SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-K
FORM 10-K
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31,
20162019
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to Commission File
No. 001-11261SONOCO PRODUCTS COMPANY
SONOCO PRODUCTS COMPANY
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Incorporated under the laws of South Carolina | | I.R.S. Employer Identification No. 57-0248420 |
Hartsville,
SCSouth Carolina 29550
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading symbol | Name of exchange on which registered |
| No par value common stock | SON | New York Stock Exchange, LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer,
or a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated
filer” andfiler,” “smaller reporting company”
and "emerging growth company" in Rule
12b-2 of the Exchange Act.
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Large accelerated filer☒ | ☒ | Accelerated filer ☐ | ☐ | Non-accelerated filer☐ | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒ The aggregate market value of voting common stock held by nonaffiliates of the registrant (based on the New York Stock Exchange closing price) on
July 3, 2016,June 28, 2019, which was the last business day of the registrant’s most recently completed second fiscal quarter, was
$4,944,332,687.$6,455,701,379. Registrant does not (and did not at
July 3, 2016)June 30, 2019) have any
non-voting common stock outstanding.
As of February
17, 2017,14, 2020, there were
99,245,190100,255,008 shares of no par value common stock outstanding.
Documents Incorporated by Reference
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the annual meeting of shareholders to be held on April
19, 2017,15, 2020, which statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates, are incorporated by reference in Part III.
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
SONOCO PRODUCTS COMPANY
Forward-looking statements
Statements included in this Annual Report on Form
10-K that are not historical in nature, are intended to be, and are hereby identified as “forward-looking statements” for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended. In addition, the Company and its representatives may from time to time make other oral or written statements that are also “forward-looking statements.” Words such as “estimate,” “project,” “intend,” “expect,” “believe,” “consider,” “plan,” “strategy,” “opportunity,” “commitment,” “target,” “anticipate,” “objective,” “goal,” “guidance,” “outlook,” “forecast,” “future,”
“re-envision, “re-envision,” “assume,” “will,” “would,” “can,” “could,” “may,” “might,” “aspires,” “potential,” or the negative thereof, and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding:
•availability and supply of raw materials, and offsetting high raw material costs;costs, including the impact of potential changes in tariffs;
•improved productivity and cost containment; •improving margins and leveraging strong cash flow and financial position; •effects of acquisitions and dispositions; •realization of synergies resulting from acquisitions; •costs, timing and effects of restructuring activities; •adequacy and anticipated amounts and uses of cash flows; •expected amounts of capital spendingspending;
•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; •research and development spending; •expected impact and costs of resolution of legal proceedings;
•extent of, and adequacy of provisions for, environmental liabilities; •sustainability commitments;
•adequacy of income tax provisions, realization of deferred tax assets, outcomes of uncertain tax issues and tax rates; •goodwill impairment charges and fair values of reporting units; •future asset impairment charges and fair values of assets; •anticipated contributions to pension and postretirement benefit plans, fair values of plan assets, long-term rates of return on plan assets, and projected benefit obligations and payments; •expected impact of implementation of new accounting pronouncements;
•creation of long-term value and returns for shareholders; •continued payment of dividends; and •planned stock repurchases.
Such forward-looking statements are based on current expectations, estimates and projections about our industry,
management’smanagement's beliefs and certain assumptions made by management. Such information includes, without limitation, discussions as to guidance and other estimates, perceived opportunities, expectations, beliefs, plans, strategies, goals and objectives concerning our future financial and operating performance. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed or forecasted in such forward-looking statements. The risks, uncertainties and assumptions include, without limitation:
•availability and pricing of raw materials, energy and transportation, including the impact of potential changes in tariffs and escalating trade wars, and the Company’sCompany's ability to pass raw material, energy and transportation price increases and surcharges through to customers or otherwise manage these commodity pricing risks; •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 thelow-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’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; • continued strength of our paperboard-based tubes and cores and composite can operations;•
ability to manage the mix of business to take advantage of growing markets while reducing cyclical effects of some of the Company’sCompany's existing businesses on operating results; •ability to maintain innovative technological market leadership and a reputation for quality; •ability to attract and retain talented and qualified employees, managers and executives;
•ability to profitably maintain and grow existing domestic and international business and market share; •ability to expand geographically and win profitable new business; •ability to identify and successfully close suitable acquisitions at the levels needed to meet growth targets, and successfully integrate newly acquired businesses into the Company’sCompany's operations; 2 FORM 10-K SONOCO 2019 ANNUAL REPORT
•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; •cost of employee and retiree medical, health and life insurance benefits; •resolution of income tax contingencies; •foreign currency exchange rate fluctuations, interest rate and commodity price risk and the effectiveness of related hedges; •changes in U.S. and foreign tariffs, tax rates, and tax laws, regulations, interpretations and interpretationsimplementation thereof; •the adoption of new, or changes in, accounting standards or interpretations;
•challenges and assessments from tax authorities resulting from differences in interpretation of tax laws, including income, sales and use, property, value added, employment, and other taxes;
•accuracy in valuation of deferred tax assets; •accuracy of assumptions underlying projections related to goodwill impairment testing, and accuracy of management’smanagement's assessment of goodwill impairment; •accuracy of assumptions underlying fair value measurements, accuracy of management’smanagement's assessments of fair value and fluctuations in fair value; •ability to maintain effective internal controls over financial reporting;
•liability for and anticipated costs of resolution of legal proceedings;
•liability for and anticipated costs of environmental remediation actions; •effects of environmental laws and regulations; •operational disruptions at our major facilities; •failure or disruptions in our information technologies; •failures of third party transportation providers to deliver our products to our customers or to deliver raw materials to us;
•substantially lower than normal crop yields;
•loss of consumer or investor confidence; •ability to protect our intellectual property rights; •changes in laws and regulations relating to packaging for food products and foods packaged therein, other actions and public concerns about products packaged in our containers, or chemicals or substances used in raw materials or in the manufacturing process;
•changing consumer attitudes toward plastic packaging;
•ability to meet sustainability targets and challenges in implementation;
•changing climate, climate change regulations and greenhouse gas effects;
•actions of domestic or foreign government agencies and other changes in laws and regulations affecting the Company;Company and increased costs of compliance; | | | | | | |
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•international, national and local economic and market conditions and levels of unemployment; and
•economic disruptions resulting from terrorist activities and natural disasters.disasters; and
•accelerating inflation.
More information about the risks, uncertainties and assumptions that may cause actual results to differ materially from those expressed or forecasted in forward-looking statements is provided in
this Annual Report on Form 10-K under Item 1A
–“Risk Factors”- "Risk Factors" and throughout other sections of this report and in other reports filed with the Securities and Exchange Commission. In light of these various risks, uncertainties and assumptions, the forward-looking events discussed in this Annual Report on Form
10-K might not occur.
The Company undertakes no obligation to publicly update or revise forward-looking statements, whether as a result of new information, future events or otherwise. You are, however, advised to review any further disclosures we make on related subjects, and about new or additional risks, uncertainties and assumptions, in our future filings with the Securities and Exchange Commission on Forms
10-K,10-Q 10-K, 10-Q and
8-K.REFERENCES TO OUR WEBSITE ADDRESS
References to our website address
References to our website address and domain names throughout this Annual Report on Form
10-K are for informational purposes only, or to fulfill specific disclosure requirements of the Securities and Exchange Commission’s rules or the New York Stock Exchange Listing Standards. These references are not intended to, and do not, incorporate the contents of our websites by reference into this Annual Report on Form
10-K. | | | | | | |
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3 FORM 10-K SONOCO 2019 ANNUAL REPORT
ITEMPART I
Item 1.
BUSINESS(A) GENERAL DEVELOPMENT OF BUSINESSBusiness
(a) General development of business –
The
Sonoco Products Company ("Sonoco," "the Company," "we," "us," or "our") is a South Carolina corporation originally founded in Hartsville, South Carolina, in 1899 as the Southern Novelty Company. The name was subsequently changed to Sonoco Products Company (“the Company” or “Sonoco”). Sonoco is a manufacturer of industrial and consumer packaging products and a provider of packaging services, with 318approximately 320 locations in 33 36 countries.Information about the Company’s acquisitions, dispositions, joint ventures and restructuring activities is provided in Notes 3 and 4 to the Consolidated Financial Statements included in Item 8
(c) Narrative description of
this Annual Report on Form10-K.(B) FINANCIAL INFORMATION ABOUT SEGMENTSbusiness –
The Company reports its financial results in four reportable segments – Consumer Packaging, Paper and Industrial Converted Products, Display and Packaging, and Protective Solutions. Information about the Company’s reportable segments is provided in Note
1618 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form
10-K.(C) NARRATIVE DESCRIPTION OF BUSINESS –
Products and Services – The following discussion outlines the principal products produced and services provided by the Company.
The Consumer Packaging segment accounted for approximately 43%44%, 43%44% and 39%42% of the Company’s consolidated net sales in the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. The operations in this segment consist of 7886 plants throughout the world. The products, services and markets of the Consumer Packaging segment are as follows: | | | | | | | | |
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| Products and Services | | Markets |
Round composite cans, shaped rigid paperboard containers,containers; fiber and plastic caulk/adhesive tubes,tubes; aluminum, steel and peelable membrane easy-open closures for composite and metal cans; thermoformed rigid plastic bottles, jars, jugs,trays, cups and trays;bowls; injection molded containers, spools and parts; high-barrier flexible and forming plastic packaging films, modified atmosphere packaging, lidding films, printed flexible packaging,packaging; rotogravure cylinder engraving, global brand management
| | Snacks,Stacked chips, snacks, nuts, cookies, crackers, other hard-baked goods, desserts, candy, gum, frozen concentrate, powdered and liquid beverages,non-carbonated beverages,ready-to-drink products, powdered infant formula, coffee, refrigerated dough, frozen foods and entrees, processed food,foods, fresh fruits, vegetables, fruit,fresh-cut produce, salads, fresh-baked goods, eggs, seafood, poultry, soup, pasta, dairy, sauces, dips,fresh-cut produce, condiments, pet food, home and personal care, adhesivesmeats, cheeses, labels |
As noted above, this
Within the Consumer Packaging segment,
included blow-molded plastic bottles and jars for most of 2016. However, on November 7, 2016, the Company completed the sale of its rigid plastics blow molding operations.In 2016, Sonoco’s rigid packaging – paper-based products – wasis the Company’s largest revenue-producing group of products and services, representing approximately 23%22% of consolidated net sales in the year ended December 31, 2016.2019. This group comprised 21% and 17%22% of consolidated net sales in 20152018 and 2014,2017, respectively.
The Display and Packaging segment accounted for approximately
11%10%,
12%11% and
13%10% of the Company’s consolidated net sales in the years ended December 31,
2016, 20152019, 2018 and
2014,2017, respectively. The operations in this segment consist of
2422 plants around the world including the United States, Poland, Mexico and Brazil. The products, services and markets of the Display and Packaging segment are as follows:
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| Products and Services | | Markets |
| Point-of-purchase displays; custom packaging; retail packaging, including printed backer cards, thermoformed blisters and heat sealing equipment; fulfillment; primary package filling; supply chain management; paperboard specialties | | Automotive,Miscellaneous foods and beverages, candy, electronics, personal care, baby care, food, cosmetics, fragrances, hosiery, office supplies, toys, home and garden, medical,over-the-counter drugs, sporting goods, hospitality industry, advertising |
Paper and Industrial Converted Products
The Paper and Industrial Converted Products segment accounted for approximately
35%37%, 35% and
38%37% of the Company’s consolidated net sales in the years ended December 31,
2016, 20152019, 2018 and
2014,2017, respectively. This segment serves its markets through
177183 plants on five continents. Sonoco’s paper operations provide the primary raw material for the Company’s fiber-based packaging. Sonoco uses approximately
62%52% of the paper it manufactures, and the remainder is sold to third parties. This vertical integration strategy is supported by
1925 paper mills with
2834 paper machines and
2324 recycling facilities throughout the world. In
2016,2019, Sonoco had the capacity to manufacture approximately
1.72.4 million tons of recycled paperboard. The products, services and markets of the Paper and Industrial Converted Products segment are as follows:
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| Products and Services | | Markets |
Recycled paperboard, chipboard, tubeboard, lightweight corestock, boxboard, linerboard, corrugating medium, edgeboard, specialty grades;paper grades, adhesives; paperboard tubes and cores, molded plugs, reels; collection, processing and recycling of old corrugated containers, paper, plastics, metal, glass and other recyclable materialsmaterials; flexible intermediate bulk containers and bulk bags | | Converted paperboard products, spiral winders, beverage insulators, construction, film,plastic films, flowable products, metal, paper mills, shipping and storage, tape and label,labels, textiles, wire and cable, adhesives, municipal, residential, customers’ manufacturing and distribution facilities |
In
2016,2019, Sonoco’s tubes and cores products were the Company’s second largest revenue-producing group of products, representing approximately
22%20% of consolidated net sales in the year ended December 31,
2016.2019. This group comprised
21%20% and
23%22% of consolidated net sales in
20152018 and
2014,2017, respectively.
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The Protective Solutions segment accounted for approximately 10%, 10%, and 11% of the Company’s consolidated net sales in each of the years ended December 31, 2016, 20152019, 2018 and 2014.2017, respectively. The operations in this segment consist of 29 plants throughout the world. The products, services and markets of the Protective Solutions segment are as follows: | | | | | | | | |
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| Products and Services | | Markets |
| Custom-engineered, paperboard-based and expanded foam protective packaging and components; temperature-assured packaging | | Consumer electronics, automotive, appliances, medical devices, temperature-sensitive pharmaceuticals and food, heating and air conditioning, office furnishings, fitness equipment, promotional and palletized distribution |
Product Distribution – Each of the Company’s operating units has its own sales staff, and maintains direct sales relationships with its customers. For those customers that buy from more than one business unit, the Company often assigns a single representative or team of specialists to handle that customer’s needs. Some of the units have service staff at the manufacturing facility that interact directly with customers. The Paper and Industrial Converted Products segment also has aand certain operations within the Consumer Packaging segment have customer service centercenters located in Hartsville, South Carolina, which isare the main contact pointpoints between itstheir North American business units and itstheir customers. Divisional sales personnel also provide sales management, marketing and product development assistance as needed. Typically, product distribution is directly from the manufacturing plant to the customer, but in some cases, product is warehoused in a mutually advantageous location to be shipped to the customer as needed. Raw Materials – The principal raw materials used by the Company are recovered paper, paperboard, steel, aluminum and plastic resins. Raw materials are purchased from a number of outside sources. The Company considers the supply and availability of raw materials to be adequate to meet its needs. Patents, Trademarks and Related Contracts – Most inventions and product and process innovations are generated by Sonoco’s development, marketing and engineering staffs, and are important to the Company’s internal growth. Patents have been granted on many inventions created by Sonoco staff in the United States and in many other countries. Patents and trade secrets were acquired as part of several acquisitions over the past two years, including the acquisitions of Thermoform Engineered Quality, LLC, and Plastique Holdings, LTD, (together "TEQ"), Corenso Holdings America, Inc. ("Corenso"), the remaining 70 percent interest in Conitex Sonoco (BVI), Ltd., and Highland Packaging Solutions. These patents are managed globally by a Sonoco intellectual capital management team through the Company’s subsidiary, Sonoco Development, Inc. (SDI). SDI globally manages patents, trade secrets, confidentiality agreements and license agreements. Some patents have been licensed to other manufacturers. Sonoco also licenses a few patents from outside companies and universities. U.S. patents expire after about 20 years, and patents on new innovations replace many of the abandoned or expired patents. A second intellectual capital subsidiary of Sonoco, SPC Resources, Inc., globally manages Sonoco’s trademarks, service marks, copyrights and Internet domain names. Most of Sonoco’s products are marketed worldwide under trademarks such as Sonoco®, SmartSeal®, Sonotube®, Sealclick®, Sonopost® and UltraSeal®. Sonoco’s registered web domain names such as www.sonoco.com and www.sonotube.com provide information about Sonoco, its people and its products. Trademarks and domain names are licensed to outside companies where appropriate. Seasonality – The Company’s operations are not seasonal to any significant degree, although the Consumer Packaging and Display and Packaging segmentssegment normally reportreports slightly higher sales and operating profits in the second half of the year, when compared with the first half. Working Capital Practices – The Company is not required to carry any significant amounts of inventory to meet customer requirements or to assure itself continuous allotment of goods. Dependence on Customers – On an aggregate basis during 2016,2019, the five largest customers in the Paper and Industrial Converted Products segment, the Consumer Packaging segment and the Protective Solutions segment accounted for approximately 6%, 30%27% and 25%16%, respectively, of each segment’s net sales. The dependence on a few customers in the Display and Packaging segment is more significant, as the five largest customers in this segment accounted for approximately 53%58% of that segment’s sales. Sales to the Company’s largest customer represented approximately 5%4.6% of consolidated revenues in 2016.2019. This concentration of sales volume resulted in a corresponding concentration of credit, representing approximately 3% 8% of the Company’s consolidated trade accounts receivable at December 31, 2016.2019. The Company’s next largest customer comprised approximately 4%3.7% of the Company’s consolidatedconsolidated revenues for the year ended December 31, 2016.in 2019.
Backlog – Most customer orders are manufactured with a lead time of three weeks or less. Therefore, the amount of backlog orders at December 31, 2016,2019, was not material. The Company expects all backlog orders at December 31, 2016,2019, to be shipped during 2017.2020.
Competition – The Company sells its products in highly competitive markets, which include paper, textile, film, food, chemical, packaging, construction, and wire and cable. All of these markets are influenced by the overall rate of economic activity and their behavior is principally driven by supply and demand. Because we operate in highly competitive markets, we regularly bid for new and continuing business. Losses and/or awards of business from our largest customers, customer changes to alternative forms of packaging, and the repricing of business, can have a significant effect on our operating results. The Company manufactures and sells many of its products globally. The Company, having operated internationally since 1923, considers its ability to serve its customers worldwide in a timely and consistent manner a competitive advantage. The Company also believes that its technological leadership, reputation for quality, and vertical integration are competitive advantages. Expansion of the Company’s product lines and global presence is driven by the rapidly changing needs of its major customers, who demand high-quality,state-of-the-art, environmentally compatible packaging, wherever they choose to do business. It is important to be alow-cost producer in order to compete effectively. The Company is constantly focused on productivity improvements and other cost-reduction initiatives utilizing the latest in technology.Research and Development – Company-sponsored research and development expenses totaled approximately $22.5 million in 2016, $22.1 million in 2015 and $24.2 million in 2014. Customer-sponsored research and development expenses were not material in any of these periods. Significant projects in Sonoco’s Consumer Packaging segment include a broad range of new and next generation product developments across flexible packaging, rigid plastic and composite packaging, including the TruVue® can, a can made of a highly engineered, multilayer plastic substrate allowing customers to see the product inside. During 2016, the Paper and Industrial Converted Products segment continued to invest in efforts to design and develop new products for the paper industry and for the film and textiles industries. In addition, efforts were focused on
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enhancing performance characteristics of the Company’s tubes and cores in the construction, tape and paper packaging areas. Technology emphasis was also placed on delivering improved productivity via materials developments and key converting process improvements. Research and development projects in the Company’s Protective Solutions segment were primarily focused on developing new temperature-assurance packaging solutions for the pharmaceuticals and clinical trials market.
Compliance with Environmental Laws – Information regarding compliance with environmental laws is provided in Item 7 –Management’s– Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Risk Management,” and in Note 14 to the Consolidated Financial Statements included in Item 8 of this Annual Report onForm 10-K.Number of Employees – Sonoco had approximately 20,000 employees worldwide as of December 31, 2016.
(D) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS –
Financial information about geographic areas is provided in Note 16 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Number of Employees – Sonoco had approximately 23,000 employees worldwide as of December 31, 2019.
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(e) Available information
about market risk in Item 7 –Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Risk Management” of this Annual Report on Form10-K.(E) AVAILABLE INFORMATION –
The Company electronically files with the Securities and Exchange Commission (SEC) its annual reports on Form10-K, its quarterly reports on Form10-Q, its periodic reports onForm 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the “1934 Act”), and proxy materials pursuant to Section 14 of the 1934 Act. The SEC maintains a site on the Internet,www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Sonoco also makes its filings available, free of charge, through its website,www.sonoco.com, as soon as reasonably practical after the electronic filing of such material with the SEC.
