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 "anticipate," "assume," "believe," "can," "committed," "commitment," "consider," "could," "estimate," "expect," "forecast," "future," "goal," "guidance," "intend," "may," "might," "objective," "opportunity," "outlook," "plan," "potential," "project," "strategy," "target," "will," "would," or the negative thereof, and similar expressions identify forward-looking statements. Forward-looking statements in this Annual Report on Form 10-K include, but are not limited to, statements regarding: •availability and supply of raw materials, and offsetting high raw material costs, including the potential impact of changes in tariffs; •potential impacts of the COVID-19 pandemic on the Company's business, operations and financial condition; •consumer and customer actions in connection with the COVID-19 pandemic; •improved productivity and cost containment; •improving margins and leveraging strong cash flow and financial position; •effects of acquisitions and divestitures, including the Company's acquisition ofBall Metalpack ; •realization of synergies resulting from acquisitions, including the acquisition ofBall Metalpack ; •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; •market leadership; •research and development spending; •expected impact and costs of resolution of legal proceedings; •extent of, and adequacy of provisions for, environmental liabilities and sustainability commitments; •commitments to reduce greenhouse gas emissions; •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. Such risks, uncertainties and assumptions include, without limitation: •availability and pricing of raw materials, energy and transportation, including the impact of potential changes in tariffs or sanctions and escalating trade wars and the impact of war and other geopolitical tensions (such as the ongoing conflict betweenRussia andUkraine and economic sanctions related thereto), and the Company's ability to pass raw material, energy and transportation price increases and surcharges through to customers or otherwise manage these commodity pricing risks; 34 --------------------------------------------------------------------------------SONOCO PRODUCTS COMPANY •impacts arising as a result of the COVID-19 pandemic on our results of operations, financial condition, value of assets, liquidity, prospects, growth, and on the industries in which we operate and that we serve, resulting from, without limitation, recent and ongoing financial market volatility, potential governmental actions, changes in consumer behaviors and demand, changes in customer requirements, disruptions to the Company's suppliers and supply chain, availability of labor and personnel, necessary modifications to operations and business, and uncertainties about the extent and duration of the pandemic; •costs of labor; •work stoppages due to labor disputes; •success of new product development, introduction and sales; •success of implementation of new manufacturing technologies and installation of manufacturing equipment, including the startup of new facilities and lines; •consumer demand for products and changing consumer preferences; •ability to be the low-cost global leader in customer-preferred packaging solutions within targeted segments; •competitive pressures, including new product development, industry overcapacity, customer and supplier consolidation, and changes in competitors' pricing for products; •financial conditions of customers and suppliers; •ability to maintain or increase productivity levels, contain or reduce costs, and maintain positive price/cost relationships; •ability to negotiate or retain contracts with customers, including in segments with concentration of sales volume; •inventory management strategies of customers; •timing of introduction of new products or product innovations by customers; •collection of receivables from customers; •ability to improve margins and leverage cash flows and financial position; •ability to manage the mix of business to take advantage of growing markets while reducing cyclical effects of some of the Company's existing businesses on operating results; •ability to maintain innovative technological market leadership and a reputation for quality; •ability to attract and retain talented and qualified employees, managers and executives; •ability to profitably maintain and grow existing domestic and international business and market share; •ability to expand geographically and win profitable new business; •ability to identify and successfully close suitable acquisitions at the levels needed to meet growth targets; •ability to successfully integrate newly acquired businesses, includingBall Metalpack , into the Company's operations and realize synergies and other anticipated benefits within the expected time period, or at all; •the costs, timing and results of restructuring activities; •availability of credit to us, our customers and suppliers in needed amounts and on reasonable terms; •effects of our indebtedness on our cash flow and business activities; •fluctuations in interest rates and our borrowing costs; •fluctuations in obligations and earnings of pension and postretirement benefit plans; •accuracy of assumptions underlying projections of benefit plan obligations and payments, valuation of plan assets, and projections of long-term rates of return; •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 inU.