SONOCO PRODUCTS COMPANY
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," "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;
•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 business strategies and the results expected of them;
•financial results for future periods;
•producing improvements in earnings;
•profitable sales growth and rates of growth;
•market leadership;
•research and development spending;
•expected impact and costs of resolution of legal proceedings;
•extent of, and adequacy of provisions for, environmental liabilities;
•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
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SONOCO PRODUCTS COMPANY
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;
•financial conditions of customers and suppliers;
•ability to maintain or increase productivity levels, contain or reduce costs,
and maintain positive price/cost relationships;
•ability to negotiate or retain contracts with customers, including in segments
with concentration of sales volume;
•inventory management strategies of customers;
•timing of introduction of new products or product innovations by customers;
•collection of receivables from customers;
•ability to improve margins and leverage cash flows and financial position;
•ability to manage the mix of business to take advantage of growing markets
while reducing cyclical effects of some of the Company's existing businesses on
operating results;
•ability to maintain innovative technological market leadership and a reputation
for quality;
•ability to attract and retain talented and qualified employees, managers and
executives;
•ability to profitably maintain and grow existing domestic and international
business and market share;
•ability to expand geographically and win profitable new business;
•ability to identify and successfully close suitable acquisitions at the levels
needed to meet growth targets, and successfully integrate newly acquired
businesses into the Company'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, tax laws, regulations and
interpretations thereof;
•the adoption of new, or changes in, accounting standards or interpretations;
•challenges and assessments from tax authorities resulting from differences in
interpretation of tax laws, including income, sales and use, property, value
added, employment, and other taxes;
•accuracy in valuation of deferred tax assets;
•accuracy of assumptions underlying projections related to goodwill impairment
testing, and accuracy of management's assessment of goodwill impairment;
•accuracy of assumptions underlying fair value measurements, accuracy of
management's assessments of fair value and fluctuations in fair value;
•ability to maintain effective 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;
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SONOCO PRODUCTS COMPANY
•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;
•actions of domestic or foreign government agencies and changes in laws and
regulations affecting the Company and increased costs of compliance;
•international, national and local economic and market conditions and levels of
unemployment;
•economic disruptions resulting from terrorist activities and natural 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-"Risk Factors" and throughout other sections of that report,
in this report on Form 10-Q under Part II, Item 1A - "Risk Factors," 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.
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SONOCO PRODUCTS COMPANY
COMPANY OVERVIEW
Sonoco is a leading provider of consumer packaging, industrial products,
protective packaging and packaging supply chain services, with approximately 320
locations in 36 countries.
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. The majority of the
Company's revenues are from products and services sold to consumer and
industrial products companies for use in the packaging of their products for
sale or shipment. The Company also manufactures uncoated recycled paperboard,
for both internal use and open market sale. Each of the Company's operating
units has its own sales staff and maintains direct sales relationships with its
customers.
COVID-19
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 36 countries where the Company operates. As a
result, nearly all of the Company's global operations have been able to continue
to operate despite locally-mandated temporary shutdown orders that were issued
in many of our geographic locations. Certain customers whose products have not
been deemed "critically essential" had to temporarily suspend operations due to
the COVID-19 pandemic, while some others have had time periods when they were
unable to fully staff their operations. As areas around the world continue to
reopen their economies, the Company is beginning to see improved demand for more
of its products and services. However, a resurgence of the virus in late June
and into July has raised concerns about a re-imposition of restrictions on
business activity and a negative effect on consumer behavior that alone, or
together, could delay or possibly reverse the economic recovery. Sonoco is
following these developments closely and will respond with appropriate changes
to active production capacity and cost-management initiatives.
The significance of the COVID-19 pandemic, including its effect on the Company's
financial condition and results of operations, will be dictated by, among other
things, its duration, the success of efforts to contain the virus and the impact
of actions taken by governments and others in response. 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
the pandemic would have an adverse impact on the Company's operations and
financial condition.
While a COVID-19 driven spike in consumer demand for certain food and household
products benefited the Company's 2020 first and second-quarter results, the
overall impact of the pandemic on second-quarter and year-to-date consolidated
results was negative, and the overall impact is expected to continue to be
negative in the third quarter. Although the Company has provided third-quarter
Base earnings per share (EPS) guidance of $0.73 to $0.83 compared to Base EPS of
$0.97 in the third quarter of 2019, it is not able to reliably estimate the
full-year 2020 financial impact of the COVID-19 pandemic and, therefore, is not
providing full-year Base EPS guidance. The wide range of third-quarter guidance
reflects uncertainties regarding the challenging macroeconomic conditions
stemming from the pandemic, including the impacts of volatile recycled fiber
costs and a stronger U.S. dollar. We expect COVID-19 to have a mixed impact on
demand for our products in the third quarter with a net negative impact to
earnings compared to the third quarter of last year. After a sharp run up in
recycled fiber costs that peaked in May 2020 , the Company expects prices,
including those for old corrugated containers, to stabilize at a lower level in
the third quarter, which has the possibility of benefiting results in our
industrial-related businesses compared to the second quarter of 2020.
Looking ahead to the third quarter, we expect our Consumer Packaging segment to
continue performing well, although more in line with normal seasonal volume
trends, as sales from food packaging should continue to benefit from consumers'
stay-at-home eating habits. We expect our industrial-related markets to continue
experiencing weak demand compared to 2019 with our Paper and Industrial
Converted Products segment continuing to face a negative price/cost relationship
due to higher year-over-year recycled fiber costs and lower market pricing.
However, more-stable OCC prices should allow price/cost to improve over the
second quarter of this year. Our Protective Solutions businesses that serve
automotive and appliance markets began seeing a gradual reopening of customers'
facilities late in the second quarter and we expect demand to continue to
improve during the third quarter. We expect our ThermoSafe temperature-assured
packaging business will benefit from a strong flu vaccine season and a return to
more-normal demand from its base pharmaceutical and food customers during the
third quarter. Finally, our Display and Packaging business is expected
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SONOCO PRODUCTS COMPANY to continue to face weak retail promotional display activity, but should partially offset this weakness through cost controls.