Information about our Executive officers of the registrantOfficers – | | | | | | | | | | | |
| Name | Age | Age | | Position and Business Experience for the Past Five Years |
Executive Committee | | | | | |
| R. Howard Coker | 57 | | |
M. Jack Sanders | | | | 63 | | | President and Chief Executive Officer since April 2013. Previously President and Chief Operating Officer December 2010-March 2013; Executive Vice President, Consumer January-December 2010; Executive Vice President, Industrial 2008-2010. Joined Sonoco in 1987. |
Robert C. Tiede | | | | 58 | | | Executive Vice President and Chief Operating Officer since January 2017.February 2020. Previously Senior Vice President, Global Consumer Packaging & Services, Protective Solutions & Reels 2015-2017; Senior Vice President, Global Consumer PackagingPaper and Services 2013-2015; Vice President, Global Flexible & Packaging Services 2009-2013. Joined Sonoco in 2004. |
Vicki B. Arthur | | | | 58 | | | Senior Vice President, Plastic Packaging and Protective Solutions since January 2017. Previously Vice President, Global Protective Solutions 2013-2017; Vice President, Protective Solutions, N.A. 2012-2013; Vice President, Global Corporate Customers 2008-2012. Joined Sonoco in 1984. |
R. Howard Coker | | | | 54 | | | Industrial Converted Products 2019-2020; Senior Vice President, Rigid Paper Containers and Paper/Engineered Carriers International since January 2017. Previously2017-2018; Group Vice President, Global Rigid Paper & Closures and Paper & Industrial Converted Products, EMEA, Asia, Australia and New Zealand 2015-2017; Vice President, Global Rigid Paper & Closures 2015; Group Vice President, Global Rigid Paper & Plastics 2013-2015; Vice President, Global Rigid Paper & Closures 2011-2013. Joined Sonoco in 1985. Mr. Coker is thebrother-in-law of John R. Haley, oneChairman of Sonoco’s directors.Sonoco's Board of Directors. |
| Robert C. Tiede | 61 | | | (Resigned as President and Chief Executive Officer effective February 1, 2020.) President and Chief Executive Officer April 2018-February 2020; Previously Vice President and Chief Operating Officer 2017-2018; Senior Vice President, Global Consumer Packaging & Services, Protective Solutions & Reels 2015-2017; Senior Vice President, Global Consumer Packaging and Services 2013-2015; Vice President, Global Flexible & Packaging Services 2009-2013. Joined Sonoco in 2004.
|
Julie C. Albrecht
| 52 | | | Vice President and Chief Financial Officer since April 2019. Previously Corporate Vice President, Treasurer/Assistant Chief Financial Officer 2017-2018; Vice President, Finance and Investor Relations & Treasurer for Esterline Technologies Corporation, 2015-2017; Finance Director, Customer Service Aircraft Systems for United Technologies, 2012-2015. Joined Sonoco in 2017. |
| Robert Dillard | 45 | | | Corporate Vice President, Corporate Development since November 2019. Previously Staff Vice President, Corporate Development 2018-2019; President of Personal Care Europe, 2018, Vice President of Strategy and Innovation at Domtar Personal Care, a division of Domtar Corporation 2016-2018; President, Stanley Hydraulics at Stanley Black & Decker, Inc. 2013-2016. Joined Sonoco in 2018. |
John M. Florence
| 41 | | | 38 | | | Vice President, Human Resources, General Counsel, and Secretary since February 2019. Previously Corporate Vice President, General Counsel and Secretary since November 2016. Previously2016-2019; Corporate Attorney 2015-2016. Joined Sonoco in 2015. Previously an attorney at Haynsworth Sinkler Boyd, P.A. 2005-2015. Mr. Florence is theson-in-law of Harris E. DeLoach, Jr., our Executive Chairman.Joined Sonoco in 2015.
|
| Rodger D. Fuller | 58 | | | 55 | | | Executive Vice President, Global Industrial and Consumer since February 2020. Previously Senior Vice President, Global Consumer Packaging, Display and Packaging and Protective Solutions 2019-2020; Senior Vice President, Paper/Engineered Carriers U.S./Canada and Display & Packaging since 2017. Previously2017-2018; Group Vice President, Paper & Industrial Converted Products, Americas 2015-2017; Vice President, Global Primary Materials Group 2015; Group Vice President, Paper & Industrial Converting N.A. 2013-2015; Vice President, Global Rigid Plastics & Corporate Customers 2011-2013. Joined Sonoco in 1985. |
Kevin P. MahoneyRichard K. Johnson | 51 | | | 61 | | | Senior Vice President, Corporate Planning since February 2011. Previously Vice President, Corporate Planning 2000-2011. Joined Sonoco in 1987. |
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Name | | Age | | Position and Business Experience for the Past Five Years |
Allan H. McLeland | | | | 50 | | | Corporate Vice President, Human Resources since January 2011. Previously Staff Vice President, Human Resources, Industrial 2010-2011. Joined Sonoco in 1993. |
Barry L. Saunders | | | | 57 | | | Senior Vice President and Chief FinancialInformation Officer since May 2015.joining Sonoco in March 2019. Previously Vice President and Chief FinancialInformation Officer 2011-2015; Vice President, Corporate Controller and Chief Accounting Officer 2008-2011. Joined Sonoco in 1989.of HNI Corporation 2011-2019. |
| Roger P. Schrum | 64 | | | 61 | | | Corporate Vice President, Investor Relations & Corporate Affairs since February 2009. Previously Staff Vice President, Investor Relations & Corporate Affairs 2005-2009. Joined Sonoco in 2005. |
Other Corporate Officers
| | | | | | | |
James A. Harrell III | | | | 55 | | | Vice President, Tubes & Cores, U.S. and Canada since December 2015. Previously Vice President, Global Tubes & Cores Operations February-December 2015; Vice President, Tubes & Cores N.A. 2012-2015; Vice President, Industrial Converting Division N.A. 2010-2012. Joined Sonoco in 1985. |
Robert L. Puechl | | | | 61 | | | Vice President, Global Flexibles since January 2011. Previously Vice President, Global Plastics 2010-2011. Joined Sonoco in 1986. |
| Marcy J. Thompson | 58 | | | 55 | | | Vice President, Marketing and Innovation since July 2013. Previously Vice President, Rigid Paper N.A. 2011-2013; Division Vice President & General Manager, Sonoco Recycling 2009-2011. Joined Sonoco in 2006. |
| Other Corporate Officers | | | |
| James A. Harrell III | 58 | | | Vice President, Americas Industrial effective March 1, 2020. Previously Vice President, Tubes & Cores, U.S. and Canada 2015-2020; Vice President, Global Tubes & Cores Operations February 2015-December 2015; Vice President, Tubes & Cores N.A. 2012-2015; and Vice President, Industrial Converting Division N.A. 2010-2012. Joined Sonoco in 1985. |
| Jeffrey S. Tomaszewski | 51 | | | Vice President, North America Consumer and Global RPC effective March 1, 2020. Previously Vice President, Global Rigid Paper and Closures and Display and Packaging 2019-2020; Division Vice President and General Manager, Rigid Paper Containers, NA and Display and Packaging 2018-2019; Division Vice President Rigid Paper Containers, NA 2015-2018; and General Manager of Global Display and Packaging and Packaging Services 2013-2015. Joined Sonoco in 2002. |
Adam Wood
| 51 | | | 48 | | | Vice President, Paper & Industrial Converted Products, Europe, Middle East, Australia and New Zealand since 2019. Previously Vice President, Paper & Industrial Converted Products, EMEA, Asia, Australia and New Zealand since December 2015. Previously2015-2019; Vice President, Global Tubes & Cores February-DecemberFebruary 2015-December 2015; Vice President, Industrial Europe 2014-2015; Division VP/GM,Vice President and General Manager, Industrial Europe 2011-2014. Joined Sonoco in 2003.
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6 FORM 10-K SONOCO 2019 ANNUAL REPORT
ITEMItem 1A.
RISK FACTORSRisk factors
We are subject to risks and uncertainties that could adversely affect our business, consolidated financial condition, results of operations and cash flows, and the trading price of our securities. These factors could also cause our actual results to materially differ from the results contemplated by forward-looking statements we make in this report, in our other filings with the Securities and Exchange Commission, and in our public announcements. You should consider the risk factors described below, as well as other factors described elsewhere in this report and in our other filings with the Securities and Exchange Commission, in evaluating us, our business, and any investment in our securities. Although these are the most significant risk factors of which we are currently aware, they are not the only risk factors to which we are subject. Additional risk factors not currently known to us, or that we currently deem immaterial, could also adversely affect our business operations and financial results.
Challenging current
Changes in domestic and
future global economic conditions
have had, and may
continue to have a negative impact on our business operations and financial results.
Although our business is diversified across various markets and customers, because of the nature of our products and services, general economic downturns in the United States and globally can adversely affect our business operations and financial results.
The currentCurrent global economic challenges, including
relatively high levels of unemployment, shrinking middle class incomes and slowing consumption, the difficulties of the United States and other countries in dealing with their rising debt levels, and currency fluctuations are likely to continue to put pressure on the economy, and on us.
As we have experiencedIn response to the last global economic recession, extraordinary monetary policy actions of the U.S. Federal Reserve and other central banking institutions, including the utilization of quantitative easing, were taken to create and maintain a low interest rate environment. The Federal Reserve began slowly raising its benchmark interest rates over the past
severalfew years in response to an improving economy and reduced unemployment, and indications in 2018 were that further increases might be expected in 2019. However, in 2019, the Federal Reserve lowered the rate three times, as concerns grew about a potential global slowdown in the face of unresolved trade negotiations between the United States and China, which dampened business investment and slowed the manufacturing sector. If the U.S. economy remains strong and international trade negotiations are successfully resolved, the Federal Reserve may begin to raise its benchmark rate again. Such an increase may, among other things, reduce the availability and/or increase the costs of obtaining new variable rate debt and refinancing existing indebtedness, and negatively impact our financial condition and results of operations. Additionally, such an increase in rates would put additional pressure on consumers and the economy in general. As evidenced in recent years, tightening of credit availability and/or financial difficulties, leading to declines in consumer and business confidence and spending, affect us, our customers, suppliers and distributors. When such conditions exist, customers may delay, decrease or cancel purchases from us, and may also delay payment or fail to pay us altogether. Suppliers may have difficulty filling our orders and distributors may have difficulty getting our products to market, which may affect our ability to meet customer demands, and result in loss of business. Weakened global economic conditions may also result in unfavorable changes in our product price/mix and lower profit margins. All of these factors may have a material adverse effect on us.
The ongoing coronavirus outbreak emanating from China at the beginning of 2020 has impacted various Chinese and multi-national businesses, including travel restrictions and the extended shutdown of certain businesses in the region. Annual sales of our China operations totaled approximately $130 million in 2019. To date, our eight manufacturing locations in China have been somewhat negatively impacted by lower customer demand and certain supply chain disruptions. If the coronavirus outbreak situation should worsen, we may experience greater disruptions to both customer demand and supply chains in China and on a worldwide basis. We continue to evaluate the potential operational impacts and closely monitor developments as they are reported and will respond accordingly.
Our international operations subject us to various risks that could adversely affect our business operations and financial results.
We have operations throughout North and South America, Europe, Australia and Asia, with
318approximately 320 facilities in
3336 countries. In
2016,2019, approximately
35%37% of consolidated sales came from operations and sales outside of the United States, and we expect to continue to expand our international operations in the future. Management of global operations is extremely complex, and operations in foreign countries are subject to
local statutory and regulatory requirements, differing legal environments and other additional risks that may not exist, or be as significant, in the United States. These additional risks may adversely affect our business operations and financial results, and include, without limitation:
•foreign currency exchange rate fluctuations and foreign currency exchange controls; •hyperinflation and currency devaluation; •possible limitations on conversion of foreign currencies into dollars or payment of dividends and other payments bynon-U.S. subsidiaries; •tariffs, non-tariff barriers, duties, taxes or government royalties, including the imposition or increase of withholding and other taxes on remittances and other payments bynon-U.S. subsidiaries; •our interpretation of our rights and responsibilities under local statutory and regulatory rules for sales taxes, VAT and similar taxes, statutory accounting requirements, licenses and permits, etc. may prove to be incorrect or unsupportable resulting in fines, penalties, and/or other liabilities related to non-compliance, damage to our reputation, unanticipated operational restrictions and/or other consequences as a result of the Company's actions, or inaction, taken to perform our responsibilities or protect our rights;
•changes in tax laws, or the interpretation of such laws, affecting foreigntaxable income, tax creditsdeductions, or tax deductionsother attributes relating to our non U.S.non-U.S. earnings or operations, and difficulties in repatriating cash generated or held bynon-U.S. subsidiaries in a tax efficient manner;operations;
•inconsistent product regulation or policy changes by foreign agencies or governments; •difficulties in enforcement of contractual obligations and intellectual property rights; •high social benefit costs for labor, including more expansive rights of foreign unions and work councils, and costs associated with restructuring activities; •national and regional labor strikes; •difficulties in staffing and managing international operations; •geographic, language and cultural differences between personnel in different areas of the world; •differences in local business practices;
•foreign governments’ restrictive trade policies, and customs, import/export and other trade compliance regulations; •compliance with and changes in applicable foreign laws; •compliance with U.S. laws, including those affecting trade and foreign investment and the Foreign Corrupt Practices Act; •loss ornon-renewal of treaties between foreign governments and the U.S.; •product boycotts, including with respect to products of our multi-national customers; •increased costs of maintaining international manufacturing facilities and undertaking international marketing programs; 7 FORM 10-K SONOCO 2019 ANNUAL REPORT
•difficulty in collecting international accounts receivable and potentially longer payment cycles; •the potential for nationalization or expropriation of our enterprises or facilities without appropriate compensation; and •political, social, legal and economic instability, civil unrest, war, catastrophic events, acts of terrorism, and widespread outbreaks of infectious diseases.
Global economic conditions
and/or disruptions in the credit markets
and instability of the Euro could adversely affect our business, financial condition or results of operations.
Additionally, there
The Company has
been concern regardingextensive international operations, and is dependent on customers and suppliers that operate in local economies around the
overall long-termworld. In addition, the Company accesses global credit markets as part of its capital allocation strategy. Adverse global macroeconomic conditions could negatively impact our ability to access credit, or the price at which funding could be obtained. Likewise, uncertainty about, or a decline in global or regional economic conditions, could have a significant impact on the financial stability of
the Euroour suppliers and
the future of the Euro as a single currency given the diverse economiccustomers, and
political circumstances in individual Eurozone countries.could negatively impact demand for our products. Potential
negative developments (such as a Eurozone country in which we operate replacing the Euro with its own currency) and market perceptions relatedeffects include financial instability, inability to
the Euro could adversely affect the value of our Euro-denominated assets, reduce the amount of our translated amounts of U.S. dollar revenue and income fromobtain credit to finance operations, and
otherwise negatively affect our business, financial condition or results of operations. Although instability of the Euro would likely have more broad-reaching effects than only to euro-denominated economies, annual revenue in 2016 for our businesses where the Euro is the functional currency totaled $515 million.insolvency.
The
vote by the United
Kingdom to leaveKingdom's exit from the European Union could adversely affect us.
On June 23,
In 2016, the U.K. voted to leave the European Union (E.U.) (referred to as Brexit),
whichand formally exited the E.U. at the end of January 2020. Brexit could cause disruptions to and
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create uncertainty surrounding our U.K. businesses, including affecting relationships with existing and future customers, suppliers and employees. The effects of Brexit will depend on any agreements the U.K. makes to retain access to E.U. markets either during a transitional period or more permanently. The measures could potentially disrupt the markets we serve and the tax jurisdictions in which we operate and adversely change tax benefits or liabilities in these or other jurisdictions. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. Our annual revenue in 2019 for our U.K. businesses alone totaled $120 million. Although the Brexit decision could have broad-reaching effects beyond just in the U.K. itself, annual revenue in 2016 forwe believe our U.K. businesses alone totaled $94 million.
exposure to this uncertainty is limited.
We are subject to governmental export and import control laws and regulations in certain jurisdictions where we do business that could subject us to liability or impair our ability to compete in these markets.
Certain of our products are subject to export control laws and regulations and may be exported only with an export license or through an applicable export license exception. If we fail to comply with export licensing, customs regulations, economic sanctions or other laws, we could be subject to substantial civil or criminal penalties, including economic sanctions against us, incarceration for responsible employees and managers, and the possible loss of export or import privileges. In addition, if our distributors fail to obtain appropriate import, export or
re-export licenses or permits, we may also be materially adversely affected through reputational harm and penalties. Obtaining the necessary export license for a particular sale may be time consuming and expensive and could result in the delay or loss of sales opportunities.
Furthermore, export control laws and economic sanctions prohibit the shipment of certain products to embargoed or sanctioned countries, governments and persons.
While we train our employees to comply with these regulations, weWe cannot guarantee that a violation
of export control laws or economic sanctions will not occur. A prohibited shipment could have negative consequences, including government investigations, penalties, fines, civil and criminal sanctions and reputational harm. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could decrease our ability to export or sell our products internationally. Any limitation on our ability to export or sell our products could materially adversely affect our business.
Changes in U.S. trade policies and regulations, as well as the overall uncertainty surrounding international trade relations, could materially adversely affect our consolidated financial condition and results of operations.
We continue to face uncertainty with respect to trade relations between the U.S. and many of its trading partners. In March 2018, the U.S. announced new tariffs on imported steel and aluminum products. Other international trade actions and initiatives also were announced in 2018 and 2019, notably the imposition by the U.S. of additional tariffs on products of Chinese origin, and China’s imposition of additional tariffs on products of U.S. origin. These tariffs have had, and we expect that they will continue to have, an adverse effect on our costs of products sold and margins in our North America segment.
In December 2019, the United States-Mexico-Canada Agreement (USMCA), which is intended to replace the North American Free Trade Agreement (NAFTA), was signed but has only been ratified by the legislative bodies of the United States and Mexico. There remains uncertainty regarding when the USMCA would be adopted as well as the specific impacts of the final agreement. Further changes in U.S. trade policies may be put into place, including additional import tariffs and tariffs on raw materials imported from Canada and Mexico, if the replacement trade agreement reached by the three countries is not ratified by Canada. Additional tariffs and changes to the U.S. trade policies would likely adversely impact our business. In response to these changes, other countries may change their own trade policies, including the imposition of additional tariffs and quotas, which could also adversely affect our business outside the U.S.
In order to mitigate the impact of these trade-related increases on our costs of products sold, we may increase prices in certain markets and, over the longer term, make changes in our supply chain and, potentially, our U.S. manufacturing strategy. Implementing price increases may cause our customers to find alternative sources for their products. We may be unable successfully to pass on these costs through price increases; adjust our supply chain without incurring significant costs; or locate alternative suppliers for raw materials or finished goods at acceptable costs or in a timely manner. Further, the uncertainty surrounding U.S. trade policy makes it difficult to make long-term strategic decisions regarding the best way to respond to these pressures and could also increase the volatility of currency exchange rates. Our inability to effectively manage the negative impacts of changing U.S. and foreign trade policies could materially adversely impact our consolidated financial condition and results of operations.
Raw materials, energy and other price increases or shortages may
reduceimpact our
net income.results of operations.
As a manufacturer, our sales and profitability are dependent on the availability and cost of raw materials, labor and other inputs. Most of the raw materials we use are purchased from third parties. Principal examples are recovered paper, steel, aluminum and resin. Prices and availability of these raw materials are subject to substantial fluctuations that are beyond our control due to factors such as changing economic conditions, currency and commodity price fluctuations, tariffs, resource availability, transportation costs, weather conditions and natural disasters, political unrest and instability, and other factors impacting supply and demand pressures. Increases in costs can have an adverse effect on our business and financial results. Our performance depends, in part, on our ability to pass on cost increases to our customers by raising selling prices and/or offset the impact by improving productivity. Although many of our long-term contracts andnon-contractual pricing arrangements with customers permit limited price adjustments to reflect increased raw material costs, such adjustments may not occur quickly enough, or be sufficient to
8 FORM 10-K SONOCO 2019 ANNUAL REPORT
prevent a materially adverse effect on net income and cash flow. Furthermore, we may not be able to improve productivity or realize sufficient savings from our cost reduction initiatives to offset the impact of increased costs.
Some of our manufacturing operations require the use of substantial amounts of electricity and natural gas, which may be subject to significant price increases as the result of changes in overall supply and demand and the impacts of legislation and regulatory action. We forecast and monitor energy usage, and, from time to time, use commodity futures or swaps in an attempt to reduce the impact of energy price increases. However, we cannot guarantee success in these efforts, and we could suffer adverse effects to net income and cash flow should we be unable to either offset or pass higher energy costs through to our customers in a timely manner or at all.
Supply shortages or disruptions in our supply chains could affect our ability to obtain timely delivery of materials, equipment and supplies from our suppliers, and, in turn, adversely affect our ability to supply products to our customers. Such disruptions could have a material adverse effect on our business and financial results.
We depend on third parties for transportation services.
We rely primarily on third parties for transportation of the products we manufacture and/or distribute, as well as for delivery of our raw materials. In particular, a significant portion of the goods we manufacture and raw materials we use are transported by railroad or trucks, which are highly regulated. If any of our third-party transportation providers were to fail to deliver the goods that we manufacture or distribute in a timely manner, we might be unable to sell those products at full value, or at all. Similarly, if any of these providers were to fail to deliver raw materials to us in a timely manner, we might be unable to manufacture our products in response to customer demand. In addition, if any of these third parties were to cease operations or cease doing business with us, we might be unable to replace them at reasonable cost. Any failure of a third-party transportation provider to deliver raw materials or finished products in a timely manner could harm our reputation, negatively impact our customer relationships and have a material adverse effect on our financial condition and results of operations.
We may be unable to achieve, or may be delayed in achieving, adequate returns from our efforts to optimize our operations, which could have an adverse impact on our financial condition and operating results.
We continually strive to serve our customers and increase returns to our shareholders through innovation and improved operating performance by investing in productivity improvements, manufacturing efficiencies, manufacturing cost reductions and the rationalization of our manufacturing facilities footprints. However, our operations include complex manufacturing systems as well as intricate scheduling and numerous geographic and logistical complexities, and our business initiatives are subject to significant business, economic and competitive uncertainties and contingencies. We may not meet anticipated implementation timetables or stay within budgeted costs, and we may not fully achieve expected results. These initiatives could also adversely impact customer retention or our operations. Additionally, our business strategies may change from time to time in light of our ability to implement new business initiatives, competitive pressures, economic uncertainties or developments, or other factors. A variety of risks could cause us not to realize some or all of the expected benefits of these initiatives. These risks include, among others, delays in the anticipated timing of activities related to such initiatives, strategies and operating plans; increased difficulty and costs in implementing these efforts; and the incurrence of other unexpected costs associated with operating the business. As a result, there can be no assurance that we will realize these benefits. If, for any reason, the benefits we realize are less than our estimates, or the implementation of these growth initiatives and business strategies adversely affects our operations or costs more or takes longer to effectuate than we expect, or if our assumptions prove inaccurate, our results of operations may be materially adversely affected.
We may not be able to identify suitable acquisition candidates, which could limit our potential for growth.
We have made numerous acquisitions in recent years, and
mayexpect to actively seek new acquisitions that management believes will provide meaningful opportunities for growth. However, we may not be able to identify suitable acquisition candidates or complete acquisitions on acceptable terms and conditions. Other companies in our industries have similar investment and acquisition strategies to ours, and competition for acquisitions may intensify. If we are unable to identify acquisition candidates that meet our criteria, our potential for growth may be restricted.
We may encounter difficulties in integrating acquisitions, which could have an adverse impact on our financial condition and operating results.
As noted in the risk factors above, we have invested a substantial amount of capital in acquisitions, joint ventures and strategic investments and we expect that we will continue to do so in the foreseeable future. We are continually evaluating acquisitions and strategic investments that are significant to our business both in the United States and internationally. Acquisitions, joint ventures and strategic investments involve numerous risks. Acquired businesses may not achieve the expected levels of revenue, profitability or productivity, or otherwise perform as expected, and acquisitions may involve significant cash expenditures, debt incurrence, operating losses, and expenses that could have a material adverse effect on our financial condition and operating results. Acquisitions also involve special risks, including, without limitation, the potential assumption of unanticipated liabilities and contingencies, and the challenges of effectively integrating acquired businesses.
Other risks and challenges associated with acquisitions include, without limitation:
•demands on management related to increase in size of our businesses and additional responsibilities of management; •diversion of management’smanagement's attention; •disruptions to our ongoing businesses; •inaccurate estimates of fair value in accounting for acquisitions and amortization of acquired intangible assets, which could reduce future reported earnings; •difficulties in assimilation and retention of employees; •difficulties in integration of departments, systems, technologies, books and records, controls (including internal financial and disclosure controls), procedures, and policies; | | | | | | |
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•potential loss of major customers and suppliers; and •challenges associated with operating in new geographic regions.regions;
•difficulties in maintaining uniform standards, controls, procedures and policies;
•potential failure to identify material problems and liabilities during due diligence review of acquisition targets; and
•potential failure to obtain sufficient indemnification rights to fully offset possible liabilities associated with acquired businesses.
While management believes that acquisitions will improve our competitiveness and profitability, no assurance can be given that acquisitions will be successful or accretive to earnings. If actual performance in an acquisition falls significantly short of the projected results, or the assessment of the relevant facts and circumstances was inaccurate or changes, it is possible that a noncash impairment charge of any related goodwill would be
required.required, and our results of operations and financial condition could be adversely affected.
9 FORM 10-K SONOCO 2019 ANNUAL REPORT
In connection with acquisitions or divestitures, we may become subject to liabilities and legal claims.
