; fiber-based protective packaging and forms;components; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, linerboard, corrugating medium, recovered paper and material recycling services.
The Protective Solutions segment includesBusinesses grouped as All Other include healthcare, protective and retail security packaging and industrial plastic products. These businesses include the following products:products and services: thermoformed rigid plastic trays and devices; custom-engineered paperboard-based and expandedmolded foam protective packaging and components; temperature-assured packaging; injection molded and temperature-assured packaging.extruded containers, spools and parts; retail security packaging, including printed backer cards, thermoformed blisters and heat sealing equipment; and paper amenities. Prior to the divestiture of the Company's global display and packaging business in two separate transactions, the European contract packaging business on November 30, 2020 and the U.S. display and packaging business on April 4, 2021, these businesses, which included point-of-purchase displays, fulfillment operations, and contract packaging, were reported in All Other.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The following table sets forth net sales, intersegment sales and operating profit for the Company’s reportable segments.segments and All Other. “Segment operating profit” is defined as the segment’s portion of “Income before interest and income taxes”“Operating profit” excluding restructuring charges,and asset impairment charges, acquisition-related costs, pension settlement charges,acquisition expenses, interest income and expense, income taxes or certain other items, if any, the exclusion of which the Company believes improves comparability and analysis of the financial performance of the business. General corporate expenses have been allocated as operating costs to each of the Company’s reportable segments. "Other, net" for the three-segments and nine-months ended October 1, 2017 includes pension settlement charges of $476 and $31,550, respectively. See note 11 for additional information.All Other. Prior period results have been recast to conform to current-year presentation.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
SEGMENT FINANCIAL INFORMATION
|
| | | | | | | | | | | | | | | | |
|
| Three Months Ended |
| Nine Months Ended |
|
| October 1, 2017 |
| October 2, 2016 |
| October 1, 2017 |
| October 2, 2016 |
Net sales: |
|
|
|
|
|
|
|
|
Consumer Packaging |
| $ | 565,788 |
|
| $ | 519,729 |
|
| $ | 1,569,231 |
|
| $ | 1,558,074 |
|
Display and Packaging |
| 135,560 |
|
| 132,016 |
|
| 365,807 |
|
| 407,157 |
|
Paper and Industrial Converted Products |
| 483,376 |
|
| 424,615 |
|
| 1,395,075 |
|
| 1,281,031 |
|
Protective Solutions |
| 139,910 |
|
| 132,364 |
|
| 407,519 |
|
| 394,418 |
|
Consolidated |
| $ | 1,324,634 |
|
| $ | 1,208,724 |
|
| $ | 3,737,632 |
|
| $ | 3,640,680 |
|
Intersegment sales: |
|
|
|
|
|
|
|
|
Consumer Packaging |
| $ | 2,173 |
|
| $ | 1,357 |
|
| $ | 4,749 |
|
| $ | 4,285 |
|
Display and Packaging |
| 679 |
|
| 683 |
|
| 2,253 |
|
| 1,806 |
|
Paper and Industrial Converted Products |
| 38,791 |
|
| 25,241 |
|
| 103,844 |
|
| 75,158 |
|
Protective Solutions |
| 518 |
|
| 257 |
|
| 1,436 |
|
| 1,129 |
|
Consolidated |
| $ | 42,161 |
|
| $ | 27,538 |
|
| $ | 112,282 |
|
| $ | 82,378 |
|
Income/(loss) before interest and income taxes: |
|
|
|
|
|
|
|
|
Segment operating profit: |
|
|
|
|
|
|
|
|
Consumer Packaging |
| $ | 67,869 |
|
| $ | 63,761 |
|
| $ | 184,942 |
|
| $ | 186,135 |
|
Display and Packaging |
| 1,965 |
|
| 5,153 |
|
| 6,592 |
|
| 13,464 |
|
Paper and Industrial Converted Products |
| 42,154 |
|
| 33,239 |
|
| 110,390 |
|
| 104,018 |
|
Protective Solutions |
| 11,272 |
|
| 12,580 |
|
| 33,085 |
|
| 38,826 |
|
Restructuring/Asset impairment charges |
| (511 | ) | | (8,947 | ) | | (12,519 | ) | | (41,453 | ) |
Other, net |
| (2,667 | ) | | (943 | ) | | (41,665 | ) | | (2,191 | ) |
Consolidated |
| $ | 120,082 |
|
| $ | 104,843 |
|
| $ | 280,825 |
|
| $ | 298,799 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | October 3, 2021 | | September 27, 2020 | | October 3, 2021 | | September 27, 2020 |
Net sales: | | | | | | | | |
Consumer Packaging | | $ | 598,969 | | | $ | 546,208 | | | $ | 1,779,525 | | | $ | 1,659,943 | |
Industrial Paper Packaging | | 635,230 | | | 490,369 | | | 1,809,159 | | | 1,447,886 | |
All Other | | 180,994 | | | 275,737 | | | 562,567 | | | 753,266 | |
Consolidated | | $ | 1,415,193 | | | $ | 1,312,314 | | | $ | 4,151,251 | | | $ | 3,861,095 | |
Intersegment sales: | | | | | | | | |
Consumer Packaging | | $ | 1,608 | | | $ | 919 | | | $ | 4,460 | | | $ | 3,179 | |
Industrial Paper Packaging | | 27,975 | | | 24,528 | | | 82,571 | | | 73,538 | |
All Other | | 2,318 | | | 1,814 | | | 7,483 | | | 5,970 | |
Consolidated | | $ | 31,901 | | | $ | 27,261 | | | $ | 94,514 | | | $ | 82,687 | |
Operating profit: | | | | | | | | |
Segment operating profit: | | | | | | | | |
Consumer Packaging | | $ | 60,918 | | | $ | 64,370 | | | $ | 196,341 | | | $ | 212,575 | |
Industrial Paper Packaging | | 53,343 | | | 41,035 | | | 161,414 | | | 133,871 | |
All Other | | 8,169 | | | 25,136 | | | 32,952 | | | 54,563 | |
Restructuring/Asset impairment charges | | (3,488) | | | (24,149) | | | (8,889) | | | (59,633) | |
Other non-base income/(charges), net | | 7,570 | | | 352 | | | 294 | | | (802) | |
Consolidated | | $ | 126,512 | | | $ | 106,744 | | | $ | 382,112 | | | $ | 340,574 | |
Note 14:16: Commitments and Contingencies
Pursuant to U.S. GAAP, accruals for estimated losses are recorded at the time information becomes available indicating that losses are probable and that the amounts are reasonably estimable. As is the case with other companies in similar industries, the Company faces exposure from actual or potential claims and legal proceedings from a variety of sources. Some of these exposures, as discussed below, have the potential to be material.
Environmental Matters
The Company is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which it operates.
Fox River
In January 2017, U.S. Paper Mills Corp. (U.S. Mills), a wholly owned subsidiary of the Company, obtained Court approval of a final settlement of cost recovery claims made by Appvion, Inc. for $3,334. The settlement was paid during the first quarter of 2017, and related legal and professional fees totaling $369 were paid during the first and second quarters of 2017. As a result of the settlement becoming final, the Company and U.S. Mills have resolved all pending or threatened legal proceedings related to the Fox River matter, as well as any such proceedings known to be contemplated by government authorities.
Spartanburg
In connection with its acquisition of Tegrant in November 2011, the Company identified potential environmental contamination at a site in Spartanburg, South Carolina. The total remediation cost of the Spartanburg site was estimated to be $17,400$17,400 at the time of acquisition and an accrual in this amount was recorded on Tegrant’s opening balance sheet. SinceBased on favorable developments at the acquisition,site, the Company has spent a totalreduced its environmental reserve by $10,000 in the third quarter of $851 on remediation of the Spartanburg site. During previous years, the Company has increased its reserves for this site by a total of $1172019 in order to reflect its revised best estimate of what it is likely to pay in order to complete the remediation. Since the acquisition, the Company has spent a total of $1,786 on remediation of the Spartanburg site. At October 1, 20173, 2021 and December 31, 2016,2020, the Company's accrual for environmental contingencies related to the Spartanburg site totaled $16,666$5,614 and $16,821,$5,700, respectively.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The Company cannot currently estimate its potential liability, damages or range of potential loss, if any, beyond the amounts accrued with respect to this exposure. However, the Company does not believe that the resolution of this matter has a reasonable possibility of having a material adverse effect on the Company's financial statements.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Other environmental matters
The Company has been named as a potentially responsible party at several other environmentally contaminated sites. All of the sites are also the responsibility of other parties. The potential remediation liabilities are shared with such other parties, and, in most cases, the Company’s share, if any, cannot be reasonably estimated at the current time. However, the Company does not believe that the resolution of these matters has a reasonable possibility of having a material adverse effect on the Company's financial statements. At October 3, 2021 and December 31, 2020, the Company's accrual for these other sites totaled $1,829 and $2,433, respectively.
Summary
As of October 1, 20173, 2021 and December 31, 2016,2020, the Company (and its subsidiaries) had accrued $20,539$7,443 and $24,515,$8,133, respectively, related to environmental contingencies. These accruals are included in “Accrued expenses and other” on the Company’s Condensed Consolidated Balance Sheets.
Other Legal Matters
In addition to those matters described above, the Company is subject to other various legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters could differ from management’s expectations, the Company does not believe the resolution of these matters has a reasonable possibility of having a material adverse effect on the Company’s financial statements.
Report of Independent Registered Public Accounting Firm
To the ShareholdersBoard of Directors and DirectorsShareholders of Sonoco Products Company:Company,
Results of Review of Interim Financial Statements
We have reviewed the accompanying condensed consolidated balance sheet of Sonoco Products Company and its subsidiaries (the “Company”) as of October 1, 2017,3, 2021, and the related condensed consolidated statements of income, and comprehensive income, and changes in total equity for the three-month and nine-month periods ended October 1, 20173, 2021 and October 2, 2016September 27, 2020, and the condensed consolidated statementstatements of cash flows for the nine-month periods ended October 1, 20173, 2021 and October 2, 2016. TheseSeptember 27, 2020, including the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements arefor them to be in conformity with accounting principles generally accepted in the responsibilityUnited States of the Company’s management.America.
We conducted our reviewhave previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the consolidated balance sheet of the Company as of December 31, 2020, and the related consolidated statements of income, comprehensive income, changes in total equity and of cash flows for the year then ended (not presented herein), and in our report dated February 26, 2021, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States),PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of income, of comprehensive income, of changes in total equity and of cash flows for the year then ended (not presented herein), and in our report dated March 1, 2017, which included a paragraph describing a change in the manner of accounting for Debt Issuance Costs in the 2016 financial statements, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
October 31, 2017November 2, 2021
|
| | | | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Statements included in this Quarterly Report on Form 10-Q that are not historical in nature, are intended to be, and are hereby identified as “forward-looking statements” for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended. In addition, the Company and its representatives may from time to time make other oral or written statements that are also “forward-looking statements.” Words such as “estimate,” “project,” “intend,” “expect,” “believe,” “consider,” “plan,” “strategy,” “opportunity,” “commitment,” "committed," “target,” “anticipate,” “objective,” “goal,” “guidance,” “outlook,” “forecast,” “future,” “re-envision,” “assume,” “will,” “would,” “can," “could,” “may,” “might,” “aspires,” “potential,” or the negative thereof, and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding:
•availability and supply of raw materials, and offsetting high raw material costs, including the impact of potential changes in tariffs;
•potential impacts of the COVID-19 Coronavirus on business, operations and financial condition;
•improved productivity and cost containment;
•improving margins and leveraging strong cash flow and financial position;
•effects of acquisitions and dispositions;divestitures;
•realization of synergies resulting from acquisitions;
•costs, timing and effects of restructuring activities;
•adequacy and anticipated amounts and uses of cash flows;
•expected amounts of capital spending;
•refinancing and repayment of debt;
•financial and business strategies and the results expected of them;
•financial results for future periods;
•producing improvements in earnings;
•profitable sales growth and rates of growth;
•consumer and customer actions in connection with the COVID-19 pandemic;
•market leadership;
•research and development spending;
•expected impact and costs of resolution of legal proceedings;
•extent of, and adequacy of provisions for, environmental liabilities;
•commitments to reduce greenhouse gas emissions;
•sustainability commitments;
•adequacy of income tax provisions, realization of deferred tax assets, outcomes of uncertain tax issues and tax rates;
•goodwill impairment charges and fair values of reporting units;
•future asset impairment charges and fair values of assets;
•anticipated contributions to pension and postretirement benefit plans, fair values of plan assets, long-term rates of return on plan assets, and projected benefit obligations and payments;
•expected impact of implementation of new accounting pronouncements;
•creation of long-term value and returns for shareholders;
•continued payment of dividends; and
•planned stock repurchases.
Such forward-looking statements are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management. Such information includes, without limitation, discussions as to guidance and other estimates, perceived opportunities, expectations, beliefs, plans, strategies, goals and objectives concerning our future financial and operating performance. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed or forecasted in such forward-looking statements. The risks, uncertainties and assumptions include, without limitation:
•availability and pricing of raw materials, energy and transportation, including the impact of potential changes in tariffs and escalating trade wars, 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 Coronavirus global 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 of 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;
SONOCO PRODUCTS COMPANY
•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;
continued strength of our paperboard-based tubes and cores and composite can operations;
•ability to manage the mix of business to take advantage of growing markets while reducing cyclical effects of some of the Company'sCompany’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, and successfully integrate newly acquired businesses into the Company'sCompany’s operations;
•the costs, timing and results of restructuring activities;
•availability of credit to us, our customers and suppliers in needed amounts and on reasonable terms;
•effects of our indebtedness on our cash flow and business activities;
•fluctuations in interest rates and our borrowing costs;
•fluctuations in obligations and earnings of pension and postretirement benefit plans;
•accuracy of assumptions underlying projections of benefit plan obligations and payments, valuation of plan assets, and projections of long-term rates of return;
•timing of funding pension and postretirement benefit plan obligations;
•cost of employee and retiree medical, health and life insurance benefits;
•resolution of income tax contingencies;
•foreign currency exchange rate fluctuations, interest rate and commodity price risk and the effectiveness of related hedges;
•changes in U.S. and foreign tariffs, tax rates, and 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'smanagement’s assessment of goodwill impairment;
•accuracy of assumptions underlying fair value measurements, accuracy of management'smanagement’s assessments of fair value and fluctuations in fair value;
•ability to maintain effective internal controls over financial reporting;
•liability for and anticipated costs of resolution of 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;
•failures of third party transportation providers to deliver our products to our customers or to deliver raw materials to us;
•substantially lower than normal crop yields;
•loss of consumer or investor confidence;
•ability to protect our intellectual property rights;
•changes in laws and regulations relating to packaging for food products and foods packaged therein, other actions and public concerns about products packaged in our containers, or chemicals or substances used in raw materials or in the manufacturing process;
•changing consumer attitudes toward plastic packaging;
•ability to meet sustainability targets and challenges in implementation;
•changing climate, climate change regulations and greenhouse gas effects;
•ability to meet commitments to reduce greenhouse gas emissions;
•actions of domestic or foreign government agencies and changes in laws and regulations affecting the Company;Company and increased costs of compliance;
•international, national and local economic and market conditions and levels of unemployment; and
•economic disruptions resulting from terrorist activities and natural disasters.disasters; and
•accelerating inflation.