Financial Flexibility and LiquiditySonoco has a strong, investment-grade balance sheet and has 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 bank or other debt capital markets. OnMarch 18, 2020 , the Company closed and funded a new$150 million , 364-day term loan, the proceeds from which were used to repay a portion of outstanding commercial paper. OnApril 1, 2020 , the Company accessed$250 million from its revolving credit facility using$85 million of the proceeds to fully repay the then outstanding commercial paper balance. OnApril 6, 2020 , the Company borrowed$100 million , pursuant to a new 364-day term loan and onApril 22, 2020 , sold$600 million of 3.125% notes due 2030. OnMay 5, 2020 , the Company repaid the$250 million borrowed April 1, 2020 under its revolving credit facility and onJuly 20, 2020 , the Company repaid the$150 million term loan entered into onMarch 18, 2020 . In May, the Company exercised a conditional, one-time option to extend its$200 million term loan originally dueMay 2020 toMay 2021 . Following these actions, the Company currently has approximately$700 million in cash and cash equivalents on hand and$500 million in committed availability under its revolving credit facility. Health, Safety and Business Continuity The health and safety ofSonoco's associates, contractors, suppliers and the general public is a top priority. Included among the safety measures we have recently implemented are: conducting health screenings for personnel entering our operations, routinely cleaning high-touch surfaces, following social distancing protocols, prohibiting all non-critical business travel, and encouraging all associateswho can to work from home when possible. Additionally,Sonoco has launched a dedicated COVID-19 internal microsite to keep its associates up to date on Company and health authority information, guidelines, protocols and policies, including those set by theWorld Health Organization and theU.S. Centers for Disease Control and Prevention .Sonoco has also put in place aGlobal Task Force to develop and implement business continuity plans to ensure its operations are as prepared as possible to be able to continue producing and shipping product to its customers without disruption.Sonoco has a diverse global supply chain and to date has not experienced significant raw material or other supply disruptions. Second Quarter 2020 Compared with Second Quarter 2019 RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES Measures calculated and presented in accordance with generally accepted accounting principles are referred to as GAAP financial measures. The following tables reconcile the Company's non-GAAP financial measures to their most directly comparable GAAP financial measures in the Company's Condensed Consolidated Statements of Income for each of the periods presented. These non-GAAP financial measures (referred to as "Base") are the GAAP measures adjusted to exclude amounts (dependent upon the applicable period), including the associated tax effects, relating to restructuring initiatives, asset impairment charges, non-operating pension costs or income, environmental reserve charges/releases, acquisition-related costs, gains or losses from the disposition 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 comparability and analysis of the underlying financial performance of the business. More information about the Company's use of non-GAAP financial measures is provided in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 under Item 7 - "Management's discussion and analysis of financial condition and results of operations," under the heading "Use of non-GAAP financial measures." 40 --------------------------------------------------------------------------------SONOCO PRODUCTS COMPANY For
the three months ended
Restructuring/
Dollars in thousands, except per share Asset Other data GAAP Impairment Adjustments(1) Base Operating profit$ 103,727 $
22,885 $ (56)
7,600 - (7,600) -
Interest expense, net 18,685 - - 18,685
Income before income taxes 77,442 22,885 7,544 107,871
Provision for income taxes 23,230 6,224 (717) 28,737
Income before equity in earnings of
affiliates 54,212 16,661 8,261 79,134
Equity in earnings of affiliates, net of
tax 778 - - 778
Net income 54,990 16,661 8,261 79,912
Net loss/(income) attributable to
noncontrolling interests 221 (5) - 215
Net income attributable to Sonoco $ 55,211 $
16,655
$ 0.55 $
0.16
(1 ) Consists of non-operating pension costs, costs related to actual and
potential acquisitions and divestitures, the anticipated impact of the
settlement of a
For
the three months ended
Restructuring/
Dollars in thousands, except per share Asset Other data GAAP Impairment Adjustments(1) Base Operating profit$ 129,768 $
13,355
5,550 - (5,550) -
Interest expense, net 15,952 - - 15,952
Income before income taxes 108,266 13,355 6,762 128,383
Provision for income taxes 28,491 3,307 1,430 33,228
Income before equity in earnings of
affiliates 79,775 10,048 5,332 95,155
Equity in earnings of affiliates, net of
tax 1,511 - - 1,511
Net income 81,286 10,048 5,332 96,666
Net (income) attributable to
noncontrolling interests (127) (69) - (196)
Net income attributable to Sonoco $ 81,159 $
9,979
$ 0.80 $
0.10
(1) Consists of non-operating pension costs and costs related to acquisitions and potential acquisitions and divestitures. RESULTS OF OPERATIONS The following discussion provides a review of results for the three months endedJune 28, 2020 versus the three months endedJune 30, 2019 . OVERVIEW Net sales for the second quarter of 2020 decreased 8.4 percent to$1,245 million , compared with$1,360 million in the same period last year. This decrease reflects volume declines and lower selling prices in many of the Company's businesses as well as unfavorable changes in foreign currency exchange rates. These negative factors were partially offset by sales from acquisitions. Lower overall selling prices in our industrial businesses were largely due to contracts indexed to Old Corrugated Containers (OCC), the cost of which increased considerably after selling prices were reset for the second quarter. Conversely, in the prior year OCC prices fell after the second quarter reset. Thus, margins contracted in the second quarter of 2020 compared to 2019 for most of the Company's industrial businesses. Net income attributable toSonoco for the second quarter of 2020 decreased 32.0 percent to$55.2 million ,$0.55 per diluted share, compared to$81.2 million ,$0.80 per diluted share, reported for the same period of 2019. Current-quarter net income includes after-tax, non-base charges totaling$24.9 million , while results for the second quarter of 2019 41 -------------------------------------------------------------------------------- SONOCO PRODUCTS COMPANY include after-tax, non-base net charges totaling$15.3 million . The$9.6 million increase in non-base charges is largely attributable to a$6.7 million increase in after-tax restructuring and asset impairment costs. For more information regarding restructuring and asset impairment costs see Note 5. All other after-tax non-base items increased$2.9 million driven by charges related to an income tax settlement that was agreed to in principle during the quarter as well as an increase in after-tax non-operating pension costs compared to the prior year's second quarter. Base net income attributable toSonoco (Base earnings) for the second quarter 2020 decreased 16.9 percent to$80.1 million ,$0.79 per diluted share, from$96.5 million ,$0.95 per diluted share, in 2019. This decrease was largely driven by a 12.3 percent decrease in Base operating profit together with a higher effective tax rate and an increase in net