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 costs of resolution of litigation, regulatory actions, or other legal proceedings; 35 --------------------------------------------------------------------------------SONOCO PRODUCTS COMPANY •liability for and anticipated costs of environmental remediation actions; •effects of environmental laws and regulations; •operational disruptions at our major facilities; •failure or disruptions in our information technologies; •failure of third party transportation providers to deliver our products to our customers or to deliver raw materials to us; •substantially lower than normal crop yields; •loss of consumer or investor confidence; •ability to protect our intellectual property rights; •changes in laws and regulations relating to packaging for food products and foods packaged therein, other actions and public concerns about products packaged in our containers, or chemicals or substances used in raw materials or in the manufacturing process; •changing consumer attitudes toward plastic packaging; •ability to meet sustainability targets and challenges in implementation; •changing climate, climate change regulations and greenhouse gas effects; •ability to meet commitments to reduce greenhouse gas emissions; •actions of domestic or foreign government agencies and changes in laws and regulations affecting the Company and increased costs of compliance; •international, national and local economic and market conditions and levels of unemployment; •economic disruptions resulting from war and other geopolitical tensions (such as the ongoing conflict betweenRussia andUkraine ), 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 and in other reports filed with theSecurities 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 theSecurities and Exchange Commission on Forms 10-K, 10-Q and 8-K. 36 --------------------------------------------------------------------------------
SONOCO PRODUCTS COMPANY COMPANY OVERVIEW
Sonoco's operating and reporting structure consists of two reportable segments,Consumer Packaging andIndustrial Paper Packaging , with all remaining businesses reported as All Other. Prior to the divestiture of the Company'sU.S. display and packaging business onApril 4, 2021 , this business was included in All Other.Sonoco competes in multiple product categories, with the majority of the Company's revenues arising from products and services sold to consumer and industrial products companies for use in the packaging of their products for sale or shipment. The Company also manufactures uncoated recycled paperboard for both internal use and open market sale. Each of the Company's operating units has its own sales staff and maintains direct sales relationships with its customers. On a consolidated basis, by the end of 2021 the impacts of COVID-19 on the Company had largely dissipated. For most of the Company's business units, first quarter 2022 sales demand equaled or exceeded pre-pandemic levels. The Company has incurred, and expects to continue to incur for the foreseeable future, localized temporary disruptions in its supply chain and customer demand due to localized resurgences of COVID-19. However, absent a future widespread resurgence, or the emergence of a more virulent COVID-19 strain, the Company does not expect such impacts to have a substantial negative effect on the Company's operations or financial results.
First Quarter 2022 Compared with First Quarter 2021
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, acquisition and
divestiture-related costs, gains/losses from the divestiture of businesses,
amortization of acquisition intangibles, changes in last-in, first-out ("LIFO")
inventory reserves, 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-GAAP financial measures is provided in the Company's Annual Report on Form
10-K for the year ended December 31, 2021 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 April 3, 2022
Amortization of
Restructuring/Asset Acquisition Acquisition/Divestiture Dollars in thousands, except per share data GAAP Impairments(1)
Intangibles(2) Related(3) Other Adjustments(4) Base
Operating profit $ 169,061 $ 12,142 $ 18,800 $ 48,352 $ 12,438 $ 260,793
Non-operating pension costs 1,324 - - - (1,324) -
Interest expense, net 19,065 - - - - 19,065
Income before income taxes 148,672 12,142 18,800 48,352 13,762 241,728
Provision for income taxes 35,289 1,635 4,630 11,756 7,738 61,048
Income before equity in earnings of
affiliates 113,383 10,507 14,170 36,596 6,024 180,680
Equity in earnings of affiliates, net of tax 2,224 - - - - 2,224
Net income 115,607 10,507 14,170 36,596 6,024 182,904
Net (income)/loss attributable to
noncontrolling interests (274) 61 - - - (213)
Net income attributable to Sonoco 115,333 10,568 14,170 36,596 6,024 182,691
Per diluted common share* $ 1.17 $ 0.11 $ 0.14 $ 0.37 $ 0.06 $ 1.85
*Due to rounding individual items may not sum across
37
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SONOCO PRODUCTS COMPANY
(1) Restructuring/asset impairment charges are a recurring item as Sonoco's
restructuring programs usually require several years to fully implement and the
Company is continually seeking to take actions that could enhance its
efficiency. Although recurring, these charges are subject to significant
fluctuations from period to period due to the varying levels of restructuring
activity and the inherent imprecision in the estimates used to recognize the
impairment of assets and the wide variety of costs and taxes associated with
severance and termination benefits in the countries in which the restructuring
actions occur. In the first quarter of 2022, the Company recognized asset
impairment charges of $5,713 related to the Company's decision to exit its
operations in Russia given the ongoing Russia -Ukraine conflict. Of the $12,142
in restructuring/asset impairments, approximately $6,300 were cash expenses.