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 - "Risk1A-"Risk Factors" and throughout other sections of that report and in other reports filed with the Securities and Exchange Commission. In light of these various risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.
The Company undertakes no obligation to publicly update or revise forward-looking statements, whether as a result of new information, future events or otherwise. You are, however, advised to review any further disclosures we make on related subjects, and about new or additional risks, uncertainties and assumptions, in our future filings with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K.
COMPANY OVERVIEW
Sonoco is a leading provider of consumer packaging, industrial products, protective packaging and packaging supply chain services, with approximately 324over 300 locations in 3334 countries.
As previously disclosed, Sonoco changed its operating and reporting structure in January 2021 and, as a result, realigned certain of its reportable segments effective January 1, 2021. The revised structure consists of two reportable segments, Consumer Packaging and Industrial Paper Packaging, with all remaining businesses reported as "All Other." The Company's former Protective Solutions and Display and Packaging segments have been eliminated and the underlying businesses and their results have been grouped into All Other or, in certain cases, subsumed into the remaining two segments. Changes to the Consumer Packaging segment include moving the Plastics - Healthcare packaging and industrial plastics business units to All Other. The Industrial Paper Packaging segment, previously called Paper and Industrial Converted Products, remains unchanged except that it now includes the Company's fiber protective packaging business unit which was previously included in the Protective Solutions segment. All Other includes our healthcare and protective packaging businesses, including Plastics - Healthcare, Sonoco ThermoSafe, consumer and automotive molded foam, retail security packaging, and paper amenities. Prior to the divestiture of the Company's global display and packaging operations in two separate transactions, the European contract packaging business on November 30, 2020 and the U.S. display and packaging business on April 4, 2021, these businesses were also included in All Other.
Sonoco competes in multiple product categories, with its operations organized and reported in four segments: Consumer Packaging, Display and Packaging, Paper and Industrial Converted Products, and Protective Solutions. Thethe majority of the Company’s revenues arearising 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 paperboard, primarily fromuncoated recycled materials,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.
Impact on Operating Results
Around the world, Sonoco is an essential provider of consumer, industrial and medical packaging. Sonoco associates are deemed “Essential Critical Infrastructure Workers” under the guidance of the U.S. Department of Homeland Security and have received similar designations by the vast majority of other governmental agencies in the 34 countries where the Company operates. Many areas around the world have largely reopened their economies and the Company has seen improved demand for many of its products and services. However, a resurgence of the virus could trigger the re-imposition of restrictions on business activity and/or have a negative effect on consumer behavior that alone, or together, could significantly hamper economic activity. Should this occur, management expects it will respond with appropriate changes to active production capacity and cost-management initiatives. An extended period of disruption to our served markets or global supply chains could materially and adversely affect our results of operations, access to sources of liquidity and overall financial condition. In addition, an extended global recession caused by a resurgence of the pandemic would have an adverse impact on the Company's operations and financial condition.
As previously reported, beginning in the first quarter of 2020 and through the course of the COVID-19 pandemic to date, the pandemic's impact on the Company's businesses has been mixed. Generally speaking, our consumer-related businesses benefited from higher demand for food packaging as large numbers of consumers chose to eat at home, while our industrial related businesses suffered from the pandemic-induced recession and a slow and halting recovery in many of its markets.
Overall sales run rates are expected to be flat or somewhat higher in the fourth quarter of 2021 compared to the third quarter of 2021. While operating profits are expected to continue to face challenges from raw material and non-material inflation and supply chain disruptions, overall the Company expects to benefit from improved price/cost in the fourth quarter. Although demand in the Consumer Packaging segment has declined from levels seen earlier in the pandemic, the Company expects the segment to continue benefiting in the fourth quarter of 2021 from elevated at-home eating trends driven by robust snacking, remote working, and consumers, particularly younger consumers, adopting new cooking habits. Demand for our global Industrial Paper Packaging products has recovered to pre-pandemic levels in most of our global markets and we have opportunities for new product growth, such as our fiber protective post business which is expanding into Poland, Turkey and Mexico. While several of our All Other businesses have been negatively impacted by supply chain interruptions, the Company expects these conditions to improve in the fourth quarter.
Financial Flexibility and Liquidity
Sonoco has a strong, investment-grade balance sheet and substantial liquidity available in the form of cash, cash equivalents and revolving credit facilities, as well as the ability to issue commercial paper and to access liquidity in the banking and debt capital markets.
Significant actions in the first nine months of 2021 affecting the Company's liquidity position included:
•On April 5, 2021, the Company received cash proceeds totaling $79.7 million from the sale of its U.S. display and packaging business.
•On May 10, 2021, the Company paid $150 million in connection with an accelerated share repurchase agreement to repurchase shares of its common stock.
•On May 25, 2021, the Company repurchased $63.2 million of its outstanding 5.75% notes, due November 2040, for a total cash cost of $82.0 million.
•On May 25, 2021, upon maturity, the Company paid $177.8 million to retire its 1% Euro loan.
•On June 30, 2021, the Company entered into a new five-year $750 million, unsecured revolving credit facility which replaced an existing $500 million facility. Consistent with prior facilities, the new revolving credit facility supports the Company's $500 million commercial paper program.
•On August 1, 2021, the Company repaid its $250 million, 4.375% debentures without penalty ahead of their November 2021 maturity.
Following these actions, at October 3, 2021, the Company had $160 million in cash on hand and committed capacity of $750 million under its revolving credit facility, of which $548 million was available for draw down net of $202 million of outstanding commercial paper balances. Scheduled debt maturities over the next twelve months total approximately $276 million, including outstanding commercial paper. The Company believes cash on hand and available credit, combined with expected net cash flows generated from operating and investing activities, will provide ample liquidity to cover these and other cash flow needs of the Company over the course of the next twelve months.
Health, Safety and Business Continuity
The health and safety of Sonoco’s associates, contractors, suppliers and the general public continue to be a top priority. Safety measures include mask requirements for non-vaccinated employees and all visitors, routinely cleaning high-touch surfaces, following social distancing protocols, prohibiting all non-critical business travel, and utilizing remote working arrangements where practical. In addition, Sonoco has proactively engaged local government health agencies and medical providers to provide access to COVID-19 vaccine opportunities when available under local regulations. Sonoco routinely provides emails and leadership communications to keep its associates up to date on Company and health authority information, guidelines, protocols and policies, including those set by the World Health Organization and the U.S. Centers for Disease Control and Prevention.
Our Global Task Force that was activated at the beginning of the pandemic continues to meet to monitor and adjust business continuity plans to ensure our operations are as prepared as possible to be able to continue producing and shipping products to our customers without disruption. Sonoco has a diverse global supply chain and to date has been able to overcome raw material or other supply disruptions as a result of the COVID-19 pandemic.
Third Quarter 20172021 Compared with Third Quarter 20162020
RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES
Measures calculated and presented in accordance with generally accepted accounting principles are referred to as GAAP financial measures. The following tables reconcile the Company’s non-GAAP financial measures to their most directly comparable GAAP financial measures in the Company’s Condensed Consolidated Statements of Income for each of the periods presented. These non-GAAP financial measures (referred to as “Base”) are the GAAP measures adjusted to exclude amounts (dependent upon the applicable period), including the associated tax effects, relating to restructuring charges,initiatives, asset impairment charges, non-operating pension costs/income, environmental reserve charges/releases, acquisition charges, specifically identified tax adjustments, pension settlement chargesand divestiture-related transaction costs, gains/losses from the divestiture of businesses, excess property
insurance recoveries, and certain other items, if any, including other income tax-related adjustments and/or events, the exclusion of which the Company believes improves the comparability and analysis of the underlying financial performance of the business. More information about the Company's use of Non-GAAPnon-GAAP financial measures is provided in the Company's Annual Report on Form 10-K for the year ended December 31, 20162020 under Item 7 - "Management's discussion and analysis of financial condition and results of operations," under the heading "Use of non-GAAP financial measures."
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended October 3, 2021 | |
Dollars in thousands, except per share data | | GAAP | | Restructuring/Asset Impairments(1) | | Other Adjustments(1) | | Base | |
Operating profit | | $ | 126,512 | | | $ | 3,488 | | | $ | (7,570) | | | $ | 122,430 | | |
Non-operating pension costs | | 525 | | | — | | | (525) | | | — | | |
Interest expense, net | | 14,219 | | | — | | | — | | | 14,219 | | |
| | | | | | | | | |
Income before income taxes | | $ | 111,768 | | | $ | 3,488 | | | $ | (7,045) | | | $ | 108,211 | | |
Provision for income taxes | | 2,564 | | | 312 | | | 16,683 | | | 19,559 | | |
Income before equity in earnings of affiliates | | $ | 109,204 | | | $ | 3,176 | | | $ | (23,728) | | | $ | 88,652 | | |
Equity in earnings of affiliates, net of tax | | 2,351 | | | — | | | — | | | 2,351 | | |
Net income | | $ | 111,555 | | | $ | 3,176 | | | $ | (23,728) | | | $ | 91,003 | | |
Net loss attributable to noncontrolling interests | | (415) | | | — | | | — | | | (415) | | |
Net income attributable to Sonoco | | $ | 111,140 | | | $ | 3,176 | | | $ | (23,728) | | | $ | 90,588 | | |
| | | | | | | | | |
Per diluted common share* | | $ | 1.12 | | | $ | 0.03 | | | $ | (0.24) | | | $ | 0.91 | | |
*Due to rounding individual items may not sum across | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | For the three months ended October 1, 2017 |
Dollars in thousands, except per share data | | GAAP | | Restructuring/ Asset Impairment | | Other Adjustments(1) | | Base |
Income before interest and income taxes | | $ | 120,082 |
| | $ | 511 |
| | $ | 2,667 |
| | $ | 123,260 |
|
Interest expense, net | | 13,647 |
| | — |
| | — |
| | 13,647 |
|
Income before income taxes | | 106,435 |
| | 511 |
| | 2,667 |
| | 109,613 |
|
Provision for income taxes | | 35,545 |
| | 445 |
| | (1,080 | ) | | 34,910 |
|
Income before equity in earnings of affiliates | | 70,890 |
| | 66 |
| | 3,747 |
| | 74,703 |
|
Equity in earnings of affiliates, net of tax | | 2,521 |
| | — |
| | — |
| | 2,521 |
|
Net income | | 73,411 |
| | 66 |
| | 3,747 |
| | 77,224 |
|
Net (income) attributable to noncontrolling interests | | (599 | ) | | (21 | ) | | — |
| | (620 | ) |
Net income attributable to Sonoco | | $ | 72,812 |
| | $ | 45 |
| | $ | 3,747 |
| | $ | 76,604 |
|
Per diluted common share* | | $ | 0.72 |
| | $ | — |
| | $ | 0.04 |
| | $ | 0.76 |
|
*Due to rounding individual items may not sum across | | | | | | |
(1)Consists primarily(1 ) See table in "Results of costsOperations - Overview" below for details related to acquisitions and potential acquisitions. Additionally, these amounts include the effectafter-tax impact of state tax rate changes on deferred taxes as well as reservesmajor components
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 27, 2020 |
Dollars in thousands, except per share data | | GAAP | | Restructuring/Asset Impairments(1) | | Other Adjustments(1) | | Base |
Operating profit | | $ | 106,744 | | | $ | 24,149 | | | $ | (352) | | | $ | 130,541 | |
Non-operating pension costs | | 7,453 | | | — | | | (7,453) | | | — | |
Interest expense, net | | 18,581 | | | — | | | — | | | 18,581 | |
Income before income taxes | | $ | 80,710 | | | $ | 24,149 | | | $ | 7,101 | | | $ | 111,960 | |
Provision for income taxes | | (649) | | | 5,668 | | | 21,990 | | | 27,009 | |
Income before equity in earnings of affiliates | | $ | 81,359 | | | $ | 18,481 | | | $ | (14,889) | | | $ | 84,951 | |
Equity in earnings of affiliates, net of tax | | 1,939 | | | — | | | — | | | 1,939 | |
Net income | | $ | 83,298 | | | $ | 18,481 | | | $ | (14,889) | | | $ | 86,890 | |
Net loss attributable to noncontrolling interests | | 151 | | | (9) | | | — | | | 142 | |
Net income attributable to Sonoco | | $ | 83,449 | | | $ | 18,472 | | | $ | (14,889) | | | $ | 87,032 | |
Per diluted common share* | | $ | 0.82 | | | $ | 0.18 | | | $ | (0.15) | | | $ | 0.86 | |
*Due to rounding individual items may not sum across | | | | | | | | |
(1) See table in "Results of Operations - Overview" below for uncertain tax positions totaling a net lossdetails related to the after-tax impact of $2,362.major components
|
| | | | | | | | | | | | | | | | |
| | For the three months ended October 2, 2016 |
Dollars in thousands, except per share data | | GAAP | | Restructuring/ Asset Impairment | | Other Adjustments(1) | | Base |
Income before interest and income taxes | | $ | 104,843 |
| | $ | 8,947 |
| | $ | 943 |
| | $ | 114,733 |
|
Interest expense, net | | 12,437 |
| | — |
| | — |
| | 12,437 |
|
Income before income taxes | | 92,406 |
| | 8,947 |
| | 943 |
| | 102,296 |
|
Provision for income taxes | | 29,618 |
| | 2,097 |
| | (357 | ) | | 31,358 |
|
Income before equity in earnings of affiliates | | 62,788 |
| | 6,850 |
| | 1,300 |
| | 70,938 |
|
Equity in earnings of affiliates, net of tax | | 3,190 |
| | — |
| | — |
| | 3,190 |
|
Net income | | 65,978 |
| | 6,850 |
| | 1,300 |
| | 74,128 |
|
Net (income) attributable to noncontrolling interests | | (583 | ) | | (34 | ) | | — |
| | (617 | ) |
Net income attributable to Sonoco | | $ | 65,395 |
| | $ | 6,816 |
| | $ | 1,300 |
| | $ | 73,511 |
|
Per diluted common share* | | $ | 0.64 |
| | $ | 0.07 |
| | $ | 0.01 |
| | $ | 0.72 |
|
*Due to rounding individual items may not sum across | | | | | | |
(1) Consists primarily of costs related to acquisitions, potential acquisitions, and a small income tax reserve adjustment.
