SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Note 4: Shareholders' Equity
Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share
(dollars and shares in thousands, except per share data)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
July 2,
2017
|
|
July 3,
2016
|
|
July 2,
2017
|
|
July 3,
2016
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income attributable to Sonoco
|
|
$
|
43,125
|
|
|
$
|
56,252
|
|
|
$
|
96,858
|
|
|
$
|
116,166
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
100,258
|
|
|
101,281
|
|
|
100,184
|
|
|
101,514
|
|
Dilutive effect of stock-based compensation
|
|
459
|
|
|
592
|
|
|
665
|
|
|
634
|
|
Diluted
|
|
100,717
|
|
|
101,873
|
|
|
100,849
|
|
|
102,148
|
|
Net income attributable to Sonoco per common share:
|
|
|
|
|
|
|
Basic
|
|
$
|
0.43
|
|
|
$
|
0.56
|
|
|
$
|
0.97
|
|
|
$
|
1.14
|
|
Diluted
|
|
$
|
0.43
|
|
|
$
|
0.55
|
|
|
$
|
0.96
|
|
|
$
|
1.14
|
|
Potentially dilutive securities are calculated in accordance with the treasury stock method, which assumes the proceeds from the exercise of all dilutive stock appreciation rights (SARs) are used to repurchase the Company’s common stock. Certain SARs are not dilutive because either the exercise price is greater than the average market price of the stock during the reporting period or assumed repurchases from proceeds from the exercise of the SARs were antidilutive. These stock appreciation rights may become dilutive in the future if the market price of the Company's common stock appreciates.
The average number of stock appreciation rights that were not dilutive and therefore not included in the computation of diluted earnings per share during the
three- and six-
month periods ended
July 2, 2017
and
July 3, 2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
July 2,
2017
|
|
July 3,
2016
|
|
July 2,
2017
|
|
July 3,
2016
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock appreciation rights
|
|
532
|
|
|
—
|
|
|
444
|
|
|
715
|
|
No adjustments were made to net income attributable to Sonoco in the computations of earnings per share.
Stock Repurchases
On February 10, 2016, the Company’s Board of Directors authorized the repurchase of up to
5,000
shares of the Company's common stock. A total of
2,030
shares were purchased during 2016 at a cost of
$100,000
, leaving a total of
2,970
shares remaining available for repurchase at
December 31, 2016
.
No
shares were repurchased under this authorization during the
six months ended July 2, 2017
. At
July 2, 2017
, a total of
2,970
shares remain available for repurchase.
The Company frequently repurchases shares of its common stock to satisfy employee tax withholding obligations in association with certain share-based compensation awards. These repurchases, which are not part of a publicly announced plan or program, totaled
111
shares in the
six months ended
July 2, 2017
at a cost of
$5,884
, and
99
shares in the
six months ended
July 3, 2016
at a cost of
$4,194
.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Dividend Declarations
On
April 19, 2017
, the Board of Directors declared a regular quarterly dividend of
$0.39
per share. This dividend was paid on
June 9, 2017
to all shareholders of record as of
May 12, 2017
.
On
July 19, 2017
, the Board of Directors declared a regular quarterly dividend of
$0.39
per share. This dividend is payable on
September 8, 2017
to all shareholders of record as of
August 11, 2017
.
Note 5: Restructuring and Asset Impairment
The Company has engaged in a number of restructuring actions over the past several years. Actions initiated in 2017 and 2016 are reported as “2017 Actions” and “2016 Actions,” respectively. Actions initiated prior to 2016, all of which were substantially complete at
July 2, 2017
, are reported as “2015 and Earlier Actions.”
Following are the total restructuring and asset impairment charges/(credits), net of adjustments, and gains on dispositions recognized by the Company during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
Second Quarter
|
|
Six Months
|
|
Second Quarter
|
|
Six Months
|
Restructuring/Asset impairment:
|
|
|
|
|
|
|
|
|
2017 Actions
|
|
$
|
3,884
|
|
|
$
|
6,188
|
|
|
$
|
—
|
|
|
$
|
—
|
|
2016 Actions
|
|
729
|
|
|
1,884
|
|
|
19,632
|
|
|
26,045
|
|
2015 and Earlier Actions
|
|
2,946
|
|
|
3,598
|
|
|
3,646
|
|
|
6,461
|
|
Other asset impairments
|
|
338
|
|
|
338
|
|
|
—
|
|
|
—
|
|
Restructuring/Asset impairment charges
|
|
$
|
7,897
|
|
|
$
|
12,008
|
|
|
$
|
23,278
|
|
|
$
|
32,506
|
|
Income tax benefit
|
|
$
|
(2,338
|
)
|
|
(3,636
|
)
|
|
$
|
(5,425
|
)
|
|
(8,345
|
)
|
Less: Costs attributable to noncontrolling interests, net of tax
|
|
(12
|
)
|
|
(14
|
)
|
|
(38
|
)
|
|
(45
|
)
|
Restructuring/asset impairment charges attributable to Sonoco, net of tax
|
|
$
|
5,547
|
|
|
$
|
8,358
|
|
|
$
|
17,815
|
|
|
$
|
24,116
|
|
Pre-tax restructuring and asset impairment charges are included in “Restructuring/Asset impairment charges” in the Condensed Consolidated Statements of Income.
When recognizable in accordance with GAAP, the Company expects to recognize future additional charges totaling approximately
$1,600
in connection with previously announced restructuring actions. The Company believes that the majority of these charges will be incurred and paid by the end of 2017. The Company continually evaluates its cost structure, including its manufacturing capacity, and additional restructuring actions are likely to be undertaken.
2017 Actions
During 2017, the Company announced the closure of an expanded foam protective packaging plant in North Carolina (part of the Protective Solutions segment) and eliminated approximately
95
positions in conjunction with its ongoing organizational effectiveness efforts.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Below is a summary of 2017 Actions and related expenses by segment and by type incurred and estimated to be incurred through completion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Actions
|
|
Second Quarter 2017
|
|
Total
Incurred
to Date
|
|
Estimated
Total Cost
|
Severance and Termination Benefits
|
|
|
|
|
|
|
Consumer Packaging
|
|
$
|
349
|
|
|
$
|
1,316
|
|
|
$
|
1,616
|
|
Display and Packaging
|
|
66
|
|
|
172
|
|
|
172
|
|
Paper and Industrial Converted Products
|
|
1,663
|
|
|
$
|
2,204
|
|
|
2,204
|
|
Protective Solutions
|
|
899
|
|
|
974
|
|
|
1,124
|
|
Corporate
|
|
—
|
|
|
456
|
|
|
456
|
|
Asset Impairment / Disposal of Assets
|
|
|
|
|
|
|
Protective Solutions
|
|
777
|
|
|
777
|
|
|
777
|
|
Other Costs
|
|
|
|
|
|
|
Consumer Packaging
|
|
92
|
|
|
251
|
|
|
251
|
|
Paper and Industrial Converted Products
|
|
38
|
|
|
38
|
|
|
88
|
|
Protective Solutions
|
|
—
|
|
|
—
|
|
|
700
|
|
Total Charges and Adjustments
|
|
$
|
3,884
|
|
|
$
|
6,188
|
|
|
$
|
7,388
|
|
The following table sets forth the activity in the 2017 Actions restructuring accrual included in “Accrued expenses and other” on the Company’s Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Actions
|
|
Severance
and
Termination
Benefits
|
|
Asset
Impairment/
Disposal
of Assets
|
|
Other
Costs
|
|
Total
|
Accrual Activity
2017 Year to Date
|
|
|
|
Liability at December 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
2017 charges
|
|
5,122
|
|
|
777
|
|
|
289
|
|
|
6,188
|
|
Cash payments
|
|
(2,254
|
)
|
|
—
|
|
|
(289
|
)
|
|
(2,543
|
)
|
Asset write downs/disposals
|
|
—
|
|
|
(777
|
)
|
|
—
|
|
|
(777
|
)
|
Foreign currency translation
|
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
Liability at July 2, 2017
|
|
$
|
2,877
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,877
|
|
The "Asset Impairment/Disposal of Assets" loss of
$777
above relates to the impairment of fixed assets resulting from the planned closure of an expanded foam protective packaging plant in North Carolina.