(2) Beginning in 2022, the Company redefined base results to exclude
amortization of intangible assets related to acquisitions.
(3) Consists of legal, professional, and other service fees related to
acquisition and divestiture transactions, whether potential or consummated, and
charges related to the partial amortization of inventory "step-ups" associated
with purchase accounting adjustments on acquisition transactions. The majority
of these charges relate to the January 2022 acquisition of Ball Metalpack .
(4) Other Adjustments include after-tax charges of $14,217 related to increases
in the Company's LIFO reserve. The remaining $8,193 after-tax net gain relates
to certain derivative transactions and discrete tax adjustments, which were
partially offset by non-operating pension charges.
For the three months ended April 4, 2021
Amortization of
Restructuring/Asset Acquisition Acquisition/Divestiture
Other
Dollars in thousands, except per share data GAAP Impairments(1)
Intangibles(2) Related(3) Adjustments(4) Base
Operating profit $ 120,309 $ 6,846 $ 12,749 $ 10,025 $ 2,487 $ 152,416
Non-operating pension costs 7,284 - - - (7,284) -
Interest expense, net 17,731 - - - - 17,731
Income before income taxes $ 95,294 $ 6,846 $ 12,749 $ 10,025 $ 9,771 $ 134,685
Provision for income taxes 24,045 1,626 3,158 2,123 3,510 34,462
Income before equity in earnings of
affiliates $ 71,249 $ 5,220 $ 9,591 $ 7,902 $ 6,261 $ 100,223
Equity in earnings of affiliates, net of
tax 1,044 - - - - 1,044
Net income $ 72,293 $ 5,220 $ 9,591 $ 7,902 $ 6,261 $ 101,267
Net loss attributable to noncontrolling
interests 4 - - - - 4
Net income attributable to Sonoco $ 72,297 $ 5,220 $ 9,591 $ 7,902 $ 6,261 $ 101,271
Per diluted common share* $ 0.71 $ 0.05 $ 0.09 $ 0.08 $ 0.06 $ 1.00
*Due to rounding individual items may not sum across
(1) Restructuring charges are a recurring item as Sonoco's restructuring
programs usually require several years to fully implement and the Company is
continually seeking to take actions that could enhance its efficiency. Although
recurring, these charges are subject to significant fluctuations from period to
period due to the varying levels of restructuring activity and the inherent
imprecision in the estimates used to recognize the impairment of assets and the
wide variety of costs and taxes associated with severance and termination
benefits in the countries in which the restructuring actions occur. Asset
impairment charges totaling $4,149 were recognized in 2021 related to certain
assets in the Company's perimeter-of-the-store thermoforming operations and
temperature-assured packaging business for which the projected undiscounted cash
flows were not sufficient to cover their carrying value.
(2) Beginning in 2022, the Company redefined base results to exclude
amortization of intangible assets related to acquisitions. Prior year has been
revised to conform with current year presentation.
(3) Consists of legal, professional, and other service fees related to
acquisition and divestiture transactions, whether potential or consummated.
(4) Includes non-operating pension costs, the loss from the divestiture of the
U.S. display and packaging business, partially offset by gains from insurance
proceeds.