RESULTS OF OPERATIONS
The following discussion provides a review of results for the three months ended October 1, 20173, 2021 versus the three months ended October 2, 2016.September 27, 2020.
OVERVIEW
Net sales for the third quarter of 20172021 increased 9.6%7.8 percent to $1,325$1,415 million, compared with $1,209$1,312 million in the same period last year. The increase in sales was the result ofThis improvement reflects increases from volume/mix as well as higher selling prices, mostly implemented to offset inflation, a favorable year-over-year impact from foreign exchange, and additional sales from the effect on salesAugust 2020 acquisition of acquisitions, netCan Packaging. These positive factors were partially offset by the April 4, 2021 and November 30, 2020 divestitures of dispositions,the Company's U.S. display and the positive impact of foreign exchange. Sales price increases primarily reflect higher raw material costs which the Company was able to pass through to customers.packaging and European contract packaging businesses, respectively.
Net income attributable to Sonoco for the third quarter of 20172021 increased 11.3% to $72.8$111.1 million, $0.72or $1.12 per diluted share, compared to $65.4$83.4 million, $0.64or $0.82 per diluted share, reported for the same period of 2016. Current2020. Net income in the current quarter includes net income includes after-tax, non-base chargesincome totaling $3.8 million. These charges consist mostly of acquisition and acquisition-related charges as well as non-base tax charges related to tax rate changes and reserve adjustments. Results$20.6 million, while results for the third quarter of 2016 include2020 included net after-tax, restructuring and asset impairmentnon-base charges totaling $3.6 million. These non-base items consisted of $6.8 million and after-tax acquisition and non-base tax charges of $1.3 million. the following:
| | | | | | | | |
| Three Months Ended |
($ in millions) | October 3, 2021 | September 27, 2020 |
Net recognized benefit on 2017 amended U.S. income tax return | $ | (30.0) | | $ | — | |
Tax impact of sale of European contract packaging business | — | | (20.4) | |
Other non-base tax charges | 12.1 | | — | |
Non-operating pension costs | 0.3 | | 6.4 | |
Gain on sale of previously closed facilities | (2.2) | | — | |
| | |
All other net restructuring and asset impairment charges | 5.4 | | 18.5 | |
All other net gains, including acquisition and divestiture-related costs | (6.2) | | (0.9) | |
| | |
Total non-base (income)/charges, after tax | $ | (20.6) | | $ | 3.6 | |
Adjusted for these items, third-quarter baseBase net income attributable to Sonoco (base(Base earnings) for the third quarter of 2021 increased 4.2%4.1 percent to $76.6$90.6 million, $0.76or $0.91 per diluted share, from $73.5$87.0 million, $0.72or $0.86 per diluted share, in 2016.
The higher2020. This overall increase reflects a decrease in Base operating profit which was more than offset by a decrease in Base net interest expense, and a lower Base effective tax rate. Despite the 7.8 percent increase in net sales, third-quarter 2017 earnings were largely theBase operating profit was down 6.2 percent from last year's third quarter as a result of a positivenegative price/cost impact, particularly inrelationship and the Company's Paper and Industrial Converted Products segment, as third quarter selling prices to manydivestitures of the segment's customersCompany's U.S. display and packaging and European contract packaging businesses, net of earnings added from the acquisition of Can Packaging in August 2020. These net negative impacts were reset duringsomewhat offset by solid productivity gains and volume/mix improvements. The Base effective tax rate for the secondcurrent year’s quarter of 2017 when old corrugated containers (OCC) prices were higherwas lower than what they subsequently averaged during the third quarter of 2017. Strong manufacturing productivity in the Company's Consumer Packaging segment and lower restructuring and asset impairment charges also contributedprior year's due primarily to the overall increase in earnings overrelease of reserves for uncertain tax positions upon the previous year's third quarter. These positive factors were slightly offset by higher wageexpiration of the statute of limitations and other inflation.an increased benefit from tax credits.
OPERATING REVENUE
Net sales for the third quarter of 20172021 increased $116$103 million, or 7.8 percent, from the prior-year quarter.
The components of the sales change were: | | | | | |
| ($ in millions) |
Volume/mix | $ | 43 | |
Selling prices | $ | 161 | |
Acquisitions and divestitures, net | $ | (111) | |
Foreign currency translation and other, net | $ | 9 | |
| |
Total sales increase | $ | 103 | |
| |
|
| | | |
| ($ in millions) |
Volume/mix | $ | (1 | ) |
Selling prices | 58 |
|
Acquisitions and Divestitures | 38 |
|
Foreign currency translation and other, net | 21 |
|
| |
Total sales increase | $ | 116 |
|
| |
SONOCO PRODUCTS COMPANY
COSTS AND EXPENSES
The Company's gross profit margin percentage declined to 18.9% this quarter compared to 19.5% in the prior-year quarter. The 60 basis point decline in gross profit margin was largely attributable to the effect on margin percentages from passing through higher material prices and other operating costs. The translation impact of a weaker dollar increased reported costCost of goods sold by approximately $13increased $102.2 million, compared toor 9.7 percent, in the third quarter of 2016. These negative impacts to2021 compared with the same period last year. The increase was driven primarily by material inflation and higher volumes which were partially offset by divestitures, net of acquisitions. Gross profit was $257.7 million for the three months ended October 3, 2021, which was $0.7 million higher than the prior-year period. However, gross profit margin percentageas a percent of sales decreased to 18.2 percent from 19.6 percent in the prior-year quarter as sales price increases were somewhat offset by manufacturingnot able to fully recover higher material and procurement productivity.other operating costs.
Selling,GAAP selling, general and administrative expenses ("SG&A") costs for the quarter increased $8.7$4.5 million, or 7.2%,3.5 percent, year over year, due primarilymitigated by a combination of mark-to-market gains on certain derivatives entered into to SG&A expenses incurred by the operations of acquired businesses, net of divested businesses, and wage inflation.
Third quarter restructuringmanage natural gas costs and assetlife insurance gains. Absent these gains, the increase in SG&A would have been approximately $10 million. This increase was largely driven by a higher, more-normal, level of management incentive expense compared to the prior year's quarter as well as increased spending on strategic information technology activities and general inflation.
In the third quarter of 2021, the Company finalized the working capital settlement related to the April 2021 sale of its U.S. display and packaging business. As a result of this settlement, together with the sale of a small plastics foods thermoforming operation, the Company recognized a total gain on divestiture of businesses in the third quarter of 2021 of $2.8 million. Additional information regarding divestitures is provided in Note 3 to the Company’s Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Restructuring/Asset impairment charges totaled $0.5$3.5 million for the third quarter of 2021 compared with $8.9$24.1 million in the same period last year. The year-over-year decrease was the result of lower restructuring activity in the current year as well as gains of $2.8 million related to the third quarter 2021 sale of buildings at previously closed facilities. Additional information regarding restructuring and asset impairment charges is provided in Note 5 to the Company’s Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
NetNon-operating pension costs were $6.9 million lower in the third quarter of 2021 compared to the same period last year due to the absence of related costs following the settlement of the liabilities of the Sonoco Pension Plan for Inactive Participants (the "Inactive Plan") in the second quarter of 2021. Additional information regarding non-operating pension costs is provided in Note 11 to the Company’s Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
GAAP net interest expense for the third quarter increasedof 2021 decreased to $13.6$14.2 million, compared with $12.4$18.6 million during the third quarter of 2016. 2020, due primarily to lower average debt balances quarter over quarter.
The increase2021 third-quarter effective tax rates on GAAP and Base earnings were 2.3 percent and 18.1 percent, respectively, compared with negative 0.8 percent and 24.1 percent, respectively, in the prior year’s quarter. The 2021 GAAP rate was primarilyunusually low largely due to higher average borrowingsa $30.0 million net recognized benefit associated with the amendment of the Company’s 2017 U.S. income tax return which resulted in an increased utilization of its foreign tax credits. In the current-year quarter stemming from acquisition financing.
Thesame period of 2020, the negative effective tax rate on GAAP and base earnings inwas due to a $20.4 million write-down of a deferred tax liability related to the thirdsale of the Company’s European contract packaging business. The Base tax rate for the current year’s quarter of 2017 was 33.4% and 31.8%, respectively, compared with 32.1% and 30.7%, respectively, for last year's quarter. The 2016 GAAP and base tax rates were both positively affected by favorable discrete tax adjustments, including a benefit fromlower due primarily to the release of reserves for uncertain tax positions whileupon the current-year rates reflectexpiration of the negative impactsstatute of lesslimitations and an increased benefit from the manufacturer’s deduction and a higher overall state tax rate. credits.
REPORTABLE SEGMENTS
The Company changed its operating and reporting structure in January 2021 and, as a result, realigned certain reportable segments effective January 1, 2021. The revised structure consists of two reportable segments, Consumer Packaging and Industrial Paper Packaging, with all remaining businesses reported as "All Other." Additional information regarding segment realignment is provided in Note 15 to the Company’s Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
The following table recaps net sales attributable to each of the Company’s segments for the third quarters of 20172021 and 20162020 ($ in thousands): | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | October 3, 2021 | | September 27, 2020 | | % Change |
Net sales: | | | | | | |
Consumer Packaging | | $ | 598,969 | | | $ | 546,208 | | | 9.7 | % |
Industrial Paper Packaging | | 635,230 | | | 490,369 | | | 29.5 | % |
All Other | | 180,994 | | | 275,737 | | | (34.4) | % |
Consolidated | | $ | 1,415,193 | | | $ | 1,312,314 | | | 7.8 | % |
|
| | | | | | | | | | | |
| | Three Months Ended |
| | October 1, 2017 | | October 2, 2016 | | % Change |
Net sales: | | | | | | |
Consumer Packaging | | $ | 565,788 |
| | $ | 519,729 |
| | 8.9 | % |
Display and Packaging | | 135,560 |
| | 132,016 |
| | 2.7 | % |
Paper and Industrial Converted Products | | 483,376 |
| | 424,615 |
| | 13.8 | % |
Protective Solutions | | 139,910 |
| | 132,364 |
| | 5.7 | % |
Consolidated | | $ | 1,324,634 |
| | $ | 1,208,724 |
| | 9.6 | % |
Consolidated operating profits, also referred to as “Income before interest and income taxes” on the Company’s Condensed Consolidated Statements of Income, are comprised of the following ($ in thousands):
|
| | | | | | | | | | | |
| | Three Months Ended |
| | October 1, 2017 | | October 2, 2016 | | % Change |
Income/(loss) before interest and income taxes: | | | | | | |
Segment operating profit: | | | | | | |
Consumer Packaging | | $ | 67,869 |
| | $ | 63,761 |
| | 6.4 | % |
Display and Packaging | | 1,965 |
| | 5,153 |
| | (61.9 | )% |
Paper and Industrial Converted Products | | 42,154 |
| | 33,239 |
| | 26.8 | % |
Protective Solutions | | 11,272 |
| | 12,580 |
| | (10.4 | )% |
Restructuring/Asset impairment charges | | (511 | ) | | (8,947 | ) | |
|
|
Other, net | | (2,667 | ) | | (943 | ) | |
|
|
Consolidated | | $ | 120,082 |
| | $ | 104,843 |
| | 14.5 | % |
The following table recaps restructuring/asset impairment chargesoperating profit attributable to each of the Company’s segments during the third quarters of 20172021 and 20162020 ($ in thousands): | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | October 3, 2021 | | September 27, 2020 | | % Change |
Operating profit: | | | | | | |
Segment operating profit: | | | | | | |
Consumer Packaging | | $ | 60,918 | | | $ | 64,370 | | | (5.4) | % |
Industrial Paper Packaging | | 53,343 | | | 41,035 | | | 30.0 | % |
All Other | | 8,169 | | | 25,136 | | | (67.5) | % |
Restructuring/Asset impairment charges | | (3,488) | | | (24,149) | | | |
Other non-base income, net | | 7,570 | | | 352 | | | |
Consolidated | | $ | 126,512 | | | $ | 106,744 | | | 18.5 | % |
|
| | | | | | | | |
| | Three Months Ended |
| | October 1, 2017 | | October 2, 2016 |
Restructuring/Asset impairment charges: | | | | |
Consumer Packaging | | $ | (1,111 | ) | | $ | 2,857 |
|
Display and Packaging | | (2 | ) | | 997 |
|
Paper and Industrial Converted Products | | 993 |
| | 4,976 |
|
Protective Solutions | | 621 |
| | 127 |
|
Corporate | | 10 |
| | (10 | ) |
Total | | $ | 511 |
| | $ | 8,947 |
|
Segment results viewed by Company management to evaluate segment performance do not include restructuring charges or income, asset impairment charges, acquisition-relatedacquisition and divestiture-related costs, environmental reserve charges interest expense, income taxes,or releases, or certain other items, if any, the exclusion of which the Company believes improves the comparability and analysis of the ongoing operating performance of the business. Accordingly, the term “segment operating profit” is a non-GAAP measure and is defined as the segment’s portion of “Income before interest and income taxes”“operating profit” excluding those items. All other general corporate expenses have been allocated as operating costs to each of the Company’s reportable segments.
The following table recaps restructuring/asset impairment (income)/charges attributable to each of the Company’s segments during the third quarter of 2021 and 2020 ($ in thousands): | | | | | | | | | | | | | | |
| | Three Months Ended |
| | October 3, 2021 | | September 27, 2020 |
Restructuring/Asset impairment (income)/charges: | | | | |
Consumer Packaging | | $ | 2,734 | | | $ | 16,498 | |
Industrial Paper Packaging | | (1,888) | | | 6,990 | |
All Other | | 555 | | | 762 | |
Corporate | | 2,087 | | | (101) | |
Consolidated | | $ | 3,488 | | | $ | 24,149 | |
Consumer Packaging
The ConsumerSonoco’s Consumer Packaging segment primarily serves prepared and fresh food markets along with other packaging for direct consumer products and includes the following products and services: round and shaped rigid containers and trays (both composite and thermoformed plastic); extruded and injection-molded plastic products; printed flexible packaging; global brand artwork management; andpaper containers; metal and peelable membrane ends and closures. This segment also included blow-moldedclosures; thermoformed plastic bottlestrays and jars through November 7, 2016, when the Company completed the sale of its rigid plastics blow molding operations.containers; printed flexible packaging; and global brand artwork management.