The Company expects to pay the majority of the remaining 2017 Actions restructuring costs by the end of 2017 using cash generated from operations.
2016 Actions
During 2016, the Company closed
four
tubes and cores plants -
one
in the United States,
one
in Canada,
one
in Ecuador, and
one
in Switzerland (all part of the Paper and Industrial Converted Products segment), a packaging services center in Mexico (part of the Display and Packaging segment) and a fulfillment service center in Brazil (part of the Display and Packaging segment). The Company also began manufacturing rationalization efforts in its Reels division (part of the Paper and Industrial Converted Products segment) and completed the sales of a paper mill in France (part of the Paper and Industrial Converted Products segment) and a retail security packaging plant in Puerto Rico (part of the Display and Packaging segment). In addition, the Company continued to realign its cost structure, resulting in the elimination of approximately
180
positions.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Below is a summary of 2016 Actions and related expenses by segment and by type incurred and estimated to be incurred through completion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Total
Incurred
to Date
|
|
Estimated
Total Cost
|
2016 Actions
|
|
Second Quarter
|
|
Six Months
|
|
Second Quarter
|
|
Six Months
|
|
|
Severance and Termination Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Packaging
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
487
|
|
|
$
|
1,452
|
|
|
$
|
2,408
|
|
|
$
|
2,408
|
|
Display and Packaging
|
|
17
|
|
|
4
|
|
|
1,277
|
|
|
2,653
|
|
|
4,308
|
|
|
4,308
|
|
Paper and Industrial Converted Products
|
|
316
|
|
|
414
|
|
|
1,730
|
|
|
4,141
|
|
|
6,301
|
|
|
6,301
|
|
Protective Solutions
|
|
1
|
|
|
—
|
|
|
38
|
|
|
360
|
|
|
678
|
|
|
678
|
|
Corporate
|
|
—
|
|
|
—
|
|
|
10
|
|
|
1,439
|
|
|
1,550
|
|
|
1,550
|
|
Asset Impairment / Disposal of Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Packaging
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
(306
|
)
|
|
(306
|
)
|
|
(306
|
)
|
Display and Packaging
|
|
—
|
|
|
96
|
|
|
2,237
|
|
|
2,237
|
|
|
2,808
|
|
|
2,808
|
|
Paper and Industrial Converted Products
|
|
45
|
|
|
45
|
|
|
13,279
|
|
|
13,279
|
|
|
13,345
|
|
|
13,345
|
|
Other Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Packaging
|
|
$
|
28
|
|
|
28
|
|
|
104
|
|
|
302
|
|
|
759
|
|
|
759
|
|
Display and Packaging
|
|
139
|
|
|
368
|
|
|
11
|
|
|
11
|
|
|
654
|
|
|
704
|
|
Paper and Industrial Converted Products
|
|
188
|
|
|
878
|
|
|
459
|
|
|
477
|
|
|
2,176
|
|
|
2,226
|
|
Protective Solutions
|
|
(5
|
)
|
|
50
|
|
|
—
|
|
|
—
|
|
|
200
|
|
|
200
|
|
Total Charges and Adjustments
|
|
$
|
729
|
|
|
$
|
1,884
|
|
|
$
|
19,632
|
|
|
$
|
26,045
|
|
|
$
|
34,881
|
|
|
$
|
34,981
|
|
The following table sets forth the activity in the 2016 Actions restructuring accrual included in “Accrued expenses and other” on the Company’s Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Actions
|
|
Severance
and
Termination
Benefits
|
|
Asset
Impairment/
Disposal
of Assets
|
|
Other
Costs
|
|
Total
|
Accrual Activity
2017 Year to Date
|
|
|
|
|
Liability at December 31, 2016
|
|
$
|
3,558
|
|
|
$
|
—
|
|
|
$
|
640
|
|
|
$
|
4,198
|
|
2017 charges
|
|
419
|
|
|
141
|
|
|
1,324
|
|
|
1,884
|
|
Adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cash payments
|
|
(2,585
|
)
|
|
—
|
|
|
(1,271
|
)
|
|
(3,856
|
)
|
Asset write downs/disposals
|
|
—
|
|
|
(141
|
)
|
|
(252
|
)
|
|
(393
|
)
|
Foreign currency translation
|
|
9
|
|
|
—
|
|
|
21
|
|
|
30
|
|
Liability at July 3, 2017
|
|
$
|
1,401
|
|
|
$
|
—
|
|
|
$
|
462
|
|
|
$
|
1,863
|
|
“Other costs” consist primarily of costs related to plant closures including equipment removal, utilities, plant security, property taxes and insurance. The Company expects to pay the majority of the remaining 2016 Actions restructuring costs by the end of 2017 using cash generated from operations.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
2015 and Earlier Actions
2015 and Earlier Actions are comprised of a number of plant closures and workforce reductions initiated prior to 2016. Charges for these actions in both 2017 and 2016 relate primarily to the cost of plant closures including severance, asset impairment, equipment removal, plant security, property taxes and insurance.
The Company expects to recognize future pretax charges of approximately
$300
associated with 2015 and Earlier Actions.
Below is a summary of expenses incurred by segment for 2015 and Earlier Actions for the
three- and six-
month periods ended
July 2, 2017
and
July 3, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
2015 and Earlier Actions
|
|
Second Quarter
|
|
Six Months
|
|
Second Quarter
|
|
Six Months
|
Consumer Packaging
|
|
$
|
2,591
|
|
|
$
|
2,564
|
|
|
$
|
2,982
|
|
|
$
|
5,137
|
|
Display and Packaging
|
|
—
|
|
|
83
|
|
|
560
|
|
|
566
|
|
Paper and Industrial Converted Products
|
|
326
|
|
|
891
|
|
|
21
|
|
|
624
|
|
Protective Solutions
|
|
29
|
|
|
53
|
|
|
83
|
|
|
134
|
|
Corporate
|
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
|
Total Charges and Adjustments
|
|
$
|
2,946
|
|
|
$
|
3,598
|
|
|
$
|
3,646
|
|
|
$
|
6,461
|
|
The accrual for 2015 and Earlier Actions totaled
$3,925
and
$3,608
at
July 2, 2017
and
December 31, 2016
, respectively, and is included in “Accrued expenses and other” on the Company’s Condensed Consolidated Balance Sheets. The accrual relates primarily to unpaid severance and building lease terminations. The Company expects the majority of the liability associated with 2015 and Earlier Actions to be paid by the end of 2017 using cash generated from operations.