interest expense. The impact on profitability of volume declines and an overall negative price/cost relationship was partially offset by strong productivity improvements, other variable and fixed cost reductions and the benefit of acquisitions. OPERATING REVENUE Net sales for the second quarter of 2020 decreased$114 million , or 8.4 percent, from the prior-year quarter. The components of the sales change were: ($ in millions) Volume/mix $ (94) Selling prices (12) Acquisitions 34 Foreign currency translation and other, net (42) Total sales decrease $ (114) COSTS AND EXPENSES Cost of goods sold decreased$86.9 million , or 8.0 percent, driven primarily by lower volume, the translation impact of a stronger dollar, and productivity gains. Gross profit was$248 million for the quarter,$27 million below the prior-year period. Despite this reduction, gross profit as a percent of sales declined only modestly to 19.9 percent compared to 20.2 percent in the prior-year quarter. Selling, general and administrative expenses ("SG&A") for the quarter decreased$10.8 million , or 8.2 percent, year over year due to a significant focus across the business on reducing controllable costs and the impact of the pandemic on certain costs such as travel and employee medical. These reductions were partially offset by the addition of SG&A from acquisitions. As noted in the segment discussions below, the COVID-19 pandemic is expected to continue triggering higher demand in some of our businesses, but result in lower demand in others. The net overall impact for the Company is expected to be negative for at least the third quarter. As a result, the Company will continue to seek to reduce costs at manufacturing locations expected to experience sustained declines in volume and aggressively pursue reductions in overall selling, general and administrative costs. Restructuring costs and asset impairment charges totaled$22.9 million for the second quarter of 2020 compared with$13.4 million in the same period last year. The year-over-year increase was driven largely by severance costs related to the closure of the No. 3 uncoated recycled board paper machine at itsHartsville, South Carolina , paper mill and the closure of theTrenton, Ontario, Canada paper mill. The closure of theCanadian Mill also resulted in a$5.7 million asset impairment charge in the second quarter of 2020. Additional information regarding restructuring and asset impairment charges is provided in Note 5 to the Company's Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Non -operating pension costs increased$2.1 million for the quarter, compared to the prior-year's period, due primarily to lower expected returns on plan assets stemming from actions in the previous year to de-risk theU.S. plan's portfolio by increasing the allocation of pension assets to fixed-income investments. Net interest expense for the second quarter increased to$18.7 million , compared with$16.0 million during the second quarter of 2019. The increase was primarily due to higher debt balances, partially offset by the impact of lower interest rates. 42 -------------------------------------------------------------------------------- SONOCO PRODUCTS COMPANY The 2020 second-quarter effective tax rates on GAAP and Base earnings were 30.0 percent and 26.6 percent, respectively, compared with 26.3 percent and 25.9 percent, respectively, in the prior year's quarter. The effective tax rate on GAAP earnings for the second quarter of 2020 was higher than the prior year's rate due primarily to recording the expected impact of settling the Company's federal income tax audit.
REPORTABLE SEGMENTS The following table recaps net sales attributable to each of the Company's segments for the second quarters of 2020 and 2019 ($ in thousands):
Three Months Ended
%
June 28, 2020 June 30, 2019 Change
Net sales:
Consumer Packaging $ 614,621 $ 602,750 2.0 %
Display and Packaging 107,303 134,833 (20.4) %
Paper and Industrial Converted Products 434,452 491,328 (11.6) %
Protective Solutions 89,109 130,810 (31.9) %
Consolidated $ 1,245,485 $ 1,359,721 (8.4) %
The following table recaps operating profit attributable to each of the
Company's segments during the second quarters of 2020 and 2019 ($ in thousands):
Three Months Ended
%
June 28, 2020 June 30, 2019 Change
Operating profit:
Segment operating profit:
Consumer Packaging $ 86,129 $ 62,942 36.8 %
Display and Packaging 5,981 5,889 1.6 %
Paper and Industrial Converted Products 29,964 61,229 (51.1) %
Protective Solutions 4,482 14,275 (68.6) %
Restructuring/Asset impairment charges (22,885) (13,355)
Other, net 56 (1,212)
Consolidated $ 103,727 $ 129,768 (20.1) %
Segment results viewed by Company management to evaluate segment performance do
not include restructuring charges, asset impairment charges, acquisition-related
costs, non-operating pension costs or income, environmental reserve charges 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 "operating profit"
excluding those items. All other general corporate expenses have been allocated
as operating costs to each of the Company's reportable segments.
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SONOCO PRODUCTS COMPANY
The following table recaps restructuring/asset impairment charges attributable
to each of the Company's segments during the second quarter of 2020 and 2019 ($
in thousands):
Three Months Ended
June 28, 2020 June 30, 2019
Restructuring/Asset impairment charges:
Consumer Packaging $ 3,250 $ 10,487
Display and Packaging 668
511
Paper and Industrial Converted Products 17,689 1,600 Protective Solutions 695 561 Corporate 583 196 Consolidated$ 22,885 $ 13,355 Consumer PackagingThe Consumer Packaging segment 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; and metal and peelable membrane ends and closures. Segment sales increased 2.0 percent compared to the prior-year quarter due to higher volume/mix and sales added from theDecember 2019 acquisition ofThermoformed Engineered Quality, LLC , andPlastique Holdings, LTD (together TEQ), medical packaging businesses, partially offset by the negative impact of foreign exchange translation and lower selling prices. Global Rigid Paper Containers sales benefited from an approximately 8 percent gain in volume/mix driven by strong food product demand inNorth America ,Europe andAsia .Flexible Packaging sales declined slightly during the quarter due primarily to the closure of a forming films line in 2019, while volume/mix was up approximately 1 percent during the quarter as solid demand for hard baked goods and other food categories was offset by lower demand for confectionery products. In Global Plastics, sales were higher as a result of the acquisition of TEQ, while solid volume/mix growth in prepared and specialty foods was more than offset by industrial-related volume declines and reduced selling prices due to lower resin prices. Segment operating profit increased 36.8 percent compared to the prior year's quarter driven by strong productivity improvements along with solid volume/mix improvement, a positive price/cost relationship and cost controls. Segment operating margin improved to 14.0 percent in the quarter from 10.4 percent in the 2019 period. The COVID-19 pandemic is expected to have a mixed impact on this segment in the near term reflecting increased demand for food and household goods packaging driven by stay-at-home consumers and weakness in non-food categories due to on-going restrictions on normal economic activity and the impact of higher unemployment. The Company will continue to seek to reduce costs at locations that experience sustained declines in volume.Display and Packaging The Display and Packaging segment includes the