RESULTS OF OPERATIONS
The following discussion provides a review of results for the three months ended
OVERVIEW
Net sales for the first quarter of 2022 increased 30.9 percent to$1.77 billion , compared with$1.35 billion in the same period last year. This improvement reflects increases from higher selling prices, primarily implemented to offset inflation, sales added from theJanuary 26, 2022 acquisition ofBall Metalpack , nowSonoco Metal Packaging , and volume/mix 38 --------------------------------------------------------------------------------SONOCO PRODUCTS COMPANY growth of approximately 2 percent. These sales increases were partially offset by sales lost as a result of theApril 4, 2021 divestiture of the Company'sU.S. display and packaging business and the negative effect of foreign exchange rate changes year over year. Net income attributable toSonoco for the first quarter of 2022 increased to$115.3 million , or$1.17 per diluted share, compared to$72.3 million , or$0.71 per diluted share, for the same period of 2021. Net income in the current period reflects increases from acquisitions, net of divestitures, and other operational improvements, both of which are described in more detail below. These benefits were partially offset by higher net interest expense related to higher borrowings, mostly to fund the acquisition ofBall Metalpack , in 2022. Additionally, Net income in the current quarter includes net after-tax, non-base charges totaling$67.4 million , while results for the first quarter of 2021 included net after-tax, non-base charges totaling$29.0 million . The net increase in non-base items further offset the year-over-year gains. These non-base items consisted of the following, after tax:
Three Months Ended
($ in millions) April
3, 2022
-
Metalpack inventory
Acquisition and divestiture related costs 17.9 7.9
Amortization of acquisition intangibles 14.2 9.6
Changes in LIFO inventory reserve 14.2 -
Impairment related to exit from Russia 5.7 -
Impairment and restructuring related charges 4.9 5.2
Non-operating pension costs 0.9 5.5
All other non-base items, including derivative gains and discrete income tax items in 2022
(9.1) 0.8
Total non-base charges, after tax $ 67.4 $ 29.0
Adjusted for these items, base net income attributable toSonoco (base earnings) for the first quarter of 2022 increased 80.4 percent to$182.7 million , or$1.85 per diluted share, from$101.3 million , or$1.00 per diluted share, in 2021. First quarter base operating profit increased 71.1 percent from last year's first quarter as a result of a positive price/cost relationship and the acquisition ofBall Metalpack inJanuary 2022 , which was partially offset by the divestiture of the Company'sU.S. display and packaging business onApril 4, 2021 . Volume/mix and productivity improvements both were slightly positive in the first quarter of 2022. These year-over-year gains were somewhat offset by increased compensation and benefit costs. The base effective tax rate for the current year's quarter was slightly lower than prior year's rate.
OPERATING REVENUE
Net sales for the first quarter of 2022 increased
The components of the sales change were:
($ in millions)
Volume/mix $ 27
Selling prices 275
Acquisitions and divestitures, net 141
Foreign currency translation and other, net (25)
Total sales increase $ 418
COSTS AND EXPENSES
Cost of goods sold increased $324.0 million , or 30.1 percent, in the first
quarter of 2022 compared with the same period last year. The increase was driven
primarily by inflation, including increases in the Company's LIFO inventory
reserves, higher volume and acquisitions, net of divestitures, which included a
charge related to the amortization of the fair value step-up of finished goods
inventory acquired and sold through to customers from the date of acquisition
through April 3, 2022 . These year-over-year increases were partially offset by
the favorable impact of foreign currency translation. Gross profit was $371.6
million for the three months ended April 3, 2022 , which was $93.7 million higher
than the prior-year period. Additionally, gross profit as a percent of sales
increased to 21.0 percent from 20.5 percent in the prior-year quarter as overall
sales price increases more than offset higher material and other operating
costs.
39
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SONOCO PRODUCTS COMPANY
GAAP selling, general and administrative expenses ("SG&A") for the quarter
increased $45.1 million , or 31.1 percent, year over year. This increase was
driven by increased costs related to acquisition and divestiture activity,
increased amortization of acquisition intangibles, and increased compensation
and other employee benefits. The prior year's results include a loss on the
Company's divestiture of its U.S. display and packaging business of $5.5 million
in the first quarter of 2021.
Restructuring/Asset impairment charges totaled $12.1 million in the first
quarter of 2022 compared with $6.8 million in the same period last year. The
year-over-year increase was the result of higher restructuring activity in the
current year, a $5.7 million impairment charge stemming from the Company's
decision to exit its operations in Russia , and the non-recurrence of prior-year
gains from the sales 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.