Other asset impairments
As a result of the continued devaluation of the Venezuelan Bolivar, the Company recognized impairment charges against inventories and certain long-term nonmonetary assets totaling
$338
in the second quarter of 2017. The assets were deemed to be impaired as the U.S. dollar value of the projected cash flows from these assets was no longer sufficient to recover their U.S. dollar carrying values.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Note 6: Accumulated Other Comprehensive Loss
The following table summarizes the components of accumulated other comprehensive loss and the changes in the balances of each component of accumulated other comprehensive loss, net of tax as applicable, for the
six months ended July 2, 2017
and
July 3, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and
Losses on Cash
Flow Hedges
|
|
Defined
Benefit
Pension Items
|
|
Foreign
Currency
Items
|
|
Accumulated
Other
Comprehensive
Loss
|
Balance at December 31, 2016
|
|
$
|
1,939
|
|
|
$
|
(453,821
|
)
|
|
$
|
(286,498
|
)
|
|
$
|
(738,380
|
)
|
Other comprehensive income/(loss) before reclassifications
|
|
(2,220
|
)
|
|
18,117
|
|
|
59,841
|
|
|
75,738
|
|
Amounts reclassified from accumulated other comprehensive loss to net income
|
|
(1,257
|
)
|
|
29,893
|
|
|
—
|
|
|
28,636
|
|
Amounts reclassified from accumulated other comprehensive loss to fixed assets
|
|
10
|
|
|
—
|
|
|
—
|
|
|
10
|
|
Other comprehensive income/(loss)
|
|
(3,467
|
)
|
|
48,010
|
|
|
59,841
|
|
|
104,384
|
|
Balance at July 2, 2017
|
|
$
|
(1,528
|
)
|
|
$
|
(405,811
|
)
|
|
$
|
(226,657
|
)
|
|
$
|
(633,996
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
(5,152
|
)
|
|
$
|
(444,244
|
)
|
|
$
|
(253,137
|
)
|
|
$
|
(702,533
|
)
|
Other comprehensive income/(loss) before reclassifications
|
|
2,121
|
|
|
(3,190
|
)
|
|
13,439
|
|
|
12,370
|
|
Amounts reclassified from accumulated other comprehensive loss to net income
|
|
2,523
|
|
|
12,144
|
|
|
—
|
|
|
14,667
|
|
Amounts reclassified from accumulated other comprehensive loss to fixed assets
|
|
(22
|
)
|
|
—
|
|
|
—
|
|
|
(22
|
)
|
Other comprehensive income
|
|
4,622
|
|
|
8,954
|
|
|
13,439
|
|
|
27,015
|
|
Balance at July 3, 2016
|
|
$
|
(530
|
)
|
|
$
|
(435,290
|
)
|
|
$
|
(239,698
|
)
|
|
$
|
(675,518
|
)
|
|
|
|
|
|
|
|
|
|
"Other comprehensive income/(loss) before reclassifications" during the
six months ended
July 2, 2017
, includes
$5,071
of "Defined Benefit Pension Items" related to the release of a portion of the valuation allowance on deferred tax assets related to the pension plan of a foreign subsidiary.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
The following table summarizes the effects on net income of significant amounts reclassified from each component of accumulated other comprehensive loss for the
three- and six-
month periods ended
July 2, 2017
and
July 3, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified from Accumulated
Other Comprehensive Loss
|
|
|
|
|
Three Months Ended
|
Six Months Ended
|
|
|
Details about Accumulated Other Comprehensive
Loss Components
|
|
July 2,
2017
|
July 3,
2016
|
July 2,
2017
|
|
July 3,
2016
|
|
Affected Line Item in
the Condensed Consolidated
Statements of Net Income
|
Gains and losses on cash flow hedges
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
2,243
|
|
$
|
(607
|
)
|
$
|
3,283
|
|
|
$
|
(2,847
|
)
|
|
Net sales
|
Foreign exchange contracts
|
|
(1,317
|
)
|
387
|
|
(2,042
|
)
|
|
1,432
|
|
|
Cost of sales
|
Commodity contracts
|
|
463
|
|
(1,294
|
)
|
711
|
|
|
(2,805
|
)
|
|
Cost of sales
|
|
|
1,389
|
|
(1,514
|
)
|
1,952
|
|
|
(4,220
|
)
|
|
Total before tax
|
|
|
(497
|
)
|
505
|
|
(695
|
)
|
|
1,697
|
|
|
Tax benefit
|
|
|
$
|
892
|
|
$
|
(1,009
|
)
|
$
|
1,257
|
|
|
$
|
(2,523
|
)
|
|
Net of tax
|
Defined benefit pension items
|
|
|
|
|
|
|
|
|
Effect of settlement loss
(a)
|
|
$
|
(31,074
|
)
|
$
|
—
|
|
$
|
(31,074
|
)
|
|
$
|
—
|
|
|
Selling, general and
administrative
|
Amortization of defined benefit pension items
(a)
|
|
(7,251
|
)
|
(7,368
|
)
|
(14,839
|
)
|
|
(14,511
|
)
|
|
Cost of sales
|
Amortization of defined benefit pension items
(a)
|
|
(2,417
|
)
|
(2,456
|
)
|
(4,946
|
)
|
|
(4,837
|
)
|
|
Selling, general and
administrative
|
|
|
(40,742
|
)
|
(9,824
|
)
|
(50,859
|
)
|
|
(19,348
|
)
|
|
Total before tax
|
|
|
17,224
|
|
3,628
|
|
20,966
|
|
|
7,204
|
|
|
Tax benefit
|
|
|
$
|
(23,518
|
)
|
$
|
(6,196
|
)
|
$
|
(29,893
|
)
|
|
$
|
(12,144
|
)
|
|
Net of tax
|
Total reclassifications for the period
|
|
$
|
(22,626
|
)
|
$
|
(7,205
|
)
|
$
|
(28,636
|
)
|
|
$
|
(14,667
|
)
|
|
Net of tax
|
|
|
(a)
|
See Note 10 for additional details.