Segment sales increased 8.9% compared to the prior-year quarter due to acquisitions, net of divestitures, higher selling prices and the positive impact of foreign exchange which more than offset modestly lower volume/mix.47
Segment operating profit grew 6.4% compared to the prior-year quarter due to strong improvement in manufacturing productivity and a positive price/cost relationship. These positive factors were partially offset by lower volume in metal ends and composite cans in North America and flexible packaging.
Segment sales increased 9.7 percent compared to the prior year's quarter due to higher selling prices, mostly implemented to help offset inflation, sales added from the prior-year Can Packaging acquisition and a positive mix of business. Overall, segment volume/mix improved about 1 percent during the quarter as solid gains in flexible packaging sales were offset by modest declines in the segment's other businesses. Flexible packaging's volume/mix improvement was driven by strong snack food market sales as well as a rebound in confectionery markets. Global rigid paper container's volume/mix declined slightly in the third quarter as North American food packaging volumes continued to normalize to pre-pandemic levels. In the plastics - food business, increased volume/mix for containers in prepared foods was more than offset by declines in fresh food packaging.
DisplaySegment operating profit declined 5.4 percent compared to the prior year's quarter as a negative price/cost relationship stemming from both raw material and non-material inflation was only partially offset by strong productivity improvements. As a result, segment operating margin declined to 10.2 percent in the quarter from 11.8 percent in the 2020 period.
Assuming consumers continue to revert towards pre-COVID-19 eating habits and traveling patterns, the Company expects there will be a mixed impact on this segment over the next few quarters with lower demand for packaged food and household goods by stay-at-home consumers being partially offset by a year-over-year increase in convenience and travel-related product categories. Despite demand in certain categories continuing to run at higher than pre-pandemic levels, overall segment sales volume is expected to decline seasonally in the fourth quarter. In addition, higher resin and other costs are expected to drive continued price/cost pressure on operating profit.
Industrial Paper Packaging
The Display andIndustrial Paper Packaging segment includes the following products: fiber-based packaging tubes, cones, and cores; fiber-based construction tubes; fiber-based protective packaging and components; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, corrugating medium, recovered paper and material recycling services.
Segment sales increased 29.5 percent from the prior year's quarter largely due to higher selling prices implemented to offset raw material and non-material inflation, while volume/mix improved by approximately 5 percent. Global tube and core volume/mix increased by approximately 7 percent as demand returned to pre-pandemic levels. In addition, global paper volume/mix improved approximately 3 percent as both internal converting and trade markets saw increased demand over the prior-year period.
Segment operating profit increased 30.0 percent from the prior year's quarter, primarily driven by positive volume/mix and related productivity gains. Segment operating margin was unchanged at 8.4 percent.
Assuming elements of the economy hit particularly hard by the COVID-19 pandemic continue to recover, over the next few quarters the Company expects to see both sequential and year-over-year volume increases in many of our paper and industrial converted products markets. Overall, the businesses in this segment were able to recover escalating costs in the third quarter. While average recycled fiber prices are expected to be slightly higher in the fourth quarter than in the third quarter, the Company expects recycled fiber prices to trend down in the fourth quarter. Partly due to this trend, the segment is expected to be able to recover these and other costs through contractual pass-through arrangements or non-contract price adjustments. As a result, the Company expects the segment to benefit in the fourth quarter from a modestly positive price/cost relationship.
All Other
Businesses grouped as All Other include healthcare, protective and retail security packaging and industrial plastic products. These businesses include the following products and services: designing, manufacturing,
assembling, packingthermoformed rigid plastic trays and distributing temporary, semi-permanentdevices; custom-engineered molded foam protective packaging and permanent point-of-purchase displays; supply chain management services, including contract packing, fulfillmentcomponents; temperature-assured packaging; injection molded and scalable service centers;extruded containers, spools and parts; retail security packaging, including printed backer cards, thermoformed blisters and heat sealing equipment; and paper amenities, such as coastersamenities. Reported in All Other, the Company sold its global display and glass covers.packaging business in two separate transactions, the European contract packaging business on November 30, 2020 and the U.S. display and packaging business on April 4, 2021. These businesses comprised the Company's point-of-purchase displays, fulfillment, and contract packaging operations.
Sales for the quarter were up 2.7% compared to last year’s quarter due primarily to the positive impact of foreign exchange.
Segment operating profit decreased $3.2 million, or 61.9%,All Other declined 34.4 percent from the prior year's quarter due primarily to higher operating costs associated with the ramp up of operations at a new domestic retail packaging fulfillment center.
Paper and Industrial Converted Products
The Paper and Industrial Converted Products segment includes the following products: paperboard tubes and cores; fiber-based construction tubes and forms; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, linerboard, corrugating medium, recovered paper and material recycling services.
Reported segment sales increased approximately 13.8% for the quarter due to higher selling prices implemented to recover higher raw material costs, the positive impact of foreign exchange,the global display and improvedpackaging divestitures. Excluding the impact of the divestitures, volume/mix of business. The higher third-quarter selling prices were the result of contract pricing resets tied to the market price for OCCincreased sales by approximately 8 percent, driven by strong gains in industrial plastics and temperature-assured packaging, which was significantly higher this year compared to when prices were set for last year's third quarter.
Operating profit increased 26.8% due to a positive price/cost relationship, improved volume in international tubes and cores and global paper operations, and gains from manufacturing productivity. Resultsmore than offset lower demand in the Company's corrugating medium operations improved over the prior-year quarter due to higher selling pricesretail security and stronger demand. Although the Company's corrugating medium operation showed significant improvement quarter over quarter, it continues to under perform long-term expectations. This operation, which consists of only one machine, has been and continues to be under pressure due to market supply in North America exceeding demand. This has resulted in generally lower prices and reduced volume for our corrugating medium operation. Management is continuing to seek both near and long-term solutions including, but not limited to, modified run schedules, targeted cost reductions, strategic partnerships, and potential closure of the operation.healthcare packaging units.
Protective Solutions
The Protective Solutions segment includes the following products: custom-engineered, paperboard-based and expanded foam protective packaging and components; and temperature-assured packaging.
Segment sales for the quarter were up 5.7% year over year driven by sales from acquisitions, higher selling prices, and the positive impact of foreign exchange.
Operating profits decreased 10.4%All Other operating profit declined 67.5 percent from the prior-yearprior year's quarter due primarily to lower volume in automotive componentsthe impact of the global display and the related unfavorable impact on manufacturing productivity.packaging divestitures along with a negative price/cost relationship stemming mostly from rising resin prices.
Operating margin declined to 4.5 percent in the quarter from 9.1 percent in 2020 largely due to unrecovered cost increases.
With the April 4, 2021 sale of the Company's U.S. display and packaging business and the November 2020 sale of the Company's European contract packaging business, the Company has completely exited its global display and packaging business. These divestitures will continue to negatively impact year-over-year comparisons of operating results through the first quarter of 2022.
The Company expects the temperature-assured business to continue producing solid results in the remainder of 2021, with operating profit exceeding the prior year, largely driven by sales of packaging critical for pharmaceutical transport, including flu and COVID-19 vaccines. The businesses that serve automotive and appliance markets are expected to continue to rebound from prior-year levels, which were significantly depressed by the COVID-19 pandemic. However, this demand rebound is expected to be somewhat restricted by supply chain issues. Finally, the Company's plastics business serving the healthcare industry is expected to show improved fourth-quarter results year over year as its served markets return to a more normalized demand for elective surgeries. However, results for the Company's industrial plastics operations, which benefited in the third quarter from both a COVID rebound and normal seasonal strength, are expected to decline sequentially in the fourth quarter due to seasonality and price/cost headwinds, but still exceed prior-year COVID-depressed results.
Nine Months Ended October 1, 20173, 2021 Compared with Nine Months Ended October 2, 2016September 27, 2020
RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES
The following tables reconcile the Company'sCompany’s non-GAAP financial measures to their most directly comparable GAAP financial measures in the Company'sCompany’s Condensed Consolidated Statements of Income for each of the periods presented. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the nine months ended October 3, 2021 | | |
Dollars in thousands, except per share data | | GAAP | | Restructuring/Asset Impairments(1) | | Other Adjustments(1) | | Base | | |
Operating profit | | $ | 382,112 | | | $ | 8,889 | | | $ | (294) | | | $ | 390,707 | | | |
Non-operating pension costs | | 562,818 | | | — | | | (562,818) | | | — | | | |
Interest expense, net | | 46,744 | | | — | | | 2,165 | | | 48,909 | | | |
Loss from the early extinguishment of debt | | 20,184 | | | — | | | (20,184) | | | — | | | |
(Loss)/income before income taxes | | $ | (247,634) | | | $ | 8,889 | | | $ | 580,543 | | | $ | 341,798 | | | |
(Benefit from)/Provision for income taxes | | (91,542) | | | 2,653 | | | 169,255 | | | 80,366 | | | |
(Loss)/income before equity in earnings of affiliates | | $ | (156,092) | | | $ | 6,236 | | | $ | 411,288 | | | $ | 261,432 | | | |
Equity in earnings of affiliates, net of tax | | 5,701 | | | | | | | 5,701 | | | |
Net (loss)/income | | $ | (150,391) | | | $ | 6,236 | | | $ | 411,288 | | | $ | 267,133 | | | |
Net loss attributable to noncontrolling interests | | (243) | | | | | | | (243) | | | |
Net (loss)/income attributable to Sonoco | | $ | (150,634) | | | $ | 6,236 | | | $ | 411,288 | | | $ | 266,890 | | | |
Diluted Weighted average common shares outstanding(2): | | 100,039 | | | | | 468 | | | 100,507 | | | |
Per diluted common share* | | $ | (1.51) | | | $ | 0.06 | | | $ | 4.09 | | | $ | 2.66 | | | |
| | |
*Due to rounding individual items may not sum across | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | For the nine months ended October 1, 2017 |
Dollars in thousands, except per share data | | GAAP | | Restructuring/ Asset Impairment | | Other Adjustments(1) | | Base |
Income before interest and income taxes | | $ | 280,825 |
| | $ | 12,519 |
| | $ | 41,665 |
| | $ | 335,009 |
|
Interest expense, net | | 38,497 |
| | — |
| | — |
| | 38,497 |
|
Income before income taxes | | 242,328 |
| | 12,519 |
| | 41,665 |
| | 296,512 |
|
Provision for income taxes | | 78,251 |
| | 4,081 |
| | 11,422 |
| | 93,754 |
|
Income before equity in earnings of affiliates | | 164,077 |
| | 8,438 |
| | 30,243 |
| | 202,758 |
|
Equity in earnings of affiliates, net of tax | | 7,320 |
| | — |
| | — |
| | 7,320 |
|
Net income | | 171,397 |
| | 8,438 |
| | 30,243 |
| | 210,078 |
|
Net (income) attributable to noncontrolling interests | | (1,727 | ) | | (35 | ) | | — |
| | (1,762 | ) |
Net income attributable to Sonoco | | $ | 169,670 |
| | $ | 8,403 |
| | $ | 30,243 |
| | $ | 208,316 |
|
Per diluted common share* | | $ | 1.68 |
| | $ | 0.08 |
| | $ | 0.30 |
| | $ | 2.07 |
|
*Due to rounding individual items may not sum across | | | | | | |
(1 )Includes pension settlement charges See table in "Results of $31,550, costs related to acquisitions and potential acquisitions, and certain other costs, partially offset by insurance settlement gains. Also includes net tax charges totaling $2,229 primarilyOperations - Overview" below for details related to the settlementafter-tax impact of major components.
(2 )Due to the magnitude of certain expenses considered by management to be non-base and included in Other Adjustments. the Company reported a tax audit in Canada and the effect of state tax rate changes on deferred taxes as well as reserves for uncertain tax positions totalingyear-to-date GAAP Net Loss Attributable to Sonoco. In instances where a company has a net loss, of $2,263. These amounts are partially offset by a tax benefit fromincluding potential common shares in the final settlementdenominator of a prior-year business disposition.diluted earnings per-share computation will have an antidilutive effect on the per-share loss. GAAP therefore requires the exclusion of any unexercised share awards or other like instruments for purposes of calculating weighted average shares outstanding. Accordingly, the Company did not include any unexercised share awards or other like instruments in calculating weighted average shares outstanding for GAAP purposes in the table above, which resulted in Basic Weighted Average Common Shares Outstanding and Diluted Weighted Average Common Shares Outstanding being the same. However, the Company also presents Base Net Income Attributable to Sonoco, which excludes the net non-base items. In order to maintain consistency and comparability of Base Diluted EPS, dilutive unexercised share awards were included in the calculation to the same extent they would have been had GAAP Net Income Attributable to Sonoco been equal to Base Net Income Attributable to Sonoco.
|
| | | | | | | | | | | | | | | | |
| | For the nine months ended October 2, 2016 |
Dollars in thousands, except per share data | | GAAP | | Restructuring/ Asset Impairment | | Other Adjustments(1) | | Base |
Income before interest and income taxes | | $ | 298,799 |
| | $ | 41,453 |
| | $ | 2,191 |
| | $ | 342,443 |
|
Interest expense, net | | 39,768 |
| | — |
| | — |
| | 39,768 |
|
Income before income taxes | | 259,031 |
| | 41,453 |
| | 2,191 |
| | 302,675 |
|
Provision for income taxes | | 83,602 |
| | 10,442 |
| | (17 | ) | | 94,027 |
|
Income before equity in earnings of affiliates | | 175,429 |
| | 31,011 |
| | 2,208 |
| | 208,648 |
|
Equity in earnings of affiliates, net of tax | | 7,457 |
| | — |
| | — |
| | 7,457 |
|
Net income | | 182,886 |
| | 31,011 |
| | 2,208 |
| | 216,105 |
|
Net (income) attributable to noncontrolling interests | | (1,325 | ) | | (78 | ) | | — |
| | (1,403 | ) |
Net income attributable to Sonoco | | $ | 181,561 |
| | $ | 30,933 |
| | $ | 2,208 |
| | $ | 214,702 |
|
Per diluted common share* | | $ | 1.78 |
| | $ | 0.30 |
| | $ | 0.02 |
| | $ | 2.11 |
|
*Due to rounding individual items may not sum across | | | | | | |
(1) Consists primarily of costs related to acquisitions and potential acquisitions.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the nine months ended September 27, 2020 |
Dollars in thousands, except per share data | | GAAP | | Restructuring/Asset Impairments(1) | | Other Adjustments(1) | | Base |
Operating profit | | $ | 340,574 | | | $ | 59,633 | | | $ | 802 | | | $ | 401,009 | |
Non-operating pension costs | | 22,632 | | | — | | | (22,632) | | | — | |
Interest expense, net | | 53,311 | | | — | | | — | | | 53,311 | |
Income before income taxes | | $ | 264,631 | | | $ | 59,633 | | | $ | 23,434 | | | $ | 347,698 | |
Provision for income taxes | | 49,337 | | | 15,021 | | | 24,673 | | | 89,031 | |
Income before equity in earnings of affiliates | | $ | 215,294 | | | $ | 44,612 | | | $ | (1,239) | | | $ | 258,667 | |
Equity in earnings of affiliates, net of tax | | 3,230 | | | — | | | — | | | 3,230 | |
Net income | | $ | 218,524 | | | $ | 44,612 | | | $ | (1,239) | | | $ | 261,897 | |
Net loss attributable to noncontrolling interests | | 581 | | | (26) | | | — | | | 555 | |
Net income attributable to Sonoco | | $ | 219,105 | | | $ | 44,586 | | | $ | (1,239) | | | $ | 262,452 | |
Per diluted common share* | | $ | 2.17 | | | $ | 0.44 | | | $ | (0.01) | | | $ | 2.59 | |
*Due to rounding individual items may not sum across | | | | | | |
| | | | | | | | |
(1) See table in "Results of Operations - Overview" below for details related to the after-tax impact of major components.