In connection with any acquisitions or divestitures, we have in the past, and may in the future, become subject to liabilities or legal claims, including but not limited to third party liability and other tort claims; claims for breach of contract; employment-related claims; environmental, health and safety liabilities, conditions or damage; permitting, regulatory or other legal compliance issues; or tax liabilities. If we become subject to any of these liabilities or claims, and they are not adequately covered by insurance or an enforceable indemnity or similar agreement from a creditworthy counterparty, we may be responsible for significant out-of-pocket expenditures. Such underinsured liabilities, if they materialize, could have a material adverse effect on our business, financial condition and results of operations.
We may encounter difficulties restructuring operations or closing or disposing of facilities.
We are continuously seeking the most cost-effective means and structure to serve our customers and to respond to changes in our markets. Accordingly, from time to time, we have, and are likely to again, close higher-cost facilities, sell
non-core assets and otherwise restructure operations in an effort to improve cost competitiveness and profitability. As a result, restructuring and divestiture costs have been, and are expected to be, a recurring component of our operating costs,
and maythe magnitude of which could vary significantly from year to year depending on the scope of such activities. Divestitures and restructuring may also result in significant financial charges for the
write-off or impairment of assets, including goodwill and other intangible assets. Furthermore, such activities may divert the attention of management, disrupt our ordinary operations, or result in a reduction in the volume of products produced and sold. There is no guarantee that any such activities will achieve our goals, and if we cannot successfully manage the associated risks, our financial position and results of operations could be adversely affected.
We face intense competition, and failure to compete effectively
canmay have an adverse effect on our operating results.
We sell our products in highly competitive markets. We regularly bid for new and continuing business, and being a responsive, high-quality,
low-cost producer is a key component of effective competition. The loss of business from our larger customers, customer changes to alternative forms of packaging, or renewal of business with less favorable terms
canmay have a significant adverse effect on our operating results.
Continuing consolidation of our customer base and suppliers may intensify pricing pressure.
Like us, many of our larger customers have acquired companies with similar or complementary product lines, and many of our customers have been acquired. Additionally, many of our suppliers of raw materials are consolidating. This consolidation of customers and suppliers has increased the concentration of our business with our largest customers, and in some cases, increased pricing pressures. Similarly, consolidation of our larger suppliers has resulted in increased pricing pressures from our suppliers. Further consolidation of customers and suppliers could intensify pricing pressure and reduce our net sales and operating results.
The loss of a key customer, or a reduction in its production requirements, could have a significant adverse impact on our sales and profitability.
Each of our segments has large customers, and the loss of any of these could have a significant adverse effect on the segment’s sales and, depending on the magnitude of the loss, our results of operations and financial condition. Although a majority of our master customer contracts are long-term, they are terminable under certain circumstances, such as our failure to meet quality, pricing, or volume requirements, and the contracts themselves often do not require a specific level of purchasing. There is no assurance that existing customer relationships will be renewed at the same level of production, or at all, at the end of the contract term. Furthermore, although no
onesingle customer accounted for more than 10% of our net sales in
2016, 20152019 or
2014,2018, the loss of any of our major customers, a reduction in their purchasing levels or an adverse change in the terms of supply agreements with these customers could reduce our net sales and net income. Continued consolidation of our customers could exacerbate any such loss. For more information on concentration of sales volume in our reportable segments, see Item1(c),
“Dependence"Dependence on Customers.
”"
We may not be able to develop new products acceptable to the market.
For many of our businesses, organic growth depends on product innovation, new product development and timely response to constantly changing consumer demands and preferences. Sales of our products and services depend heavily on the volume of sales made by our customers to consumers. Consumer preferences for products and packaging formats are constantly changing based on, among other factors, cost, convenience, and health, environmental and social concerns and perceptions. Our failure, or the failure of our customers, to develop new or better products in response to changing consumer preferences in a timely manner may hinder our growth potential and affect our competitive position, and adversely affect our business and results of operations.
We are subject to costs and liabilities related to environmental, health and safety, and corporate social responsibility laws and regulations that could adversely affect
our operating results.
We must comply with extensive laws, rules and regulations in the United States and in each of the countries in which we do business regarding the environment, health and safety, and corporate social responsibility. Compliance with these laws and regulations can require significant expenditures of financial and employee resources.
Federal, state, provincial, foreign and local environmental requirements, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), and particularly those relating to air, soil and water quality, handling, discharge, storage and disposal of a variety of substances, and climate change are significant factors in our business and generally increase our costs of operations. We may be found to have environmental liability for the costs of remediating soil or water that is, or was, contaminated by us or a third party at various sites that we now
own, use or operate, or previously, owned, used or operated. Legal proceedings may result in the imposition of fines or penalties, as well as mandated remediation programs, that require substantial, and in some instances, unplanned capital expenditures.
We have incurred in the past, and may incur in the future, fines, penalties and legal costs relating to environmental matters, and costs relating to the damage of natural resources, lost property values and toxic tort claims. We have made expenditures to comply with environmental regulations and expect to make additional expenditures in the future. As of December 31,
2016,2019, approximately
$24.5$8.7 million was reserved for environmental liabilities. Such reserves are established when it is considered probable that we have some liability. However, because the extent of potential environmental damage, and the extent of our liability for the damage, is usually difficult to assess and may only be ascertained over a long period of time, our actual liability in such cases may end up being substantially higher than the currently reserved amount. Accordingly, additional charges could be incurred that would have a material adverse effect on
our operating results and financial position.
Many of our products come into contact with the food and beverages packaged within, and therefore we are subject to risks and liabilities related to health and safety matters in connection with those products.
Accordingly, our products must comply with various laws and regulations for food and beverages applicable to our customers. Changes in such laws and regulations could negatively impact customers’ demand for our
10 FORM 10-K SONOCO 2019 ANNUAL REPORT
products as they comply with such changes and/or require us to make changes to our products. Such changes to our products could include modifications to the coatings and compounds we use, possibly resulting in the incurrence of additional costs. Additionally, because many of our products are used to package consumer goods, we are subject to a variety of risks that could influence consumer behavior and negatively impact demand for our products, including changes in consumer preferences driven by various health-related concerns and perceptions.
Disclosure regulations relating to the use of “conflict minerals” sourced from the Democratic Republic of the Congo and adjoining countries could affect the sourcing, availability and cost of materials used in the manufacture of some of our products. We
will also incur costs associated with supply chain due diligence, and, if applicable, potential changes to products, processes or sources of supply as a result of such due diligence. Because our supply chain is complex, we may also face reputation risk with our customers and other stakeholders if we are unable sufficiently to verify the origins of all such minerals used in our products.
Changes to laws and regulations dealing with environmental, health and safety, and corporate social responsibility issues are made or proposed with some frequency, and some of the proposals, if adopted, might, directly or indirectly, result in a material reduction in the operating results of one or more of our operating units. However, any such changes are uncertain, and we cannot predict the amount of additional capital expenditures or operating expenses that could be necessary for compliance.
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Product liability claims and other legal proceedings could adversely affect our operations and financial performance.
We produce products and provide services related to other parties’ products. While we have built extensive operational processes intended to ensure that the design and manufacture of our products meet rigorous quality standards, there can be no assurance that we or our customers will not experience operational process failures that could result in potential product, safety, regulatory or environmental claims and associated litigation. We are also subject to a variety of legal proceedings and legal compliance risks in our areas of operation around the globe. Any such claims, whether with or without merit, could be time consuming and expensive to defend and could divert management’s attention and resources. In accordance with customary practice, we maintain insurance against some, but not all, of these potential claims; however, in the future, we may not be able to maintain such insurance at acceptable premium cost levels. In addition, the levels of insurance we maintain may not be adequate to fully cover any and all losses or liabilities. If any significant judgment or claim is not fully insured or indemnified against, it could have a material adverse impact on our business, financial condition and results of operations.
We and the industries in which we operate are at times being reviewed or investigated by regulators and other governmental authorities, which could lead to enforcement actions, fines and penalties or the assertion of private litigation claims and damages. Simply responding to actual or threatened litigation or government investigations of our compliance with regulatory standards may require significant expenditures of time and other resources. While we believe that we have adopted appropriate risk management and compliance programs, the global and diverse nature of our operations means that legal and compliance risks will continue to exist and legal proceedings and other contingencies, the outcome of which cannot be predicted with certainty, will arise from time to time that could adversely affect our business, results of operations and financial condition.
Changes in pension plan assets or liabilities may reduce
our operating results and shareholders’ equity.
We sponsor various defined benefit plans worldwide, and have an aggregate projected benefit obligation for these plans of approximately
$1.8 billion.$2.0 billion as of December 31, 2019. The difference between defined benefit plan obligations and assets (the funded status of the plans) significantly affects the net periodic benefit costs and the ongoing funding requirements of the plans. Among other factors, changes in discount rates and lower-than-expected
actual investment returns could substantially increase our future plan funding requirements and have a negative impact on our results of operations and cash flows.
We haveAs of December 31, 2019, these plans hold a total
assets of approximately
$1.3$1.7 billion
in assets consisting primarily of common collective trusts, mutual funds, fixed income securities and alternative investments such as interests in hedge funds, funding a portion of the projected benefit obligations of the
plans, which consist primarily of common collective trusts, mutual funds, common stocks and debt securities and also include alternative investments such as interests in real estate funds and hedge funds.plans. If the performance of these assets does not meet our assumptions, or discount rates decline, the underfunding of the plans may increase and we may
havebe required to contribute additional funds to these plans, and our pension expense may increase, which could adversely affect operating results and shareholders’ equity.
We may not be able Beginning in 2019, the Company initiated de-risking measures in its U.S. defined benefit pension plans which at December 31, 2019 comprised approximately 74% and 78% of the aggregate projected benefit obligation and plan asset value, respectively, of the Company's worldwide defined benefit plans, These measures included a voluntary $200 million plan contribution, reallocation of plan assets to develop new products acceptable toprimarily fixed income investments, and initiating the market.
For manyprocess of our businesses, organic growth depends on product innovation, new product developmentterminating and timely response to constantly changing consumer demands and preferences. Salesannuitizing the Sonoco Pension Plan for Inactive Participants, the larger of our products and services depend heavily on the volume of sales made by our customers to consumers. Consumer preferences for products and packaging formats are constantly changing based on, among other factors, cost, convenience, and health, environmental and social concerns and perceptions. Our failure, or the failure of our customers, to develop new or better products in response to changing consumer preferences in a timely manner may hinder our growth potential and affect our competitive position, and adversely affect our business and results of operations.
Company's U.S. defined benefit pension plans.
We, or our customers, may not be able to obtain necessary credit or, if so, on reasonable terms.
We have $1.0 billion of fixed-rate debt outstanding. We also operate a
$350$500 million commercial paper program, supported by a
$500 million credit facility
of an equal amount committed by a syndicate of eight banks until
October 2019.July 2022. If we were prevented from issuing commercial paper, we have the contractual right to draw funds directly on the underlying bank credit facility. We believe that the lenders have the ability to meet their obligations under the facility. However, if these obligations were not met, we may be forced to seek more costly or cumbersome forms of credit. Should such credit be unavailable for an extended time, it would significantly affect our ability to operate our business and execute our plans. In addition, our customers may experience liquidity problems as a result of a negative change in the economic environment, including the ability to obtain credit, that could limit their ability to purchase our products and services or satisfy their existing obligations.
Our credit ratings are important to our ability to issue commercial paper at favorable rates of interest. A downgrade in our credit rating could increase our cost of borrowing.
Certain of our debt agreements impose restrictions with respect to the maintenance of financial ratios and the disposition of assets. The most restrictive covenant currently requires us to maintain a minimum level of interest coverage, and a minimum level of net worth. Although we were substantially above these minimum levels at December 31, 2016, these restrictive covenants could adversely affect our ability to engage in certain business activities that would otherwise be in our best long-term interests.
Our indebtedness could adversely affect our cash flow, increase our vulnerability to economic conditions, and limit or restrict our business activities.
In addition to interest payments, from time to time a significant portion of our cash flow may need to be used to service our indebtedness, and, therefore, may not be available for use in our business. Our ability to generate cash flow is subject to general economic, financial, competitive, legislative, regulatory, and other factors that may be beyond our control. Our indebtedness could have a significant impact on us, including, but not limited to:
•increasing our vulnerability to general adverse economic and industry conditions; •requiring us to dedicate a significant portion of our cash flow from operations to payments on our indebtedness, thereby reducing the | | | | | | |
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amount of our cash flow available to fund working capital, acquisitions and capital expenditures, and for other general corporate purposes;
•limiting our flexibility in planning for, or reacting to, changes in our business and our industry; •restricting us from making strategic acquisitions or exploiting business opportunities; and •limiting our ability to borrow additional funds.Despite
11 FORM 10-K SONOCO 2019 ANNUAL REPORT
Certain of our currentdebt agreements impose restrictions with respect to the maintenance of financial ratios and the disposition of assets. The most restrictive covenants currently require us to maintain a minimum level of interest coverage, and a minimum level of net worth. Although we were substantially above these minimum levels at December 31, 2019, these restrictive covenants could adversely affect our ability to engage in certain business activities that would otherwise be in our best long-term interests.
Some of our indebtedness is subject to floating interest rates, which would result in our interest expense increasing if interest rates rise.
In 2019, our average variable-rate borrowings were approximately $0.7 billion. Increases in short-term interest rates would directly impact the amount of interest we pay. Fluctuations in interest rates can increase borrowing costs and have a material adverse effect on our business.
We may incur additional debt in the future, which could increase the risks associated with our leverage.
We are continually evaluating and pursuing acquisition opportunities and may incur additional indebtedness to finance any such acquisitions and to fund any resulting increased operating needs.
IfAs new debt is added to our current debt levels, the related risks we
now face could increase. While we will have to effect any new financing in compliance with the agreements governing our then existing indebtedness, changes in our debt levels and or debt structure may impact our credit rating and costs to borrow, as well as constrain our future financial flexibility in the event of a deterioration in our financial operating performance or financial condition.
Currency exchange rate fluctuations may reduce operating results and
shareholders’shareholders' equity.
Fluctuations in currency exchange rates can cause translation, transaction and other losses that can unpredictably and adversely affect our consolidated operating results. Our reporting currency is the U.S. dollar. However, as a result of operating globally, a portion of our consolidated net sales, costs, assets and liabilities, are denominated in currencies other than the U.S. dollar. In our consolidated financial statements, we translate the local currency financial results of our foreign operations into U.S. dollars based on their respective exchange rates. Depending on the direction, changes in those rates will either increase or decrease operating results and balances as reported in U.S. dollars. Although we monitor our exposures and, from time to time, may use forward currency contracts to hedge certain forecasted currency transactions or foreign currency denominated assets and liabilities, this does not insulate us completely from foreign currency fluctuations and exposes us to counterparty risk of nonperformance.
There are also ongoing concerns about the stability of the euro and its continued viability as a single European currency. If individual countries were to revert, or threaten to revert, to their former local currencies, euro-denominated assets could be significantly devalued. In addition, a dislocation or dissolution of the euro could cause significant volatility and disruption in the global economy, which could adversely impact our business, including the demand for our products, the availability and cost of supplies and materials and our ability to obtain financing at reasonable costs.
Adverse weather and climate changes may result in lower sales.
We manufacture packaging products for
beverages and foods
as as well as products used in construction and industrial manufacturing.
Unseasonably coolVarying weather
conditions can
temporarily reduceimpact crop growing seasons and related farming conditions that can then impact the timing or amount of demand for
certain beveragesfood packaged in our containers. In addition, poor
or extreme weather conditions can temporarily impact the level of construction and industrial activity and also impact the efficiency of our manufacturing operations. Such disruptions could have a material adverse effect on our results of operations.
We rely on our information technology, and its failure or disruption could disrupt our operations
compromise customer, employee, vendor and other data, and adversely affect our
business, financial condition and results of operations.
We rely on the successful and uninterrupted functioning of our information technologies to securely manage operations and various business functions, and we rely on variousdiverse technologies to process, store and report information about our business, and to interact with customers, vendors and employees around the world. As with all large systems,environments, our information technology systems may be susceptible to damage, disruption or shutdown due to power outages, failures during the processnatural disaster, hardware of upgrading or replacing software hardware failures, computer viruses, cyber attacks, catastrophic events, telecommunications failures,failure, obsolescence, cyberattack, support infrastructure failure, user errors unauthorized access, andor malfeasance resulting in malicious or accidental destruction of information or functionality. We also maintainfunctionality, or other catastrophic event..
From time to time, we have been, and
have accesswe will likely continue to
sensitive, confidential or personal data or information that isbe, subject to
privacy and security laws, regulations and customer controls. Despitecybersecurity-related incidents. However, to date we have not experienced any material impact on our
efforts to protect such sensitive, confidentialbusiness or
personal dataoperations from these attacks or
information, our facilities and systems and those of our customers and third-party service providers may be vulnerable to security breaches, misplaced or lost data, and programming and/or user errors that could lead to the compromising of sensitive, confidential or personal data or information.events.
Information system damages, disruptions, shutdowns or compromises could result in production downtimes and operational disruptions, transaction errors, loss of customers and business opportunities, legal liability, regulatory fines, penalties or intervention, reputational damage, reimbursement or compensatory payments, and other costs, any of which could have a material adverse effect on our business, financial position and results of operations. Although we attempt to mitigate these risks by employing a number of
technical and process-based measures,
including employee training, comprehensive monitoring of our networks and systems, and maintenance of backup and protective systems, our systems, networks, products, and services remain potentially vulnerable to
advancedcyber threats. Furthermore, the tactics, techniques, and
persistent threats.We haveprocedures used by malicious actors to obtain unauthorized access to information technology systems and networks change frequently and often are not recognizable until launched against a significant amount of goodwill and other intangible assets and a write down would negatively impact operating results and shareholders’ equity.
At December 31, 2016, the carrying value of our goodwill and intangible assets was approximately $1.3 billion. We are requiredtarget. Accordingly, we may be unable to evaluate our goodwill amounts annually,anticipate these techniques or more frequently when evidence of potential impairment exists. The impairment test requires us to analyze a number of factors and make estimatesimplement adequate preventative measures. It is possible that require judgment. Future changeswe may in the costfuture suffer a criminal attack whereby unauthorized parties gain access to our information technology networks and systems, including sensitive, confidential or proprietary data, and we may not be able to identify and respond to such an incident in a timely manner.
A security breach of capital, expected cash flows, changes in our business strategy, and external market conditions, among other factors, could require us to record an impairment charge for goodwill, which could lead to decreased assets and reduced net income. If a significant write down were required, the charge couldcustomer, employee, supplier or company information may have a material adverse effect on our business, financial condition and results of operations.
We maintain and have access to sensitive, confidential, proprietary and personal data and information that is subject to privacy and security laws, regulations and customer controls. This data and information is subject to the risk of intrusion, tampering and theft. Although we develop and maintain systems to prevent such events from occurring, the development and maintenance of these systems is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become increasingly sophisticated. Moreover, despite our efforts to protect such sensitive, confidential or personal data or information, our facilities and systems and those of our customers, suppliers and third-party service providers may be vulnerable to security breaches, misplaced or lost data, and programming and/or user errors that could lead to the compromising of sensitive, confidential, proprietary or personal data and information. Similar security threats exist with respect to the IT systems of our lenders, suppliers, consultants, advisors and other third parties with whom we conduct business. Additionally, we provide confidential, proprietary and personal information to third parties when it is necessary to pursue business objectives. While we obtain assurances that these third parties will protect this information and, where appropriate, assess the protections employed by these third parties, there is a risk the confidentiality of data held by third parties may be compromised.
We continue to see increased regulation of data privacy and security and the adoption of more stringent subject matter specific state laws and national laws regulating the collection and use of data, as well as security and data breach obligations – including, for example, the General Data Protection Regulation in the EU, the Cyber Security Law in China, the General Data Protection Law in Brazil and the state of California's Consumer Privacy Act of 2018. It is likely that new laws and regulations will continue to be adopted in the United States and internationally, and
12 FORM 10-K SONOCO 2019 ANNUAL REPORT
existing laws and regulations may be interpreted in new ways that would affect our business. Although we take reasonable efforts to comply with all applicable laws and regulations, the uncertainty and changes in the requirements of multiple jurisdictions may increase the cost of compliance, reduce demand for our services, restrict our ability to offer services in certain locations, and jeopardize business transactions across borders.
As a result of potential cyber threats and existing and new data protection requirements, we have incurred and expect to continue to incur ongoing operating
costs as part of our efforts to protect and safeguard our sensitive, confidential, proprietary and personal data and information, and the sensitive, confidential, proprietary and personal data and information of our customers, suppliers and third-party service providers. These efforts also may divert management and employee attention from other business and growth initiatives. Failure to provide adequate privacy protections and maintain compliance with the new data privacy laws could result in interruptions or damage to our operations, legal or reputational risks, create liabilities for us, subject us to sanctions by national data protection regulators and result in significant penalties, and increase our cost of doing business, all of which could have a materially adverse impact on our business, financial condition and results
and shareholders’ equity.of operations.
Our ability to attract, develop and retain talented executives, managers and employees is critical to our success.
Our ability to attract, develop and retain talented employees, including executives and other key managers, is important to our business. The experience and industry contacts of our management team and other key personnel significantly benefit us, and we need expertise like theirs to carry out our business strategies and plans. We also rely on the specialized knowledge and experience of
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taincertain key technical employees. The loss of these key officers and employees, or the failure to attract and develop talented new executives, managers and employees, could have a materially adverse effect on our business. Effective succession planning is also important to our long-term success, and failure to ensure effective transfer of knowledge and smooth transitions involving key officers and employees could hinder our strategic planning and execution.
Changes in U.S. generally accepted accounting principles (U.S. GAAP) and SEC rules and regulations could materially impact our reported results.
U.S. GAAP and SEC accounting and reporting changes are common and have become more frequent and significant in the past several years. These changes could have significant effects on our reported results when compared to prior periods and to other companies, and may even require us to retrospectively revise prior periods from time to time. Additionally, material changes to the presentation of transactions in the consolidated financial statements could impact key ratios that analysts and credit rating agencies use to rate our company, increase our cost of borrowing, and ultimately our ability to access the credit markets in an efficient manner.
Our financial results are based upon estimates and assumptions that may differ from actual results.
In preparing our consolidated financial statements in accordance with U.S. GAAP, we make estimates and assumptions that affect the accounting for and recognition of assets, liabilities, revenues and expenses. These estimates and assumptions must be made due to certain information used in the preparation of our financial statements that is dependent on future events, cannot be calculated with a high degree of precision from data available, or is not capable of being readily calculated based on generally accepted methodologies. We believe that accounting for long-lived assets, pension benefit plans, contingencies and litigation, and income taxes involves the more significant judgments and estimates used in the preparation of our consolidated financial statements. Actual results for all estimates could differ materially from the estimates and assumptions that we use, which could have a material adverse effect on our financial condition and results of operations.
We have a significant amount of goodwill and other intangible assets and a write down would negatively impact our operating results and shareholders' equity.
At December 31, 2019, the carrying value of our goodwill and intangible assets was approximately $1.8 billion. We are required to evaluate our goodwill amounts annually, or more frequently when evidence of potential impairment exists. The impairment test requires us to analyze a number of factors and make estimates that require judgment. As a result of this testing, we have in the past recognized goodwill impairment charges, and we have identified one reporting unit that currently is at risk of a significant future impairment charge if actual results fall short of expectations. Future changes in the cost of capital, expected cash flows, changes in our business strategy, and external market conditions, among other factors, could require us to record an impairment charge for goodwill, which could lead to decreased assets and reduced net income. If a significant write down were required, the charge could have a material adverse effect on our operating results and shareholders' equity.