|
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
The following table summarizes the before and after tax amounts for the various components of other comprehensive income/(loss) for the three-month periods ended
July 2, 2017
and
July 3, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 2, 2017
|
|
Three months ended July 3, 2016
|
|
|
|
Before Tax Amount
|
Tax (Expense) Benefit
|
After Tax Amount
|
|
Before Tax Amount
|
Tax (Expense) Benefit
|
After Tax Amount
|
Foreign currency items
|
|
$
|
29,685
|
|
$
|
—
|
|
$
|
29,685
|
|
|
$
|
(17,389
|
)
|
$
|
—
|
|
$
|
(17,389
|
)
|
Defined benefit pension items:
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss) before
reclassifications
|
|
19,168
|
|
(5,975
|
)
|
13,193
|
|
|
(5,395
|
)
|
2,205
|
|
(3,190
|
)
|
|
Amounts reclassified from accumulated other
comprehensive income/(loss) to net income
|
|
40,742
|
|
(17,224
|
)
|
23,518
|
|
|
9,824
|
|
(3,628
|
)
|
6,196
|
|
|
Net other comprehensive income/(loss) from
defined benefit pension items
|
|
59,910
|
|
(23,199
|
)
|
36,711
|
|
|
4,429
|
|
(1,423
|
)
|
3,006
|
|
Gains and losses on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss) before
reclassifications
|
|
602
|
|
(196
|
)
|
406
|
|
|
2,529
|
|
(819
|
)
|
1,710
|
|
|
Amounts reclassified from accumulated other
comprehensive income/(loss) to net income
|
|
(1,389
|
)
|
497
|
|
(892
|
)
|
|
1,514
|
|
(505
|
)
|
1,009
|
|
|
Amounts reclassified from accumulated other
comprehensive income/(loss) to fixed assets
|
|
(32
|
)
|
—
|
|
(32
|
)
|
|
3
|
|
—
|
|
3
|
|
|
Net other comprehensive income/(loss) from
cash flow hedges
|
|
(819
|
)
|
301
|
|
(518
|
)
|
|
4,046
|
|
(1,324
|
)
|
2,722
|
|
Other comprehensive income/(loss)
|
|
$
|
88,776
|
|
$
|
(22,898
|
)
|
$
|
65,878
|
|
|
$
|
(8,914
|
)
|
$
|
(2,747
|
)
|
$
|
(11,661
|
)
|
The following table summarizes the before and after tax amounts for the various components of other comprehensive income/(loss) for the
six-month
periods ended
July 2, 2017
and
July 3, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended July 2, 2017
|
|
Six months ended July 3, 2016
|
|
|
|
Before Tax Amount
|
Tax (Expense) Benefit
|
After Tax Amount
|
|
Before Tax Amount
|
Tax (Expense) Benefit
|
After Tax Amount
|
Foreign currency items
|
|
$
|
59,841
|
|
$
|
—
|
|
$
|
59,841
|
|
|
$
|
13,439
|
|
$
|
—
|
|
$
|
13,439
|
|
Defined benefit pension items:
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss) before
reclassifications
|
|
19,021
|
|
(904
|
)
|
18,117
|
|
|
(5,395
|
)
|
2,205
|
|
(3,190
|
)
|
|
Amounts reclassified from accumulated other
comprehensive income/(loss) to net income
|
|
50,859
|
|
(20,966
|
)
|
29,893
|
|
|
19,348
|
|
(7,204
|
)
|
12,144
|
|
|
Net other comprehensive income/(loss) from
defined benefit pension items
|
|
69,880
|
|
(21,870
|
)
|
48,010
|
|
|
13,953
|
|
(4,999
|
)
|
8,954
|
|
Gains and losses on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss) before
reclassifications
|
|
(3,446
|
)
|
1,226
|
|
(2,220
|
)
|
|
3,130
|
|
(1,009
|
)
|
2,121
|
|
|
Amounts reclassified from accumulated other
comprehensive income/(loss) to net income
|
|
(1,952
|
)
|
695
|
|
(1,257
|
)
|
|
4,220
|
|
(1,697
|
)
|
2,523
|
|
|
Amounts reclassified from accumulated other
comprehensive income/(loss) to fixed assets
|
|
10
|
|
—
|
|
10
|
|
|
(22
|
)
|
—
|
|
(22
|
)
|
|
Net other comprehensive income/(loss) from
cash flow hedges
|
|
(5,388
|
)
|
1,921
|
|
(3,467
|
)
|
|
7,328
|
|
(2,706
|
)
|
4,622
|
|
Other comprehensive income/(loss)
|
|
$
|
124,333
|
|
$
|
(19,949
|
)
|
$
|
104,384
|
|
|
$
|
34,720
|
|
$
|
(7,705
|
)
|
$
|
27,015
|
|
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Note 7: Goodwill and Other Intangible Assets
Goodwill
A summary of the changes in goodwill by segment for the
six months ended July 2, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Packaging
|
|
Display
and
Packaging
|
|
Paper and
Industrial
Converted
Products
|
Protective
Solutions
|
|
Total
|
Goodwill at December 31, 2016
|
|
$
|
435,590
|
|
|
$
|
203,414
|
|
|
$
|
221,983
|
|
$
|
231,228
|
|
|
$
|
1,092,215
|
|
Acquisitions
|
|
67,951
|
|
|
—
|
|
|
—
|
|
—
|
|
|
67,951
|
|
Foreign currency translation
|
|
10,154
|
|
|
—
|
|
|
7,194
|
|
603
|
|
|
17,951
|
|
Other
|
|
(715
|
)
|
|
—
|
|
|
—
|
|
161
|
|
|
(554
|
)
|
Goodwill at July 2, 2017
|
|
$
|
512,980
|
|
|
$
|
203,414
|
|
|
$
|
229,177
|
|
$
|
231,992
|
|
|
$
|
1,177,563
|
|
The acquisition of Packaging Holdings in March 2017 resulted in the recognition of
$67,951
of goodwill. In addition, measurement period adjustments were made in the first half of 2017 to the provisional fair values of the assets acquired and the liabilities assumed in the November 2016 acquisition of PPI and the September 2016 acquisition of Laminar. These measurement period adjustments resulted in a
$715
reduction in the goodwill associated with PPI and a
$161
increase in the goodwill associated with Laminar. See Note 3 for additional information.
The Company assesses 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. The Company completed its most recent annual goodwill impairment testing during the third quarter of 2016. As part of this testing, the Company analyzed certain qualitative and quantitative factors in determining goodwill impairment. During this most recent testing, management concluded that goodwill associated with the Company's Paper and Industrial Converted Products - Brazil reporting unit had become impaired as a result of the continued deterioration of economic conditions in Brazil. Accordingly, as previously disclosed, an impairment charge totaling
$2,617
, the entire amount of goodwill associated with this reporting unit, was recognized during the third quarter of 2016.
Based on its assessments, the Company concluded that there was
no
impairment of goodwill for any of its other reporting units. The assessments reflected a number of significant management assumptions and estimates including the Company's forecast of sales volumes and prices, profit margins, income taxes, capital expenditures and changes in working capital requirements. Changes in these assumptions and/or discount rates could materially impact the Company's conclusions.
Although no other reporting units failed the assessments noted above, in management’s opinion, the reporting units having the greatest risk of a significant future impairment if actual results fall short of expectations are Display and Packaging, and Paper and Industrial Converted Products - Europe. Total goodwill associated with these reporting units was
$203,414
and
$92,957
, respectively, at
July 2, 2017
. A large portion of sales in the Display and Packaging reporting unit is concentrated in
one
customer, the majority of which is under contract until 2021.
There have been no triggering events identified between the most recent annual impairment test and
July 2, 2017
.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Other Intangible Assets
A summary of other intangible assets as of
July 2, 2017
and
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
July 2,
2017
|
|
December 31,
2016
|
Other Intangible Assets, gross:
|
|
|
|
|
Patents
|
|
$
|
22,456
|
|
|
$
|
13,164
|
|
Customer lists
|
|
418,927
|
|
|
362,162
|
|
Trade names
|
|
22,991
|
|
|
19,902
|
|
Proprietary technology
|
|
20,756
|
|
|
20,721
|
|
Land use rights
|
|
293
|
|
|
288
|
|
Other
|
|
1,725
|
|
|
1,701
|
|
Other Intangible Assets, gross
|
|
$
|
487,148
|
|
|
$
|
417,938
|
|
|
|
|
|
|
Accumulated Amortization:
|
|
|
|
|
Patents
|
|
(5,870
|
)
|
|
(5,647
|
)
|
Customer lists
|
|
(190,459
|
)
|
|
(172,292
|
)
|
Trade names
|
|
(3,110
|
)
|
|
(2,733
|
)
|
Proprietary technology
|
|
(12,221
|
)
|
|
(11,236
|
)
|
Land use rights
|
|
(44
|
)
|
|
(41
|
)
|
Other
|
|
(1,125
|
)
|
|
(1,031
|
)
|
Total Accumulated Amortization
|
|
$
|
(212,829
|
)
|
|
$
|
(192,980
|
)
|
Other Intangible Assets, net
|
|
$
|
274,319
|
|
|
$
|
224,958
|
|
The Packaging Holdings acquisition in March 2017 resulted in the addition of
$61,490
of intangible assets, the majority of which related to customer lists. In addition, measurement period adjustments were made in the first quarter of 2017 to the provisional fair values of the assets acquired and the liabilities assumed in the November 2016 acquisition of PPI which resulted in the recognition of an additional
$1,400
of intangible assets, all of which related to customer lists. These intangible assets will be amortized over an expected average useful life of
9.5
years.