RESULTS OF OPERATIONS
The following discussion provides a review of results for the nine months ended October 1, 2017 versus3, 2021 compared with the nine months ended October 2, 2016.September 27, 2020.
OVERVIEW
Net sales for the first nine months of 2017 were $3,7382021 increased 7.5 percent to $4,151 million a 2.7% increase from the $3,641, compared with $3,861 million reported in the same period last year. The modest sales growth wasincrease reflects volume/mix benefits stemming from the result ofpandemic recovery, higher selling prices mostly implemented to recover rising raw material and other operating costs, and a positive impact from foreign currency translation. These benefits were somewhat offset by the net impact of acquisitions, net of divestitures. These positive factors were partially offset by lower volume/mixthe global display and packaging divestitures, less additions from the loss of contract packaging business in Mexico and Brazil.Can Packagingacquisition.
Net (loss)/income attributable to Sonoco for the first nine months of 20172021 decreased 6.5% to $169.7$(150.6) million, $1.68or $(1.51) per diluted share, compared to $181.6$219.1 million, $1.78or $2.17 per diluted share, reported for the same period of 2016. Current period2020. GAAP net loss for the first nine months of 2021 includes after-tax, non-base charges totaling $417.5 million. GAAP net income includes after-tax restructuring and asset impairment charges of $8.4 million, after-tax pension settlement charges of $19.5 million, and other after-tax, non-base items netting to a charge of $10.7 million. These other items primarily consist of charges for acquisition-related costs, the settlement of a tax audit in Canada and changes in deferred tax amounts, partially offset by insurance settlement gains and a favorable tax adjustment related to a prior-year disposition. Results for the third quarterfirst nine months of 2016 include after-tax restructuring and asset impairment2020 includes non-base charges totaling $43.3 million. The major components of $30.9 million, and after-tax acquisition-related costs of $2.2 million. these non-base amounts are shown below:
| | | | | | | | |
| Nine Months Ended |
($ in millions) | October 3, 2021 | September 27, 2020 |
Non-operating pension settlement charges | $ | 406.5 | | $ | — | |
Net recognized benefit on 2017 amended U.S. income tax return | (30.0) | | — | |
Tax impact of sale of European contract packaging business | — | | (20.4) | |
Loss on early extinguishment of debt | 15.0 | | — | |
Other non-base tax charges | 11.9 | | |
Other non-operating pension costs | 11.8 | | 17.8 | |
Gain on sale of previously closed facilities | (7.2) | | — | |
Euro derivative gain related to Euro loan repayment | (3.3) | | — | |
Refund of foreign VAT and applicable interest | (3.1) | | — | |
All other net restructuring and asset impairment charges | 13.4 | | 44.6 | |
Acquisition and divestiture-related costs | 9.5 | | 2.4 | |
All other net gains | (7.0) | | (1.1) | |
| | |
Total non-base charges, after tax | $ | 417.5 | | $ | 43.3 | |
Adjusted for these items, base net income attributableBase earnings for the nine-month period ending October 3, 2021 increased 1.7 percent to Sonoco (base earnings) decreased 3.0% to $208.3$266.9 million, $2.07or $2.66 per diluted share, from $262.5 million, or $2.59 per diluted share, in the first nine monthssame period in 2020.
The increase in Base earnings of 2017 down$4.4 million is largely attributable to a lower Base effective tax rate and lower Base net interest expense which more than compensated for a decline in Base Operating Profit. The decline in Base Operating Profit was driven by an overall negative price/cost impact and the loss of operating profit from $214.7 million, $2.11 per diluted share, in 2016.
The lower earnings in the first nine months of 2017 were the result of volume declines and unfavorable product mix, particularly in global rigid paper containers and retail packaging and fulfillment. The divestituredivestitures of the Company's rigid plastic blowmolding operations in November 2016 also contributed toglobal display and packaging businesses, net of the lower year-over-year earningsacquisition of Can Packaging. The negative impacts in the first nine months of 2017. These negative impacts2021 period were partially offset by a positive year-to-date price/cost relationship compared tovolume/mix increases, which were aided by the prior-year as third-quarter selling price resets allowed the Company to fully recover the margin impact of higher OCC costs on a year-to-date basis. Productivity improvementsCOVID-19 pandemic recovery, and lower management incentive costs also benefited year-over-year earnings.productivity gains.
OPERATING REVENUE
Net sales for the first nine months of 20172021 increased $97$290 million from the same period in 2016. 2020.
The components of the sales change were: | | | | | |
| ($ in millions) |
Volume/mix | $ | 181 | |
Selling prices | 300 | |
Acquisitions and divestitures, net | (248) | |
Foreign currency translation and other, net | 57 | |
| |
Total sales increase | $ | 290 | |
| |
|
| | | |
| ($ in millions) |
Volume/mix | $ | (51 | ) |
Selling prices | 141 |
|
Acquisitions and Divestitures | 19 |
|
Foreign currency translation and other, net | (12 | ) |
| |
Total sales increase | $ | 97 |
|
| |
In order to enhance the meaningfulness of reported changes in volume/mix, a $20.9 million reduction in packaging center sales resulting from changes in the level of activity, primarily from the previously reported losses of contract packaging business in Mexico and Brazil, is classified above as "other" due to the low/inconsistent correlation that typically exists between changes in revenue and operating profit in certain packaging center operations.
COSTS AND EXPENSES
TheCost of goods sold increased $263.5 million, or 8.5 percent, while the Company's gross profit margin percentage declined slightly to 18.9% 19.2 percent for the first nine months of 2021, compared to 19.8%20.0 percent in the prior-year period. The 90 basis point declineincrease in gross profit margin was largely attributable to volume declines in Global Rigid Containers and Flexible Packaging. The translation impact of a stronger dollar lowered reported cost of goods sold was the result of an increase in volume as well as inflation in the cost of certain raw materials and other operating expenses. Gross profit margin declined due to the negative price/cost relationship resulting from the year-to-date increase in old corrugated containers costs, resin prices, and other operating cost inflation. The negative price/cost impact was partially offset by approximately $5productivity improvements.
GAAP SG&A costs for the first nine months of 2021 increased $33.2 million, or 9.0 percent, year over year. The year-over-year increase was largely driven by a higher, more-normal, level of management incentive expense compared to the same periodprior year's quarter, higher acquisition and divestiture transaction costs, as well as higher medical costs as employees returned to normalized levels of 2016.
Inhealthcare benefit utilization after the nine months ended October 1, 2017 selling, generalprior year's pandemic-induced suspension of routine care and administrative ("SG&A") costs increased $31.2 million or 8.2%, from the nine months ended October 2, 2016. This increase was driven by the previously mentioned pension settlement charges totaling $31.6 million, before-tax. Additionally, legalother elective procedures. Higher property insurance expense and professional fees related to acquisitions and potential acquisitions, SG&A expenses incurred by the operations of acquired businesses, net of divested businesses, and
higher wages allspending on strategic information technology activities also contributed to the increase in SG&A costs year over year.increase. These items were partially offset by fixed cost reductions, including lower management incentive costs.current-year gains on hedges entered into to mitigate foreign currency risk related to the repayment of a Euro-denominated loan, mark-to-market gains on certain derivatives entered into to manage natural gas price exposure, life insurance gains, and a foreign VAT refund.
InRestructuring costs and asset impairment charges net to $8.9 million in the first nine months of 2017, restructuring costs and asset impairment charges totaled $12.5 million2021, compared with $41.5$59.6 million of net charges in the same period last year. The year-over-year decrease was driven by lower year-over-year restructuring activity and gains recorded in 2021 for the sale of buildings at previously closed facilities. Additional information regarding restructuring and asset impairment charges is provided in Note 5 to the Company’s Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
NetNon-operating pension costs increased $540.2 million year over year due to the $547.3 million non-cash settlement charge recognized in the second quarter of 2021 upon settling the liabilities associated with the Sonoco Pension Plan for Inactive Participants. Additional information regarding pension settlement charges is provided in Note 11 to the Company’s Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Additionally, in the second quarter of 2021 the Company executed a cash tender offer in which it retired a portion of its 5.75% notes due November 2040, recognizing a loss on early extinguishment of debt totaling $20.2 million. See Note 8 to the Company’s Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.
GAAP net interest expense for the first nine months ended October 1, 2017of 2021 decreased to $38.5$46.7 million, comparedcompared with $39.8$53.3 million during the same periodfirst nine months of 2016.2020. The decrease was primarily due to lower averagedebt balances and additional interest rates applicableincome related to debt and an increase in interest income.a foreign VAT refund.
The effective tax rate on the GAAP loss and baseBase earnings in the first nine months of 20172021 was 32.3%37.0 percent and 31.6%,23.5 percent, respectively, compared with 32.3%18.6 percent and 31.1%,25.6 percent for GAAP and Base earnings, respectively, in the prior-year period. The higher effective tax rate on the GAAP loss in 2021 was primarily due to the $30.0 million net recognized benefit associated with the previously mentioned amendment of the Company's 2017 U.S. income tax return. The effective tax rate on Base earnings for the first nine months of 2021 was lower than the same period last year. The GAAP and base tax rates were both affected by favorable 2016 discrete tax adjustments including a benefit fromyear primarily due to the settlementrelease of a contested statereserve for uncertain tax audit. The current year rates benefitted from the adoption of FASB Accounting Standards Update 2016-9 regarding accounting for share-based compensation which requires excess tax benefits on settlements of share-based compensation to be recognized within the income statement. The Company adopted ASU 2016-09 effective January 1, 2017 using the prospective method.positions.
REPORTABLE SEGMENTS
The following table recaps net sales for the first nine months of 2017 and 2016 ($ in thousands):
|
| | | | | | | | | | | |
| | Nine Months Ended |
| | October 1, 2017 | | October 2, 2016 | | % Change |
Net sales: | | | | | | |
Consumer Packaging | | $ | 1,569,231 |
| | $ | 1,558,074 |
| | 0.7 | % |
Display and Packaging | | 365,807 |
| | 407,157 |
| | (10.2 | )% |
Paper and Industrial Converted Products | | 1,395,075 |
| | 1,281,031 |
| | 8.9 | % |
Protective Solutions | | 407,519 |
| | 394,418 |
| | 3.3 | % |
Consolidated | | $ | 3,737,632 |
| | $ | 3,640,680 |
| | 2.7 | % |
Consolidated operating profits, also referred to as “Income before interest and income taxes” on the Company’s Condensed Consolidated Statements of Income, are comprised of the following ($ in thousands):
|
| | | | | | | | | | | |
| | Nine Months Ended |
| | October 1, 2017 | | October 2, 2016 | | % Change |
Income/(loss) before interest and income taxes: | | | | | | |
Segment operating profit: | | | | | | |
Consumer Packaging | | $ | 184,942 |
| | $ | 186,135 |
| | (0.6 | )% |
Display and Packaging | | 6,592 |
| | 13,464 |
| | (51.0 | )% |
Paper and Industrial Converted Products | | 110,390 |
| | 104,018 |
| | 6.1 | % |
Protective Solutions | | 33,085 |
| | 38,826 |
| | (14.8 | )% |
Restructuring/Asset impairment charges | | (12,519 | ) | | (41,453 | ) | |
|
|
Other, net | | (41,665 | ) | | (2,191 | ) | | |
Consolidated | | $ | 280,825 |
| | $ | 298,799 |
| | (6.0 | )% |
The following table recaps restructuring/asset impairment charges attributable to each of the Company’sCompany's segments during the first nine months of 20172021 and 20162020 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended |
| | October 3, 2021 | | September 27, 2020 | | % Change |
Net sales: | | | | | | |
Consumer Packaging | | $ | 1,779,525 | | | $ | 1,659,943 | | | 7.2 | % |
Industrial Paper Packaging | | 1,809,159 | | | 1,447,886 | | | 25.0 | % |
All Other | | 562,567 | | | 753,266 | | | (25.3) | % |
Consolidated | | $ | 4,151,251 | | | $ | 3,861,095 | | | 7.5 | % |
|
| | | | | | | | |
| | Nine Months Ended |
| | October 1, 2017 | | October 2, 2016 |
Restructuring/Asset impairment charges: | | | | |
Consumer Packaging | | $ | 3,049 |
| | $ | 9,442 |
|
Display and Packaging | | 721 |
| | 6,464 |
|
Paper and Industrial Converted Products | | 5,801 |
| | 23,497 |
|
Protective Solutions | | 2,475 |
| | 621 |
|
Corporate | | 473 |
| | 1,429 |
|
Total | | $ | 12,519 |
| | $ | 41,453 |
|
The following table recaps operating profits attributable to each of the Company's segments during the first nine months of 2021 and 2020 ($ in thousands): | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended |
| | October 3, 2021 | | September 27, 2020 | | % Change |
Operating profit: | | | | | | |
Segment operating profit: | | | | | | |
Consumer Packaging | | $ | 196,341 | | | $ | 212,575 | | | (7.6) | % |
Industrial Paper Packaging | | 161,414 | | | 133,871 | | | 20.6 | % |
All Other | | 32,952 | | | 54,563 | | | (39.6) | % |
Restructuring/Asset impairment charges | | (8,889) | | | (59,633) | | | |
Other non-base charges, net | | 294 | | | (802) | | | |
Consolidated | | $ | 382,112 | | | $ | 340,574 | | | 12.2 | % |
Segment results viewed by Company management to evaluate segment performance do not include restructuring charges and income, asset impairment charges, acquisition-relatedacquisition and divestiture-related charges, pension settlement charges, interest expense, income taxes, or certain other items, if any, the exclusion of which the Company believes improves the comparability and analysis of the ongoing operating performance of the business. Accordingly, the term “segment operating profit” is a non-GAAP measure and is defined as the segment’s portion of “Income before interest and income taxes”“operating profit” excluding those items. All other general corporate expenses have been allocated as operating costs to each of the Company’s reportable segments.