Non -operating pension costs were $6.0 million lower in the first quarter of 2022
compared to the same period last year due to the settlement of the Sonoco
Pension Plan for Inactive Participants (the "Inactive Plan") in the second
quarter of 2021 and the absence of any costs related to the Inactive Plan in the
current year. 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 first quarter of 2022 increased to
The 2022 first-quarter effective tax rates on GAAP and base earnings were 23.7 percent and 25.3 percent, respectively, compared with negative 25.2 percent and 25.7 percent, respectively, in the prior year's quarter. The lower GAAP rate for 2022 is due largely to the release of valuation allowances on the Company's state net operating loss carryforwards due to an increase in forecasted taxable income driven by theBall Metalpack acquisition.
REPORTABLE SEGMENTS
The Company's operating and reporting structure consists of two reportable
segments,
Three Months Ended
%
April 3, 2022 April 4, 2021 Change
Net sales:
Consumer Packaging $ 868,098 $ 582,753 49.0 %
Industrial Paper Packaging 699,129 565,397 23.7 %
All Other 203,755 205,154 (0.7) %
Consolidated $ 1,770,982 $ 1,353,304 30.9 %
40
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SONOCO PRODUCTS COMPANY
The following table recaps operating profit attributable to each of the
Company's segments during the first quarters of 2022 and 2021 ($ in thousands):
Three Months Ended
%
April 3, 2022 April 4, 2021 Change
Operating profit:
Segment operating profit:
Consumer Packaging $ 173,609 $ 81,360 113.4 %
Industrial Paper Packaging 72,660 52,299 38.9 %
All Other 14,524 18,757 (22.6) %
Restructuring/Asset impairment charges (12,142) (6,846) 77.4 %
Amortization of acquisition intangibles (18,800) (12,749) 47.5 %
Other non-base charges, net (60,790) (12,512) 385.9 %
Consolidated $ 169,061 $ 120,309 40.5 %
Segment results viewed by Company management to evaluate segment performance do
not include restructuring charges or income, asset impairment charges,
acquisition and divestiture-related costs, 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 the Company's reportable segments and All Other. Effective
January 1, 2022 , the Company changed its measure of segment operating profit to
exclude amortization of acquisition intangibles. Accordingly, prior year's
segment operating profit has been revised to conform with the current
presentation.
The following table recaps restructuring/asset impairment charges attributable
to each of the Company's segments during the first quarter of 2022 and 2021 ($
in thousands):
Three Months Ended
April 3, 2022 April 4, 2021
Restructuring/Asset impairment charges:
Consumer Packaging $ 2,311 $ 2,835
Industrial Paper Packaging 7,061 1,433
All Other 78 2,564
Corporate 2,692 14
Consolidated $ 12,142 $ 6,846
Consumer Packaging
The Consumer Packaging segment primarily serves processed and fresh food markets
along with other packaging for direct-to-consumer products and includes the
following products and services: round and shaped rigid paper containers; two-
and three-piece steel tinplate cans and aerosol containers; metal and peelable
membrane ends and closures; thermoformed plastic trays and containers; printed
flexible packaging; and global brand artwork management.
Segment sales increased 49.0 percent compared to the prior year's quarter due
primarily to the Ball Metalpack acquisition and higher selling prices primarily
implemented to help offset inflation. Overall, segment volume/mix improved
approximately 4 percent during the quarter due to gains in flexible packaging
and plastic food packaging. Flexible packaging's volume/mix improvement was
driven by strong confectionery, food service and other food products. Increased
volume/mix in plastic food packaging reflects higher demand in both the fresh
and prepared food markets. Global rigid paper containers volume/mix was
essentially flat in the quarter.