Other intangible assets are amortized on a straight-line basis over their respective useful lives, which generally range from
three
to
forty
years. The Company has
no
intangible assets with indefinite lives.
Aggregate amortization expense was
$9,378
and
$8,231
for the
three months ended July 2, 2017
and
July 3, 2016
, respectively, and
$16,589
and
$16,567
for the
six months ended July 2, 2017
and
July 3, 2016
, respectively. Amortization expense on other intangible assets is expected to total approximately
$35,400
in 2017,
$37,200
in 2018,
$36,100
in 2019,
$34,300
in 2020 and
$32,400
in 2021.
Note 8: Debt
On July 20, 2017, the Company entered into a Credit Agreement in connection with a new
$750,000
bank credit facility which replaced an existing credit facility entered into on October 2, 2014, and reflects substantially the same terms and conditions. Included in the new facility are a
$500,000
five
-year revolving credit facility and a
$250,000
five
-year term loan. Based on the pricing grid in the Credit Agreement and the Company's current credit ratings, the borrowing has an all-in drawn margin above the London Interbank Offered Rate (LIBOR) of
112.5
basis points. Borrowings under the Credit Agreement are pre-payable at any time at the discretion of the Company and the term loan has annual amortization payments totaling
$12,500
.
Consistent with prior facilities, the
$500,000
revolving credit facility will continue to support the Company's
$350,000
commercial paper program. Proceeds from the
$250,000
term loan were used to repay the
$150,000
term loan entered into on March 13, 2017, and the remaining
$100,000
was used to partially fund the Clear Lam acquisition.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Note 9: Financial Instruments and Derivatives
The following table sets forth the carrying amounts and fair values of the Company’s significant financial instruments for which the carrying amount differs from the fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2, 2017
|
|
December 31, 2016
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Long-term debt, net of current portion
|
|
$
|
1,190,646
|
|
|
$
|
1,317,654
|
|
|
$
|
1,020,698
|
|
|
$
|
1,116,336
|
|
The carrying value of cash and cash equivalents, short-term debt and long-term variable-rate debt approximates fair value. The fair value of long-term debt is determined based on recent trade information in the financial markets of the Company’s public debt or is determined by discounting future cash flows using interest rates available to the Company for issues with similar terms and maturities. It is considered a Level 2 fair value measurement.
Cash Flow Hedges
At
July 2, 2017
and
December 31, 2016
, the Company had derivative financial instruments outstanding to hedge anticipated transactions and certain asset and liability related cash flows. These contracts, which have maturities ranging to December 2019, qualify as cash flow hedges under U.S. GAAP. To the extent considered effective, the changes in fair value of these contracts are recorded in other comprehensive income and reclassified to income or expense in the period in which the hedged item impacts earnings. The Company has determined all hedges to be highly effective and as a result no material ineffectiveness has been recorded.
Commodity Cash Flow Hedges
The Company has entered into certain derivative contracts to manage the cost of anticipated purchases of natural gas and aluminum. At
July 2, 2017
, natural gas swaps covering approximately
7.1
MMBTUs were outstanding. These contracts represent approximately
85%
,
54%
, and
35%
of anticipated U.S. and Canadian usage for the remainder of 2017, 2018 and 2019, respectively. Additionally, the Company had swap contracts covering
2,419
metric tons of aluminum, representing approximately
61%
of anticipated usage for the remainder of 2017. The fair values of the Company’s commodity cash flow hedges netted to gain positions of
$1,419
at
July 2, 2017
and
$3,636
at
December 31, 2016
. The amount of the gain included in Accumulated Other Comprehensive Loss at
July 2, 2017
, that is expected to be reclassified to the income statement during the next twelve months is
$1,390
.
Foreign Currency Cash Flow Hedges
The Company has entered into forward contracts to hedge certain anticipated foreign currency denominated sales and purchases forecast to occur in 2017. The net positions of these contracts at
July 2, 2017
were as follows (in thousands):
|
|
|
|
|
Currency
|
Action
|
Quantity
|
Colombian peso
|
purchase
|
1,073,625
|
|
Mexican peso
|
purchase
|
300,067
|
|
Canadian dollar
|
purchase
|
28,244
|
|
Turkish lira
|
purchase
|
6,327
|
|
Russian ruble
|
purchase
|
3,733
|
|
British pound
|
purchase
|
2,489
|
|
New Zealand dollar
|
sell
|
(340
|
)
|
Australian dollar
|
sell
|
(417
|
)
|
Euro
|
sell
|
(1,350
|
)
|
Polish zloty
|
sell
|
(1,513
|
)
|
The fair value of these foreign currency cash flow hedges netted to loss positions of
$(3,291)
at
July 2, 2017
and
$(185)
at
December 31, 2016
. During the
six months ended July 2, 2017
, certain foreign currency cash flow hedges related to construction in progress were settled as the related capital expenditures were made. Losses from these hedges totaling
$10
were reclassified from accumulated other comprehensive loss and included in the carrying value of the
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
assets acquired. During the next twelve months, losses of
$(3,481)
are expected to be reclassified from Accumulated Other Comprehensive Loss to the income statement.
Other Derivatives
The Company routinely enters into forward contracts or swaps to economically hedge the currency exposure of intercompany debt and existing foreign currency denominated receivables and payables. The Company does not apply hedge accounting treatment under ASC 815 for these instruments. As such, changes in fair value are recorded directly to income and expense in the periods that they occur.
The net positions of these contracts at
July 2, 2017
, were as follows (in thousands):
|
|
|
|
|
Currency
|
Action
|
Quantity
|
Colombian peso
|
purchase
|
3,049,889
|
|
Mexican peso
|
purchase
|
233,791
|
|
Canadian dollar
|
purchase
|
18,625
|
|
The fair value of the Company’s other derivatives was
$(816)
and
$(696)
at
July 2, 2017
and
December 31, 2016
, respectively.