Consumer Packaging
The following table recaps restructuring/asset impairment (income)/charges attributable to date segment sales increased 0.7% fromeach of the prior year due to the net impact of businesses acquired and sold, and higher sales prices. The positive factors were mostly offset by lower volume in composite cans in Europe and metal ends in North America and the negative impact of foreign currency translation from a stronger U.S. dollar year over year.
Segment operating profit decreased 0.6% year over year due to lower volumes and negative mix and the net impact of businesses acquired and sold. In addition, results were negatively impacted by higher labor, maintenance, and other operating expenses.These negative factors were partially offset by productivity gains and a favorable price/cost relationship.
Display and Packaging
Reported sales forCompany’s segments during the first nine months of
20172021 and 2020 ($ in thousands): | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | |
| | October 3, 2021 | | September 27, 2020 | | |
Restructuring/Asset impairment charges: | | | | | | |
Consumer Packaging | | $ | 6,150 | | | $ | 20,707 | | | |
Industrial Paper Packaging | | (4,827) | | | 30,189 | | | |
All Other | | 5,474 | | | 6,727 | | | |
Corporate | | 2,092 | | | 2,010 | | | |
Consolidated | | $ | 8,889 | | | $ | 59,633 | | | |
Consumer Packaging
Segment sales increased 7.2 percent year to date compared to the prior-year period driven by increased selling prices, largely implemented to recover cost inflation, sales added by the acquisition of Can Packaging, a modest increase in volume, and a positive impact from foreign currency translation.
Year-to-date segment operating profit decreased 7.6 percent driven by a negative price/cost impact as businesses in the segment were not able to completely pass along rapidly rising material and other costs. Additionally, rising wage and other benefit costs offset productivity gains in the first nine months of 2021. As a result, segment operating profit margin decreased 177 basis points to 11.0 percent.
Industrial Paper Packaging
Segment sales increased 25.0 percent year to date versus the prior-year period due to increased selling prices, largely implemented to recover increased raw material and other operating costs, a positive volume/mix impact driven by a global rebound in demand, and a positive impact from foreign currency translation.
Segment operating profit increased 20.6 percent from the prior-year period driven by broad increases in volume/mix and strong productivity improvements. These gains were offset by a negative price/cost relationship largely due to a year-to-date increase in recycled fiber costs that could not be fully recovered through selling price adjustments. As a result, segment operating margins were down 10.2% compared32 basis points to last year’s period8.9 percent.
All Other
Sales for All Other declined 25.3 percent year to date due primarily to the previously disclosed lossglobal display and packaging divestitures. Exclusive of the Company’s contract packaging businesssales from those businesses in Mexicothe prior year, volume/mix for businesses grouped in All Other improved approximately 13 percent, driven primarily by demand improvements in several businesses, most notably our molded-foam, plastics industrial, and Brazil. Lower volumes in our domestic displays and retail security packaging businesses also negatively impacted year-over-year sales. These declines were partially offset by the positive effect of foreign exchange rates.temperature-assured businesses.
SegmentAll Other operating profit decreased $6.9 million, or 51.0%, from the prior year's first nine monthsdeclined 39.6 percent year to date due to lower volume/mix in domesticthe impact of the global display and retail packaging and higher operating costs associated with the ramp up of operations at a new domestic retail packaging fulfillment center. These negative factors were partially offset by improved fixed-cost productivity.
Paper and Industrial Converted Products
Segment sales increased 8.9% as higher selling prices due to contract pricing resets and announced price increases, both driven by increased raw material costs, more than offset the impacts of the divestiture of a paperboard mill in France, volume declines, and foreign currency translation.
Operating profit increased 6.1% largely due to a positive year-over-year price/cost relationship driven by a current year third-quarter decline in OCC prices following selling price resets that occurred at the end of the second quarter of 2017 when old corrugated containers (OCC) prices were higher. As a result, the Company has recovered all of the negative profit impact caused by OCC cost increases during the first six months of 2017. Manufacturing productivity improvements were essentially offset by higher labor, maintenance, and other operating expenses.
The Company's corrugating medium operation continues to under perform long-term expectations. This operation, which consists of only one machine, has been and continues to be under pressure due to market supply in North America exceeding demand. This has resulted in lower prices and reduced volume for our corrugating medium operation.
Management is continuing to seek both near and long-term solutions including, but not limited to, modified run schedules, targeted cost reductions, strategic partnerships, and potential closure of the operation.
Protective Solutions
Segment sales were up 3.3% year over year as sales from acquisitions and higher selling prices were only partially offset by unfavorable changes in volume/mix.
Operating profits decreased 14.8% on unfavorable changes in volume/mix, declines in manufacturing productivity,divestitures and a negative price/cost relationship.relationship stemming from higher raw material costs. These were partially offset by fixed-costpositive volume/mix and productivity improvements. Segment operating margin declined to 5.9 percent year to date from 7.2 percent in 2020.
With the April 4, 2021 sale of the Company's U.S. display and packaging business and the November 2020 sale of the Company's European contract packaging business, the Company has completely exited its global display and packaging business. These divestitures will negatively impact year-over-year comparisons of operating results through the first quarter of 2022.
OTHER ITEMS
Critical Accounting Policies and Estimates
Income taxes
As previously disclosed, the Company received a draft Notice of Proposed Adjustment (“NOPA”) from the Internal Revenue Service (IRS) in February 2017 proposing an adjustment to income for the 2013 tax year based on the IRS's recharacterization of a distribution of an intercompany note made in 2012, and the subsequent repayment of the note over the course of 2013, as if it were a cash distribution made in 2013. In March 2017, the Company received a draft NOPA proposing penalties of $18.0 million associated with the IRS’s recharacterization, as well as an Information Document Request (“IDR”) requesting the Company’s analysis of why such penalties should not apply. The Company responded to this IDR in April 2017. On October 5, 2017, the Company received two revised draft NOPAs proposing the same adjustments and penalties as in the prior NOPAs. At the time of the distribution in 2012, it was characterized as a dividend to the extent of earnings and profits, with the remainder as a tax free return of basis and taxable capital gain. As the IRS proposes to recharacterize the distribution, the entire distribution would be characterized as a dividend. The incremental tax liability associated with the income adjustment proposed in the NOPA would be approximately $84.0 million, excluding interest and the previously referenced penalties. Should a final NOPA be issued, the Company intends to file a protest to the proposed deficiency with the IRS, which will cause the matter to be referred to the Appeals Division of the IRS. The Company strongly believes the position of the IRS with regard to this matter is inconsistent with applicable tax laws and existing Treasury regulations, and that the Company's previously reported income tax provision for the year in question is appropriate. However, there can be no assurance that this matter will be resolved in the Company's favor. Regardless of whether the matter is resolved in the Company's favor, the final resolution of this matter could be expensive and time consuming to defend and/or settle. While the Company believes that the amount of tax originally paid with respect to this distribution is correct, and accordingly has not provided additional reserve for tax uncertainty, there is still a possibility that an adverse outcome of the matter could have a material effect on its results of operations and financial condition.
Pension and postretirement benefit plans
In February 2017, the Company initiated a program through which it offered certain terminated vested participants in the Sonoco Pension Plan for Inactive Participants, a qualified retirement plan in the United States, the opportunity to receive their benefits early as either a lump sum or an annuity. The terminated vested population comprised approximately 15% of the projected benefit obligation of this plan. At the close of the election period, approximately 51% of the eligible participants elected to take the early payment. These payments were distributed from plan assets in May and June 2017. As a result of settling these obligations, the Company recognized a non-cash pre-tax settlement charge of approximately $31.1 million in the second quarter of 2017. Additional settlement charges of $0.5 million were recognized in the third quarter of 2017 for settlements to certain plan participants who were eligible to select a lump sum payment option upon retirement.
Goodwill impairment evaluation
The Company assesses its goodwill for impairment annually and from time to time when warranted by the facts and circumstances surrounding individual reporting units or the Company as a whole. If the fair value of a reporting unit exceeds the carrying value of the reporting unit's assets, including goodwill, there is no impairment. If the carrying value of a reporting unit's goodwillunit exceeds the implied fair value of that goodwill,reporting unit, an impairment charge to goodwill is recognized for the excess. The Company's reporting units are the same as, or one level below, its operating segments, as determined in accordance with ASC 350.
The Company completed its most recent annual goodwill impairment testing during the third quarter of 2017.2021. For testing purposes, the Company performed an assessment of each reporting unit using either a qualitative evaluation or a quantitative test. The qualitative evaluations considered factors such as the macroeconomic environment, Company stock price and market capitalization movement, current-year operating performance as compared to prior projections, business strategy changes, and significant customer wins and losses. The quantitative tests, considered factors such asdescribed further below, relied on the current yearoutlook of reporting unit management for future operating performance as compared to prior projectionsresults and took into consideration, among other things, the expected impact of the COVID-19 pandemic on future operations, specific business unit risk, the countries in which the reporting units operate, and implied fair values frombased on comparable trading and transaction multiples.
When performing a quantitative analysis, the Company estimates the fair value of its reporting units it does so using a discounted cash flow model based on projections of future years’ operating results and associated cash flows, together withflows. The Company's assessments reflected a number of significant management assumptions and estimates including the Company's forecast of sales growth, contribution margins, selling, general and administrative expenses, and discount rates, which are validated by observed comparable trading and transaction multiples. The Company’s model discounts projected future cash flows, forecasted over a ten-yearseven-year period, with an estimated residual growth rate. The Company’s projections incorporate management’s estimates of the most-likely expected future results, including significant assumptions and estimates related to, among other things: sales volumes and prices, new business, profit margins, income taxes, capital expenditures and changes in working capital requirements and, where applicable, improved operating margins.results. Projected future cash flows are discounted to present value using a discount rate that management believes is appropriate for the reporting unit.
The Company’s assessments, whether qualitative or quantitative, incorporate management’s expectations for the future, including forecasted growth rates and/or margin improvements. Therefore, should there be changes in the relevant facts and circumstances and/or expectations, management’s assessmentconclusions regarding goodwill impairment may change as well. Management’s projections related to revenue growth and/or margin improvements are based on a combination of factors, including expectations for volume growth with existing customers and customer retention, product expansion, changes in price/cost relationships, productivity gains, fixed cost leverage, and stability or improvement in general economic conditions.
In considering the level of uncertainty regarding the potential for goodwill impairment, management has concluded that any such impairment would, in most cases, likely be the result of adverse changes in more than one assumption. Management does not consider any of itsconsiders the assumptions used to be either aggressive or conservative, but rather its best estimates across a range of possible outcomes based on available evidence at the time of the assessment. Other than in Display and Packaging,Plastics - Healthcare, which is discussed below, there is no specific singular event or single change in circumstances management has identified that it believes could reasonably result in a change to expected future results in any of its reporting units sufficient to result in goodwill impairment. In management’s opinion, a change of such magnitude would more likely be the result of changes to some combination of the factors identified above, a general deterioration in competitive position, introduction of a superior technology, significant unexpected changes in customer preferences, an inability to pass through significant raw material cost increases, and other such items as identified in "Item 1A. Risk Factors" on pages 9-1510-20 of the Company's 20162020 Annual Report on Form 10-K.
Although no reporting units failed the annual impairment test or the testing performed as a result of the segment realignment noted above, in management’s opinion, the reporting units havinggoodwill of the greatest risk of a significant future impairment if actual results fall short of expectations are Display and Packaging, and Paper and Industrial Converted ProductsPlastics - Europe.
Display and Packaging
The Display and Packaging reporting unit designs, manufactures, assembles, packs and distributes temporary, semi-permanent and permanent point-of-purchase displays; provides supply chain management services, including contract packing, fulfillment and scalable service centers; and manufactures retail packaging, including printed backer cards, thermoformed blisters and heat sealing equipment. The updated goodwill impairment analysis reflects expectations for moderate sales growth and improved percentage profit margins based largely on the expected successful ramp up of operations at the Company’s new battery packaging facility. In addition, the analysis reflects expected cash flow improvements from future productivity initiatives and increased capacity. A large portion of expected sales in thisHealthcare reporting unit is concentratedat risk of impairment in two customers andthe near term if the reporting unit's operations do not perform in line with management's expectations, or if there is a negative change in the long-term outlook for the business with either one of these customers is lost, or in other projected synergies and productivity gains are not realized, a goodwill impairment charge could be incurred. Total goodwill associated with this reporting unit was approximately $203 million at October 1, 2017. Based onfactors such as the valuationdiscount rate.
work performed forAlthough beginning to benefit from the economic recovery, the results of the Plastics – Healthcare reporting unit have been negatively impacted by end-market weakness due to the COVID-19 pandemic. In addition, the unit is facing near-term headwinds from higher raw material and other cost increases. Assuming COVID-19 infection rates continue to decline, management expects market demand will improve over the coming year and that selling price increases and/or cost reductions, including restructuring actions and investments in production efficiency projects, will mitigate the impacts of recent raw material and other cost inflation. However, should it become apparent that the ongoing post-COVID-19 recovery is likely to be significantly weaker, delayed, or prolonged compared to management’s current year'sexpectations, significant negative price/cost relationships will persist over the long-term, or profit margins do not improve as expected, goodwill impairment charges may be possible in the future. Total goodwill associated with the Plastics – Healthcare reporting unit was approximately $64 million at October 3, 2021. Based on the most-recent annual impairment test, the estimated fair value of Display and Packagingthe Plastics – Healthcare reporting unit exceeded its carrying value by approximately 37%.