following products and services: designing, manufacturing, assembling, packing and distributing temporary, semi-permanent and permanent point-of-purchase displays; supply chain management services, including contract packing, fulfillment and scalable service centers; retail packaging, including printed backer cards, thermoformed blisters and heat sealing equipment; and paper amenities, such as coasters and glass covers. Sales declined 20.4 percent compared to last year's quarter due to lower volume in domestic displays, paper amenities and retail security packaging as well as the negative impact of foreign currency translation. Segment operating profit was essentially flat as productivity improvements and cost controls were mostly offset by lower volume/mix. Segment operating margin improved to 5.6 percent in the quarter up from 4.4 percent in 2019. Lower overall economic activity is expected to negatively impact the segment's manufactured materials, retail security, and paper amenities businesses compared to the prior-year levels. This negative impact is expected to be only partially offset by demand from stay-at-home consumers and COVID-19 preparedness which should continue benefiting the Company's fulfillment operations. The Company will continue to seek to reduce costs at locations that experience sustained declines in volume. Because the profitability of certain packaging center business is not highly sensitive to volume, COVID-19 driven declines in activity would not be expected to have a commensurate impact on related operating results. 44 -------------------------------------------------------------------------------- SONOCO PRODUCTS COMPANY Paper and Industrial Converted Products The Paper and Industrial Converted Products segment includes the following products: paperboard tubes, cones and cores; fiber-based construction tubes; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, linerboard, corrugating medium, recovered paper and material recycling services. Segment sales declined 11.6 percent from the prior year's quarter as lower volume/mix, the negative impact of foreign exchange translation and lower selling prices more than offset sales gained from the acquisition ofCorenso Holdings inAugust 2019 . The lower volume/mix was driven by significantly lower global tube, core and cone volume, including an approximately 13 percent decline in tube and core volume in theU.S. andCanada and about an 8 percent decline in volume inEurope . Global uncoated recycled paperboard (URB) and corrugated medium volume/mix was down almost 7 percent despite an approximately 14 percent increase in demand for paper going into the tissue and towel market. During the quarter, the Company permanently closed its paper mill inTrent Valley ,Ontario, Canada , and a URB machine inHartsville, South Carolina , to address capacity requirements. Segment operating profit declined 51.1 percent from the prior year's quarter as the benefit of productivity improvements and earnings from theCorenso acquisition was more than offset by a significant negative price/cost relationship caused by an approximately$60 per ton, or 130%, increase in average OCC prices for the quarter along with the negative impact of much lower volume/mix and the strongerU.S. dollar. Segment operating margin declined 556 basis points from the prior-year quarter to 6.9 percent. As a result of COVID-19, the Company expects to see continued year-over-year volume declines in many of our global paper and industrial converted markets with some offset from increased near-term demand for paperboard serving the tissue and towel market. The Company expects recycled fiber prices to stabilize nearJuly 2020 averages in the third quarter. Although the resulting price/cost relationship is expected to be negative compared to the prior-year third quarter, the relationship is expected to improve compared to this year's second quarter. The Company will continue to seek to reduce costs at locations that experience sustained declines in volume. 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 declined 31.9 percent driven primarily by virus-related customer shutdowns which negatively impacted demand for molded foam automotive components and fiber packaging for consumer appliances. ThermoSafe temperature-assured packaging volume also declined due to reduced demand for transporting pharmaceuticals to medical clinics as non-virus related treatments were postponed. Segment operating margin, compared to the prior-year's quarter, declined 588 basis points to 5.0 percent. The ThermoSafe business is expected to produce solid results in the third quarter of 2020 largely driven by the sales of temperature-assured packaging critical for virus testing and pharmaceutical transport, including flu vaccines. In addition, we expect third-quarter earnings in our Protective Solutions segment to significantly improve over the second quarter of 2020 driven by improved demand in our molded foam and consumer fiber businesses, which serve the automotive and appliance markets. 45 -------------------------------------------------------------------------------- SONOCO PRODUCTS COMPANY
Six Months Ended
For the
six months ended
Restructuring/
Dollars in thousands, except per share Asset Other data GAAP Impairment Adjustments(1) Base Operating profit$ 233,830 $ 35,484 $ 1,154 $ 270,468 Non-operating pension costs 15,179 - (15,179) - Interest expense, net 34,730 - - 34,730 Income before income taxes 183,921 35,484 16,333 235,738 Provision for income taxes 49,986 9,353 2,683 62,022 Income before equity in earnings of affiliates 133,935 26,131 13,650 173,716 Equity in earnings of affiliates, net of tax 1,291 - - 1,291 Net income 135,226 26,131 13,650 175,007 Net (income) attributable to noncontrolling interests 430 (17) - 413 Net income attributable to Sonoco$ 135,656 $ 26,114 $ 13,650 $ 175,420 Per diluted common share*$ 1.34 $ 0.26 $ 0.14 $ 1.73 *Due to rounding individual items may not sum across
(1) Consists of non-operating pension costs, costs related to actual and
potential acquisitions and divestitures, the anticipated impact of the
settlement of a
For the
six months ended
Restructuring/
Dollars in thousands, except per share Asset Other data GAAP Impairment Adjustments(1) Base Operating profit$ 246,656 $ 24,027 $ 1,612 $ 272,295 Non-operating pension costs 11,591 - (11,591) - Interest expense, net 31,337 - - 31,337 Income before income taxes 203,728 24,027 13,203 240,958 Provision for income taxes 51,115 5,945 3,315 60,375 Income before equity in earnings of affiliates 152,613 18,082 9,888 180,583 Equity in earnings of affiliates, net of tax 2,441 - - 2,441 Net income 155,054 18,082 9,888 183,024 Net (income) attributable to noncontrolling interests (232) (138) - (370) Net income attributable to Sonoco$ 154,822 $ 17,944 $ 9,888 $ 182,654 Per diluted common share*$ 1.53 $ 0.18 $ 0.10 $ 1.81 *Due to rounding individual items may not sum across
(1) Consists primarily of non-operating pension costs and costs related to acquisitions and potential acquisitions and divestitures..
46
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SONOCO PRODUCTS COMPANY
RESULTS OF OPERATIONS
The following discussion provides a review of results for the six months ended
June 28, 2020 compared with the six months ended June 30, 2019 .
OVERVIEW
Net sales for the first six months of 2020 decreased 6.0 percent to $2,549
million , compared with $2,711 million in the same period last year. The decline
reflects a decrease in volume/mix stemming from the virus-driven recession,
lower selling prices, and a negative impact from foreign exchange translation
that more than offset sales added from acquisitions.