The following table sets forth the location and fair values of the Company’s derivative instruments at
July 2, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance Sheet Location
|
|
July 2,
2017
|
|
December 31,
2016
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
Commodity Contracts
|
|
Prepaid expenses
|
|
$
|
1,795
|
|
|
$
|
3,240
|
|
Commodity Contracts
|
|
Other assets
|
|
$
|
58
|
|
|
$
|
527
|
|
Commodity Contracts
|
|
Accrued expenses and other
|
|
$
|
(235
|
)
|
|
$
|
(89
|
)
|
Commodity Contracts
|
|
Other liabilities
|
|
$
|
(199
|
)
|
|
$
|
(42
|
)
|
Foreign Exchange Contracts
|
|
Prepaid expenses
|
|
$
|
113
|
|
|
$
|
761
|
|
Foreign Exchange Contracts
|
|
Accrued expenses and other
|
|
$
|
(3,594
|
)
|
|
$
|
(946
|
)
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
|
Prepaid expenses
|
|
$
|
12
|
|
|
$
|
194
|
|
Foreign Exchange Contracts
|
|
Accrued expenses and other
|
|
$
|
(828
|
)
|
|
$
|
(890
|
)
|
While certain of the Company’s derivative contract arrangements with its counterparties provide for the ability to settle contracts on a net basis, the Company reports its derivative positions on a gross basis. There are no collateral arrangements or requirements in these agreements.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
The following tables set forth the effect of the Company's derivative instruments on financial performance for the
three months ended
July 2, 2017
and
July 3, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Amount of Gain or
(Loss) Recognized
in OCI on
Derivatives
(Effective Portion)
|
|
Location of Gain
or (Loss)
Reclassified from
Accumulated OCI
Into Income
(Effective Portion)
|
|
Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI Into Income
(Effective Portion)
|
|
Location of Gain
or (Loss) Recognized in
Income on
Derivatives
(Ineffective Portion)
|
|
Amount of Gain
or (Loss)
Recognized
in Income on
Derivatives (Ineffective
Portion)
|
Derivatives in Cash Flow Hedging Relationships:
|
|
|
|
|
|
|
Three months ended July 2, 2017
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
$
|
509
|
|
|
Net sales
|
|
$
|
2,243
|
|
|
Net sales
|
|
$
|
—
|
|
|
|
|
|
Cost of sales
|
|
$
|
(1,317
|
)
|
|
|
|
|
Commodity Contracts
|
$
|
93
|
|
|
Cost of sales
|
|
$
|
463
|
|
|
Cost of sales
|
|
$
|
135
|
|
Three months ended July 3, 2016
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
$
|
(797
|
)
|
|
Net sales
|
|
$
|
(607
|
)
|
|
Net sales
|
|
$
|
—
|
|
|
|
|
|
Cost of sales
|
|
$
|
387
|
|
|
|
|
|
Commodity Contracts
|
$
|
3,249
|
|
|
Cost of sales
|
|
$
|
(1,294
|
)
|
|
Cost of sales
|
|
$
|
(108
|
)
|
|
|
|
|
|
|
Description
|
Location of Gain or (Loss) Recognized in
Income Statement
|
Gain or (Loss)
Recognized
|
Derivatives not Designated as Hedging Instruments:
|
|
Three months ended July 2, 2017
|
|
|
Foreign Exchange Contracts
|
Cost of sales
|
$
|
—
|
|
|
Selling, general and administrative
|
$
|
1,665
|
|
Three months ended July 3, 2016
|
|
|
Foreign Exchange Contracts
|
Cost of sales
|
$
|
—
|
|
|
Selling, general and administrative
|
$
|
1,352
|
|
The following tables set forth the effect of the Company’s derivative instruments on financial performance for the
six months ended
July 2, 2017
and
July 3, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Amount of Gain or
(Loss) Recognized
in OCI on
Derivatives
(Effective Portion)
|
|
Location of Gain
or (Loss)
Reclassified from
Accumulated OCI
Into Income
(Effective Portion)
|
|
Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI Into Income
(Effective Portion)
|
|
Location of Gain
or (Loss)
Recognized in
Income on
Derivatives
(Ineffective Portion)
|
|
Amount of Gain
or (Loss) Recognized
in Income on
Derivatives
(Ineffective
Portion)
|
Derivatives in Cash Flow Hedging Relationships:
|
|
|
|
|
|
|
Six months ended July 2, 2017
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
|
$
|
(2,183
|
)
|
|
Net sales
|
|
$
|
3,283
|
|
|
Net sales
|
|
$
|
—
|
|
|
|
|
|
Cost of sales
|
|
$
|
(2,042
|
)
|
|
|
|
|
Commodity Contracts
|
|
$
|
(1,263
|
)
|
|
Cost of sales
|
|
$
|
711
|
|
|
Cost of sales
|
|
$
|
(200
|
)
|
Six months ended July 3, 2016
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
|
$
|
1,570
|
|
|
Net sales
|
|
$
|
(2,847
|
)
|
|
Net sales
|
|
$
|
—
|
|
|
|
|
|
Cost of sales
|
|
$
|
1,432
|
|
|
|
|
|
Commodity Contracts
|
|
$
|
1,516
|
|
|
Cost of sales
|
|
$
|
(2,805
|
)
|
|
Cost of sales
|
|
$
|
2
|
|
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
|
|
|
|
|
|
Description
|
Location of Gain or (Loss) Recognized in
Income Statement
|
Gain or (Loss)
Recognized
|
Derivatives not Designated as Hedging Instruments:
|
|
Six months ended July 2, 2017
|
|
|
Foreign Exchange Contracts
|
Cost of sales
|
$
|
—
|
|
|
Selling, general and administrative
|
$
|
1,098
|
|
Six months ended July 3, 2016
|
|
|
Foreign Exchange Contracts
|
Cost of sales
|
$
|
—
|
|
|
Selling, general and administrative
|
$
|
1,116
|
|
Note 10: Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
|
|
|
Level 1 –
|
Observable inputs such as quoted market prices in active markets;
|
Level 2 –
|
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
|
Level 3 –
|
Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
The following table sets forth information regarding the Company’s financial assets and financial liabilities, excluding retirement and postretirement plan assets, measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
July 2,
2017
|
|
Assets measured at NAV
|
Level 1
|
|
Level 2
|
|
Level 3
|
Hedge derivatives, net:
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
1,419
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
1,419
|
|
|
$
|
—
|
|
Foreign exchange contracts
|
|
$
|
(3,481
|
)
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
(3,481
|
)
|
|
$
|
—
|
|
Non-hedge derivatives, net:
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(816
|
)
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
(816
|
)
|
|
$
|
—
|
|
Deferred compensation plan assets
|
|
$
|
374
|
|
|
$
|
—
|
|
$
|
374
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
December 31,
2016
|
|
Assets measured at NAV
|
Level 1
|
|
Level 2
|
|
Level 3
|
Hedge derivatives, net:
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
3,636
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
3,636
|
|
|
$
|
—
|
|
Foreign exchange contracts
|
|
$
|
(185
|
)
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
(185
|
)
|
|
$
|
—
|
|
Non-hedge derivatives, net:
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(696
|
)
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
(696
|
)
|
|
$
|
—
|
|
Deferred compensation plan assets
|
|
$
|
349
|
|
|
$
|
—
|
|
$
|
349
|
|
|
$
|
—
|
|
|
$
|
—
|
|
As discussed in Note 8, the Company uses derivatives to mitigate the effect of raw material and energy cost fluctuations, foreign currency fluctuations and, from time to time, interest rate movements. Fair value measurements for the Company’s derivatives are classified under Level 2 because such measurements are estimated based on observable inputs such as interest rates, yield curves, spot and future commodity prices and spot and future exchange rates.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Certain deferred compensation plan liabilities are funded by assets invested in various exchange traded mutual funds. These assets are measured using quoted prices in accessible active markets for identical assets.
The Company does not currently have any non-financial assets or liabilities that are recognized or disclosed at fair value on a recurring basis. None of the Company’s financial assets or liabilities are measured at fair value using significant unobservable inputs. There were no transfers in or out of Level 1 or Level 2 fair value measurements during the
three- and six-
month periods ended
July 2, 2017
.
Note 11: Employee Benefit Plans
Retirement Plans and Retiree Health and Life Insurance Plans
The Company provides non-contributory defined benefit pension plans for a majority of its employees in the United States and certain of its employees in Mexico and Belgium. The Company also sponsors contributory defined benefit pension plans covering the majority of its employees in the United Kingdom, Canada, and the Netherlands. In addition, the Company provides postretirement healthcare and life insurance benefits to a limited number of its retirees and their dependents in the United States and Canada, based on certain age and/or service eligibility requirements.
The Company froze participation in its U.S. qualified defined benefit pension plan for newly hired salaried and non-union hourly employees effective December 31, 2003. To replace this benefit, the Company provides non-union U.S. employees hired on or after January 1, 2004, with an annual contribution, called the Sonoco Retirement Contribution (SRC), to their participant accounts in the Sonoco Retirement and Savings Plan. The SRC is equal to
4%
of the participant's eligible pay plus
4%
of eligible pay in excess of the social security wage base. Also eligible for the SRC are former participants of the U.S. qualified defined benefit pension plan who elected to transfer out of that plan under a one-time option effective January 1, 2010.