Segment operating profit increased 113.4 percent due primarily to the
41
--------------------------------------------------------------------------------SONOCO PRODUCTS COMPANY Industrial Paper Packaging The Industrial 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 23.7 percent from the prior year's quarter largely due to higher selling prices primarily implemented to offset raw material and non-material inflation, and sales from businesses acquired in the prior year. These positives were partially offset by volume/mix declines of approximately 2 percent. Volume/mix declines were driven by severe winter weather, supply chain disruptions and operational closures inChina stemming from COVID-19 restrictions. Volume declines were concentrated inAsia andEurope tube and core operations, as well as recycling and fiber protective packaging inNorth America . Segment operating profit increased 38.9 percent from the prior year's quarter, driven by a positive price/cost impact which was somewhat offset by lower volume/mix and productivity declines. As a result, segment operating profit margin improved to 10.4% in the current year's quarter from 9.2% in the prior year. All Other Businesses grouped as All Other include healthcare packaging, protective and retail security packaging and industrial plastic products. These businesses include the following products and services: thermoformed rigid plastic trays and devices; custom-engineered molded foam protective packaging and components; temperature-assured packaging; injection molded and 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'sU.S. display and packaging business onApril 4, 2021 , this business, which included point-of-purchase displays, fulfillment operations, and contract packaging, was reported in All Other. Sales for All Other declined 0.7 percent from the prior year's quarter due primarily to the impact of theU.S. display and packaging divestiture. Excluding the impact of the divestiture, volume/mix increased sales by approximately 9 percent, driven by strong gains in temperature-assured packaging, retail security packaging, industrial plastics and molded foam components which were somewhat offset by lower demand in healthcare packaging. All Other operating profit declined 22.6 percent from the prior year's quarter due primarily to the impact of theU.S. display and packaging divestiture. Operating margin declined to 7.1 percent in the quarter from 9.1 percent in 2021 in part due to the impact of the divestiture ofU.S. display and packaging business. Furthermore, unfavorable productivity more than offset the favorable impacts of price/cost and volume/mix on operating margins. OTHER ITEMS Critical Accounting Policies and EstimatesGoodwill 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 exceeds the fair value of that 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 2021. For testing purposes, the Company performed an assessment of each reporting unit using either a qualitative evaluation or a quantitative test. There have been no changes to the Company's annual qualitative and quantitative tests, or underlying assumptions, from what is disclosed in its Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theSecurities and Exchange Commission onFebruary 28, 2022 . 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 conclusions regarding goodwill impairment may change as well. 42 --------------------------------------------------------------------------------SONOCO PRODUCTS COMPANY 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 considers the assumptions used to be its best estimates across a range of possible outcomes based on available evidence at the time of the assessment. Other than in 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 9-19 of the Company's 2021 Annual Report on Form 10-K. Although no reporting units failed the annual impairment test, in management's opinion, the goodwill of the Plastics - Healthcare reporting unit is at risk of impairment in the 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 or in other factors such as the discount rate. Although 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 expectations, 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$63.7 million atApril 3, 2022 . Based on the most-recent annual impairment test, the estimated fair value of the Plastics - Healthcare reporting unit exceeded its carrying value by 13.3%. Sensitivity Analysis In its 2021 annual goodwill impairment analysis, projected future cash flows for the Plastics - Healthcare reporting unit were discounted at 8.3%. Based on the discounted cash flow model and holding other valuation assumptions constant, projected operating profits across all future periods would have to be reduced approximately 13.0%, or the discount rate increased to 9.3%, in order for the estimated fair value of the reporting unit to fall below carrying value. Other Asset Impairments -Russia The Company recognized an asset impairment charge of$5.7 million during the three months endedApril 3, 2022 as a result of management's decision to exit the Company's operations inRussia due to the ongoingRussia -Ukraine conflict. The Company expects to complete this exit byJune 30, 2022 . The Company's operations inRussia consist of two small tube and core plants in ourIndustrial Paper Packaging segment with approximately 70 employees and annual sales of approximately$21 million for the year endedDecember 31, 2021 . Upon completion of its exit fromRussia , the Company expects that approximately$3.5 million of cumulative currency translation adjustment losses will be reclassified from accumulated other comprehensive income and recognized as an additional loss on the Company's Condensed