Full realization of our deferred tax assets may be affected by a number of factors.
We have deferred tax assets, including U.S. and foreign operating loss carryforwards, capital loss carryforwards, employee and retiree benefit items,
foreign tax credits, and other accruals not yet deductible for tax purposes. We have established valuation allowances to reduce those deferred tax assets to an amount that
we believe is more likely than not to be realized prior to expiration of such deferred tax assets. Our ability to use these deferred tax assets depends in part upon our having future taxable income during the periods in which these temporary differences reverse or our ability to carry back any losses created by the deduction of these temporary differences. We expect to realize these assets over an extended period. However, if we were unable to generate sufficient future taxable income in the U.S. and certain foreign jurisdictions, or if there were a significant change in the time period within which the underlying temporary differences became taxable or deductible, we could be required to increase our valuation allowances against our deferred tax assets, which would increase our effective tax rate which could have a material adverse effect on our reported results of operations.
Our annual effective tax rate and the amount of taxes we pay can change materially as a result of changes in U.S. and foreign tax laws, changes in the mix of our U.S. and foreign earnings, adjustments to our estimates for the potential outcome of any uncertain tax issues, and audits by federal, state and foreign tax authorities.
As a large multinational corporation, we are subject to U.S. federal, state and local, and many foreign tax laws and regulations, all of which are complex and subject to
significant change and varying interpretations. Changes in these laws or regulations, or any change in the position of taxing authorities regarding their application, administration or interpretation, could have a material adverse effect on our business, consolidated financial condition or results of our operations.
For example, the U.S. Tax Cuts and Jobs Act (“Jobs Act”), enacted in 2017, significantly changes how the U.S. taxes corporations. The Jobs Act requires complex computations to be performed that were not previously required under U.S. tax law, significant judgments to be made in interpretation of the provisions of the Jobs Act, and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on application or administration of provisions of the Jobs Act and regulations under the act that is different from our interpretations. It is
13 FORM 10-K SONOCO 2019 ANNUAL REPORT
also reasonable to expect that global taxing authorities will be reviewing current legislation for potential modifications in reaction to the implementation of the Jobs Act. Any such additional guidance, along with the potential for additional global tax legislation changes, could have a material adverse impact on our net income and cash flow by impacting significant deductions or income inclusions. In addition, our products, and our customers’ products, are subject to import and excise duties and/or sales or value-added taxes in many jurisdictions in which we operate. Increases in these indirect taxes could affect the affordability of our products and our customers’ products, and, therefore, reduce demand.
Recently, international tax norms governing each country’s jurisdiction to tax cross-border international trade have evolved, and are expected to continue to evolve, due in part to the Base Erosion and Profit Shifting project led by the Organization for Economic Cooperation and Development (“OECD”), an international association of 36 countries including the United States, and supported by the G20. Changes in these laws and regulations, or any change in the position of tax authorities regarding their application, administration or interpretation could adversely affect our financial results. In addition, a number of countries are actively pursuing changes to their tax laws applicable to multinational corporations.
Due to widely varying tax rates in the taxing jurisdictions applicable to our business, a change in income generation to higher taxing jurisdictions or away from lower taxing jurisdictions may also have an adverse effect on our financial condition and results of operations.
We make estimates of the potential outcome of uncertain tax issues based on our assessment of relevant risks and facts and circumstances existing at the time, and we use these assessments to determine the adequacy of our provision for income taxes and other
tax-related accounts. These estimates are highly judgmental. Although we believe we adequately provide for any reasonably foreseeable outcome related to these matters, future results may include favorable or unfavorable adjustments to estimated tax liabilities, which may cause our effective tax rate to fluctuate significantly.
In addition, our income tax returns are subject to regular examination by domestic and foreign tax authorities. These taxing authorities may disagree with the positions we have taken or intend to take regarding the tax treatment or characterization of any of our transactions. If any tax authorities were
to successfully
to challenge the tax treatment or characterization of any of our transactions, it could have a material adverse effect on our business, consolidated financial condition or results of our operations.
Furthermore, regardless of whether any such challenge is resolved in our favor, the final resolution of such matter could be expensive and time consuming to defend and/or settle. Future changes in tax law could significantly impact our provision for income taxes, the amount of taxes payable, and our deferred tax asset and liability balances. Recent proposals
As further discussed in Note 14 to lowerour December 31, 2019 financial statements included in Item 8 of this Form 10-K, the U.S. corporateIRS has previously notified us that it disagrees with our characterization of a distribution, and subsequent repayment, of an intercompany note in 2012 and 2013. If the IRS were to prevail, we could be required to make an adjustment to income tax ratefor the affected years and pay a significant amount of additional taxes, which could have a material adverse effect on our results of operations and financial condition.
If we fail to continue to maintain effective internal control over financial reporting at a reasonable assurance level, we may not be able to accurately report our financial results, and may be required to restate previously published financial information, which could have a material adverse effect on our operations, investor confidence in our business and the trading prices of our securities.
Effective internal controls are necessary to provide reliable financial reports and to assist in the effective prevention of fraud. Any inability to provide reliable financial reports or prevent fraud could harm our business. We are required to assess the effectiveness of our internal control over financial reporting annually, as required by Section 404 of the Sarbanes-Oxley Act. We need to maintain our processes and systems and adapt them as our business grows and changes. This continuous process of maintaining and adapting our internal controls and complying with Section 404 is expensive, time-consuming and requires significant management attention. As we grow our businesses and acquire other businesses, our internal controls will become increasingly complex and we may require significantly more resources. The integration of acquired businesses into our internal control over financial reporting has required, and will continue to require, significant time and resources from our management and other personnel and will increase our compliance costs. Additionally, maintaining effectiveness of our internal control over financial reporting is made more challenging by the fact that we have over 190 subsidiaries and joint ventures in 36 countries around the world. As described in Item 9A of this Form 10-K, management has concluded that our internal controls over financial reporting were effective as of December 31, 2019. There is no assurance that, in the future, material weaknesses will not be identified that would
require uscause management to
reducechange its current conclusion as to the effectiveness of our
net federal deferred tax liability upon enactmentinternal controls. If we fail to maintain the adequacy of
new tax legislation, with a correspondingone-time,non-cash decrease in income tax expense.our internal controls, as such standards are modified, supplemented or amended from time to time, we could be subject to regulatory scrutiny, civil or criminal penalties or litigation. In addition,
these proposals would createfailure to maintain adequate internal controls could result in financial statements that do not accurately reflect our financial condition, and we may be required to restate previously published financial information, which could have a
territorial systemmaterial adverse effect on our operations, investor confidence in our business and
would require aone-time current tax expense and cash payment associated with undistributed earnings of foreign subsidiaries.Continuing consolidationthe trading prices of our customer base and suppliers may intensify pricing pressure.
Like us, many of our larger customers have acquired companies with similar or complementary product lines, and many of our customers have been acquired. Additionally, many of our suppliers of raw materials are consolidating. This consolidation of customers and suppliers has increased the concentration of our business with our largest customers, and in some cases, increased pricing pressures. Similarly, consolidation of our larger suppliers has resulted in increased pricing pressures from our suppliers. Further consolidation of customers and suppliers could intensify pricing pressure and reduce our net sales and operating results.
securities.
Challenges to, or the loss of, our intellectual property rights could have an adverse impact on our ability to compete effectively.
Our ability to compete effectively depends, in part, on our ability to protect and maintain the proprietary nature of our owned and licensed intellectual property. We own a large number of patents on our products, aspects of our products, methods of use and/or methods of manufacturing, and we own, or have licenses to use, all of the material trademark and trade name rights used in connection with the packaging, marketing and distribution of our major products. We also rely on trade secrets,
know-how and other unpatented proprietary technology. We attempt to protect and restrict access to our intellectual property and proprietary information by relying on the patent, trademark, copyright and trade secret laws of the U.S. and other countries, as well as
non-disclosure agreements. However, it may be possible for a third party to obtain our information without our authorization, independently develop similar technologies, or breach a
non-disclosure agreement entered into with us. Furthermore, many of the countries in which we operate do not have intellectual property laws that protect proprietary rights as fully as do laws in the U.S. The use of our intellectual property by someone else without our authorization could reduce or eliminate certain of our competitive advantages, cause us to lose sales or otherwise harm our business. The costs associated with protecting our intellectual property rights could also adversely impact our business.
In addition, we are from time to time subject to claims from third parties suggesting that we may be infringing on their intellectual property rights. If we were held liable for infringement, we could be required to pay damages, obtain licenses or cease making or selling certain products.
Intellectual property litigation, which could result in substantial cost to us and divert the attention of management, may be
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sarynecessary to protect our trade secrets or proprietary technology or for us to defend against claimed infringement of the rights of others and to determine the scope and validity of others’ proprietary rights. We may not prevail in any such litigation, and if we are unsuccessful, we may not be able to obtain any necessary licenses on reasonable terms or at all. Failure to protect our patents, trademarks and other intellectual property rights may have a material adverse effect on our business, consolidated financial condition or results of operations.
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Several of our operations are conducted by joint ventures that we cannot operate solely for our benefit.
Several of our operations are conducted through joint ventures. In joint ventures, we share ownership and, in some instances, management of a company with one or more parties who may or may not have the same goals, strategies, priorities or resources as we do. In general, joint ventures are intended to be operated for the benefit of all co-owners, rather than for our exclusive benefit. Operating a business as a joint venture often requires additional organizational formalities as well as time-consuming procedures for sharing information, accounting and making decisions. In certain cases, our joint venture partners must agree in order for the applicable joint venture to take certain actions, including acquisitions, the sale of assets, budget approvals, borrowing money and granting liens on joint venture property. Our inability to take unilateral action that we believe is in our best interests may have an adverse effect on the financial performance of the joint venture and the return on our investment. In joint ventures, we believe our relationship with our co-owners is an important factor to the success of the joint venture, and if a co-owner changes, our relationship may be adversely affected. In addition, the benefits from a successful joint venture are shared among the co-owners, so that we do not receive all the benefits from our successful joint ventures. Finally, we may be required on a legal or practical basis or both, to accept liability for obligations of a joint venture beyond our economic interest, including in cases where our co-owner becomes bankrupt or is otherwise unable to meet its commitments.
Material disruptions in our business operations could negatively affect our financial results.
Although we take measures to minimize the risks of disruption at our facilities, we
may nonetheless from time to time encounter an unforeseen material operational disruption in one of our major facilities, which could negatively impact production and our financial results. Such a disruption could occur as a result of any number of events including but not limited to a major equipment failure, labor stoppages, transportation failures affecting the supply and shipment of materials, disruptions at our suppliers, fire, severe weather conditions,
natural disasters and disruptions in utility services. These types of disruptions could materially adversely affect our earnings to varying degrees depending upon the facility, the duration of the disruption, our ability to shift business to another facility or find alternative sources of materials or energy. Any losses due to these events may not be covered by our existing insurance policies or may be subject to certain deductibles.
ITEM
Item 1B.
UNRESOLVED STAFF COMMENTSUnresolved staff comments
There are no unresolved written comments from the SEC staff regarding the Company’s periodic or current 1934 Act reports.
ITEM
Item 2.
PROPERTIESProperties
The Company’s corporate offices are owned and operated in Hartsville, South Carolina. There are 94approximately 320 owned and 73 leased facilities used by operations in the Paper and Industrial Converted Products segment, 34 owned and 44 leased facilities used by operations in the Consumer Packaging segment, 7 owned and 17 leased facilities used by operations in the Display and Packaging segment, and 11 owned and 28 leased facilities used by the Protective Solutions segment. Europe,Company in 36 countries around the world. The majority of these facilities are located in North America. The most significant foreign geographic region in which the Company operates has 61 manufacturing locations.ITEMis Europe, followed by Asia.
The Company believes that its facilities have been well maintained, are generally in good condition and suitable for the conduct of its business. The Company does not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities.
Item 3.
LEGAL PROCEEDINGSLegal proceedings
The Company has been named as a potentially responsible party (PRP) at several environmentally contaminated sites not owned by the Company. All of the sites are also the responsibility of other parties. The Company’s liability, if any, is shared with such other parties, but the Company’s share has not been finally determined in most cases. In some cases, the Company has cost-sharing agreements with other PRPs relating to the sharing of legal defense costs and cleanup costs for a particular site. The Company has assumed, for accrual purposes, that the other parties to these cost-sharing agreements will perform as agreed. Final resolution of some of the sites is years away, and actual costs to be incurred for these matters in future periods is likely to vary from current estimates because of the inherent uncertainties in evaluating environmental exposures. Accordingly, the ultimate cost to the Company with respect to such sites, beyond what has been accrued as of December 31,
2016,2019, cannot be determined.
As of December 31, 20162019 and 2015,2018, the Company had accrued $24.5accrued $8.7 million and $25.2$20.1 million, respectively,respectively, related to environmental contingencies. The Company periodically reevaluates the assumptions used in determining the appropriate reserves for environmental matters as additional information becomes available and makes appropriate adjustments when warranted.Fox River settlement
As previously disclosed, the Company’s wholly owned subsidiary, U. S. Paper Mills Corp. (U.S. Mills) was previously identified as a PRP for the Wisconsin Fox River environmental cleanup and U.S. Mills has been involved in subsequent Superfund litigation related
For further information about legal proceedings, see Note 16 to the
Fox River. In March 2014, U.S. Mills settled claims brought by the U. S. Environmental Protection Agency (EPA) and the Wisconsin Department of Natural Resources (WDNR) for $14.7 million, which settlement provided U.S. Mills with protection from the contribution claims of other PRPs. As a result of the settlement becoming final, U.S. Mills reversed approximately $32.5 million of the reserves it had previously established for the related claims, resulting in the recognition of a gain in the Company’sCompany's Consolidated Financial Statements
in the first quarter of 2015.The settlement left intact a cost recovery claim by Appvion, Inc., under Section 107 of CERCLA against eight defendants, including U.S. Mills, to recover response costs allegedly incurred by Appvion consistent with the national contingency plan for responding to release or threatened release of hazardous substances into the lower Fox River (Civil Action No.8-CV-16-WCG in the United States District Court for the Eastern District of Wisconsin). In January 2017, U.S. Mills obtained Court Approval of a final settlement of the claims made by Appvion for $3.3 million. As a resultItem 8 of this 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 governmental authorities.
As of December 31, 2016, U.S. Mills had a total of $3.7 million reserved for the Section 107 settlement and related legal fees. The entirety of this reserve is expected to be paid before the end of the first quarter of 2017.
Annual Report on Form 10-K.
Additional information regarding legal proceedings is provided in Note
1416 to the Consolidated Financial Statements of this Annual Report on Form
10-K.ITEM
Item 4.
MINE SAFETY DISCLOSURESMine safety disclosures
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ITEMPART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESMarket for registrant’s common equity, related stockholder matters and issuer purchases of equity securities
The Company’s common stock is traded on the New York Stock Exchange under the stock symbol “SON.” As of December 31,
2016,2019, there were approximately
117,00095,000 shareholder accounts. Information required by Item 201(d) of Regulation
S-K can be found in Part III, Item 12 of this Annual Report on Form
10-K. The following table indicates the high and low sales prices of the Company’s common stock for each full quarterly period within the last two years as reported on the New York Stock Exchange, as well as cash dividends declared per common share: | | | | | | | | | | | | | | | |
| | | High | | Low | | Cash Dividends |
2016 | | | | | | | | | | | | | | | |
First Quarter | | | $ | 49.08 | | | | $ | 36.56 | | | | $ | 0.35 | |
Second Quarter | | | $ | 50.13 | | | | $ | 45.02 | | | | $ | 0.37 | |
Third Quarter | | | $ | 53.57 | | | | $ | 49.10 | | | | $ | 0.37 | |
Fourth Quarter | | | $ | 55.47 | | | | $ | 49.50 | | | | $ | 0.37 | |
| | | |
2015 | | | | | | | | | | | | | | | |
First Quarter | | | $ | 47.94 | | | | $ | 42.44 | | | | $ | 0.32 | |
Second Quarter | | | $ | 46.50 | | | | $ | 43.89 | | | | $ | 0.35 | |
Third Quarter | | | $ | 44.13 | | | | $ | 34.68 | | | | $ | 0.35 | |
Fourth Quarter | | | $ | 44.56 | | | | $ | 37.01 | | | | $ | 0.35 | |
The Company made the following purchases of its securities during the fourth quarter of
2016:2019:
Issuer purchases of equity securities
| | | | | | | | | | | | | | | | | | | | |
| Period | | (a) Total Number of Shares Purchased1 | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs2 | | (d) Maximum Number of Shares that May Yet be Purchased under the Plans or Programs2 |
10/03/16 – 11/06/16 | | | | 313,188 | | | | $ | 50.50 | | | | | 305,000 | | | | | 3,450,857 | |
11/07/16 – 12/04/16 | | | | 289,085 | | | | $ | 53.11 | | | | | 284,837 | | | | | 3,166,020 | |
12/05/16 – 12/31/16 | | | | 196,524 | | | | $ | 53.71 | | | | | 196,409 | | | | | 2,969,611 | |
Total | | | | 798,797 | | | | $ | 52.23 | | | | | 786,246 | | | | | 2,969,611 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Period | (a) Total Number of Shares Purchased1 | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs2 | | (d) Maximum Number of Shares that May Yet be Purchased under the Plans or Programs2 |
| 09/30/19 - 11/03/19 | 12,589 | | | $58.12 | | | — | | | 2,969,611 | |
| 11/04/19 - 12/01/19 | 887 | | | $59.27 | | | — | | | 2,969,611 | |
| 12/02/19 - 12/31/19 | 2,067 | | | $61.40 | | | — | | | 2,969,611 | |
| Total | 15,543 | | | $58.62 | | | — | | | 2,969,611 | |
| | | | | |
1 | A total of 12,55115,543 common shares were repurchased in the fourth quarter of 20162019 related to shares withheld to satisfy employee tax withholding obligations in association with the exercise of certain share-based compensation awards. These shares were not repurchased as part of a publicly announced plan or program. |
2 | On February 10, 2016, the Board of Directors authorized the repurchase of up to 5,000,000 shares of the Company’sCompany's common stock. No shares were repurchased under this authorization during 2019, 2018 or 2017. During 2016, a total of 2,030,389 shares were repurchased under this authorization at a cost of $100 million. Accordingly, at December 31, 2016,2019, a total of 2,969,611 shares remain available for repurchase under this authorization. |
The Company did not make any unregistered sales of its securities during
2016. | | | | | | |
FORM 10-K
| | | | 16
| | SONOCO 2016 ANNUAL REPORT
|
2019.
16 FORM 10-K SONOCO 2019 ANNUAL REPORT
ITEMItem 6.