On February 4, 2009, the U.S. qualified defined benefit pension plan was amended to freeze plan benefits for all active participants effective December 31, 2018. Remaining active participants in the U.S. qualified plan will become eligible for SRC contributions effective January 1, 2019.
The components of net periodic benefit cost include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
July 2,
2017
|
|
July 3,
2016
|
|
July 2,
2017
|
|
July 3,
2016
|
Retirement Plans
|
|
|
|
|
|
|
Service cost
|
|
$
|
4,497
|
|
|
$
|
4,799
|
|
|
$
|
9,209
|
|
|
$
|
9,822
|
|
Interest cost
|
|
13,668
|
|
|
14,984
|
|
|
28,369
|
|
|
30,310
|
|
Expected return on plan assets
|
|
(19,698
|
)
|
|
(21,388
|
)
|
|
(40,536
|
)
|
|
(43,432
|
)
|
Amortization of prior service cost
|
|
224
|
|
|
188
|
|
|
455
|
|
|
381
|
|
Amortization of net actuarial loss
|
|
9,792
|
|
|
9,960
|
|
|
19,960
|
|
|
19,556
|
|
Effect of settlement loss
|
|
31,074
|
|
|
—
|
|
|
31,074
|
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
39,557
|
|
|
$
|
8,543
|
|
|
$
|
48,531
|
|
|
$
|
16,637
|
|
Retiree Health and Life Insurance Plans
|
|
|
|
|
|
|
|
|
Service cost
|
|
80
|
|
|
71
|
|
|
164
|
|
|
156
|
|
Interest cost
|
|
104
|
|
|
114
|
|
|
224
|
|
|
244
|
|
Expected return on plan assets
|
|
(406
|
)
|
|
(394
|
)
|
|
(820
|
)
|
|
(798
|
)
|
Amortization of prior service credit
|
|
(123
|
)
|
|
(124
|
)
|
|
(250
|
)
|
|
(252
|
)
|
Amortization of net actuarial gain
|
|
(225
|
)
|
|
(200
|
)
|
|
(380
|
)
|
|
(337
|
)
|
Net periodic benefit income
|
|
$
|
(570
|
)
|
|
$
|
(533
|
)
|
|
$
|
(1,062
|
)
|
|
$
|
(987
|
)
|
The Company made aggregate contributions of
$34,445
and
$22,295
to its defined benefit retirement and retiree health and life insurance plans during the
six months ended July 2, 2017
and
July 3, 2016
, respectively. The Company anticipates that it will make additional aggregate contributions of approximately
$9,000
to its defined benefit retirement and retiree health and life insurance plans over the remainder of 2017.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
In February 2017, the Company initiated a program through which it offered certain terminated vested participants in the U.S. qualified retirement plans the opportunity to receive their benefits early as either a lump sum or an annuity. This population comprised approximately
15%
of the projected benefit obligation of these plans. At the close of the election period, approximately
51%
of the eligible participants elected to take the early payment. These payments were distributed from plan assets in May and June 2017. As a result of settling these obligations, the Company recognized a non-cash pre-tax settlement charge of
$31,074
in the second quarter of 2017.
Sonoco Retirement Contribution (SRC)
The SRC, which is funded annually in the first quarter, totaled
$14,066
during the
six months ended July 2, 2017
, and
$13,352
during the
six months ended July 3, 2016
.
No
additional SRC contributions are expected during the remainder of 2017. The Company recognized expense related to the SRC of
$3,820
and
$3,577
for the quarters ended
July 2, 2017
and
July 3, 2016
, respectively, and
$7,691
and
$6,595
for the
six-month
periods ended
July 2, 2017
and
July 3, 2016
, respectively.
Note 12: Income Taxes
The Company’s effective tax rate for the
three- and six-
month periods ending
July 2, 2017
, was
29.6%
and
31.4%
, respectively, and its effective rate for the
three- and six-
month periods ending
July 3, 2016
, was
31.5%
and
32.4%
, respectively. The rates for the three- and six-month periods of both years varied from the U.S. statutory rate due primarily to the favorable effect of certain international operations that are subject to tax rates generally lower than the U.S. rate. The 2017 year-to-date rate also varied from the statutory rate due to the Company's January 1, 2017, adoption of ASU 2016-09 regarding accounting for share-based compensation, which requires excess tax benefits to be utilized as an offset to tax expense and was not required to be applied retrospectively.
The Company and/or its subsidiaries file federal, state and local income tax returns in the United States and various foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, or non-U.S., income tax examinations by tax authorities for years before 2012. With respect to state and local income taxes, the Company is no longer subject to examination for years prior to 2012, with few exceptions. The Company is currently under audit by the Internal Revenue Service for the 2012 and 2013 tax years.
The Company’s reserve for uncertain tax benefits has decreased by approximately
$2,400
since
December 31, 2016
, due to the settlement of a prior year's audit. The Company's reserves for uncertain tax benefits for which it believes it is reasonably possible that a resolution may be reached within the next twelve months was
$0
at
July 2, 2017
. Although the Company’s estimate for the potential outcome for any uncertain tax issue is highly judgmental, management believes that any reasonably foreseeable outcomes related to these matters have been adequately provided for. However, future results may include favorable or unfavorable adjustments to estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which earnings or deductions are realized may differ from current estimates. As a result, the Company’s effective tax rate may fluctuate significantly on a quarterly basis. The Company has operations and pays taxes in many countries outside of the U.S. and taxes on those earnings are subject to varying rates. The Company is not dependent upon the favorable benefit of any one jurisdiction to an extent that loss of those benefits would have a material effect on the Company’s overall effective tax rate.
As previously disclosed, the Company received a draft Notice of Proposed Adjustment (“NOPA”) from the Internal Revenue Service (IRS) in February 2017 proposing an adjustment to income for the 2013 tax year based on the IRS's recharacterization of a distribution of an intercompany note made in 2012, and the subsequent repayment of the note over the course of 2013, as if it were a cash distribution made in 2013. In March 2017, the Company received a draft NOPA proposing penalties of
$18,000
associated with the IRS’s recharacterization, as well as an Information Document Request (“IDR”) requesting the Company’s analysis of why such penalties should not apply. The Company responded to this IDR in April 2017. At the time the distribution was paid in 2012, it was characterized as a dividend to the extent of earnings and profits, with the remainder as a tax free return of basis and taxable capital gain. As the IRS proposes to recharacterize the distribution, the entire distribution would be characterized as a dividend. The incremental tax liability associated with the income adjustment proposed in the NOPA would be approximately
$84,000
, excluding interest and the previously referenced penalties. Should a final NOPA be issued, the Company intends to file a protest to the proposed deficiency with the IRS, which will cause the matter to be referred to the Appeals Division of the IRS. The Company strongly believes the position of the IRS with regard to this matter is inconsistent with applicable tax laws and existing Treasury
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
regulations, and that the Company's previously reported income tax provision for the year in question is appropriate. However, there can be no assurance that this matter will be resolved in the Company's favor. Regardless of whether the matter is resolved in the Company's favor, the final resolution of this matter could be expensive and time consuming to defend and/or settle. While the Company believes that the amount of tax originally paid with respect to this distribution is correct, and accordingly has not provided additional reserve for tax uncertainty, there is still a possibility that an adverse outcome of the matter could have a material effect on its results of operations and financial condition.
Note 13: Segment Reporting
The Company reports its financial results in
four
reportable segments: Consumer Packaging, Display and Packaging, Paper and Industrial Converted Products, and Protective Solutions.