Net income attributable to Sonoco for the first six months of 2020 decreased
12.4 percent to $135.7 million , $1.34 per diluted share, compared to $154.8
million , $1.53 per diluted share, reported for the same period of 2019. Current
period net income includes after-tax, non-base charges totaling $39.8 million .
These charges largely consist of $26.1 million in after-tax restructuring
charges and $11.1 million in after-tax non-operating pension charges. Results
for the first six months of 2019 include after-tax restructuring and asset
impairment charges of $17.9 million and other non-base charges totaling $9.9
million , after tax, consisting largely of non-operating pension expense and
acquisition costs. Adjusted for these items, Base net income attributable to
Sonoco (Base earnings) for the six-month period ending June 28, 2020 decreased
4.0 percent to $175.4 million , $1.73 per diluted share, from $182.7 million ,
$1.81 per diluted share, in 2019.
The decrease in Base earnings of $7.2 million is largely attributable to the net
impact of the COVID-19 pandemic on overall sales volume, negative price/cost in
our Paper and Industrial Converted Products segment, higher net interest expense
and a slightly higher effective tax rate, which, in total, were largely offset
by productivity improvements, other cost reductions and earnings from prior-year
acquisitions.
OPERATING REVENUE
Net sales for the first six months of 2020 decreased $163 million from the same
period in 2019.
The components of the sales change were:
($ in millions)
Volume/mix $ (131)
Selling prices (37)
Acquisitions and Divestitures 72
Foreign currency translation and other, net (68)
Total sales increase $ (163)
COSTS AND EXPENSES
Cost of goods sold decreased $131.8 million , or 6.1 percent, while the Company's
gross profit margin percentage increased slightly to 20.2 percent for the first
six months of 2020, compared to 20.1 percent in the prior-year period. The
decrease in the amount of cost of goods sold was primarily due to the decrease
in sales, as their percentage decreases were nearly identical. Despite the
pandemic-driven decrease in sales volume and the negative price/cost
relationship resulting from the second-quarter spike in OCC costs, gross profit
margin remained steady due to strong productivity improvements and aggressive
cost management actions.
SG&A costs for the first six months decreased $29.5 million , or 10.7 percent,
year over year driven by a significant focus across the business on reducing
controllable costs, as well as the impact of the pandemic on lower travel,
employee medical, management incentives, and other expenses. These reductions
were partially offset by the addition of SG&A expenses from acquisitions.
Year-to-date restructuring costs and asset impairment charges in 2020 totaled
$35.5 million , compared with $24.0 million in the same period last year.
Additional information regarding restructuring and asset impairment charges is
provided in Note 5 to the Company's Condensed Consolidated Financial Statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
47
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SONOCO PRODUCTS COMPANY
Non-operating pension costs increased $3.6 million in the first six months of
2020 compared to the prior-year period due primarily to lower expected returns
stemming from actions in the previous year to de-risk the U.S. plan's portfolio
by increasing the allocation of pension assets to fixed-income investments.
Net interest expense for the first six months of 2020 increased to $34.7
million , compared with $31.3 million during the first six months of 2019. The
increase was primarily due to higher debt balances stemming from the $600
million in 10-year bonds issued in April 2020 and other shorter-term borrowings
executed in April and May to ensure adequate liquidity due to the pandemic.
The effective tax rate on GAAP and Base earnings in the first six months of 2020
was 27.2 percent and 26.3 percent, respectively, compared with 25.1 percent for
both GAAP and Base earnings in the prior-year period. The effective tax rate on
GAAP and Base earnings was higher in the current year due to a greater portion
of the Company's earnings being subject to tax in higher-tax jurisdictions
outside of the United States . The effective tax rate on GAAP earnings was also
higher due to recording the expected impact of settling the Company's federal
income tax audit.
REPORTABLE SEGMENTS
The following table recaps net sales attributable to each of the Company's
segments during the first six months of 2020 and 2019 ($ in thousands):
Six Months Ended
June 28, 2020 June 30, 2019 % Change
Net sales:
Consumer Packaging $ 1,203,038 $ 1,192,466 0.9 %
Display and Packaging 228,659 272,387 (16.1) %
Paper and Industrial Converted Products 909,422 987,365 (7.9) %
Protective Solutions 207,662 259,208 (19.9) %
Consolidated $ 2,548,781 $ 2,711,426 (6.0) %
The following table recaps operating profits attributable to each of the
Company's segments during the first six months of 2020 and 2019 ($ in
thousands):
Six Months Ended
June 28, 2020 June 30, 2019 % Change
Operating profit:
Segment operating profit:
Consumer Packaging $ 153,930 $ 125,057 23.1 %
Display and Packaging 14,075 12,343 14.0 %
Paper and Industrial Converted Products 83,977 109,616 (23.4) %
Protective Solutions 18,486 25,279 (26.9) %
Restructuring/Asset impairment charges (35,484) (24,027)
Other, net (1,154) (1,612)
Consolidated $ 233,830 $ 246,656 (5.2) %
Segment results viewed by Company management to evaluate segment performance do
not include restructuring charges, asset impairment charges, acquisition-related
charges, non-operating pension costs, or certain other items, if any, the
exclusion of which the Company believes improves the comparability and analysis
of the ongoing operating performance of the business. Accordingly, the term
"segment operating profit" is a non-GAAP measure and is defined as the segment's
portion of "operating profit" excluding those items. All other general corporate
expenses have been allocated as operating costs to each of the Company's
reportable segments.