Consolidated Statements of Income. Financial Position, Liquidity and Capital Resources Operating cash flows totaled$1.1 million in the three months endedApril 3, 2022 , compared with$138.7 million during the same period last year, a decrease of$137.7 million . This decrease was driven by increases in net working capital which used$155.5 million more cash in the first three months of 2022 compared to the same period last year. This increased use was driven by a more pronounced increase in business activity in the first quarter of 2022 as compared to last year's first quarter, inflation, and a normal seasonal build of inventory in the newly acquiredMetal Packaging business (formerlyBall Metalpack ). The Company continues to actively manage all components of net working capital in an effort to minimize the impact on cash utilization while also supporting the needs of our customers and mitigating stock out risk. The year-over-year increased net working capital use was partially offset by the$43.0 million year-over-year increase in Net Income. 43 --------------------------------------------------------------------------------SONOCO PRODUCTS COMPANY Changes in accrued expenses and other assets and liabilities provided$0.2 million in the three months endedApril 3, 2022 compared with providing$20.2 million in the same period last year. The$19.9 million decreased provision of operating cash flow was mostly the result of timing of collection of rebates and other receivables that benefited the prior year's period. Despite$11.2 million higher income tax expense recognized in the first quarter of 2022, cash paid for income taxes only increased approximately$6 million over the prior-year quarter. This was largely attributable to the impact of deferred tax items. Cash used in investing activities was$1.42 billion in the three months endedApril 3, 2022 , compared with$39.0 million in the same period last year, a higher year-over-year use of cash of$1.38 billion . This increase was almost entirely attributable to acquisition spending, which was$1.35 billion higher year over year due to the purchase ofBall Metalpack . Capital spending during the first three months of 2022 was$67.5 million ,$28.0 million higher than the same period last year. While spending continued for Project Horizon, the modernization of the Company's Hartsville paper mill complex, the year-over-year increase was largely driven by increased strategic investments in growth and productivity projects in theConsumer Packaging segment. Capital spending for the remainder of 2022 is expected to be approximately$260 million , bringing total capital spending in 2022 to approximately$325 million , compared to$256.0 million in 2021. Other net investing proceeds, primarily insurance proceeds received in 2021, were$2.6 million lower year over year. Financing activities provided$1.39 billion of cash in the three months endedApril 3, 2022 , while using$69.8 million in the corresponding prior year period, a year-over-year increase of$1.46 billion . This increase was driven by net debt proceeds/repayments, which provided$1.48 billion more cash year over year. Current-year borrowings include$1.19 billion of net proceeds from the issuance of unsecured notes and$300 million of proceeds from a new term loan facility, which were used primarily to fund the acquisition ofBall Metalpack . The Company used cash of$14.5 million to repurchase a noncontrolling interest in the first quarter of 2021. The Company paid cash dividends of$43.7 million during the three months endedApril 3, 2022 , a decrease of$1.4 million over the same period last year due to lower outstanding shares stemming from repurchases of the Company's common stock during the last three quarters of 2021. Cash and cash equivalents totaled$151.5 million and$171.0 million atApril 3, 2022 andDecember 31, 2021 , respectively. Of these totals, approximately$131.6 million and$154.4 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 believes it has ample domestic liquidity from a combination of cash on hand, expected future operating cash flow, 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 the bank 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 three months ended
The Company operates a$500 million commercial paper program, supported by a$750 million unsecured revolving credit facility with a syndicate of eight banks. The revolving credit facility is committed throughJune 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. OnJanuary 21, 2022 , the Company completed a registered public offering of green bonds with an aggregate principal amount of$1.20 billion . The unsecured notes (the "Notes") consisted of the following (dollars in thousands): 44 --------------------------------------------------------------------------------
SONOCO PRODUCTS COMPANY
Issuance Costs
Principal Amount and Discounts Net Proceeds Interest Rate Maturity
2025 Notes $ 400,000 $ (2,356) $ 397,644 1.800% February 1, 2025
2027 Notes 300,000 (2,565) 297,435 2.250% February 1, 2027
2032 Notes 500,000 (5,220) 494,780 2.850% February 1, 2032
Total $ 1,200,000 $ (10,141) $ 1,189,859
The Notes are the Company's senior unsecured obligations and rank equal in right
of payment to the Company's other senior unsecured debt from time to time
outstanding. The indenture governing the Notes contains certain covenants with
respect to the Company that, among other things, restrict the entry into
additional secured indebtedness, sale and leaseback transactions and certain
mergers, consolidations and transfers of all or substantially all of the
Company's assets. The Company used an amount equal to the net proceeds from the
Notes of $1.19 billion to partially fund the acquisition of Ball Metalpack .