Paper and Industrial Converted Products - Europe
Paper and Industrial Converted Products - Europe manufactures paperboard tubes and cores, fiber-based construction tubes and forms and recycled paperboard. In recent years the Eurozone has faced persistent high unemployment, spillover effects of geo-political conflicts in Eastern Europe and the Middle East, and uncertainties over the United Kingdom’s exit negotiations with the European Union. Despite these issues, the economy experienced steady year over year growth in the last couple of years and the Company expects the momentum to continue in the near future. This outlook is supported by accommodative monetary policy, recovery in manufacturing and export activities, and lower inflation related to energy price declines. The growth is expected to slow down slightly in the outer years as the European Central Bank gradually tightens its monetary policies. In addition, the reporting unit has experienced a significant increase in raw material costs this year which it has not yet been able to fully offset through higher selling prices. Despite the challenges, management believes the reporting unit should be able to grow at or above the Eurozone’s projected GDP growth rates and continue to mitigate the impact of these factors. However, if economic conditions were to deteriorate and management was unable to fully mitigate the impacts, or be unable to consistently recover additional significant cost increases or otherwise achieve expected sales volumes and profit margins, a goodwill impairment charge could be incurred. Total goodwill associated with this reporting unit was approximately $93 million at October 1, 2017. Based on the valuation work performed for the current year test, the estimated fair value of Paper and Industrial Converted Products - Europe exceeded its carrying value by approximately 29%13.3%.
Sensitivity Analysis
In its 20172021 annual goodwill impairment analysis, projected future cash flows for the Plastics - Healthcare reporting unit were discounted at 10.2%8.3%. Based on the discounted cash flow model and 8.5% for Display and Packaging and Paper and Industrial Converted Products - Europe, respectively. Holdingholding other valuation assumptions constant, Display and Packaging projected operating profits across all future periods would have to be reduced approximately 23%13.0%, or the discount rate increased to 12.7%9.3%, in order for the estimated fair value of the reporting unit to fall below the reporting unit’s carrying value.
Pension Plan Termination
As disclosed in previous filings, the Company terminated the Inactive Plan, a tax-qualified defined benefit plan, effective September 30, 2019. The corresponding percentagesCompany settled the liabilities of the Inactive Plan in the second quarter of 2021 through a combination of lump-sum payments and purchases of group annuity contracts. In order for Paperthe Inactive Plan to be fully funded upon final settlement, the Company made contributions totaling $133.0 million during the second quarter of 2021. The Company realized a cash tax benefit of approximately $38 million in 2020 from the anticipated contributions to the Inactive Plan. Non-cash, pre-tax settlement charges totaling $547.3 million were recognized in the second quarter of 2021 as the lump sum payouts were made and Industrial Converted Products - Europe are 19% and 10.4%, respectively.group annuity contracts were purchased.
Financial Position, Liquidity and Capital Resources
CashOperating cash flows provided by operations totaled $282.1$220.1 million in the nine months ended October 1, 20173, 2021, compared with $348.7$489.5 million during the same period last year, a declinedecrease of $66.6$269.4 million. The decrease reflects higher year-over-year decrease in net income of $11.5 million was offset by an increase in year-to-date net pension and post-retirement plan expenses and contributions of $19.5 million. However, changes$130.5 million, primarily the result of fully funding the Inactive Plan as part of settling the plan's liabilities in tax accounts consumed $30.0the second quarter of 2021. Additionally, net working capital used $58.8 million more cash in the first nine months of 20172021 compared to 2016.the same period last year. This increased consumptionuse was partially driven by the settlement of outstanding taxes payable at the end of 2016 related to the disposal of the Company's blow molded plastics business. Asset impairment charges/losses on the dispositions of assets was $19.6 million less of a benefitinflation in the current periodyear and a more pronounced increase in business activity in the third quarter of 2021 as compared to 2016. The benefitlast year's third quarter. The Company continues to actively manage all components of net working capital in 2016 included non-cash losses relatedan effort to dispositions of a paper millminimize the impact on cash utilization.
Changes in France and retail packaging business in Puerto Rico, along with other previously announced restructuring actions and a goodwill impairment of the Company’s industrial converted products business in Brazil.
Inventories consumed $15.0 million in the first nine months of 2017 compared with $11.3 million consumed in the first nine months of 2016. Trade accounts payableaccrued expenses provided $29.3$10.4 million of operating cash duringflow in the nine months ended October 1, 2017 while consuming $7.73, 2021 compared with $40.9 million in the same period last year. AlthoughThe lower provision of cash in the current year is primarily due to the deferral of certain FICA remittances in the prior year pursuant to the CARES Act and the payment of a portion of those previously deferred remittances in the third quarter of 2021. Income taxes payable, deferred taxes, and other income tax items consumed $165.7 million more cash in the first nine months of both 2016 and 2017 saw increased rates2021 than the first nine months of business activity following seasonal year-end slow downs, there were higher levelsthe prior year mostly related to the non-cash reduction of deferred payments at December 31, 2015 than at December 31, 2016. As a result, more cash wasincome tax expense of $140.8 million recorded in relation to the previously disclosed final settlement of the Inactive Plan's pension liabilities.
Cash used in 2016investing activities was $50.9 million in the nine months ended October 3, 2021, compared with $157.1 million in the same period last year, a lower year-over-year use of cash of $106.3 million. Proceeds from the sale of businesses added $91.6 million of cash in the first nine months of 2021 as the Company received cash from the sale of its U.S. display and packaging business, the sale of a small plastics foods thermoforming operation in North Carolina, and the release of cash from escrow from the November 2020 sale of its European contract packaging business. Acquisition spending was $46.1 million lower year over year. Acquisition activity in the nine months ended October 3, 2021 totaled $3.2 million and reflects the Company's acquisitions of two small international businesses in its Industrial Paper Packaging segment and the final working capital settlement for the 2020 acquisition of Can Packaging. This activity was less than the net $49.3 million spent in the first nine months of 2020, primarily for the purchase of Can Packaging. Proceeds from the sale of assets provided $10.5 million in the nine months ended October 3, 2021, compared to settle prior-year payables$8.2 million in the same period last year. The proceeds in both years stemmed from the sale of buildings and equipment associated with previously closed facilities. Capital spending during the first nine months of 2021 was $156.6 million, $39.9 million higher than wasthe same period last year. The increase is attributable to spending on "Project Horizon," a $115
million project to transform the corrugated medium paper machine in Hartsville, South Carolina, into a low-cost, state-of-the-art uncoated recycled paperboard machine and to optimize materials handling systems and storage facilities. Total spending on this project is expected to be approximately $75 million in 2021. Capital spending for the remainder of 2021 is expected to be approximately $90 million, bringing total capital spending in 2021 to approximately $250 million, compared to $194.1 million in 2020. Other net investing proceeds, primarily insurance proceeds, were $6.2 million higher year over year.
Financing activities used in 2017. This difference was a primary contributor to the $21.6 million year-over-year improvement in cash provided by trade accounts payable.
Increases in accrued expenses provided $1.2$563.2 million of cash in the nine months ended October 1, 20173, 2021, while providing $16.4they provided $311.4 million in the same period last year, primarily due to lower year-over-year accruals for management incentives, restructuring activities, payroll, payroll-related taxes and withholdings. Also reflected in the current year accrued expense reduction is a $3.3 million payment for the final settlement of environmental claims related to Fox River. Changes in prepaid expenses and other assets and liabilities used $22.0 million of additional cash in 2017 compared to 2016, largely attributable to a current year increase in miscellaneous prepaid expenses and the collection of miscellaneous receivables
in the first nine months of 2016 that were outstanding at the end of 2015. Similar levels of miscellaneous receivable items were not outstanding at the end of 2016.
Cash used in investing activities was $522.6 million in the nine months ended October 1, 2017, compared with $165.2 million in the same period last year. The $357.4 million increase in the net use of cash reflects the 2017 acquisition of Packaging Holdings and Clear Lam for $383.4 million and capital spending increased $2.7 million year over year. Capital spending for the remainder of 2017 is expected to total approximately $45 million.
Cash provided by financing activities totaled $218.3 million in the nine months ended October 1, 2017, $422.6 million more than the $204.3 million use of cash in the same period last year. Outstandingyear, a year-over-year difference of $874.6 million. In the prior year, net proceeds from the issuance of debt was $1,426.1provided cash of $428.2 million at October 1, 2017 compared with $1,052.7 million at December 31, 2016. Net debt borrowings provided $338.1 million of cash duringreflecting actions initiated by the Company in the first nine months ended October 1, 2017. This activity included proceeds from a $250.0 million term loan which were usedof 2020 to repaymitigate liquidity risks due to uncertainty regarding the $150.0 million term loan entered intopotential impacts of the COVID-19 pandemic on March 13, 2017,credit markets, banks and the remaining $100.0global economy. The year-over-year change in net debt proceeds/repayments decreased cash by $670.6 million was used to partially fund the Clear Lam acquisition. There was also a $98.0 million increase in borrowings from commercial paper year over year. In the prior-year period,The first nine months of 2021 reflect net debt repayments used $38.6of $242.5 million, including the repayments of cash.the Company's 4.375% bonds, 9.2% bonds, euro-denominated bonds, and a partial tender of its 5.75% bonds, partially offset by additional commercial paper borrowings. The debt tender resulted in additional cash costs of $20.1 million, primarily premiums paid to participating bondholders. The year-over-year decrease in outstanding checks of $19.3 million resulted primarily from the timing of the last accounts payable check runs in December 2020 and December 2019. The Company paid cash dividends of $114.4$134.6 million during the nine months ended October 1, 2017,3, 2021, an increase of $4.5$5.2 million over the same period last year. Cash used to repurchase the Company's common stock was lower$152.3 million higher year over year by $59.1 million as throughout 2016 the Company was engaged in a $100 million stock buyback program that was concluded by the endresult of the year.
On July 20, 2017, the Company entered into a Credit Agreement in connection with a new $750 million bank credit facility which replaced the credit facility entered into on October 2, 2014, and reflected substantially the same terms and conditions. Includedshare repurchases completed under an accelerated share repurchase agreement executed in the new facility are a $500 million five-year revolving credit facility and a $250 million five-year term loan. The Company is continuing to explore strategic acquisition opportunities which may result in the additional usesecond quarter of cash. Given the nature of acquisitions, the timing and amounts of such utilization are not predictable. The Company expects that acquisitions requiring funding in excess of cash on hand would be financed using available borrowing capacity.2021.
Cash and cash equivalents totaled $247.9totaled $160.0 million and $257.2$564.8 million at October 1, 20173, 2021 and December 31, 2016,2020, respectively. Of these totals, approximately $222$141.5 million and $175$170.8 million, respectively, were held outside of the United States by the Company’s foreign subsidiaries. CashCash held outside of the United States is available to meet local liquidity needs, or for capital expenditures, acquisitions, and other offshore growth opportunities. Under current law, cash repatriated toReflecting the United States is subject to federal income taxes, less applicable foreign tax credits. Becausefinancing actions described above, the Company has ample domestic liquidity throughfrom a combination of on-goingcash on hand, generation of operating cash flow, and access to bank and capital markets borrowings, itborrowings. The Company has generally considered its offshore cash balancesforeign unremitted earnings to be indefinitely invested outside the United States and the Company currently has no plans to repatriate any of thesesuch earnings, other than excess cash balances. balances that can be repatriated at minimal tax cost. Accordingly, as of October 1, 2017, the Company is not providing for any deferred tax liabilitytaxes on the foreign earnings associated with these balances. However, if any such balances were to be repatriated, additional income tax payments could result.amounts for financial reporting purposes. Computation of the potential deferred tax liability associated with unremitted earnings deemedconsidered 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 positionsposition through local currency accounts with the bank, so long as the aggregate position of the global pool is a notionally calculated net cash deposit. Because the bankit maintains a security interest in the cash deposits, and has the right to offset the cash deposits against the borrowings, the bank provides the Company and its participating subsidiaries favorable interest terms on both.
During the nine months ended October 1, 2017,3, 2021, the Company reported a net increasedecrease in cash and cash equivalents of $12.9$10.8 milliondue to currency translation adjustments resulting from a weakerstronger U.S. dollar relative to certainmost foreign currencies, most notablycurrencies.
On April 28, 2021, the Canadian dollar, Euro,Company commenced a cash tender offer to purchase up to $300 million of the $600 million outstanding principal amount of its 5.75% notes due November 2040. Upon expiration of the tender on May 25, 2021, the Company repurchased $63.2 million of its outstanding 5.75% notes for a total cash cost of $82.0 million.
On June 30, 2021, the Company entered into a new five-year $750 million, unsecured revolving credit facility which replaced an existing credit facility entered into on July 20, 2017, and Mexican peso.reflects substantially the same terms and conditions. Consistent with prior facilities, the new revolving credit facility supports the Company's $500 million commercial paper program. The revolving credit facility is with a syndicate of banks and is committed through June 2026. If circumstances were to prevent the Company from issuing commercial paper, it has the contractual right to draw funds on the underlying revolving credit facility.
On August 1, 2021, the Company repaid its $250 million, 4.375% debentures without penalty ahead of their November 2021 maturity. Also on August 1, 2021, the Company repaid its $4 million, 9.2% debentures upon their maturity.
At October 3, 2021, the Company had scheduled debt maturities of approximately $276 million over the next twelve months, including $202 million of outstanding commercial paper balances. Also at October 3, 2021, the Company had $160 million in cash and cash equivalents on hand and $750 million in committed capacity under its revolving credit
facility, of which $548 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 investing activities, will provide ample liquidity to cover these debt maturities and other cash flow needs of the Company over the course of the next twelve months.
Certain of the Company’s debt agreements impose restrictions with respect to the maintenance of financial ratios and the disposition of assets. The most restrictive covenants currently require the Company to maintain a minimum level of interest coverage and a minimum level of net worth, as defined in the agreements. As of October 1, 2017,3, 2021, the Company’s interest coverage and net worth were substantially above the minimum levels required under these covenants.
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.
On April 4, 2021, the Company completed the sale of its U.S. display and packaging business to makeHood Container Corporation for net cash proceeds totaling $79.7 million. The proceeds from the sale were received on April 5, 2021. During the quarter ended October 3, 2021, the Company finalized the working capital settlement related to this sale. The settlement resulted in additional cash proceeds of $2.0 million. The proceeds were used for general corporate purposes.
On April 20, 2021, the Company's Board of Directors authorized the repurchase of the Company's common stock in an aggregate amount of up to $350 million. The new authorization replaced the previous authorization dated February 10, 2016. Under the authorization, which has no expiration date, the Company may choose to purchase shares in the open market from individual holders through privately negotiated transactions, an accelerated share repurchase program, a combination of these methods, or otherwise. The timing and amount of the repurchases, if any, will depend upon several factors, including market and business conditions and the nature of other investment opportunities. Common stock repurchases, including with respect to any share repurchase program, may be limited, suspended or discontinued at any time without prior notice.