48
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SONOCO PRODUCTS COMPANY
The following table recaps restructuring/asset impairment charges attributable
to each of the Company's segments during the first six months of 2020 and 2019
($ in thousands):
Six Months Ended
June 28, 2020 June 30, 2019
Restructuring/Asset impairment charges:
Consumer Packaging $ 5,612 $ 17,742
Display and Packaging 3,548
886
Paper and Industrial Converted Products 23,045 2,474 Protective Solutions 1,168 1,003 Corporate 2,111 1,922 Consolidated$ 35,484 $ 24,027 Consumer Packaging Segment sales increased 0.9 percent year to date compared to the prior-year period as sales added by the acquisition of TEQ and a modest uptick in volume, were largely offset by the closure of a forming films line in 2019, lower selling prices and the negative impact of foreign currency translation. The pandemic's impact on consumer behavior positively affected demand for rigid paper containers and prepared and specialty foods plastic packaging, but those benefits were largely offset by significantly reduced demand for plastic packaging in our industrial end use market. Year-to-date segment operating profit increased 23.1 percent due almost entirely to productivity gains and other cost reductions that, in total, were somewhat offset by a modestly negative price/cost impact. As a result, segment operating profit margin increased 231 basis points to 12.8 percent.Display and Packaging Sales for the segment were down 16.1 percent year to date compared to last year's period as volume was down throughout the segment due primarily to the pandemic's impact on demand for promotional displays and paper amenities for the hotel industry. Despite the decline in volume, segment operating profit increased$1.7 million due to strong productivity improvements and effective cost reduction actions. Paper and Industrial Converted Products Segment sales decreased 7.9 percent year to date versus the prior-year period due to pandemic-driven volume declines, lower sales prices, and a negative impact of foreign currency translation. These declines were partially offset by sales added by the prior-year acquisition ofCorenso Holdings . Operating profit decreased 23.4 percent from the prior-year period driven by the decline in volume and a negative price/cost relationship largely due to a steep increase in recycled fiber costs in the second quarter that could not be fully recovered through selling price adjustments. These decreases were partially offset by solid productivity gains. As a result, segment operating margin declined 188 basis points to 9.2 percent. Protective Solutions Segment sales for the period declined 19.9 percent year over year driven by volume declines in molded foam and consumer fiber packaging due to automotive plant shutdowns and lower consumer demand for durable goods such as appliances. In addition, temperature-assured packaging sales also saw a year-over-year decline as customers reduced or delayed purchases due to uncertainty regarding the impact the virus would have on their businesses. Year-to-date operating profit decreased 26.9 percent from the prior-year period due primarily to the volume declines, partially offset by productivity improvements and effective cost management. Segment operating margin was 8.9 percent, an 86 basis point decline from the same period last year. 49 -------------------------------------------------------------------------------- SONOCO PRODUCTS COMPANY OTHER ITEMS Critical Accounting Policies and EstimatesGoodwill impairment evaluation The Company assesses goodwill for impairment annually during the third quarter, or from time to time when warranted by the facts and circumstances surrounding individual reporting units or the Company as a whole. The Company completed its most recent annual goodwill impairment testing during the third quarter of 2019. Although no reporting units failed the assessments, during the time subsequent to the annual evaluation, and atJune 28, 2020 , the Company considered whether any events and/or changes in circumstances, including the impact of the COVID-19 pandemic, had resulted in the likelihood that the goodwill of any of its reporting units may have been impaired. Although it is management's opinion that no such events have occurred, the results of the Conitex reporting unit have been negatively impacted by the economic fallout of the COVID-19 pandemic due to end-market weakness, particularly in textiles, as well as certain customers' plants being temporarily shut down to contain the spread of the virus. Management currently expects customer demand will begin to increase and begin approaching pre-pandemic levels next year. However, should it become apparent that the post-COVID-19 recovery is likely to be weaker, or significantly delayed, compared to management's current expectations, a goodwill impairment charge may be possible in the future. Total goodwill associated with this reporting unit was$32.2 million atJune 28, 2020 . The Company previously owned a 30% noncontrolling interest inConitex Sonoco (BVI), Ltd. before acquiring the remaining 70% interest onOctober 1, 2018 . In its 2019 annual goodwill impairment test, the Company estimated the fair value of the Conitex reporting unit to be approximately equal to its carrying value. Income taxes As disclosed in prior periods, inFebruary 2017 the Company received a Notice of Proposed Adjustment ("NOPA") from the Internal Revenue Service ("IRS") proposing adjustments to the 2012 and 2013 tax years. In 2018, the Company filed a protest to the proposed deficiency and the matter was referred to theAppeals Division of the IRS . In the second quarter of 2020, the Company agreed to pay approximately$6 million in taxes and interest to settle the dispute and recorded the impact of this settlement in its provision for income taxes. The Company anticipates receiving a final notice formalizing the settlement, and paying the assessment, in the second half of 2020. Pension Plan Termination As previously disclosed, the Company terminated the Sonoco Pension Plan for Inactive Participants, a tax-qualified defined benefit plan (the "Inactive Plan"), effectiveSeptember 30, 2019 . Once approval is received from thePension Benefit Guaranty Corporation ("PBGC"), and following completion of a limited lump-sum offering, the Company is expected to settle all remaining liabilities under the Inactive Plan in 2021 through the purchase of annuity contracts. The Company intends to apply to the PBGC for an extension of the distribution deadline and expects to make additional contributions to the Inactive Plan of approximately$150 million in 2021 in order to be fully funded on a termination basis at the time of the annuity purchase. The actual amount of the Company's long-term liability when it is transferred, and the related required cash contribution, will depend upon the nature and timing of participant settlements, as well as prevailing market conditions. These expected contributions are reducing tax payments in 2020 by approximately$38 million . Non-cash, pretax settlement charges resulting from the lump sum payouts and annuity purchases are currently expected to total approximately$590 million . The termination of the Inactive Plan will apply to participantswho have separated service fromSonoco and to nonunion active employeeswho no longer accrue pension benefits. There is no change in the cumulative benefit previously earned by the approximately 11,000 impacted participants as a result of these actions, and the Company will continue to manage and support the Sonoco Pension Plan, comprised of approximately 600 active participantswho continue to accrue benefits in accordance with a flat-dollar multiplier formula. Financial Position, Liquidity and Capital Resources Operating cash flows totaled$282.0 million in the six months endedJune 28, 2020 compared with$40.1 million during the same period last year, an increase of$241.9 million . The increase is largely attributable to a year-over-year reduction in pension and retirement plan contributions. The Company made a voluntary contribution of$190 million to itsU.S. defined benefit pension plans in the first six months of 2019 and made no such contributions in the first six months of 2020. Accounts Receivable consumed$13.5 million of operating cash in the first six months of 2020 compared with$46.2 million in the same