The 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. This segment also included blow-molded plastic bottles and jars through November 7, 2016, when the Company completed the sale of its rigid plastics blow molding operations.
The Display and Packaging segment includes the following products and services: point-of-purchase displays; supply chain management services; retail packaging, including printed backer cards, thermoformed blisters and heat sealing equipment; and paperboard specialties, such as coasters and glass covers.
The Paper and Industrial Converted Products segment includes the following products: paperboard tubes and cores; fiber-based construction tubes and forms; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, linerboard, corrugating medium, recovered paper and material recycling services.
The Protective Solutions segment includes the following products: custom-engineered, paperboard-based and expanded foam protective packaging and components; and temperature-assured packaging.
The following table sets forth net sales, intersegment sales and operating profit for the Company’s reportable segments. “Segment operating profit” is defined as the segment’s portion of “Income before interest and income taxes” excluding restructuring charges, asset impairment charges, acquisition-related costs, pension settlement charges, and certain other items, if any, the exclusion of which the Company believes improves comparability and analysis of the financial performance of the business. General corporate expenses have been allocated as operating costs to each of the Company’s reportable segments. "Other, net" for the three- and six-months ended July 2, 2017 includes a
$31,074
pension settlement charge. See note 10 for additional information.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
SEGMENT FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
July 2,
2017
|
|
July 3,
2016
|
|
July 2,
2017
|
|
July 3,
2016
|
Net sales:
|
|
|
|
|
|
|
|
|
Consumer Packaging
|
|
$
|
521,262
|
|
|
$
|
511,007
|
|
|
$
|
1,003,443
|
|
|
$
|
1,038,345
|
|
Display and Packaging
|
|
115,612
|
|
|
130,874
|
|
|
230,247
|
|
|
275,141
|
|
Paper and Industrial Converted Products
|
|
469,197
|
|
|
433,342
|
|
|
911,699
|
|
|
856,416
|
|
Protective Solutions
|
|
134,603
|
|
|
130,457
|
|
|
267,609
|
|
|
262,054
|
|
Consolidated
|
|
$
|
1,240,674
|
|
|
$
|
1,205,680
|
|
|
$
|
2,412,998
|
|
|
$
|
2,431,956
|
|
Intersegment sales:
|
|
|
|
|
|
|
|
|
Consumer Packaging
|
|
$
|
1,353
|
|
|
$
|
1,596
|
|
|
$
|
2,576
|
|
|
$
|
2,928
|
|
Display and Packaging
|
|
824
|
|
|
626
|
|
|
1,574
|
|
|
1,123
|
|
Paper and Industrial Converted Products
|
|
36,680
|
|
|
23,536
|
|
|
65,053
|
|
|
49,917
|
|
Protective Solutions
|
|
519
|
|
|
286
|
|
|
918
|
|
|
872
|
|
Consolidated
|
|
$
|
39,376
|
|
|
$
|
26,044
|
|
|
$
|
70,121
|
|
|
$
|
54,840
|
|
Income before interest and income taxes:
|
|
|
|
|
|
|
|
|
Segment operating profit:
|
|
|
|
|
|
|
|
|
Consumer Packaging
|
|
$
|
59,063
|
|
|
$
|
59,509
|
|
|
$
|
117,073
|
|
|
$
|
122,374
|
|
Display and Packaging
|
|
1,444
|
|
|
5,030
|
|
|
4,627
|
|
|
8,311
|
|
Paper and Industrial Converted Products
|
|
43,513
|
|
|
37,480
|
|
|
68,236
|
|
|
70,779
|
|
Protective Solutions
|
|
10,952
|
|
|
14,220
|
|
|
21,813
|
|
|
26,246
|
|
Restructuring/Asset impairment charges
|
|
(7,897
|
)
|
|
(23,278
|
)
|
|
(12,008
|
)
|
|
(32,506
|
)
|
Other, net
|
|
(36,305
|
)
|
|
(837
|
)
|
|
(38,998
|
)
|
|
(1,248
|
)
|
Consolidated
|
|
$
|
70,770
|
|
|
$
|
92,124
|
|
|
$
|
160,743
|
|
|
$
|
193,956
|
|
Note 14: Commitments and Contingencies
Pursuant to U.S. GAAP, accruals for estimated losses are recorded at the time information becomes available indicating that losses are probable and that the amounts are reasonably estimable. As is the case with other companies in similar industries, the Company faces exposure from actual or potential claims and legal proceedings from a variety of sources. Some of these exposures, as discussed below, have the potential to be material.
Environmental Matters
The Company is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which it operates.
Fox River
In January 2017, U.S. Paper Mills Corp. (U.S. Mills), a wholly owned subsidiary of the Company, obtained Court approval of a final settlement of cost recovery claims made by Appvion, Inc. for
$3,334
. The settlement was funded during the first quarter of 2017, and related legal and professional fees totaling
$369
were funded during the first and seconds quarters of 2017. As a result of the settlement becoming final, the Company and U.S. Mills have resolved all pending or threatened legal proceedings related to the Fox River matter, as well as any such proceedings known to be contemplated by government authorities.
Spartanburg
In connection with its acquisition of Tegrant in November 2011, the Company identified potential environmental contamination at a site in Spartanburg, South Carolina. The total remediation cost of the Spartanburg site was estimated to be
$17,400
at the time of acquisition and an accrual in this amount was recorded on Tegrant’s opening balance sheet. Since the acquisition, the Company has spent a total of
$731
on remediation of the Spartanburg site. During previous years, the Company has increased its reserves for this site by a total of
$117
in order to reflect its best estimate of what it is likely to pay in order to complete the remediation. At
July 2, 2017
and
December 31, 2016
, the Company's accrual for environmental contingencies related to the Spartanburg site totaled
$16,786
and
$16,821
, respectively. The Company cannot currently estimate its potential liability, damages or range of potential loss, if any, beyond the amounts accrued with respect to this exposure. However, the Company does not believe that the resolution of this matter has a reasonable possibility of having a material adverse effect on the Company's financial statements.
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Other environmental matters
The Company has been named as a potentially responsible party at several other environmentally contaminated sites. All of the sites are also the responsibility of other parties. The potential remediation liabilities are shared with such other parties, and, in most cases, the Company’s share, if any, cannot be reasonably estimated at the current time. However, the Company does not believe that the resolution of these matters has a reasonable possibility of having a material adverse effect on the Company's financial statements.
Summary
As of
July 2, 2017
and
December 31, 2016
, the Company (and its subsidiaries) had accrued
$20,694
and
$24,515
, respectively, related to environmental contingencies. These accruals are included in “Accrued expenses and other” on the Company’s Condensed Consolidated Balance Sheets.
Other Legal Matters
In addition to those matters described above, the Company is subject to other various legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters could differ from management’s expectations, the Company does not believe the resolution of these matters has a reasonable possibility of having a material adverse effect on the Company’s financial statements.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Directors of Sonoco Products Company:
We have reviewed the accompanying condensed consolidated balance sheet of Sonoco Products Company and its subsidiaries (the "Company") as of
July 2, 2017
, and the related condensed consolidated statements of income and comprehensive income for the three and
six-month
periods ended
July 2, 2017
and
July 3, 2016
and the condensed consolidated statement of cash flows for the
six-month
periods ended
July 2, 2017
and
July 3, 2016
. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of income, of comprehensive income, of changes in total equity and of cash flows for the year then ended (not presented herein), and in our report dated March 1, 2017, which included a paragraph describing a change in the manner of accounting for Debt Issuance Costs in the 2016 financial statements, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2016 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
August 2, 2017