SELECTED FINANCIAL DATASelected financial data
The following table sets forth the Company’s selected consolidated financial information for the past five years. The information presented below should be read together with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Annual Report on Form
10-K and the Company’s historical Consolidated Financial Statements and the Notes thereto included in Item 8 of this Annual Report on Form
10-K. The selected statement of income data and balance sheet data are derived from the Company’s Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31 |
| (Dollars and shares in thousands except per share data) | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
Operating Results | | | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | | $ | 4,782,877 | | | | $ | 4,964,369 | | | | $ | 5,016,994 | | | | $ | 4,861,657 | | | | $ | 4,813,571 | |
Cost of sales and operating expenses | | | | 4,351,452 | | | | | 4,531,188 | | | | | 4,616,104 | | | | | 4,487,184 | | | | | 4,437,722 | |
Restructuring/Asset impairment charges | | | | 42,883 | | | | | 50,637 | | | | | 22,792 | | | | | 25,038 | | | | | 32,858 | |
Gain on disposition of business | | | | (104,292 | ) | | | | — | | | | | — | | | | | — | | | | | — | |
Interest expense | | | | 54,170 | | | | | 56,973 | | | | | 55,140 | | | | | 59,913 | | | | | 64,114 | |
Interest income | | | | (2,613 | ) | | | | (2,375 | ) | | | | (2,749 | ) | | | | (3,187 | ) | | | | (4,129 | ) |
Income before income taxes | | | | 441,277 | | | | | 327,946 | | | | | 325,707 | | | | | 292,709 | | | | | 283,006 | |
Provision for income taxes | | | | 164,631 | | | | | 87,738 | | | | | 108,758 | | | | | 93,631 | | | | | 100,402 | |
Equity in earnings of affiliates, net of tax | | | | (11,235 | ) | | | | (10,416 | ) | | | | (9,886 | ) | | | | (12,029 | ) | | | | (12,805 | ) |
Net income | | | | 287,881 | | | | | 250,624 | | | | | 226,835 | | | | | 211,107 | | | | | 195,409 | |
Net (income) attributable to noncontrolling interests | | | | (1,447 | ) | | | | (488 | ) | | | | (919 | ) | | | | (1,282 | ) | | | | (110 | ) |
Net income attributable to Sonoco | | | $ | 286,434 | | | | $ | 250,136 | | | | $ | 225,916 | | | | $ | 209,825 | | | | $ | 195,299 | |
Per common share | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income attributable to Sonoco: | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | $ | 2.83 | | | | $ | 2.46 | | | | $ | 2.21 | | | | $ | 2.05 | | | | $ | 1.92 | |
Diluted | | | | 2.81 | | | | | 2.44 | | | | | 2.19 | | | | | 2.03 | | | | | 1.90 | |
Cash dividends | | | | 1.46 | | | | | 1.37 | | | | | 1.27 | | | | | 1.23 | | | | | 1.19 | |
Weighted average common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | | 101,093 | | | | | 101,482 | | | | | 102,215 | | | | | 102,577 | | | | | 101,804 | |
Diluted | | | | 101,782 | | | | | 102,392 | | | | | 103,172 | | | | | 103,248 | | | | | 102,573 | |
Actual common shares outstanding at December 31 | | | | 99,193 | | | | | 100,944 | | | | | 100,603 | | | | | 102,147 | | | | | 100,847 | |
Financial Position | | | | | | | | | | | | | | | | | | | | | | | | | |
Net working capital | | | $ | 546,152 | | | | $ | 384,862 | | | | $ | 461,596 | | | | $ | 498,105 | | | | $ | 453,145 | |
Property, plant and equipment, net | | | | 1,060,017 | | | | | 1,112,036 | | | | | 1,148,607 | | | | | 1,021,920 | | | | | 1,034,906 | |
Total assets | | | | 3,923,203 | | | | | 4,013,685 | | | | | 4,186,706 | | | | | 3,967,322 | | | | | 4,152,390 | |
Long-term debt | | | | 1,020,698 | | | | | 1,015,270 | | | | | 1,193,680 | | | | | 939,056 | | | | | 1,091,454 | |
Total debt | | | | 1,052,743 | | | | | 1,128,367 | | | | | 1,245,960 | | | | | 974,257 | | | | | 1,365,062 | |
Total equity | | | | 1,554,705 | | | | | 1,532,873 | | | | | 1,503,847 | | | | | 1,706,049 | | | | | 1,487,539 | |
Current ratio | | | | 1.7 | | | | | 1.4 | | | | | 1.5 | | | | | 1.6 | | | | | 1.4 | |
Total debt to total capital1 | | | | 40.4% | | | | | 42.4% | | | | | 45.3% | | | | | 36.3% | | | | | 47.9% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31 | | | | | | | | |
| (Dollars and shares in thousands except per share data) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Operating Results | | | | | | | | | |
| Net sales | $ | 5,374,207 | | | $ | 5,390,938 | | | $ | 5,036,650 | | | $ | 4,782,877 | | | $ | 4,964,369 | |
| Cost of sales and operating expenses | 4,847,245 | | | 4,913,238 | | | 4,585,822 | | | 4,339,643 | | | 4,512,927 | |
| Restructuring/Asset impairment charges | 59,880 | | | 40,071 | | | 38,419 | | | 42,883 | | | 50,637 | |
| Gain on disposition of business | — | | | — | | | — | | | (104,292) | | | — | |
| Non-operating pension costs | 24,713 | | | 941 | | | 45,110 | | | 11,809 | | | 18,261 | |
| Interest expense | 66,845 | | | 63,147 | | | 57,220 | | | 54,170 | | | 56,973 | |
| Interest income | (5,242) | | | (4,990) | | | (4,475) | | | (2,613) | | | (2,375) | |
| Income before income taxes | 380,766 | | | 378,531 | | | 314,554 | | | 441,277 | | | 327,946 | |
| Provision for income taxes | 93,269 | | | 75,008 | | | 146,589 | | | 164,631 | | | 87,738 | |
| Equity in earnings of affiliates, net of tax | (5,171) | | | (11,216) | | | (9,482) | | | (11,235) | | | (10,416) | |
| Net income | 292,668 | | | 314,739 | | | 177,447 | | | 287,881 | | | 250,624 | |
| Net (income) attributable to noncontrolling interests | (883) | | | (1,179) | | | (2,102) | | | (1,447) | | | (488) | |
| Net income attributable to Sonoco | $ | 291,785 | | | $ | 313,560 | | | $ | 175,345 | | | $ | 286,434 | | | $ | 250,136 | |
| Per common share | | | | | | | | | |
| Net income attributable to Sonoco: | | | | | | | | | |
| Basic | $ | 2.90 | | | $ | 3.12 | | | $ | 1.75 | | | $ | 2.83 | | | $ | 2.46 | |
| Diluted | 2.88 | | | 3.10 | | | 1.74 | | | 2.81 | | | 2.44 | |
| Cash dividends | 1.70 | | | 1.62 | | | 1.54 | | | 1.46 | | | 1.37 | |
| Weighted average common shares outstanding: | | | | | | | | | |
| Basic | 100,742 | | | 100,539 | | | 100,237 | | | 101,093 | | | 101,482 | |
| Diluted | 101,176 | | | 101,016 | | | 100,852 | | | 101,782 | | | 102,392 | |
| Actual common shares outstanding at December 31 | 100,198 | | | 99,829 | | | 99,414 | | | 99,193 | | | 100,944 | |
| Financial Position | | | | | | | | | |
Net working capital1 | $ | 116,704 | | | $ | 436,342 | | | $ | 563,666 | | | $ | 546,152 | | | $ | 384,862 | |
| Property, plant and equipment, net | 1,286,842 | | | 1,233,821 | | | 1,169,377 | | | 1,060,017 | | | 1,112,036 | |
| Total assets | 5,126,289 | | | 4,583,465 | | | 4,557,721 | | | 3,923,203 | | | 4,013,685 | |
| Long-term debt | 1,193,135 | | | 1,189,717 | | | 1,288,002 | | | 1,020,698 | | | 1,015,270 | |
| Total debt | 1,681,369 | | | 1,385,162 | | | 1,447,329 | | | 1,052,743 | | | 1,128,367 | |
| Total equity | 1,815,705 | | | 1,772,278 | | | 1,730,060 | | | 1,554,705 | | | 1,532,873 | |
| Current ratio | 1.1 | | | 1.4 | | | 1.6 | | | 1.7 | | | 1.4 | |
Total debt to total capital2 | 48.1 | % | | 43.9 | % | | 45.6 | % | | 40.4 | % | | 42.4 | % |
| | | | | |
1 | Calculated as total current assets minus total current liabilities. |
2` | Calculated as total debt divided by the sum of total debt and total equity. |
| | | | | | |
SONOCO 2016 ANNUAL REPORT
| | 17
| | | | FORM 10-K
|
17 FORM 10-K SONOCO 2019 ANNUAL REPORT
ITEMItem 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSGENERAL OVERVIEW
Management’s discussion and analysis of financial condition and results of operations
The following discussion and analysis contains forward-looking statements, including, without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and resources. Such forward-looking statements should be read in conjunction with our disclosures under "Forward-Looking Statements" and under “Item 1A. Risk Factors” of this Form 10-K.
This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
General overview
Sonoco is a leading manufacturer of consumer, industrial and protective packaging products and provider of packaging services with
318approximately 320 locations in
3336 countries. The Company’s operations are reported in four segments, Consumer Packaging, Display and Packaging, Paper and Industrial Converted Products, and Protective Solutions.
Generally, the Company serves two broad
end-use markets, consumer and industrial, which, period to period, can exhibit different economic characteristics from each other. Geographically,
in 2019 approximately
65%63% of sales were generated in the United States, 20% in Europe,
6%7% in Asia, 4% in Canada and
9%6% in other regions.
The Company is a market-share leader in many of its product lines, particularly in tubes, cores and composite containers. Competition in most of the Company’s businesses is intense. Demand for the Company’s products and services is primarily driven by the overall level of consumer consumption of
non-durable goods; however, certain product and service groups are tied more directly to durable goods, such as appliances, automobiles and construction. The businesses that supply and/or service consumer product companies have tended to be, on a relative basis, more recession resistant than those that service industrial markets.
Financially, the Company’s objective is to deliver average annual double-digit total returns to shareholders over time. To meet that target, the Company focuses on three major areas: driving profitable sales growth, improving margins and leveraging the Company’s strong cash flow and financial position. Operationally, the Company’s goal is to be the acknowledged leader in high-quality, innovative, value-creating packaging solutions within targeted customer market segments.
Over the next three to four years, the Company aspires to achieve base operating margins
Use of
9% to 10% per year and increase return on net assets employed to 11% or more, subject to the impacts of potential acquisitions (see “Use ofNon-GAAP financial
measures” below). Although achieving these goals will be difficult in the currentlow-growth environment, the Company believes it will be successful by focusing on the following: organic sales growth, including new product development and expansion in emerging international markets; strategic acquisitions; and margin enhancement through more effective organizational design, indirect spend management, and improved manufacturing productivity, supply chain and back office support processes.USE OFNON-GAAP FINANCIAL MEASURES
measures
To assess and communicate the financial performance of the Company, Sonoco management uses, both internally and externally, certain financial performance measures that are not in conformity with generally accepted accounting principles
(“ (“non-GAAP” financial measures). These
non-GAAP financial measures reflect the Company’s GAAP operating results adjusted to remove amounts, including the associated tax effects, relating to restructuring initiatives, asset impairment charges, environmental charges, acquisition-related costs, gains or losses from the disposition of businesses, excess property insurance recoveries,
non-operating pension costs, certain income tax events and
certain other items, if any, including other income
tax-related adjustments and/or events, the exclusion of which management believes improves the
period-to-period comparability and analysis of the underlying financial performance of the business. The adjusted
non-GAAP results are identified using the term “base,” for example, “base earnings.”
The Company’s base financial performance measures are not in accordance with, nor an alternative for, measures conforming to generally accepted accounting principles and may be different from
non-GAAP measures used by other companies. In addition, these
non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Sonoco continues to provide all information required by GAAP, but it believes that evaluating its ongoing operating results may not be as useful if an investor or other user is limited to reviewing only GAAP financial measures. The Company uses the
non-GAAP “base” performance measures presented herein for internal planning and forecasting purposes, to evaluate its ongoing operations, and to evaluate the ultimate performance of management and each business unit against plan/forecast all the way up through the evaluation of the Chief Executive Officer’s performance by the Board of Directors. In addition, these same
non-GAAP measures are used in determining incentive compensation for the entire management team and in providing earnings guidance to the investing community.
Sonoco management does not, nor does it suggest that investors should, consider these
non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Sonoco presents these
non-GAAP financial measures to provide users information to evaluate Sonoco’s operating results in a manner similar to how management evaluates business performance. Material limitations associated with the use of such measures are that they do not reflect all period costs included in operating expenses and may not reflect financial results that are comparable to financial results of other companies that present similar costs differently. Furthermore, the calculations of these
non-GAAP measures are based on subjective determinations of management regarding the nature and classification of events and circumstances that the investor may find material and view differently. To compensate for these limitations, management believes that it is useful in understanding and analyzing the results of the business to review both GAAP information which includes all of the items impacting financial results and the
non-GAAP measures that exclude certain elements, as described above.
Restructuring and restructuring-related 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.
Similarly, non-operating pension expense is a recurring item. However, this expense is subject to significant fluctuations from period to period due to changes in actuarial assumptions, global financial markets (including stock market returns and interest rate changes), plan changes, settlements, curtailments, and other changes in facts and circumstances.
Reconciliations of GAAP to base results are presented on
pagepages 21 and 22 in conjunction with management’s discussion and analysis of the Company’s results of operations. Whenever reviewing a
non-GAAP financial measure, readers are encouraged to review the related reconciliation to fully understand how it differs from the related GAAP measure. Reconciliations are not provided for
non-GAAP measures related to future years due to the likely occurrence of one or more of the following, the timing and magnitude of which management is unable to reliably forecast: possible gains or losses on the sale of businesses or other assets, restructuring costs and restructuring-related
asset impairment charges, acquisition-related
| | | | | | |
FORM 10-K
| | | | 18
| | SONOCO 2016 ANNUAL REPORT
|
costs, and the tax effect of these items and/or other incometax-related events. These items could have a significant impact on the Company’sCompany's future GAAP financial results.
2016 OVERVIEW AND 2017 OUTLOOK
18 FORM 10-K SONOCO 2019 ANNUAL REPORT
2019 overview and 2020 outlook
Management's focus in 2019 was on generating profitable growth, improving margins, driving free cash flow, and portfolio optimization, including both potential acquisitions and divestitures. Management targeted an overall 2019 organic volume increase of approximately 1.0% and a positive price/cost relationship, albeit lower than what was achieved in 2018. As a result, management was expecting a notable increase in net sales, including the full-year impact of 2018 acquisitions, and modest improvements in overall margins for gross profit, base operating profit and base operating profit before depreciation and amortization. However, as the year unfolded, price/cost was flat and global weakness in manufacturing, exacerbated by tariffs and overall trade uncertainty, drove volume down in our Paper and Industrial Converted Products segment, while continued secular declines in certain end markets of our rigid paper container business and a combination of operational performance issues, competitive pressure and spotty demand in our plastics business resulted in lower overall volume in Consumer Packaging. Despite low growth ratescompany-wide volume being down 2.5% and flat price/cost, consolidated operating profit and operating margin improved considerably, due to acquisitions, net productivity gains and the effective control of other fixed costs.
Consolidated operating profit increased in many2019 by $29.4 million, or 6.7% despite a small 0.3% decline in total revenue year over year. The benefit to sales from acquisitions and higher selling prices implemented to recover rising costs were offset by negative volume/mix in most of the Company’s served marketsCompany's businesses, the negative impact of foreign exchange on sales and headwinds stemminglost sales from the continued strength2018 exit of a single-customer contract for retail packaging fulfillment. Each of the U.S. dollar, Sonoco reported solid resultsCompany's segments contributed to the year-over-year growth in 2016, posting year-over-year improvements in all of our segments. Operating profit in the Consumer Packaging segment improved $9.3 million, or 4 percent, year-over-year. Although theconsolidated operating profit improvement was lower in dollar terms, our Protective Solutions andwith the greatest gain reported by Display and Packaging, segments both posted double digit percentage growth in operating profits year over year.followed by Paper and Industrial Converted Products and Protective Solutions. On a company-wide basis, gains from a positive overall price/cost relationship (the relationship of the change in sales prices to the change in costs of materials, energy and freight), manufacturing productivity improvements and the benefit of lower pension expenseadded operating profit from acquisitions were only somewhatpartially offset by volume/mix, higher labor, maintenancenegative volume / mix. Volume declines, together with production inefficiencies in certain businesses, were the primary drivers of a significant decline in manufacturing productivity, which was more than offset by purchasing and otherfixed cost productivity.
Despite the increased consolidated operating
costs, and the impact of foreign currency translation. As a result, consolidated gross profit,
margin for 2016 improved to 19.6% compared to 18.7% in 2015.Current year Net Income Attributable to Sonoco (GAAP earnings) improved $36.3for 2019 decreased $21.8 million, or 6.9%, year over year, or 14.5%,year. This decrease was primarily due to higher current-year non-operating pension and includesrestructuring costs and a $104.3 million net gain, $49.3 million afterprior-year income tax related to the salevaluation allowance release triggered by certain provisions of the Company’s rigid plastics blow molding operations.Tax Cuts and Jobs Act ("Tax Act"). Base earnings, forwhich exclude the current year, which excludes this gainpreviously mentioned non-operating pension costs, restructuring costs and income tax valuation allowance release, as well as certain other items of income and expense, asimproved $16.6 million, or 4.9%, year over year. Base earnings are more fully described within this Item under “Use"Use ofNon-GAAP financial measures”measures" and are reconciled within this Item under “Reconciliations"Reconciliations of GAAP toNon-GAAP financial measures,”measures." Base operating profit as a percent of sales increased to 9.8% from 9.1% in 2018, and base operating profit before depreciation and amortization as a percent of sales improved $20.6to 14.2% from 13.5% in 2018.
2019 gross profit was $1,057.8 million,
or 8.0%, year over year.Key expectations for 2016compared with $1,041.0 million in 2018. Gross profit as a percentage of sales improved to 19.7% compared to 19.3% in 2018. GAAP selling, general and administrative expenses declined $32.4 million driven by a gain related to the reversal of an environmental reserve and significant focus across the Company on lowering controllable costs, the benefits of which were that overall volumes would increase by around 2%, price/cost would be relatively flat, productivity would be strong enough to more than offset the expected inflation in labor and other costs, and there would be a benefit from lower pension and post-retirement expense. Although actual volume was essentially flat overall, it was mixed by business unit, with gains in flexible packaging, plastics, protective packaging and tubes and cores beingpartially offset by declinesthe addition of expenses from acquisitions.
On December 31, 2019, the Company completed the acquisition of Thermoform Engineered Quality, LLC, and Plastique Holdings, LTD, (together "TEQ") with operations in composite cans, reelsthe United States, the United Kingdom and recycling. Despite flat volume, reported sales were down 3.6%Poland. The acquisition of TEQ provides a strong platform to further expand Sonoco's growing healthcare packaging business. On August 9, 2019, the Company completed the acquisition of Corenso Holdings America, Inc. ("Corenso"), a leading manufacturer of uncoated recycled paperboard (URB) and high-performance cores used in the paper, packaging films, tape, and specialty industries. Corenso's operations expand the Company's ability to produce a wide variety of sustainable coreboard grades. These transactions are described in greater detail below.
On July 17, 2019, the Company's Board of Directors approved a resolution to terminate the Sonoco Pension Plan for Inactive Participants (the "Inactive Plan") effective September 30, 2019. Upon approval from
a combination of lower selling prices in response to lower raw material costs, the
translation impactPension Benefit Guaranty Corporation, and following completion of a
stronger dollar, and the negative impact of dispositions net of acquisitions. Offsetting the earnings impact of lower than expected volume,limited lump-sum offering, the Company
was ableis expected to
maintainsettle all remaining liabilities under the Inactive Plan through the purchases of annuities in late 2020 or early 2021. In anticipation of settling these liabilities, the Company also took measures to de-risk the Inactive Plan's assets moving them to a
stronger than expected positive price/cost relationship in manymore conservative mix of
its businesses, aided by a declining raw material cost environment and procurement productivity gains. Although manufacturing productivity improvements forprimarily fixed income investments. During 2019, the
year fell short of expectations, the results of our fixed cost productivity and cost management efforts were better than expected and partially offset inflation in labor and other costs.PensionCompany recorded total pension and postretirement benefit expenses forof approximately $52.7 million, compared with $34.9 million during 2018. The increased expense was primarily due to lower expected returns on plan assets as a result of the year were $12.0 million lower than in 2015.de-risking of the Inactive Plan portfolio. The aggregate net unfunded position of the Company’s various defined benefit plans increaseddecreased from $432$369 million at the end of 2015,2018, to $446$294 million at the end of 2016.2019. This increasedecrease was largely driven primarily by contributions to its various pension and postretirement plans, including voluntary contributions to the U.S. plans totaling $200 million, partially offset by the impacteffect of lower discount rates, partially offset by contributions to the plans.
rates.
The effective tax rate on GAAP earnings was
10.6 percentage points higher than24.5%, compared with 19.8% in 2018, and the
prior year while theeffective tax rate on base earnings was
0.5 percentage points lower than23.9%, compared with 23.7% in
2015. A more favorable distribution2018. The year-over-year increase in the GAAP tax rate was driven primarily by the 2018 benefit from the release of
earnings between high- andlow-tax jurisdictions reduceda valuation allowance on foreign tax credits of $16.1 million. The modest increase in the
year-over-yearbase effective tax rate
on both GAAP andwas due to a discrete foreign benefit in the 2018 base
earnings; however, the year-over-year benefit to the GAAPeffective rate,
was more thanpartially offset by
the unfavorable impact of taxes associated with the 2016 disposal of the rigid plastics blow molding operations and prior-year incomeadditional US tax
benefits related to the release of valuation allowances against deferred tax assetscredits available in
certain international jurisdictions.2019.
The Company generated
$399$425.9 million in cash from operations during
2016,2019, compared with
$453$589.9 million in
2015.2018. The
majorityprimary driver of the
year-over-yearlower operating cash flow was the previously mentioned voluntary U.S. pension contribution which had an after-tax cash flow impact of approximately $165 million. Free cash flow for 2019 was $74.3 million, compared with $260.2 million in the prior year, reflecting the decrease
in cash flow from operations discussed above as well as an increase in net capital expenditures and cash dividends in the current year. Free cash flow is
attributable to income taxes and expenses related toa non-GAAP financial measure which may not represent the
sale of the blow molding operations and an increased useamount of cash
to fund workingflow available for general discretionary use because it excludes non-discretionary expenditures, such as mandatory debt repayments and required settlements of recorded and/or contingent liabilities not reflected in cash flow from operations. (Free cash flow is defined as cash flow from operations minus net capital
changes, partially offset by lower year-over-year income tax paymentsexpenditures and cash dividends. Net capital expenditures are defined as capital expenditures minus proceeds from, and/or plus costs incurred in,
2016, excluding payments related to the
blow molding sale.disposition of capital assets.) Cash flow from operations is expected to be approximately
$470$635 million in
2017.OUTLOOK
In 2017, management’s2020 and free cash flow is expected to be approximately $260 million.
Outlook
Profitable growth, margin expansion, improving free cash flow and sustainability will continue to be primary focus
areas for the Company in 2020. Key to achieving management's objectives for the year will be
on accelerating organic growth, improving manufacturing productivityfurther development of the Company's previously implemented commercial and
using the Company’s strong financial position to make strategic acquisitions primarilyoperational excellence initiatives aimed at
its targeted growth areas of thermoforming, flexibles and protective packaging. The Company has identified a number of targeted growth projects,improving margins by more fully realizing the
majority of which fall within its Consumer Packaging, Display and Packaging, and Protective Solutions segments and emerging markets. Two key projects planned for 2017 are the commercial roll outvalue of our
products and services, reducing our unit costs and better leveraging our fixed support costs. Management is targeting an overall organic volume increase in 2020 of approximately 1.0% driven by new
TruVueTM clear plastic canchilled and
development of a new contract packaging services center to support the expansion of a key North American customer. Expected increases in raw materials, particularly resins, tinplate steel and old corrugated containers (OCC), together with forecasts for a continued strengtheningprepared food volume, improved perimeter of the
dollar, if realized, could create pressure on reported earnings.store performance, new sustainable products, and stabilization of demand in our industrial products markets. In
large part, productivity effortsaddition, the Company will
be focused on reducing our operations’unit-cost-to-produce through the continued internal roll out of the Sonoco Performance System, our systematic approachcontinue to
operational excellence. We expect improved performance from our Paperlook for strategic and
Industrial Converted Products segmentopportunistic acquisition candidates as
we furtherwell as opportunities to optimize our
manufacturing footprint and address the market-related challenges in our corrugating medium operation. Although 2016 corrugating medium results were disappointing, we are seeing encouraging signs for 2017 as we have orders to run this machine at full capacity through the first half of the year and the current pricing environment has improved. Management is continuing to seek a long-term solution for the under-performance of this operation and is actively exploring several options.Management expects overall volume in 2017 to increase approximately 2%; volumes in the Protective Solutions and Display and Packaging segments are expected to increase at higher rates. Although thebusiness portfolio.
The Company has projected that on an annual basis, overallcompany-wide price/cost will be positivenegative in 2017, headwinds from higher-than-expected price2020 as continued weakness in key raw material prices are likely to make full recovery of any overall cost increases that have been experienced early in the year will make achieving those gains more challenging. Manufacturing and other productivity isgains are expected to offset the increase expecteda significant portion of projected increases in labor and other costs, excludingcosts; however, not realizing the targeted organic volume gains would make fully
19 FORM 10-K SONOCO 2019 ANNUAL REPORT
achieving management's productivity objectives more difficult. Operating results in 2020 will include a full year of revenue and operating profit from the Corenso and TEQ acquisitions.
The Company projects the operating component of pension and
postretirement expense.Normal pension and postretirement benefit plan expenses are expectedpost-retirement benefits expense will be approximately $1 million higher year over year, while the non-operating component, excluding settlement charges, is projected to increase from 2016 levelsbe $3 million lower. The net anticipated decrease of $2 million is primarily due largely to lower discount rates. However, as more fully described within this item under “Critical accounting policies and estimates,” the Company expects
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to incur additionalnon-cash settlement charges of between $25 to $40 million related to a program to offer early settlement of pension benefits to certain plan participants. Excluding any such settlement charges and changes ininterest expense due to remeasurement, pension and post-retirement expenses area decline in discount rates, partially offset by lower expected returns on plan assets due to increase year-over-year byde-risking actions taken to move the Inactive Plan's assets to a more conservative mix of primarily fixed income investments. Non-cash settlement charges totaling approximately $5 million. Total contributions in 2017 to the Company’s domestic and international pension and postretirement plans$600 million are expected to be approximately $58 million.
In considerationrecognized beginning in 2020 as the liabilities of the above factors, management is projecting overall margins for both gross profitInactive Plan, terminated in 2019, are settled through lump-sum payouts and EBIT, excludingannuity purchases. The Company anticipates making additional contributions to the impactsInactive Plan of pension settlement charges, dispositions and restructuring/asset impairments,approximately $150 million in late 2020 or early 2021 in order to improve modestly over 2016 levels.
be fully funded on a termination basis at the time of the annuity purchase. Contributions to all other defined benefit plans in 2020 are expected to total approximately $25 million.