On May 6, 2021, the Company repurchased 53.5 thousand shares for $3.6 million from a private stockholder based upon the average stock price on that day.
On May 10, 2021, the Company entered into an accelerated share repurchase agreement ("ASR Agreement") with a financial institution to repurchase shares of common stock. In exchange for an upfront payment of $150 million, which was funded using available cash on hand, the financial institution delivered approximately 1.8 million of initial shares to the Company. These initial shares represented 80% of the expected number of shares to be repurchased during the repurchase period based upon the closing stock price on May 10, 2021 of $68.50 per share. The initial shares received were retired by the Company. The final number of shares repurchased and retired was based on the Company's volume-weighted average share price during the repurchase period, less a discount and subject to certain adjustments (the "Settlement Price").
In July 2021, pursuant to the ASR Agreement, the financial institution elected to fully accelerate settlement of the share repurchase agreement. Accordingly, 504.7 thousand additional shares were transferred to the Company based upon an overall effective Settlement Price of $66.47 and were retired.
As discussed in "Other Items - Pension Plan Termination," the Inactive Plan was terminated effective September 30, 2019. The Company settled the liabilities under the Inactive Plan during the second quarter of 2021 through a combination of lump-sum payments and annuity purchases, making additional contributions to the Inactive Plan totaling approximately $133 million during the second quarter of 2021 in order to be fully funded at the time the liabilities were settled.
The Company anticipates making additional contributions to its other pension and postretirement plans of approximately $55approximately $6.5 million during the remainder of 2017,2021, which includes a voluntary contributionwould result in total contributions to its U.S. qualified defined benefit pension planthese plans of $50 million made on October 25, 2017. Contributions to its pension and postretirement plans are
expected to total approximately $107$39 million in 2017.2021. 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 operations are located throughout the world, and the Company generally sells in the same countries where it produces with both revenue and costs transacted in the local currency. The Company monitors these exposures and may use traditional currency swaps and forward exchange contracts to hedge a portion of forecasted transactions that are denominated in foreign currencies, foreign currency assets and liabilities or net investment in foreign subsidiaries. The Company’s foreign operations are exposed to political, geopolitical and cultural risks, but the risks are mitigated by diversification and the relative stability of the countries in which the Company has significant operations.
PriorDue to July 1, 2015,the highly inflationary economy in Venezuela, the Company used Venezuela's official exchange rateconsiders the U.S. dollar to reportbe the results of its operations in Venezuela. As a result of significant inflationary increases, and to avoid distortion of its consolidated results from translationfunctional currency of its Venezuelan operations and uses the Company concluded that it was an appropriate time to begin translating its Venezuelan operations at an alternativeofficial exchange rate. Accordingly, effective July 1, 2015,rate when remeasuring the Company began translating its Venezuelan operatingfinancial results and all monetary assets and liabilitiesof those operations. Economic conditions in Venezuela usinghave worsened considerably over the alternative rate known aspast several years and there is no indication that conditions are due to improve in the SIMADI rate (replacedforeseeable future. Further deterioration could result in 2016 by the DICOM rate).recognition of an impairment charge or a deconsolidation of the subsidiary. At October 1, 2017,3, 2021, the carrying value of the Company's net investment in its Venezuelan operations was approximately $2.3$2.0 million. In addition, at October 1, 2017,3, 2021, 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 thesethe Venezuelan operations.
At October 1, 2017,The Company has operations in the United Kingdom and elsewhere in Europe that had the potential to be impacted by the exit of the U.K. from the European Union (Brexit) at the end of January 2020 and the new E.U.-U.K. Trade and Cooperation Agreement which went into effect December 31, 2020. Our U.K. operations developed contingency plans regarding potential customs clearance issues, tariffs and other uncertainties resulting from Brexit and the new agreement with the European Union. Although it is difficult to predict all of the possible future impacts to our supply chain or in our customers' downstream markets, the operational impacts subsequent to Brexit have been minor. The Company has evaluated the future potential operational impacts and uncertainties of Brexit and continues to believe that the likelihood of a material impact on our future results of operations is low. Although there are some cross-border sales made out of and into the U.K., most of what the Company had commodity contracts outstanding to fixproduces in the costU.K. is also sold in the U.K. and the same is true for continental Europe. In some cases, companies that have been importing from Europe into the U.K. are now seeking local sources, which has actually been positive for our U.K. operations. Sales in our U.K. operations totaled approximately $127 million for the full year 2020 and approximately $106 million in the first nine months of a portion of anticipated raw materials and natural gas purchases. 2021.
The total net fair market value of these instruments was $0.0 million and a favorable position of $3.6 million at at October 1, 2017 and December 31, 2016, respectively. Natural gas and aluminum hedge contracts covering an equivalent of 5.8 MMBTUs and 1,210 metric tons, respectively, were outstanding at October 1, 2017. Additionally, the Company had variousroutinely enters into derivative currency contracts outstanding to fix the exchange rate on certain anticipated foreign currency cash flows. The total market value of these instruments was a net unfavorable position of $(2.5)$0.4 million at October 1, 2017, compared with3, 2021 and a net unfavorablefavorable position of $(0.2)$0.6 million at December 31, 2016.2020. These contracts qualify as cash flow hedges and mature within twelve months of their respective reporting dates.
have maturities ranging to July 2022. In addition, at October 1, 2017,3, 2021, the Company had various currency contracts outstanding to fix the exchange rate on certain foreign currency assets and liabilities. Although placed as an economic hedge, the Company does not apply hedge accounting to these contracts. Thecontracts, the fair value of which was not material at October 3, 2021 and December 31, 2020.
The Company routinely enters into derivative commodity contracts to fix the cost of a portion of anticipated raw materials and energy-related purchases. The total net fair market value of these currency contractsinstruments was a net favorable position of $0.1$10.4 million at October 1, 20173, 2021 and a netan unfavorable position of $(0.7)$0.2 million at December 31, 2016.2020. Natural gas and aluminum hedge contracts covering an equivalent of 4.5 million MMBTUs and 904 metric tons, respectively, were outstanding at October 3, 2021. These contracts, some of which are designated as cash flow hedges, have maturities ranging to December 2022.
The Company's 1%, 150 million euro-denominated debt matured on May 25, 2021. On April 7, 2021, the Company entered into two forward contracts to buy a total of 150 million euros. The risk management objective of the forward contracts was to manage foreign currency risk related to the Company's funding of the debt repayment upon maturity. The Company recognized a gain of $4,387 upon the May 21, 2021 maturity of these forward contracts. The gain is
included in "Selling, general and administrative expenses" on the Company's Condensed Consolidated Statements of Income for the three and nine months ended October 3, 2021.
At October 1, 2017,3, 2021, the U.S. dollar had weakenedstrengthened against most of the functional currencies of the Company's foreign operations compared to December 31, 2016,2020, resulting in a net translation gain of $86.8 million being recorded in accumulated other comprehensive loss duringfor the nine months ended October 1, 2017.3, 2021 of $57.3 million being recorded in "Accumulated other comprehensive loss."
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.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Information about the Company’s exposure to market risk is discussed under Part I, Item 2 in this report and was disclosed in its Annual Report on Form 10-K for the year ended December 31, 2016,2020, which was filed with the Securities and Exchange Commission on March 1, 2017.February 26, 2021. There have been no other material quantitative or qualitative changes in market risk exposure since the date of that filing.
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Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
Under the supervision, and with the participation, of our management, including our Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we conducted an evaluation pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, ("the Exchange Act") of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on this evaluation, our CEO and CFO concluded that such controls and procedures, as of October 1, 2017,3, 2021, the end of the period covered by this Quarterly Report on Form 10-Q, were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. For this purpose, disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information that is required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
ThereIn response to the COVID-19 pandemic, we have required certain employees, some of whom are involved in the operation of our internal controls over financial reporting, to work from home. Despite this change, there have been no changes in the Company’s internal control over financial reporting occurring during the three monthsquarter ended October 1, 2017,3, 2021, that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting. We are continually monitoring and assessing the COVID-19 pandemic on our internal controls to minimize any impact it may have on their design and operating effectiveness.
PART II. OTHER INFORMATION
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Item 1. | Legal Proceedings. |
Information with respect to legal proceedings and other exposures appears in Part I - Item 3 - “Legal Proceedings” and Part II - Item 8 - “Financial Statements and Supplementary Data” (Note 1416 - “Commitments and Contingencies”) in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2020, and in Part I - Item 1 - “Financial Statements” (Note 1316 - “Commitments and Contingencies”) of this report.
Environmental Matters
The Company has been named as a potentially responsible party (PRP) at several environmentally contaminated sites not owned by the Company. All of the sites are also the responsibility of other parties. The Company's liability, if any, is shared with such other parties, but the Company's share has not been finally determined in most cases. In some cases, the Company has cost-sharing arrangements with other PRPs with respect to a particular site. Such agreements relate to the sharing of legal defense costs or cleanup costs, or both. The Company has assumed, for purposes of estimating amounts to be accrued, that the other parties to such cost-sharing agreements will perform as agreed. It appears that final resolution of some of the sites is years away, and actual costs to be incurred for these environmental matters in future periods is likely to vary from current estimates because of the inherent uncertainties in evaluating environmental exposures. Accordingly, the ultimate cost to the Company with respect to such sites, beyond what has been accrued at October 1, 2017,3, 2021, cannot be determined. As of October 1, 20173, 2021 and December 31, 2016,2020, the Company had accrued $20.5$7.4 million and $24.5$8.1 million, respectively, related to environmental contingencies. The Company periodically reevaluates the assumptions used in determining the appropriate reserves for environmental matters as additional information becomes available and, when warranted, makes appropriate adjustments.
Fox River
In January 2017, U.S. Paper Mills Corp. (U.S. Mills), a wholly owned subsidiary of the Company, obtained Court approval of a final settlement of cost recovery claims made by Appvion, Inc. for $3.3 million. The settlement was paid during the first quarter of 2017. Legal and professional fees relating to the settlement, totaling $0.4 million, were paid during the first and second quarters of 2017. As a result of the settlement becoming final, the Company and U.S. Mills have resolved all pending or threatened legal proceedings related to the Fox River matter, as well as any such proceedings known to be contemplated by government authorities.
Other legal matters
Additional information regarding legal proceedings is provided inin Note 1416 to the CondensedCondensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
ISSUER PURCHASES OF EQUITY SECURITIES
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Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1 | | Maximum Number or Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs1 |
7/5/21 - 8/8/21 | | 504,739 | | 2 | $ | 66.47 | | 2 | 504,739 | | 2 | $ | 196,385,005 | |
8/9/21 - 9/5/21 | | — | | | $ | — | | | — | | | $ | 196,385,005 | |
9/6/21 - 10/3/21 | | — | | | $ | — | | | — | | | $ | 196,385,005 | |
Total | | 504,739 | | | $ | 66.47 | | | 504,739 | | | $ | 196,385,005 | |
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Period | | (a) Total Number of Shares Purchased1 | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs2 | | (d) Maximum Number of Shares that May Yet be Purchased under the Plans or Programs2 |
7/03/17 - 8/06/17 | | 238 |
| | $ | 51.77 |
| | — |
| | 2,969,611 |
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8/07/17 - 9/03/17 | | 58 |
| | $ | 47.67 |
| | — |
| | 2,969,611 |
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9/04/17 - 10/01/17 | | 889 |
| | $ | 48.88 |
| | — |
| | 2,969,611 |
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Total | | 1,185 |
| | $ | 49.40 |
| | — |
| | 2,969,611 |
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1 | A total of 1,185 common shares were repurchased in the third quarter of 2017 related to shares withheld to satisfy employee tax withholding obligations in association with certain share-based compensation awards. These shares were not repurchased as part of a publicly announced plan or program. |
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2 | On February 10, 2016,April 20, 2021, the Company's Board of Directors authorized the repurchase of the Company's common stock in an aggregate amount of up to 5,000,000$350.0 million. As of October 3, 2021, a total of $196.4 million remains available under this authorization. |
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2 | On May 10, 2021, the Company entered into an accelerated share repurchase agreement ("ASR Agreement") with a financial institution to repurchase shares of the Company's common stock. A totalIn exchange for an upfront payment of 2,030,389$150.0 million, the financial institution delivered 1,751,825 of initial shares were repurchased under this authorization during 2016 at a costto the Company. These initial shares represented 80% of $100.0 million. Nothe expected number of shares wereto be repurchased during the nine-monthrepurchase period ended October 1, 2017.based upon the closing stock price on May 10, 2021 of $68.50 per share. The initial shares received were retired by the Company. The final number of shares repurchased and retired was based on the Company's volume-weighted average share price during the repurchase period, less a discount and subject to certain adjustments (the "Settlement Price"). In July 2021, pursuant to the ASR Agreement, the financial institution elected to fully accelerate settlement of the share repurchase agreement. Accordingly, a total504,739 additional shares were transferred to the Company based upon an overall effective Settlement Price of 2,969,611 shares remain available for repurchase at October 1, 2017.$66.47 and were retired.
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| Exhibit Index |
Item 6. | Exhibits. |
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| Exhibit Index |
10.13.1 | |
3.2 | |
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10.210.1 | |
10.2 | |
15.15 | |
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31.31 | |
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32.32 | |
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.101.SCH | The following materials from Sonoco Products Company’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2017, formattedXBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at October 1, 2017 and December 31, 2016, (ii) Condensed Consolidated Statements of Income for the three and nine months ended October 1, 2017 and October 2, 2016, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 1, 2017 and October 2, 2016, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended October 1, 2017 and October 2, 2016, and (v) Notes to Condensed Consolidated Financial Statements.Exhibit 101) |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | SONOCO PRODUCTS COMPANY |
| | (Registrant) |
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Date: | November 12, 2021 | By: | | /s/ Julie C. Albrecht |
| | | | Julie C. Albrecht |
| | | | Vice President and Chief Financial Officer |
| | | | (principal financial officer) |
| | | | |
| | SONOCO PRODUCTS COMPANY |
| | (Registrant) |
| | |
Date: | October 31, 2017 | By: | | /s/ Barry L. Saunders |
| | | | Barry L. Saunders |
| | | | Senior Vice President and Chief Financial Officer |
| | | | (principal financial officer) |
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| | | | /s/ James W. Kirkland |
| | | | James W. Kirkland |
| | | | Corporate Controller |
| | | | (principal accounting officer) |