period last year. Although both periods saw increased business activity from year-end levels, the global recession caused by COVID-19 has muted that increase in the current year. Additionally, inventories consumed$32.0 million of cash in the first six months of 2020 compared with$16.8 million in 50 -------------------------------------------------------------------------------- SONOCO PRODUCTS COMPANY the same period last year. Due to swiftly changing demand caused by the pandemic, right-sizing inventory has been a greater challenge than normal. Trade accounts payable provided$17.8 million of cash during the six months endedJune 28, 2020 compared to consuming$2.8 million in the same reporting period last year. Changes in accrued expenses provided$9.3 million of operating cash in the six months endedJune 28, 2020 while consuming$7.7 million in the same period last year. The greater provision of cash in the current year is primarily due to lower management incentives paid in the first six months of 2020 compared to the same period last year, as well as the timing of payroll and other payments. Changes in other assets and liabilities provided$0.8 million less cash in the first six months of 2020 compared to 2019. Although the current year benefited from the deferred payment of certain payroll taxes under the CARES Act, these were slightly less than insurance proceeds received in the prior year associated with clean-up and other repair costs related to Hurricane Florence. The impact of income taxes, net payables and deferred items provided$17.2 million more cash in the first six months of 2020 versus the first six months of the prior year due largely to timing of estimated tax payments in 2020 because of deferrals allowed underCOVID-related IRS guidance. Cash used in investing activities was$74.8 million in the six months endedJune 28, 2020 , compared with$99.9 million in the same period last year, a lower year-over-year use of cash of$25.1 million . Acquisition spending was$3.3 million higher year over year as a result of the Company's acquisition of a tubes and cores operation inJacksonville, Florida in the first six months of 2020. In the first six months of 2019, a small amount of cash was used to settle final purchase price adjustments related to the 2018 Conitex and Compositub acquisitions. Proceeds from the sale of assets provided$4.8 million in the six months endedJune 28, 2020 , compared to$1.5 million in the same period last year. The year-over-year increase was due primarily to net proceeds of$2.4 million received inFebruary 2020 for the sale of equipment at a metal ends operation inCanton, Ohio . Capital spending during the first six months of 2020 was$76.4 million , approximately$26 million lower year over year. Capital spending for the remaining six months of 2020 is not expected to exceed$120 million , bringing the total expected net capital spending in 2020 to$195.0 million . This increase in the second half of 2020 includes planned spending of approximately$20 million to begin work on the transformation of the corrugated medium paper machine inHartsville, South Carolina , into a low-cost, state-of-the-art uncoated recycled paperboard machine, as well as other projects that were previously on hold due to the economic uncertainty of COVID-19. Cash generated in financing activities totaled$514.3 million in the six months endedJune 28, 2020 , compared with$34.7 million in the same period last year, a change of$479.6 million . Proceeds from the issuance of debt increased$861.7 million year over year mostly driven by the Company's issuance of$600 million of 10-year bonds inApril 2020 . Additionally, the Company paid down an additional$420.9 million in debt year over year. These large swings in financing activities were driven by the Company's efforts to improve and ensure liquidity during the global recession. The year-over-year increase in outstanding checks was$19.2 million and resulted primarily from the timing of payroll payments. The Company received proceeds of$14.5 million from the settlement of a cross-currency swap inMarch 2020 and, during the six months endedJune 28, 2020 , paid cash dividends of$86.3 million , an increase of$2.2 million over the same period last year. Cash used to repurchase the Company's common stock was lower year over year by$4.6 million . During the six months endedJune 28, 2020 , the Company reported a net decrease in cash and cash equivalents of$9.5 million due to currency translation adjustments resulting from a strongerU.S. dollar relative to most foreign currencies. The Company operates a$500 million commercial paper program, supported by a$500 million revolving credit facility with a syndicate of eight banks. The revolving bank credit facility is committed throughJuly 2022 . If circumstances were to prevent the Company from issuing commercial paper, it has the contractual right to draw funds directly on the underlying revolving bank credit facility. Borrowings under the credit facility may be prepaid at any time at the discretion of the Company. The Company has taken several actions to secure liquidity in light of volatility in the credit markets and economic uncertainty being caused by the COVID-19 pandemic. OnMarch 18, 2020 , the Company closed and funded a 364-day,$150 million term loan withWells Fargo Bank, National Association , and the proceeds were used to repay a portion of outstanding commercial paper. Interest was assessed at the London Interbank Offered Rate (LIBOR) plus a margin based on a pricing grid that used the Company's credit ratings. The margin above LIBOR atJune 28, 2020 was 125 basis points. There was no required amortization and repayment could be accelerated at any time at the discretion of the Company. OnJuly 20, 2020 , subsequent to quarter end, this loan was fully repaid. 51 -------------------------------------------------------------------------------- SONOCO PRODUCTS COMPANY OnApril 1, 2020 , the Company accessed$250 million from its revolving credit facility. This borrowing was repaid onMay 5, 2020 . The Company used$85 million of the proceeds to fully repay its outstanding commercial paper balance and the remaining proceeds were invested in short term cash equivalents with maturities of 30 days or less. OnApril 6, 2020 , the Company borrowed$100 million , pursuant to a new 364-day term loan withU.S. Bank, National Association . Interest is assessed at LIBOR plus a margin based on a pricing grid that uses the Company's credit ratings. The margin above LIBOR atJune 28, 2020 was 125 basis points. There is no required amortization and repayment can be accelerated at any time at the discretion of the Company. OnApril 22, 2020 , the Company sold through a public offering$600 million of 3.125% notes dueMay 1, 2030 . The offering was made pursuant to an effective shelf registration statement. This action was taken largely to mitigate the risk of possible future credit market dislocations triggered by the economic impact of the COVID-19 pandemic. The net proceeds from the offering of approximately$594.2 million are available for general corporate purposes, including repayment of outstanding debt. To further improve its financial flexibility and liquidity, the Company exercised a conditional one-time option to extend its$200 million term loan withWells Fargo Bank, National Association , dueMay 2020 , for an additional 364 days toMay 2021 . As a result of these actions, the Company currently expects debt maturities of approximately$750 million throughDecember 31, 2021 . The Company currently has approximately$700 million in cash and cash equivalents on hand and$500 million in committed availability under its revolving credit facility. The Company believes these amounts, combined with net cash flows from operating and investing activities, provide ample liquidity to cover the 2021 debt maturities and other cash flow needs of the Company over the course of the next year. 