Absent any additional borrowings for acquisitions or significant changes in 2017 from acquisition activity,interest rates, net interest expense is expected to decrease approximately $2 million.be relatively flat year over year. The consolidated effective tax rate on base earnings is expected to be approximately 32.0%between 25.0% and 26.0% in 20172020 compared with 30.6%23.9% in 2016. A reconciliation2019. The anticipated year-over-year increase is due to discrete items that benefited the 2019 rate that are not expected to reoccur in 2020.
In consideration of the effective tax rate onabove factors, management is projecting that reported 2020 net sales will increase approximately 3% and overall margins for gross profit and base earnings to the effective tax rate onoperating profit will improve approximately 0.3% and 0.1%, respectively, over 2019 levels.
The Company does not provide projected GAAP earnings
for 2017 is not providedresults due to the likely occurrence of one or more of the following, the timing and magnitude of which
management iswe are unable to reliably forecast: possible gains or losses on the sale of businesses or other assets, restructuring costs and restructuring-related impairment charges, acquisition-related costs, and the
income tax
effecteffects of these items
and and/or other income
tax-related events. These items could have a significant impact on the
Company’sCompany's future GAAP financial results.
ACQUISITIONS AND DISPOSITIONS
The Company completed fourtwo acquisitions during 20162019 at a cost of $88.6$297.9 million, net of cash acquired. On June 24, 2016,December 31, 2019, the Company completed the acquisition of Thermoform Engineered Quality, LLC, and Plastique Holdings, LTD, (together "TEQ") for $187.3 million, net of cash acquired. Final consideration is subject to a small tube and core businesspost-closing adjustment for the change in Australia for $0.9 million in cash. The acquisitionworking capital to the date of closing. This adjustment is expected to generate annual salesbe made by the end of the first quarter of 2020.The operations acquired consist of three thermoforming and extrusion facilities in the United States along with a thermoforming operation in the United Kingdom and thermoforming and molded-fiber manufacturing in Poland, which together employ approximately 500 associates. The acquisition of TEQ provides a strong platform to further expand Sonoco's growing healthcare packaging business. The operations of TEQ will be reported in the Company's Consumer Packaging segment. On August 9, 2019, the Company completed the acquisition of Corenso Holdings America, Inc. ("Corenso") for $110.6 million, net of cash acquired. Final consideration was subject to a post-closing adjustment for the change in working capital to the date of closing. This adjustment was settled in November 2019 and required an additional cash payment of approximately $0.8 million$0.1 million. Corenso is a leading manufacturer of uncoated recycled paperboard (URB) and high-performance cores used in the Company’spaper, packaging films, tape, and specialty industries. Corenso operates a 108,000-ton per year URB mill and core converting facility in Wisconsin Rapids, Wisconsin, as well as a core converting facility in Richmond, Virginia, expanding the Company's ability to produce a wide variety of sustainable coreboard grades. To finance the acquisitions, the Company used short-term credit facilities, and available cash. The operations of Corenso are reported in the Company's Paper and Industrial Converted Products segment.
The Company completed three acquisitions during 2018 at a cost of $278.8 million, net of cash acquired. On
August 30, 2016,October 1, 2018, the Company completed the acquisition of the
temperature-controlled cargo container assets, licenses, trademarks,remaining 70 percent interest in Conitex Sonoco (BVI), Ltd. ("Conitex Sonoco") from Texpack Investments, Inc. ("Texpack") for total consideration of $134.8 million, including net cash payments of $127.8 million and
manufacturing rights from AAR Corporation. Totaldebt assumed of $7.1 million. Final consideration
was subject to a post-closing adjustment for
this businessthe change in working capital to the date of closing. This adjustment was
$6.0 million consisting of a currentsettled in February 2019 and required an additional cash payment of
$3.0 million,non-contingent deferred cash consideration of $2.0 million, and contingent consideration valued at $1.0approximately $0.1 million. The
acquisition is expected to generate annual salesoperations of
Conitex Sonoco are reported in the Company's Paper and Industrial Converted Products segment. The Conitex Sonoco joint venture was formed in 1998 with Texpack, a Spanish-based global provider of paperboard and paper-based packaging products. Conitex Sonoco produces uncoated recycled paperboard and tubes and cones for the global spun yarn industry, as well as adhesives, flexible intermediate bulk containers and corrugated pallets. Conitex Sonoco has approximately
$2.51,250 employees across 13 manufacturing locations in 10 countries, including four paper mills and seven cone and tube converting operations and two other production facilities. Also on October 1, 2018, the Company acquired from Texpack Group Holdings B.V. a rigid paper facility in Spain ("Compositub") for $10.0 million in
cash. Final consideration was subject to a post-closing adjustment for the
Protective Solutions segment. Laminar Medica (“Laminar”), a privately held specialty medical products company basedchange in working capital to the date of closing. This adjustment was settled in February 2019 for an additional cash payment to the seller of $0.4 million. The operations of Compositub are reported in the
U.K., was acquiredCompany's Consumer Packaging segment. Both the Conitex Sonoco and Compositub acquisitions were funded with existing cash on
September 19, 2016 for $17.2 million, net of cash acquired. The acquisition of Laminar is expected to generate approximately $16 million of annual sales in the Protective Solutions segment.hand. On
November 1, 2016,April 12, 2018, the Company completed the acquisition of
PlasticHighland Packaging
Inc. (“PPI”Solutions ("Highland")
, a privately held Hickory,NC-based flexible packaging company for $67.6 million, net of cash acquired. Founded in 1957, PPI specializes inshort-run, customized flexible packaging for consumer brands in markets including: food products (i.e. frozen foods, baked goods, seafood), pet products (i.e. dry food, bird seed, litter), confection (i.e. seasonal promotions, heat-sealed chocolate packaging, hard and soft candy), and health and personal care (i.e. nutraceuticals, diapers, tissues/wipes).
The acquisition is expected to generate approximately $42 million of annual sales in the Consumer Packaging segment.Subsequent to year end, on February 15, 2017, the Company signed a definitive agreement to acquire Packaging Holdings, Inc. (Packaging), including Peninsula Packaging, LLC, for approximately $230 million in cash. Packaging manufactures thermoformed packaging for a wide range of whole fresh fruits,pre-cut fruits and produce, prepared salad mixes, as well as baked goods in retail supermarkets. Founded in 2001 and based in Exeter, California, Packaging operates five manufacturing facilities, four in the United States and one in Mexico. The transaction is subject to normal regulatory review and is expected to close by the end of the second quarter of 2017. The acquisition of Packaging is expected to add approximately $190 million of annual sales in the Company’s Consumer Packaging segment.
The Company completed two acquisitions during 2015 at an aggregate cost of $21.2 million, of which $17.4 million was paid in cash. On April 1, 2015, the Company acquired a 67% controlling interest in Graffo Paranaense de Embalagens S/A (“Graffo”), a flexible packaging business located in Brazil. Graffo serves the confectionery, dairy, pharmaceutical and tobacco markets in Brazil with approximately 230 employees. Total consideration paid for Graffo was approximately $18.3 million, including cash of $15.7 million, and assumed debt of $2.6 million. On September 21, 2015, the Company acquired the high-density wood plug business from Smith Family Companies, Inc., in Hartselle, Alabama. Total consideration for thethis acquisition was $2.9$148.5 million, including net cash paid at closing of $1.8 million and$141.0, along with a contingent purchase liability of $1.1$7.5 million.
The contingent purchase liability is based upon a sales metric which the Company completed two acquisitions during 2014expected to meet in full at an aggregate costthe time of $366.3 million, of which $334.1the acquisition. The first year's metric was met and $5.0 million was paid in cash.the second quarter of 2019. The most significantsecond installment of these was$2.5 million is expected to be paid during the Octobersecond quarter of 2020. The liability for the remaining installment is included in "Accrued expenses and other" on the Company's Consolidated Balance Sheets at December 31, 2014, acquisition2019. Highland manufactures thermoformed plastic packaging for fresh produce and dairy products from a single production facility in Plant City, Florida, providing total packaging solutions for customers that include sophisticated engineered containers, flexographic printed labels, and inventory management through distribution warehouses in the Southeast and West Coast of the privately held Weidenhammer Packaging Group (“Weidenhammer”), a manufacturer of composite cans, drums, and luxury tubes, as well as rigid plastic containers using thin-walled injection molding technology within-mold labeling. Markets served include processed foods, powdered beverages, tobacco, confectionery, personal care, pet food, pharmaceuticals, and home and garden products. At the time of acquisition Weidenhammer had approximately 1,100 employees and 13 production facilities located in Germany and six other European countries, Chile, and the United States. Total consideration paid for Weidenhammer was approximately $355.3 million, including cash of $323.2 million, and debt and other liabilities assumed totaling $32.1 million. On May 2, 2014, theThe Company completedfinanced the acquisition with proceeds from a $100.0 million term loan, along with proceeds from existing credit facilities, which was repaid in full before the end of Dalton Paper Products, Inc., a manufacturer2018. The operations of tubes and cores, for a net cash cost of $11.3 million. The acquisition consisted of a single manufacturing facility located in Dalton, Georgia. Also during 2014, the Company received cash totaling $0.3 million in connection with the final working capital settlement related to a 2013 acquisition.
Dispositions
On November 7, 2016, the Company completed the sale of its rigid plastics blow molding operations to Amcor Rigid Plastics USA, LLC and Amcor Packaging Canada, Inc. for approximately $280 million, with the Company receiving net cash proceeds of $271.8 million. In conjunction with the sale, the Company recognized a gain on the disposition, net of associated fees, of $104.3 million. The Company’s rigid plastics blow molding operations included seven manufacturing facilitiesHighland are reported in the U.S. and Canada with approximately 850 employees producing containers serving the personal care and food and beverage markets. The disposition of these operations is expected to negatively impact the 2017 year-over-year sales comparison by approximately $175 million. The decision to sell the blow molding operations was made to focus on, and provide resources to further enhance, the Company’s targeted growth businesses, including flexible packaging, thermoformed rigid plastics,
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FORM 10-K
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| | SONOCO 2016 ANNUAL REPORT
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and temperature-assurance packaging. This sale is not expected to notably affect operating margin percentages for the Company’sCompany's Consumer Packaging segment, nor does it represent a strategic shift for the Company that will have a major effect on the entity’s operations and financial results.
segment.
See Note 3 to the Consolidated Financial Statements for further information about acquisition activities.
20 FORM 10-K SONOCO 2019 ANNUAL REPORT
Restructuring and
disposition activities.RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
asset impairment charges
Due to its geographic footprint
(318(approximately 320 locations in
3336 countries) and the cost-competitive nature of its businesses, the Company is constantly seeking the most cost-effective means and structure to serve its customers and to respond to fundamental changes in its markets. As such, restructuring costs have been and are expected to be a recurring component of the Company’s operating costs. The amount of these costs can vary significantly from year to year depending upon the scope and location of the restructuring activities.
The following table recaps the impact of restructuring and asset impairment charges on the Company’s net income for the periods presented (dollars in thousands):
| | | | | | | | | | | | | | | |
| | | Year Ended December 31 |
| | | 2016 | | 2015 | | 2014 |
Exit costs: | | | | | | | | | | | | | | | |
2016 Actions | | | $ | 30,930 | | | | $ | — | | | | $ | — | |
2015 Actions | | | | 4,801 | | | | | 23,494 | | | | | — | |
2014 and Earlier Actions | | | | 30 | | | | | 2,735 | | | | | 14,653 | |
Asset impairments: | | | | 7,122 | | | | | 24,408 | | | | | 8,139 | |
Total restructuring/asset impairment charges | | | $ | 42,883 | | | | $ | 50,637 | | | | $ | 22,792 | |
Income tax benefit | | | | (7,520 | ) | | | | (22,641 | ) | | | | (5,732 | ) |
Impact of noncontrolling interests, net of tax | | | | (161 | ) | | | | (93 | ) | | | | (52 | ) |
Total impact of restructuring/asset impairment charges, net of tax | | | $ | 35,202 | | | | $ | 27,903 | | | | $ | 17,008 | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
| Restructuring and restructuring-related asset impairment charges | $ | 44,819 | | | $ | 40,071 | | | $ | 19,834 | |
| Other asset impairments | 15,061 | | | — | | | 18,585 | |
| Restructuring/Asset impairment charges | $ | 59,880 | | | $ | 40,071 | | | $ | 38,419 | |
During
2016,2019, the Company announced the
elimination of a forming film production line at a flexible packaging facility in Illinois and initiated the closure of
four tubesa composite can and
coresinjection molding facility in Germany, a composite can plant in Malaysia, a molded plastics plant in the United States (all part of the Consumer Packaging segment), and three tube and core plants
–- one in the United
States,Kingdom, one in
Canada, one in Ecuador,Norway, and one in
Switzerland. The Company closed a packaging services centerEstonia (all part of the Paper and Industrial Converted Products segment). Restructuring actions in
Mexico and a fulfillment service center in Brazil. The Company also began manufacturing rationalization efforts in its Reels division, completed the
salesProtective Solutions segment included charges associated with the exit of a
paper millprotective packaging facility in
France, and a retail security packaging plant in Puerto Rico.Texas. In addition the Company continued to realign its cost structure, resulting in the elimination of approximately
180223 positions.
During
2015,2018, the Company
announcedinitiated the
closureclosures of
six rigid paper facilities – twoa flexible packaging plant in
North Carolina, a global brand management facility in Canada, a thermoformed packaging plant in California (all part of the
United States,Consumer Packaging segment), five tube and core plants - one in Alabama, one in Canada, one in
Russia,Indonesia, one in
Germany,Russia, and one in
Norway (all part of the
United Kingdom; the closure of a production line at a thermoforming plant in the United States;Paper and
the sale of a portion of its metal ends and closures business in the United States. Restructuring actions also included the closures of a tubes and cores plant, a recycling business,Industrial Converted Products segment), and a
printed backer card facility in the United States. During 2015, the Company also recognized asset impairment charges related to the planned sale of a paper mill in France and eliminated approximately 235 positions worldwide in conjunction with the Company’s organizational effectiveness efforts.During 2014, the Company announced the closures of a tube and core plant in Canada; a molded foam plant in the United States and a temperature-assuredprotective packaging plant in North Carolina (part of the United States; and two recycling facilities –oneProtective Solutions segment). Restructuring actions in the United StatesDisplay and onePackaging segment included charges associated with exiting a single-customer contract at a packaging center in Brazil. The Company also recognized exit costs and asset impairment charges as the result of halting the planned start up of a rigid paper facility in Europe following the acquisition of Weidenhammer Packaging Group.Atlanta, Georgia. In addition, to these actions, the Company eliminatedcontinued to realign its cost structure, resulting in the elimination of approximately 125120 positions.
The Company expects to recognize future additional costs totaling approximately
$2.1$2.8 million 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
2017.2020. The Company regularly evaluates its cost structure, including its manufacturing capacity, and additional restructuring actions are likely to be undertaken. Restructuring and asset impairment 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 Company operates.
See Note 4 to the Consolidated Financial Statements for further information about restructuring activities and asset impairment charges.
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RECONCILIATIONS OFReconciliations of GAAP
TONON-GAAP FINANCIAL MEASURESto non-GAAP financial measures
The following tables reconcile the Company’s
non-GAAP financial measures to their most directly comparable GAAP financial measures for each of the years presented:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2016 |
| Dollars and shares in thousands, except per share data | | GAAP | | Restructuring/ Asset Impairment | | Acquisition Related Cost | | Other Adjustments(1) | | Base |
Income before interest and income taxes | | | $ | 492,834 | | | | $ | 42,883 | | | | $ | 4,569 | | | | $ | (103,360 | ) | | | $ | 436,926 | |
Interest expense, net | | | | 51,557 | | | | | — | | | | | — | | | | | — | | | | | 51,557 | |
Income before income taxes | | | $ | 441,277 | | | | $ | 42,883 | | | | $ | 4,569 | | | | $ | (103,360 | ) | | | $ | 385,369 | |
Provision for income taxes | | | | 164,631 | | | | | 7,520 | | | | | 1,422 | | | | | (55,803 | ) | | | | 117,770 | |
Income before equity in earnings of affiliates | | | $ | 276,646 | | | | $ | 35,363 | | | | $ | 3,147 | | | | $ | (47,557 | ) | | | $ | 267,599 | |
Equity in earnings of affiliates, net of tax | | | | 11,235 | | | | | — | | | | | — | | | | | — | | | | | 11,235 | |
Net income | | | $ | 287,881 | | | | $ | 35,363 | | | | $ | 3,147 | | | | $ | (47,557 | ) | | | $ | 278,834 | |
Less: Net (income) attributable to noncontrolling interests, net of tax | | | | (1,447 | ) | | | | (161 | ) | | | | — | | | | | — | | | | | (1,608 | ) |
Net income attributable to Sonoco | | | $ | 286,434 | | | | $ | 35,202 | | | | $ | 3,147 | | | | $ | (47,557 | ) | | | $ | 277,226 | |
Per diluted common share | | | $ | 2.81 | | | | $ | 0.35 | | | | $ | 0.03 | | | | $ | (0.47 | ) | | | $ | 2.72 | |
(1) | Consists of the following: gain from the sale of the rigid plastics blow molding operations totaling $104,292 ($49,341 after tax); $850 increase ($522 after tax) in reserves for Fox River environmental claims; $1,203 net tax loss due primarily to changes in rates and valuation allowances for foreign entities; and other charges totaling $82 ($59 after tax). |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2015 |
| Dollars and shares in thousands, except per share data | | GAAP | | Restructuring/ Asset Impairment | | Acquisition Related Cost | | Other Adjustments(2) | | Base |
Income before interest and income taxes | | | $ | 382,544 | | | | $ | 50,637 | | | | $ | 1,663 | | | | $ | (22,280 | ) | | | $ | 412,564 | |
Interest expense, net | | | | 54,598 | | | | | — | | | | | — | | | | | — | | | | | 54,598 | |
Income before income taxes | | | $ | 327,946 | | | | $ | 50,637 | | | | $ | 1,663 | | | | $ | (22,280 | ) | | | $ | 357,966 | |
Provision for income taxes | | | | 87,738 | | | | | 22,641 | | | | | 9 | | | | | 746 | | | | | 111,134 | |
Income before equity in earnings of affiliates | | | $ | 240,208 | | | | $ | 27,996 | | | | $ | 1,654 | | | | $ | (23,026 | ) | | | $ | 246,832 | |
Equity in earnings of affiliates, net of tax | | | | 10,416 | | | | | — | | | | | — | | | | | — | | | | | 10,416 | |
Net income | | | $ | 250,624 | | | | $ | 27,996 | | | | $ | 1,654 | | | | $ | (23,026 | ) | | | $ | 257,248 | |
Less: Net (income) attributable to noncontrolling interests, net of tax | | | | (488 | ) | | | | (93 | ) | | | | — | | | | | — | | | | | (581 | ) |
Net income attributable to Sonoco | | | $ | 250,136 | | | | $ | 27,903 | | | | $ | 1,654 | | | | $ | (23,026 | ) | | | $ | 256,667 | |
Per diluted common share | | | $ | 2.44 | | | | $ | 0.27 | | | | $ | 0.02 | | | | $ | (0.22 | ) | | | $ | 2.51 | |
(2) | Consists of the following: gain from the release of reserves related to the partial settlement of the Fox River environmental claims totaling $32,543 ($19,928 after tax); income tax gains from the release of valuation allowances against net deferred tax assets in Spain, Canada, the Netherlands, and the United Kingdom totaling $9,563; legal and financial professional expenses associated with the Company’s investigation of financial misstatements in Mexico totaling $7,099 ($4,380 after tax); additional expenses related to executive life insurance policies totaling $2,188 ($1,344 after tax); and other charges totaling $976 ($741 after tax). |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the year ended December 31, 2014 |
| Dollars and shares in thousands, except per share data | | GAAP | | Restructuring/ Asset Impairment | | Acquisition Related Cost | | Other Adjustments(3) | | Base |
Income before interest and income taxes | | | $ | 378,098 | | | | $ | 22,792 | | | | $ | 9,221 | | | | $ | (2,568 | ) | | | $ | 407,543 | |
Interest expense, net | | | | 52,391 | | | | | — | | | | | — | | | | | — | | | | | 52,391 | |
Income before income taxes | | | $ | 325,707 | | | | $ | 22,792 | | | | $ | 9,221 | | | | $ | (2,568 | ) | | | $ | 355,152 | |
Provision for income taxes | | | | 108,758 | | | | | 5,732 | | | | | 722 | | | | | 787 | | | | | 115,999 | |
Income before equity in earnings of affiliates | | | $ | 216,949 | | | | $ | 17,060 | | | | $ | 8,499 | | | | $ | (3,355 | ) | | | $ | 239,153 | |
Equity in earnings of affiliates, net of tax | | | | 9,886 | | | | | — | | | | | — | | | | | — | | | | | 9,886 | |
Net income | | | $ | 226,835 | | | | $ | 17,060 | | | | $ | 8,499 | | | | $ | (3,355 | ) | | | $ | 249,039 | |
Less: Net (income)/loss attributable to noncontrolling interests, net of tax | | | | (919 | ) | | | | (52 | ) | | | | — | | | | | 533 | | | | | (438 | ) |
Net income attributable to Sonoco | | | $ | 225,916 | | | | $ | 17,008 | | | | $ | 8,499 | | | | $ | (2,822 | ) | | | $ | 248,601 | |
Per diluted common share | | | $ | 2.19 | | | | $ | 0.16 | | | | $ | 0.08 | | | | $ | (0.03 | ) | | | $ | 2.41 | |
(3) | Consists of excess property insurance settlement gains on a facility in Thailand damaged by a flood in 2011 totaling $2,568 ($2,006 after tax) and othernon-base income tax benefits totaling $1,349. |
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| | SONOCO 2016 ANNUAL REPORT
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, 2019 | | | | | | | | |
| Dollars and shares in thousands, except per share data | GAAP | | Restructuring/ Asset Impairment | | Acquisition Related Costs | | Other Adjustments(1) | | Base |
| Operating profit | $ | 467,082 | | | $ | 59,880 | | | $ | 8,429 | | | $ | (9,999) | | | $ | 525,392 | |
| Non-operating pension costs | 24,713 | | | — | | | — | | | (24,713) | | | — | |
| Interest expense, net | 61,603 | | | — | | | — | | | — | | | 61,603 | |
| Income before income taxes | $ | 380,766 | | | $ | 59,880 | | | $ | 8,429 | | | $ | 14,714 | | | $ | 463,789 | |
| Provision for income taxes | 93,269 | | | 15,520 | | | 1,147 | | | 994 | | | 110,930 | |
| Income before equity in earnings of affiliates | $ | 287,497 | | | $ | 44,360 | | | $ | 7,282 | | | $ | 13,720 | | | $ | 352,859 | |
| Equity in earnings of affiliates, net of tax | 5,171 | | | — | | | — | | | — | | | 5,171 | |
| Net income | $ | 292,668 | | | $ | 44,360 | | | $ | 7,282 | | | $ | 13,720 | | | $ | 358,030 | |
| Less: Net (income) attributable to noncontrolling interests, net of tax | (883) | | | 51 | | | — | | | — | | | (832) | |
| Net income attributable to Sonoco | $ | 291,785 | | | $ | 44,411 | | | $ | 7,282 | | | $ | 13,720 | | | $ | 357,198 | |
| Per diluted common share | $ | 2.88 | | | $ | 0.44 | | | $ | 0.07 | | | $ | 0.14 | | | $ | 3.53 | |
(1) Consists of a favorable change in estimate of an environmental reserve totaling $10,000, non-operating pension costs, and other non-base tax adjustments totaling a net benefit of approximately $3,059.