Also on January 21, 2022 , the Company entered into a $300 million three-year
term loan facility (the "Term Loan Facility") with a syndicate of eight banks.
The full $300 million was drawn from this facility on January 26, 2022 , and the
proceeds used to partially fund the acquisition of Ball Metalpack . Interest is
assessed at the SOFR plus a margin based on a pricing grid that uses the
Company's credit ratings. The current SOFR margin is 122.5 basis points. There
is no required amortization and repayment can be accelerated at any time without
penalty at the Company's discretion.
At April 3, 2022 , the Company had scheduled debt maturities of approximately
$441 million over the next twelve months, including $322 million of outstanding
commercial paper balances. Also at April 3, 2022 , the Company had $152 million
in cash and cash equivalents on hand and $750 million in committed capacity
under its revolving credit facility, of which $428 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 April 3, 2022 , 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.
The Company anticipates making additional contributions to its other pension and
postretirement plans of approximately $10 million during the remainder of 2022,
which would result in total contributions to these plans of approximately $38
million in 2022. 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 from time to time uses
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.
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SONOCO PRODUCTS COMPANY
Due to the highly inflationary economy in Venezuela , the Company considers the
U.S. dollar to be the functional currency of its Venezuelan operations and uses
the official exchange rate when remeasuring the financial results of those
operations. Economic conditions in Venezuela have worsened considerably over the
past several years and there 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 Company's Venezuelan
subsidiary. At April 3, 2022 , the carrying value of the Company's net investment
in its Venezuelan operations was approximately $2.0 million . In addition, at
April 3, 2022 , the Company's Accumulated Other Comprehensive Loss included a
cumulative translation loss of $3.8 million related to its Venezuelan operations
which would need to be reclassified to net income in the event of a complete
exit of the business or a deconsolidation of the Venezuelan operations.
Turkey has experienced a cumulative rate of inflation over the last three years
of slightly more than 100 percent, the threshold at which it is deemed to be a
highly inflationary economy under U.S. GAAP. The Company is continuing to
monitor the inflation rate in Turkey and is assessing the impact that accounting
for Turkey as highly inflationary might have on its financial results in the
second quarter of 2022. The Company's net investment in its operations in Turkey
was approximately $18.0 million at April 3, 2022 .
The Company routinely enters into derivative currency contracts 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 $1.1 million
at April 3, 2022 and a net favorable position of $(0.1) million at December 31,
2021 . These contracts qualify as cash flow hedges and have maturities ranging to
July 2022 . In addition, at April 3, 2022 , 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 value of which was not
material at April 3, 2022 and December 31, 2021 .
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 instruments was a favorable position of
$10.6 million at April 3, 2022 and an unfavorable position of $2.2 million at
December 31, 2021 . Natural gas and aluminum hedge contracts covering an
equivalent of 3.9 million MMBTUs and 252 metric tons, respectively, were
outstanding at April 3, 2022 . These contracts, some of which are designated as
cash flow hedges, have maturities ranging to December 2022 .
Pursuant to the registered public offering of unsecured 2.850% notes with a
principal amount of $500.0 million maturing on February 1, 2032 , the Company
entered into treasury lock derivative instruments with two banks, with a
notional principal amount of $150.0 million each on December 29, 2021 . These
instruments had the risk management objective of reducing exposure to the
Company of increases in the underlying Treasury index up to the date of pricing
of the notes. The derivatives were settled when the bonds priced on January 11,
2022 , with the Company recognizing a gain on the settlement of $5.2 million .
During the first quarter of 2022, the U.S. dollar strengthened against the euro
and British pound and weakened against the Canadian dollar, Brazilian real, and
Mexican peso, the functional currencies in which a majority of the Company's
foreign investments are held. The net impact of these changes resulted in a net
translation loss of $0.2 million being recorded in "Accumulated other
comprehensive loss" for the three months ended April 3, 2022 .
Restructuring and ImpairmentInformation 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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