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 ofJune 28, 2020 , 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. Although there are approximately 3.0 million shares of common stock remaining available for open-market repurchase under a 2016 Board of Directors authorization, the Company currently has no intention of making any such repurchases in the near term. Cash and cash equivalents totaled$857.3 million and$145.3 million atJune 28, 2020 andDecember 31, 2019 , respectively. Of these totals, approximately$127.5 million and$115.0 million , respectively, were held outside ofthe United States by the Company's foreign subsidiaries. Cash held outside ofthe United States is available to meet local liquidity needs, or for capital expenditures, acquisitions, and other offshore growth opportunities. Reflecting the financing actions described above, the Company has ample domestic liquidity from a combination of cash on hand, operating cash flow generation and access to bank and capital markets borrowings. The Company has generally considered its foreign unremitted earnings to be indefinitely invested outsidethe United States and currently has no plans to repatriate such earnings, other than excess cash balances that can be repatriated at minimal tax cost. Accordingly, the Company is not providing for taxes on these amounts for financial reporting purposes. Computation of the potential deferred tax liability associated with unremitted earnings considered to be indefinitely reinvested is not practicable. The Company uses a notional pooling arrangement with an international bank to help manage global liquidity requirements. Under this pooling arrangement, the Company and its participating subsidiaries may maintain either a cash deposit or borrowing position through local currency accounts with the bank, so long as the aggregate position of the global pool is a notionally calculated net cash deposit. Because it maintains a security interest in the cash deposits, and has the right to offset the cash deposits against the borrowings, the bank provides the Company and its participating subsidiaries favorable interest terms on both. The Company anticipates making additional contributions to its pension and postretirement plans of approximately$8.5 million during the remainder of 2020, which would result in total 2020 contributions of approximately$40 million , 52 -------------------------------------------------------------------------------- SONOCO PRODUCTS COMPANY excluding potential immaterial cash funding related to restructuring actions. As discussed in "Other Items," the Sonoco Pension Plan for Inactive Participants was terminated effectiveSeptember 30, 2019 . Upon approval by the PBGC, and following completion of a limited lump-sum offering, the Company is expected to settle all remaining liabilities under the Inactive Plan through the purchase of annuities. The Company intends to apply to the PBGC for an extension of the distribution deadline and expects to make additional contributions to the Inactive Plan of approximately$150 million in 2021 in order to be fully funded on a termination basis at the time of the annuity purchase. Any such contributions in excess of cash on hand are expected to be financed using available borrowing capacity. Future funding requirements beyond the current year will vary depending largely on actual investment returns, future actuarial assumptions, the nature and timing of participant settlements, 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. Due to the highly inflationary economy inVenezuela , the Company considers theU.S. dollar to be the functional currency of its Venezuelan operations and uses the official exchange rate when remeasuring the financial results of those operations. Economic conditions inVenezuela have worsened considerably over the past several years and there is no indication that conditions are due to improve in the foreseeable future. Further deterioration could result in the recognition of an impairment charge or a deconsolidation of the subsidiary. AtJune 28, 2020 , the carrying value of the Company's net investment in its Venezuelan operations was approximately$2.1 million . In addition, atJune 28, 2020 , 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 these operations. The Company has operations in theUnited Kingdom and elsewhere inEurope that could be impacted by the exit of theU.K. from theEuropean Union (Brexit). OurU.K. operations have made contingency plans regarding potential customs clearance issues, tariffs and other uncertainties resulting from Brexit. Although it is difficult to predict all of the possible impacts to our supply chain or in our customers' downstream markets, the Company has evaluated the potential operational impacts and uncertainties of Brexit and at this time believes 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 theU.K. , most of what we produce in theU.K. is also sold in theU.K. and the same is true for continentalEurope . In some cases, companies that have been importing fromEurope into theU.K. are now seeking local sources, which has actually been positive for ourU.K. operations. Annual sales of ourU.K. operations totaled approximately$120 million in 2019. AtJune 28, 2020 , the Company had various currency contracts outstanding to fix the exchange rate on certain anticipated foreign currency cash flows. The total market value of these instruments was a net unfavorable position of$(2.3) million atJune 28, 2020 and a net favorable position of$1.1 million atDecember 31, 2019 . These contracts qualify as cash flow hedges and mature within twelve months of their respective reporting dates. In addition, atJune 28, 2020 , the Company had various currency contracts outstanding to fix the exchange rate on certain foreign currency assets and liabilities. Although placed as an economic hedge, the Company does not apply hedge accounting to these contracts. The fair values of these currency contracts were immaterial atJune 28, 2020 andDecember 31, 2019 . AtJune 28, 2020 , the Company had commodity contracts outstanding to fix the cost of a portion of anticipated raw materials and natural gas purchases. The total net fair market value of these instruments was an unfavorable position of$(1.7) million and$(1.6) million atJune 28, 2020 andDecember 31, 2019 , respectively. Natural gas and aluminum hedge contracts covering an equivalent of 2.3 million MMBTUs and 1,088 metric tons, respectively, were outstanding atJune 28, 2020 . These contracts qualify as cash flow hedges and mature within twelve months of their respective reporting 53 -------------------------------------------------------------------------------- SONOCO PRODUCTS COMPANY dates. In addition, during the second quarter of 2020, the Company entered into commodity contracts to fix the cost of a portion of anticipated diesel purchases. The Company does not apply hedge accounting to these contracts, the fair value of which was not material atJune 28, 2020 . InJanuary 2020 , the Company entered into a cross-currency swap agreement with a notional amount of$250 million to effectively convert a portion of the Company's fixed-rate,U.S. dollar denominated debt, including the semi-annual interest payments, to fixed-rate euro-denominated debt. The swap agreement had an original maturity ofNovember 1, 2024 and provided for the Company to receive semi-annual interest payments inU.S. dollars at a rate of 5.75% and pay interest in euros at a rate of 3.856%. The risk management objective was to manage foreign currency risk relating to net investments in certain European subsidiaries denominated in foreign currencies. As a result of significant strengthening of theU.S. dollar, as well as a reduction in the differential betweenU.S. and European interest rates, the fair market value of the swap position appreciated significantly during the first quarter of 2020. InMarch 2020 , the Company terminated the agreement and received a net cash settlement of$14.5 million . The Company recorded this foreign currency translation gain in "Accumulated other comprehensive loss," net of a tax provision of$7.6 million . AtJune 28, 2020 , theU.S. dollar had strengthened against most of the functional currencies of the Company's foreign operations compared toDecember 31, 2019 , resulting in a net translation loss of$60.1 million being recorded in accumulated other comprehensive loss atJune 28, 2020 . As a result of the weakening global economy due to the COVID-19 pandemic, the Company increased its allowance for cumulative expected credit losses by$1.0 million as ofJune 28, 2020 . Continued weakness in the economy may require additional charges to be recognized in future periods. The magnitude of such charges cannot be estimated at this time. 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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