21 FORM 10-K SONOCO 2019 ANNUAL REPORT
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, 2018 | | | | | | | | |
| Dollars and shares in thousands, except per share data | GAAP | | Restructuring/ Asset Impairment | | Acquisition Related Costs | | Other Adjustments(2) | | Base |
| Operating profit | $ | 437,629 | | | $ | 40,071 | | | $ | 14,446 | | | $ | (326) | | | $ | 491,820 | |
| Non-operating pension costs | 941 | | | — | | | — | | | (941) | | | — | |
| Interest expense, net | 58,157 | | | — | | | — | | | — | | | 58,157 | |
| Income before income taxes | $ | 378,531 | | | $ | 40,071 | | | $ | 14,446 | | | $ | 615 | | | $ | 433,663 | |
| Provision for income taxes | 75,008 | | | 10,038 | | | 115 | | | 17,723 | | | 102,884 | |
| Income before equity in earnings of affiliates | $ | 303,523 | | | $ | 30,033 | | | $ | 14,331 | | | $ | (17,108) | | | $ | 330,779 | |
| Equity in earnings of affiliates, net of tax | 11,216 | | | — | | | — | | | — | | | 11,216 | |
| Net income | $ | 314,739 | | | $ | 30,033 | | | $ | 14,331 | | | $ | (17,108) | | | $ | 341,995 | |
| Less: Net (income) attributable to noncontrolling interests, net of tax | (1,179) | | | (191) | | | — | | | — | | | (1,370) | |
| Net income attributable to Sonoco | $ | 313,560 | | | $ | 29,842 | | | $ | 14,331 | | | $ | (17,108) | | | $ | 340,625 | |
| Per diluted common share | $ | 3.10 | | | $ | 0.30 | | | $ | 0.14 | | | $ | (0.17) | | | $ | 3.37 | |
(2) Primarily the release of a valuation allowance and other non-base tax adjustments totaling a net benefit of approximately $17,434.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, 2017 | | | | | | | | |
| Dollars and shares in thousands, except per share data | GAAP | | Restructuring/ Asset Impairment | | Acquisition Related Costs | | Other Adjustments(3) | | Base |
| Operating profit | $ | 412,409 | | | $ | 38,419 | | | $ | 13,790 | | | $ | (2,279) | | | $ | 462,339 | |
| Non-operating pension costs | 45,110 | | | — | | | — | | | (45,110) | | | — | |
| Interest expense, net | 52,745 | | | — | | | — | | | — | | | 52,745 | |
| Income before income taxes | $ | 314,554 | | | $ | 38,419 | | | $ | 13,790 | | | $ | 42,831 | | | $ | 409,594 | |
| Provision for income taxes | 146,589 | | | 13,064 | | | 3,841 | | | (40,123) | | | 123,371 | |
| Income before equity in earnings of affiliates | $ | 167,965 | | | $ | 25,355 | | | $ | 9,949 | | | $ | 82,954 | | | $ | 286,223 | |
| Equity in earnings of affiliates, net of tax | 9,482 | | | — | | | — | | | 581 | | | 10,063 | |
| Net income | $ | 177,447 | | | $ | 25,355 | | | $ | 9,949 | | | $ | 83,535 | | | $ | 296,286 | |
| Less: Net (income)/loss attributable to noncontrolling interests, net of tax | (2,102) | | | (71) | | | — | | | — | | | (2,173) | |
| Net income attributable to Sonoco | $ | 175,345 | | | $ | 25,284 | | | $ | 9,949 | | | $ | 83,535 | | | $ | 294,113 | |
| Per diluted common share | $ | 1.74 | | | $ | 0.25 | | | $ | 0.10 | | | $ | 0.83 | | | $ | 2.92 | |
(3) Consists of the following: pension settlement charges of $32,761 ($20,241 after tax), partially offset by insurance settlement gains; tax charges of approximately $76,933 related to a one-time transition tax on certain accumulated foreign earnings offset by approximately $25,668 related to an increase in net deferred tax assets, both of which are related to implementation of the U.S. Tax Cuts and Jobs Act; and other net tax charges totaling $492.
Results of operations –
20162019 versus
2015For 2016, net2018
Net income attributable to Sonoco (GAAP earnings) was $286.4$291.8 million ($2.812.88 per diluted share) in 2019, compared with $313.6 million ($3.10 per diluted share) in 2018.
Net income in 2019 reflects net after-tax charges totaling $65.4 million, related to restructuring and asset impairment charges, acquisition costs and non-operating pension costs, partially offset by the favorable change in estimate of an environmental reserve. Net income in 2018 was negatively impacted by net after-tax charges totaling $27.1 million, consisting ofrestructuring/asset impairment charges and acquisition-related expenses, partially offset by beneficial tax adjustments related to the Tax Act.
Base earnings in 2019 were $357.2 million ($3.53 per diluted share), compared with
$250.1$340.6 million ($
2.44 per diluted share) for 2015. Current-year earnings reflect a netafter-tax benefit of $9.2 million, consisting of the gain from the disposal of the Company’s rigid plastics blow molding operations, partially offset by restructuring costs, asset impairment charges, acquisition-related expenses, and foreign income tax losses related to rate adjustments.Net income in 2015 was negatively impacted by netafter-tax charge of $6.5 million consisting of restructuring costs, asset impairment charges, legal and professional fees associated with the Company’s investigation of financial misstatements in Mexico, acquisition-related expenses, and excess executive life insurance expenses, partially offset by gains related to the final settlement of certain of the Fox River environmental claims and income tax gains from the release of valuation allowances against certain net deferred tax assets.
Base earnings in 2016 were $277.2 million ($2.72 per diluted share), compared with $256.7 million ($2.513.37 per diluted share) in 2015.
2018.
Both GAAP and base earnings
benefittedin 2019 benefited from
a positive price/cost relationship,operating profit from current and prior-year acquired businesses, as well as total productivity
improvementsgains and lower
pension expense.management incentives. These
year-over-year favorable factors were partially offset by
volumevolume/mix declines
particularlyas well as a higher current-year effective tax rate. The effective tax rate change had more impact on GAAP earnings. Additionally, GAAP earnings were unfavorably impacted by a $19.8 million increase in
Rigid Paper North America, higher overhead, management incentive and other operating costs, and unfavorable changesrestructuring activity in 2019 as well as a $23.8 million increase in non-operating pension costs. Changes in foreign currency
translation.translation had little effect on earnings year over year.
The effective tax rate on GAAP earnings was
37.3%,24.5% in 2019, compared with
26.8%19.8% in
2015,2018, and the effective tax rate on base earnings was
30.6%23.9%, compared with
31.0%23.7% in
2015.2018. The
main drivers of the unfavorable changeyear-over-year increase in the
GAAP tax rate
on GAAP earnings include taxes onwas driven primarily by the
gain related to the current-year disposal of the rigid plastics blow molding operations and prior year income tax benefits related to2018 benefit from the release of
a valuation
allowances against deferredallowance on foreign tax
assetscredits of $16.1 million. The modest increase in
certain international jurisdictions. Thethe base effective tax rate
onwas due to a discrete foreign benefit in the 2018 base
earnings was essentially flat year over year.effective rate, partially offset by additional US tax credits available in 2019.
22 FORM 10-K SONOCO 2019 ANNUAL REPORT
Consolidated net sales for
20162019 were
$4.8$5.4 billion, a
$181$17 million, or
3.7%0.3%, decrease from
2015.2018. The components of the sales change were:
| | | | | |
| ($ in millions) | | |
Volume/mix | | | $ | 6 | |
Selling price | | | | (25 | ) |
Acquisitions and divestitures, net | | | | (25 | ) |
Foreign currency translation and other, net | | | | (137 | ) |
Total sales decrease | | | $ | (181 | ) |
| | | | | |
| ($ in millions) |
|
| Volume/mix | $ | (133) | |
| Selling price | 15 | |
| Acquisitions and divestitures, net | 251 | |
| Foreign currency translation and other, net | (149) | |
| Total sales decrease | $ | (17) | |
In
order to enhanceSeptember 2018, the
meaningfulness of reported changes in volume/mix,Company exited a
$63.7 million reduction insingle-customer contract for retail packaging fulfillment ("Atlanta Packaging Contract") at a packaging center
in Atlanta, Georgia ("Atlanta Packaging Center"). The negative impact on comparable year-over-year net sales
resulting from changes in the level of activity, primarily from the previously reported loss of contract packaging business in Irapuato, Mexico, is classified above as “other” duewas approximately $67 million. Due to the
low/inconsistent correlation that typically exists between changesrelatively low margins in
this business, the impact of the lost revenue
is included above in "Foreign currency translation and
changes in operating profit in our packaging center operations.other, net."
Sales volume/mix was
essentially flat as organic volume growth and a favorable change in product mix in a number of our businesses offset volume declines in rigid paper containers. For the most part, price changes for the Company’s products weredown approximately 2.5% driven by
changesdecreases in
the underlying raw materials costs. In 2016, manyeach segment except for Display and Packaging. Higher selling prices year-over-year were implemented to recover rising material prices, mostly resins. This led to year-over-year increases in all of the
Company’s primary raw materials saw decreases in their market prices; however, old corrugated containers (OCC) saw a moderate increase year over year. This increase most directly affectedCompany's segments, except for the Paper and Industrial Converted Products segment
whilewhere market prices for the
decreasesegment's primary raw material, old corrugated containers ("OCC"), continued to decline in
other raw materials, mainly resins, most directly affected the Consumer Packaging segment. While the Company’s 2016 and 20152019 from 2018. The Company's 2019 acquisitions added
more than $20$251 million to comparable year-over-year
sales, the impact was more than offset by comparable sales decreases related to dispositions, the most significant of which was the 2016 sale of the Company’s rigid plastics blow molding operations.sales. Finally, foreign exchange rate changes decreased
year-over-year sales
year-over-yearapproximately $90 million as almost all of the foreign currencies in which the Company conducts business weakened
slightly in relation to the U.S. Dollar.
Total domestic sales were $3.1$3.4 billion, down 3.1%2.3% from 20152018 levels. The main driver of the domestic decrease was the exit from the Atlanta Packaging Contract. International sales were $1.7$2.0 billion, down 4.6%up 3.4% from 20152018 with most of the decreaseincrease driven by growth in the Company's international rigid paper containers and industrial businesses.
Costs and expenses/margins
Despite the impact of
foreign currency translation. Additionally, sales in Mexico were lower due to the loss of contract packaging business in Irapuato, Mexico.Costs and expenses/margins
Costacquisitions, cost of sales was down $189.5decreased $33.6 million in 2016,2019, or 4.7%0.8%, from the prior year primarilyyear. This decrease was driven by lower volumes as a result ofwell as foreign currency translation, certain raw material price declines, disposed businesses, lower pension expense and productivity improvements, somewhat offset by the impact of acquisitions. Partially offsetting these benefits were an unfavorable mix of sales and higher labor and other costs. Overall, the Company was able to achieve a positive price cost relationship, aided by certain raw material price declines in some businessesexchange rate changes and procurement productivity gains. As a result, grossproductivity. Gross profit margins improvedincreased to 19.6%19.7% in 20162019 from 18.7%19.3% in the prior year.
Aggregate pensionyear driven by the previously mentioned procurement productivity and postretirement plan expenses decreased $12.0 million in 2016 to a totalthe timing and direction of $45.3 million, compared with $57.3 million in 2015. The decrease was primarily the result of the Company’s previously disclosed change in its method to estimate service and interestmaterial cost components of net periodic benefit cost. On January 1, 2016 the Company began using a full yield curve approach to estimate these costs as opposed to the previous method that used a single weighted-average discount rate. Approximately 75% of pension and postretirement plan expenses are reflected in cost of sales and 25% in selling, general and administrative expenses. See Note 12 to the Consolidated Financial Statements for further information on employee benefit plans.
movements.
Selling, general and administrative expenses
increased $9.8decreased $32.4 million, or
2.0%5.8%, and were
10.6%9.9% of sales compared to
10.0%10.4% of sales in
2015. In 2015, selling, general and administrative expenses included a $32.5 million gain from the release of environmental reserves upon the partial settlement of the Fox River environmental claim, and included expenses totaling approximately $7.1 million for legal and professional fees related to the financial misstatements at our Irapuato, Mexico, packaging center. Absent these items, the year-over-year change2018. The current year decrease in selling, general and administrative expenses
would have been a decrease of $15.6is largely attributable to management's concerted efforts to control costs throughout the year as well as lower management incentives. Additionally, acquisition-related costs decreased $6.0 million from last year to $8.4 million.
The year-over-year decrease reflects lower pension expense, a reductionThese decreases in
costs related to the Company’s domestic self-insured employee group medical plan, lower legalselling, general, and
professional fees, reductions from the sale of the Company’s rigid plastics blow molding operations, and the favorable effect of foreign currency translation from a stronger U.S. dollar. These favorable factorsadministrative expenses were partially offset by
increases in 2016 incentive-based compensation and general inflation.the added expenses of acquired businesses. | | | | | | |
SONOCO 2016 ANNUAL REPORT
| | 23
| | | | FORM 10-K
|
GAAP Earnings before interest and income taxes (EBIT) were 10.3%operating profit was 8.7% of sales in 20162019 compared to 7.7%8.1% in 2015, The largest contributor2018. Base operating profit increased to this increase was the 2016 gain on the sale of the Company’s rigid plastics blow molding business. Base EBIT was 9.1%9.8% of sales in 20162019 compared to 8.3%9.1% in 2015, in line with2018. GAAP and base operating profit increased $29.5 million and $33.6 million, respectively. The increased GAAP and base operating margins were driven by the year-over-year increase inpreviously mentioned factors positively affecting gross profit margin discussed above which contributed toas well as the improvements in both GAAP EBITreduction of selling general and Base EBIT.
administrative costs.
Restructuring and
restructuring relatedrestructuring-related asset impairment charges totaled
$42.9$59.9 million and
$50.6$40.1 million in
20162019 and
2015,2018, respectively. Additional information regarding restructuring actions and impairments is provided in Note 4 to the Company’s Consolidated Financial Statements.
Research and development
Non-operating pension costs
all of which were charged to expense, were $22.5increased $23.8 million in
2016 and $22.12019 to a total of $24.7 million, compared with $0.9 million in
2015. Management expects research2018. The higher year-over-year expense is primarily due to lower expected returns on plan assets as a result of de-risking actions taken in 2019 on the U.S. pension plans in which assets were reallocated to a more conservative mix of primarily fixed income investments. Service cost, a component of net periodic benefit plan expense, is reflected in the Company's Consolidated Statements of Income with approximately 75% in cost of sales and
development spending25% in selling, general and administrative expenses. See Note 13 to
remain at a similar level in 2017.the Consolidated Financial Statements for further information on employee benefit plans.
Net interest expense totaled
$51.6$61.6 million for the year ended December 31,
2016,2019, compared with
$54.6$58.2 million in
2015.2018. The
decreaseincrease was
primarily due
primarily to
the impact of higher borrowings, partially offset by lower
average debt levels as the Company settled its $75.2 million 5.625% debentures upon their maturity in June 2016, and in May 2016 used proceeds from a new 1.00% fixed rate Euro 150 million loan to settle the remaining $150 million balance of a variable rate term loan entered into in conjunction with the 2014 acquisition of Weidenhammer Packaging Group.interest rates.
The Company reports its financial results in four reportable segments – Consumer Packaging, Display and Packaging, Paper and Industrial Converted Products, and Protective Solutions.
Consolidated operating profits,
also referred toreported as
“Income before interest and income taxes”“Operating Profit” on the Consolidated Statements of Income, are comprised of the following:
| | | | | | | | | | | | | | | |
| ($ in millions) | | 2016 | | 2015 | | % Change |
Segment operating profit | | | | | | | | | | | | | | | |
Consumer Packaging | | | $ | 240.9 | | | | $ | 231.6 | | | | | 4.0 | % |
Display and Packaging | | | | 14.8 | | | | | 10.9 | | | | | 35.7 | % |
Paper and Industrial Converted Products | | | | 129.7 | | | | | 124.1 | | | | | 4.5 | % |
Protective Solutions | | | | 51.5 | | | | | 46.0 | | | | | 12.0 | % |
Restructuring/Asset impairment charges | | | | (42.9 | ) | | | | (50.6 | ) | | | | (15.3 | )% |
Acquisition-related costs | | | | (4.6 | ) | | | | (1.7 | ) | | | | 174.7 | % |
Othernon-operational gains, net | | | | 103.4 | | | | | 22.3 | | | | | 363.9 | % |
Consolidated operating profits | | | $ | 492.8 | | | | $ | 382.5 | | | | | 28.8 | % |
| | | | | | | | | | | | | | | | | |
| ($ in millions) | 2019 | | 2018 | | % Change |
| Segment operating profit | | | | | |
| Consumer Packaging | $ | 228.4 | | | $ | 224.5 | | | 1.7 | % |
| Display and Packaging | 27.7 | | | 13.3 | | | 108.3 | % |
| Paper and Industrial Converted Products | 219.1 | | | 211.1 | | | 3.8 | % |
| Protective Solutions | 50.2 | | | 42.9 | | | 17.0 | % |
| Restructuring/Asset impairment charges | (59.9) | | | (40.1) | | | 49.4 | % |
| Acquisition-related costs | (8.4) | | | (14.5) | | | (42.1) | % |
| Other non-operational (charges)/income, net | 10.0 | | | 0.4 | | | 2,400.0 | % |
| Consolidated operating profit* | $ | 467.1 | | | $ | 437.6 | | | 6.7 | % |
| *Due to rounding, amounts above may not sum to the totals presented | | | | | |
Segment results viewed by Company management to evaluate segment performance do not include restructuring charges, asset impairment charges, acquisition-related charges, gains or losses from the sale of businesses,
pension settlement charges, specifically identified tax adjustments, and certain other items, if any, the exclusion of which the Company believes improves comparability and analysis. Accordingly, the term “segment operating
profits”profit” is defined as the segment’s portion of
“Income before interest and income taxes”“Operating profit” excluding those items. General corporate expenses, with the exception of restructuring charges, asset impairment charges, acquisition-related charges, net interest expense and income taxes, have been allocated as operating costs to each of the Company’s reportable segments.
23 FORM 10-K SONOCO 2019 ANNUAL REPORT
See Note
1618 to the Company’s Consolidated Financial Statements for more information on reportable segments.
Consumer Packaging
| | | | | | | | | | | | | | | |
| ($ in millions) | | 2016 | | 2015 | | % Change |
Trade sales | | | $ | 2,043.1 | | | | $ | 2,122.6 | | | | | (3.7 | )% |
Segment operating profits | | | | 240.9 | | | | | 231.6 | | | | | 4.0 | % |
Depreciation, depletion and amortization | | | | 88.9 | | | | | 96.2 | | | | | (7.6 | )% |
Capital spending | | | | 86.4 | | | | | 76.0 | | | | | 13.7 | % |
| | | | | | | | | | | | | | | | | |
| ($ in millions) | 2019 | | 2018 | | % Change |
| Trade sales | $ | 2,333.4 | | | $ | 2,360.0 | | | (1.1) | % |
| Segment operating profits | 228.4 | | | 224.5 | | | 1.7 | % |
| Depreciation, depletion and amortization | 111.9 | | | 116.8 | | | (4.2) | % |
| Capital spending | 64.6 | | | 66.7 | | | (3.1) | % |
Sales decreased year over year due to
decreased sales prices drivenvolume declines in Rigid Paper Containers North America, Global Plastics, and Flexibles. These declines were mostly offset by
decreases in resins and other raw material costs coupled with a number of dispositions. The Company’s sold its rigid plastic blow molding operations in November 2016 and in February 2015 sold a portion of its metal ends and closures business, consisting of two facilities in Canton, Ohio. The year-over-year impact of these dispositions more than offset the additional sales from the
full-year impact of the April 12, 2018 acquisition of
PlasticHighland Packaging
Inc. on Novemberand the October 1,
2016. Organic2018 acquisition of Compositub. Higher selling prices in most of the segment's businesses, driven largely by raw material price increases, also served to offset the volume
growth in flexible packaging and plastics somewhat offset volume declines in global composite cans. Tradedeclines. Foreign currency translation decreased sales
in the segment were reduced by approximately
$27$32 million year over year
as a result of foreign currency translation due to a stronger U.S. dollar. Domestic sales were approximately
$1,368$1,659 million, down
5.6%1.0%, or
$81$17 million, from
2015,2018, while international sales were approximately
$675$674 million,
up 0.2%down 1.4%, or
$1$10 million, from
2015.2018.
Segment operating profits increased by
$9.3$3.9 million year over year and operating profit margins
increased to 11.8%of 9.8% were up 28 basis points from
10.9% in 2015.2018. The
increaseincreases in segment operating profits
wasand operating profit margins were largely driven by
total productivity and a positive
price/price cost
relationship and solid gainsrelationship. Additionally, operating profits from the full-year impact of businesses acquired in
fixed cost productivity.2018 also increased operating profit from last year. These
benefitspositive factors were partially offset by
inflation, volume declines
and isolated manufacturing inefficiencies in
global composite cans,Global Plastics. In response, the Company is investing in new machinery and
tooling to improve performance from operations serving the
impact of foreign currency translation. Material purchasing and logistics savings were key driversperimeter of the
positive price/store and is optimistic that it will improve manufacturing performance and better leverage the fixed cost
relationship. The previously mentioned divestitures were almost completely offset by acquisitions at an operating profit level.Significant capitalprofile of these operations in 2020.
Capital spending in the
Consumer Packaging segment included numerous productivity projects and expansion of manufacturing capabilities in North America
in both(primarily flexible packaging and
plastics,plastics) and
expansion of manufacturing capabilities in Europe
in(primarily rigid paper
and plastic containers.containers).
Display and Packaging
| | | | | | | | | | | | | | | |
| ($ in millions) | | 2016 | | 2015 | | % Change |
Trade sales | | | $ | 520.4 | | | | $ | 606.1 | | | | | (14.1 | )% |
Segment operating profits | | | | 14.8 | | | | | 10.9 | | | | | 35.7 | % |
Depreciation, depletion and amortization | | | | 16.7 | | | | | 16.6 | | | | | 0.6 | % |
Capital spending | | | | 11.5 | | | | | 10.9 | | | | | 5.8 | % |
| | | | | | | | | | | | | | | | | |
| ($ in millions) | 2019 | | 2018 | | % Change |
| Trade sales | $ | 554.1 | | | $ | 592.3 | | | (6.4) | % |
| Segment operating profits | 27.7 | | | 13.3 | | | 108.3 | % |
| Depreciation, depletion and amortization | 14.9 | | | 18.0 | | | (17.2) | % |
| Capital spending | 5.1 | | | 19.8 | | | (74.2) | % |
Domestic trade sales in the segment decreased
$12.8$44 million, or
5.0%15.0%, to
$246$247 million, while international trade sales
decreased $73increased $5 million, or
21.0%1.8%, to
$274$307 million. The decrease in domestic trade sales resulted from
lowerlast year's exit of the Atlanta Packaging Contract, offset by higher volume in retail security
packaging and the impact of the July 2016 sale of our retail security packaging facility in Juncos, Puerto Rico.packaging. The
decreaseincrease in international sales reflects
increases in activity at the
Company’s exit in 2016 fromCompany's packaging center
fulfillment contract within Poland, partially offset by a
customer. The Company transitioned the operation of the facility back to the customer during the first half of 2016. Additionally, the negative impact of approximately
$18$19 million from
for- | | | | | | |
FORM 10-K
| | | | 24
| | SONOCO 2016 ANNUAL REPORT
|
eignforeign currency translation as a result of a weaker Mexican peso and Polish zloty relative to the U.S. dollar also lowered sales year over year.
The increase in segment operating profit was driven bylargely due to increased volumes both domestically and internationally. Additionally, 2018 operating profits were depressed due to losses related to exiting the Atlanta Packaging Contract in the third quarter of 2019 as a positive price/cost relationship and total productivity. These gains were partially offset byresult of the impact of foreign currency translation and inflation of labor and other costs along with volume declines in retail security packaging.
Company's determination that it could not achieve acceptable margins under the contract.
Capital spending in the segment
included numerous productivitydeclined year over year as last year's spending related to the Atlanta Packaging Center and
Contract did not repeat in 2019. Capital spending in 2019 was mostly related to customer development
projects in North America.and productivity related projects.
Paper and Industrial Converted Products
| | | | | | | | | | | | | | | |
| ($ in millions) | | 2016 | | 2015 | | % Change |
Trade sales | | | $ | 1,693.5 | | | | $ | 1,729.8 | | | | | (2.1 | )% |
Segment operating profits | | | | 129.7 | | | | | 124.1 | | | | | 4.5 | % |
Depreciation, depletion and amortization | | | | 74.7 | | | | | 76.7 | | | | | (2.6 | )% |
Capital spending | | | | 60.6 | | | | | 74.0 | | | | | (18.1 | )% |
| | | | | | | | | | | | | | | | | |
| ($ in millions) | 2019 | | 2018 | | % Change |
| Trade sales | $ | 1,974.7 | | | $ | 1,911.0 | | | 3.3 | % |
| Segment operating profits | 219.1 | | | 211.1 | | | 3.8 | % |
| Depreciation, depletion and amortization | 85.6 | | | 74.4 | | | 15.1 | % |
| Capital spending | 112.3 | | | 91.4 | | | 22.9 | % |
The
U.S. Dollar strengthened againstmain driver of the
local currencies in virtually every international market where the segment operates, resulting in a $31 million year-over-year
decreaseincrease in sales
due to foreign currency translation.was the full-year impact of the October 1, 2018 acquisition of the remaining 70 percent interest in the Conitex Sonoco joint venture. Conitex Sonoco's sales for the first nine months of 2019 were approximately $180 million. Additionally, the
divestitureacquisition of
the Company’s paperboard millCorenso in
Schweighouse-sur-Moder, France was only partially August 2019 added approximately $30 million to trade sales. These increases were offset by
sales from acquired businesses, a smallvolume declines in many of our tubes and cores
businessbusinesses as well as an overall decline in
Australia acquired in June 2016 and a domestic high-density wood plug business acquired in September 2015. On averagesales prices as market
costsprices for
recovered paper inOCC on the
U.S.whole were
higher year over year resulting in higher average selling prices in all ofdown from the
segment’s domestic businesses with the exception of corrugating medium. Selling prices were slightly higher in Brazil and the Andean region, primarily due to overall inflation, and were up in Europe due to the pass through of higher material costs in that market. Total volume/mix was effectively flat in the segment despite gains in Europe and Latin America which were due to a combination of market share gains and regional expansion. Volume decreased in our reels business on lower volumes in nail-wood reels and lower demand for steel reels used in bothon- andoff-shore applications in the oil and gas industry. Volume also declined in our recycling business primarily due to a 2015 action to exit a recovery facility operating agreement coupled with some loss of market share. In addition, volume decreased on our one corrugating medium machine due to general market softening.previous year. Total domestic sales in the segment decreased
$18$13 million, or
1.7%1.2%, to
$1,025$1,095 million while international sales
decreased $18increased $77 million, or
2.6%9.6%, to
$668$880 million.
Segment operating profit increased year over year, driven by total productivity. Adding to this were gains from the previously mentioned acquisitions and divestitures. Partially offsetting thesetotal productivity gains, which were price offset by volume declines and a negative price/cost declines driven byrelationship.
Conditions deteriorated for the
Company’s single corrugating medium
machine which continued to struggle as market supply depressed sales price and forced a larger portion of output to be soldoperation in
less-profitable foreign markets. In corrugating medium, lower selling prices and reduced volume, which also had2019. While the business remained profitable, a negative
impact on productivity, resulted in a $16.2 million year-over-year reduction in product line profitability. Excluding corrugating medium, the segment’s operating profit would have increased $21.8 million, or 17.8%, driven by solid gains in manufacturing productivity, a positive price price/cost relationship and
lower fixed costs.volume declines eroded the business's profits year over year. The Company’s corrugating medium operation, which consists of only one machine, has been andCompany continues to be under pressure due to market supply in North America exceeding demand. As a result, larger competitors have moved to sell their excess capacity in the export market, a key target marketevaluate strategic alternatives for the Company, resulting in lower prices and reduced volume for our corrugating mediumthis operation. Management is seeking both near and long-term solutions including, but not limited to, modified run schedules, targeted cost reductions, strategic partnerships, and potential closure of the operation.
Significant capital spending in the segment included the modification of several paper machines in North America,
and numerous productivity
projects.projects, and IT investments.
24 FORM 10-K SONOCO 2019 ANNUAL REPORT
Protective Solutions
| | | | | | | | | | | | | | | |
| ($ in millions) | | 2016 | | 2015 | | % Change |
Trade sales | | | $ | 525.9 | | | | $ | 505.9 | | | | | 4.0 | % |
Operating profits | | | | 51.5 | | | | | 46.0 | | | | | 12.0 | % |
Depreciation, depletion and amortization | | | | 24.8 | | | | | 23.6 | | | | | 5.4 | % |
Capital spending | | | | 12.9 | | | | | 15.7 | | | | | (18.2 | )% |
| | | | | | | | | | | | | | | | | |
| ($ in millions) | 2019 | | 2018 | | % Change |
| Trade sales | $ | 512.0 | | | $ | 527.7 | | | (3.0) | % |
| Segment operating profits | 50.2 | | | 42.9 | | | 17.0 | % |
| Depreciation, depletion and amortization | 26.7 | | | 27.0 | | | (1.1) | % |
| Capital spending | 6.9 | | | 5.9 | | | 16.9 | % |
Sales
increaseddeclined slightly year over year,
due to higherimpacted mostly by volume
declines in automotive components, consumer electronics and appliances, partially offset by volume gains in temperature-assured
packaging, molded foam automotive components and paper-based protective packaging, partially reduced by the negative impact of foreign currency translation.packaging.
Segment operating profit increased year over year due to
total productivity slightly offset by a
positivenegative price/cost
relationship and higher volume which were partially offset by increases in labor, overhead and other costs.relationship.
Domestic sales were
$436$407 million in
2016 up $142019 down $8 million,
3.2%or 1.9%, from
2015. International2018, while international sales
increased more modestly to $90were approximately $105 million,
up $6down $8 million, or
7.6%.6.9% from 2018.
Capital spending in the segment included numerous productivity
initiatives as well as customer-related projects in our expanded foam protective packaging and
customer development projects.FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
temperature-assured packaging businesses.
Financial position, liquidity and capital resources
Cash flow from operations totaled
$398.7$425.9 million in
20162019 and
$452.9$589.9 million in
2015, a year-over-year2018. This $164.0 million decrease
was mostly driven by the $165 million after-tax cash impact of
$54.3the voluntary U.S. pension contributions made in 2019. These voluntary pension contributions totaled $200 million.
Although currentThe cash flow impact from lower GAAP net income
increased year over yearwas essentially offset by
$37.3 million, it includes apre-tax gain of $108.7 million from the November 2016 sale of the Company’s rigid plastics blow molding operations, the proceeds of which are reported as investing cash flows. Current year net income also reflects lower pensionhigher non-cash operating expenses and
postretirement expenses, which together with higher pension and postretirement cash contributions resulted in a combined year-over-year decrease in operating cash flow of $22.7 million. More cash was consumed byimproved working capital
management. Working capital provided $36.9 million in 2019 compared to providing $27.7 million in 2018; this $9.2 million additional cash provision was largely driven by changes in
2016 compared with the prior year. The changeaccounts receivable. Accounts receivable, net of acquisitions, declined in
trade2019 due to a concerted effort by management regarding collection efficiencies as well as other process improvements. While accounts receivable
consumed $29.3 millionand inventory both provided more cash
year over year. Whilein 2019 than in 2018, this was partially offset by accounts payable's increased consumption of cash which was partially the
seasonal slowdownresult of lower raw material prices at the end of
2016 was greater than2019 which amplified the decline in
2015, ending trade accounts receivable increased more in 2016 than in 2015, due largely to current-year payment term extensions and isolated payment collection timing issues at the
endyear-end balance of
2016. Changes in inventory used $11.5 million of cash in 2016 versus $2.6 million in 2015, a higher year-over-year use of cash of $8.9 million, primarily attributable to certain businesses engaging in raw materialpre-buying at the end of 2016 in anticipation of upcoming price increases. The change in accounts payable
provided $5.6 million of cash in 2016 compared with $12.3 million in 2015, a lower year-over-outstanding. | | | | | | |
SONOCO 2016 ANNUAL REPORT
| | 25
| | | | FORM 10-K
|
year provision of $6.8 million. This decline was primarily due to the lower level of business activity in the latter part of 2016 compared with the same period in 2015.Non-cash asset impairment charges were $17.3$19.2 million lowerhigher year over year, due largely to the prior year recognition of a foreign exchange remeasurement loss on the company’s net assets in Venezuela as the Company moved from translating these operations at the country’s official rate to an alternative exchange rate and the prior yearfourth quarter 2019 impairment of fixed assets related to the Company’s paperboard mill inSchweighouse-sur-Moder, France which was sold in early 2016.certain plastics, flexibles, and temperature-assured packaging operations. Thenon-cash impact of net benefit from changes in environmental reserves increased $33.4deferred income tax and income tax payable balances was $39.2 million due to a $0.9 million increasehigher in the reserves being recorded in 2016 in anticipation of final settlement of claims related to Fox River, compared with reductions in these reserves in 2015 of $32.5 million pretax, $19.9 million after tax. Operating cash flows provided by changes intax-related activities was $45.4 million greater in 20162019 compared with the previous year. The year-over-year increase was due primarilyis largely attributable to the use of available prepaid taxes to offset current year$35 million cash tax liabilities in 2016, contrasted with 2015 when there was a use of cash primarilybenefit that resulted from the overpayment of estimated taxes due to passage of new tax rules late in the year. The year-over-year variance in the change in the net deferred tax liability balances also contributed to the net provision of cash and resulted largely from variances in$200 million pre-tax pension payments, the use of U.S. net operating losses and deferred taxes in foreign jurisdictions.contribution mentioned above. Non-cash share-based compensation expenses were $10.0$3.6 million higher year over year as expenses recognized in association with our performance-based awards increased, reflecting assumptions about actual performance against targeted performance metrics over the vesting period of the awards. Net losses on disposition of assets totaled $14.2$0.7 million in 20162019 compared with a net gain of $5.7$8.6 million in 2015,2018, a year-over-year change of $19.9 million. The change was$7.9 million, driven by the loss on exiting and disposing of the dispositionAtlanta Packaging Center. The Company's 2018 acquisition of Conitex resulted in the recognition of a paperboard millloss of $4.8 million as the implied fair value of the previously held minority interest was less than its book value. Changes in Franceaccrued expenses reflect a $7.5 million provision of cash in 2016. Accrued expenses used $11.7 million in 20162019 compared with a $19.2 million provision of $15.3 millioncash in 2015.2018. The lower provision in 2019 is primarily due to lower year-over-year change of $27.0 million was driven by increases in reserves related to restructuring actions implemented during 2016management incentives and the timing of payments for other accrued expenses. Changes in other assets and liabilities provided $15.1used $7.3 million of additionalmore cash in 20162019 compared to 2015, driven by higher2018. This year-over-year receiptsincreased consumption is largely attributable to the collection of cash related to rebates, value added taxes, and customer reimbursable costs.various other receivables in 2018 that were outstanding at the end of 2017. Similar levels of miscellaneous receivable items were not outstanding at the end of 2018. Cash paid for income taxes was $29.9$20.9 million higherlower year over year, includingwhich was due primarily to the impacttax benefit of the payment$138 million pension plan contribution recognized in December 2016 of taxes arising from the gain on the sale of the blow molding operations.
2019.
Investing activities
Cash
flow from operations totaled $452.9used by investing activities was $479.1 million in
2015 and $417.92019, compared with $444.1 million in
2014, a2018. The higher use of cash in 2019 is due in part to increased year-over-year
increase of $35.0 million. Higher year-over-year net income increased operating cash flows by $23.8 million and higher pension and postretirementnon-cash expenses and lower pension and postretirement cash contributions resulted in a combined year-over-year increase in operating cash flow of $46.8 million. Slightly more cash wasacquisition spending. The Company's acquisitions consumed
by working capital changes year over year. Lower trade accounts receivable balances created a $20.5 million year-over-year increase in cash. The lower trade receivables were the result of lower levels of business activity in the latter part of 2015 compared with the latter part of 2014. Marginally higher year-over-year inventory levels used $2.6$298.4 million of cash in
2015,2019 compared with
providing $6.2 million of cash in 2014, resulting in a year-over-year decrease in operating cash flow of $8.8 million. The provision of cash in the prior year was the result of lower year-over-year inventory levels at December 31, 2014, resulting from inventory reduction initiatives in place at that time. Accounts payable provided $12.3 million of cash in 2015 compared with $26.9$277.2 million in
2014, a year-over-year decrease in operating cash flow of $14.5 million. The decline in the year-over-year provision of cash was primarily due to the lower level of business activity in the latter part of 2015 compared with the same period in 2014. Accrued expenses provided $15.3 million in 2015 compared with an $8.7 million use of cash in 2014. The year-over-year change of $24.0 million was driven by increases in reserves related to restructuring actions implemented during 2015 and the timing of payments for other accrued expenses. The change in the Fox River environmental reserves reflects anon-cash gain of $32.5 million in 2015 from the reversal of reserves following finalization of a settlement of certain environmental claims and litigation associated with Fox River, while 2014 reflects a cash payment of $14.7 million to fund this settlement. Cash paid for taxes was $37.7 million higher in 2015 than in 2014 due to higher pretax income and prepayments made in December 2015 prior to Congress taking action to extend certain favorable expired tax laws.Investing activities
Cash used in investing activities was $3.1 million in 2016, compared with $179.9 million in 2015. The lower year-over-year use of cash is primarily due to a net $239.4 million increase in2018. In addition, proceeds from the sale of assets. Proceeds in 2016 included $271.8 million from the November 2016 sale of the Company’s rigid plastics blow molding operations, partially offset by cash paid for the disposal of a paper operation in France. Proceeds in 2015 primarily related to approximately $29.1 millionassets were lower year over year. The Company received proceeds from the sale of two metal ends and closures plantsassets totaling $14.6 million in February 2015. Acquisition spending, net2019 compared with $24.3 million in the prior year. The 2018 proceeds included $17.2 million from the September 2018 sale of cash acquired, was $71.2 million higher year-over-year asequipment relating to the Company completed four acquisitions in 2016 versus two in 2015. Activity in 2016 includedAtlanta Packaging Center, less a contract termination fee on the acquisition of PlasticAtlanta Packaging Inc. for $67.6 million whereas the cash paid for acquisitions in 2015 was significantly lower.Contract. Capital spending was $186.7slightly higher year over year, totaling $195.9 million in 2016,2019, compared with $192.3$192.6 million in 2015, a decrease2018, an increase of $5.6$3.4 million. Capital spending is expected to total approximately $190$195.0 million in 2017.
Cash used in investing2020.
Financing activities was $179.9
Net cash provided by financing activities increased $350.9 million
in 2015, compared with $507.4 million in 2014. The year-over-year decrease is primarily due to lower acquisition spending as the Company paid $323.2 million to acquire the Weidenhammer Packaging Group in October 2014 and completed only two small acquisitions in 2015 for a total cash cost of $17.4 million. Proceeds from the sale of assets were higher year over year
due to the February 2015 saleas financing activities provided $77.2 million of
two metal ends and closures plants for which the Company received cash
proceeds of approximately $29.1 million. The change in
“investment in affiliates and other, net” is primarily due to the purchase of long-term investment properties in Venezuela in 2015 using locally available cash. Capital spending was $192.3 million in 2015,2019, compared with
$177.1 million in 2014, an increase of $15.2 million. The increase is largely attributable to the construction of a
new research, development and innovation center at the Company’s corporate headquarters and additional capital investment in Weidenhammer.Financing activities
Net cash used by financing activities totaled $315.7 million in 2016, compared with $256.4 million in 2015, an increased use of cash of $59.3 million. This increasetotaling $273.7 million in 2018. The year-over-year change was driven primarily by the use of $106.7 million of cash in 2016 to repurchase 2.2 million shares of the Company’s common stock. Outstanding debt was $1,052.7 million at December 31, 2016 compared with at
| | | | | | |
FORM 10-K
| | | | 26
| | SONOCO 2016 ANNUAL REPORT
|
$1,135.0 million at December 31,2015. These balances reflecthigher net repayments of $65.1 million during the 12 months ending December 31, 2016, including $75.3 million for the repayment of the Company’s 5.625% debentures upon their maturity on June 15, 2016. The balances also reflect Euro 150 million of borrowings in May 2016, under an unsecured, five-year, 1.0% fixed-rate assignable loan agreement, which were used in part2019 compared to repay the remaining balance of the $1502018, including proceeds from a new $200 million term loan used to fund voluntary contributions to the October 2014 acquisitionU.S. defined benefit pension plans and borrowings to fund acquisitions. Although the cost of Weidenhammer Packaging Group. In 2015, net debt repayments used $114.7 million of cash as the Company paid downacquisitions was up only slightly year over year, a greater portion of the incremental2019 activity was funded by debt. Outstanding debt incurred to fund the acquisition of Weidenhammer.was $1,681.4 million at December 31, 2019, compared with $1,385.2 million at December 31, 2018. Cash dividends increased 6.0%5.5% to $146.4$170.3 million in 20162019 compared to $138.0$161.4 million in 2015,2018, reflecting a $0.02 per share increase in the quarterly dividend payment approved by the Board of Directors in April 2016.
Net cash used by financing activities totaled $256.4 million in 2015, compared with a $39.5 million provision in 2014, an increased use of cash of $295.9 million. Net debt repayments used $114.7 million of cash in 2015 as the Company paid down a portion of the incremental debt incurred to fund the October 2014 acquisition of Weidenhammer. In 2014, net debt borrowings provided $245.2 million of cash including proceeds from a new three-year $250 million term loan arranged in connection with the Weidenhammer acquisition. Cash dividends increased 7.1% to $138.0 million in 2015 compared to $128.8 million in 2014, reflecting a $0.03 per share increase in the quarterly dividend payment approved by the Board of Directors in April 2015. Net proceeds from the exercise of stock awards totaled $1.3 million in 2015, compared with $5.4 million in 2014, and the excess tax benefit of share-based compensation totaled $3.6 million in 2015, compared with $4.1 million in 2014. In addition, Sonoco acquired 0.2 million shares of its common stock in 2015 at a cost of $7.9 million, compared with 2.1 million shares in 2014 at a cost of $87.8 million. Two million of the shares purchased in 2014 were acquired under a previously announced share repurchase authorization.
Current assets increased year over year by $41.4 million to $1,348.8 million at December 31, 2016, and current liabilities decreased by $119.9 million to $802.6 million, resulting in an increase in the Company’s current ratio from 1.4 at December 31, 2015 to 1.7 at December 31, 2016. Proceeds from the sale of the Company’s rigid plastics blow mold operations increased cash on hand at December 31, 2016, and this increase to current assets was partially offset by reductions in trade accounts receivable and inventories disposed of in the sale, and by the foreign currency translation impact of the strengthening U.S. dollar. The year-over-year reduction in current liabilities resulted from the $75.3 million repayment of the Company’s 5.625% debentures upon their maturity in June 2016, the sale of the blow molding operations, and by the foreign currency translation impact of the strengthening U.S. dollar.
2019.
25 FORM 10-K SONOCO 2019 ANNUAL REPORT
The following table summarizes contractual obligations at December 31,
2016: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due In |
| ($ in millions) | | Total | | 2017 | | 2018-2019 | | 2020-2021 | | Beyond 2021 | | Uncertain |
Debt obligations | | | $ | 1,052.7 | | | | $ | 32.0 | | | | $ | 3.6 | | | | $ | 411.2 | | | | $ | 605.9 | | | | $ | — | |
Interest payments1 | | | | 885.8 | | | | | 47.8 | | | | | 95.4 | | | | | 92.8 | | | | | 649.8 | | | | | — | |
Operating leases | | | | 152.7 | | | | $ | 38.7 | | | | $ | 59.5 | | | | $ | 32.9 | | | | $ | 21.6 | | | | | — | |
Income tax contingencies2 | | | | 16.9 | | | | | 2.3 | | | | | — | | | | | — | | | | | — | | | | | 14.6 | |
Purchase obligations3 | | | | 339.5 | | | | | 102.6 | | | | | 182.8 | | | | | 52.5 | | | | | 1.6 | | | | | — | |
Total contractual obligations4 | | | $ | 2,447.6 | | | | $ | 223.4 | | | | $ | 341.3 | | | | $ | 589.4 | | | | $ | 1,278.9 | | | | $ | 14.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due In | | | | | | | | | | |
| ($ in millions) | Total | | 2020 | | 2021-2022 | | 2023-2024 | | Beyond 2024 | | Uncertain |
| Debt obligations | $ | 1,681.4 | | | $ | 488.2 | | | $ | 575.5 | | | $ | 10.3 | | | $ | 607.3 | | | $ | — | |
Interest payments1 | 775.4 | | | 46.4 | | | 79.2 | | | 69.0 | | | 580.8 | | | — | |
| Operating leases | 389.3 | | | 55.7 | | | 92.9 | | | 73.3 | | | 167.5 | | | — | |
Transition tax under Tax Act2 | 46.3 | | | — | | | — | | | 26.2 | | | 20.1 | | | — | |
Income tax contingencies3 | 13.0 | | | — | | | — | | | — | | | — | | | 13.0 | |
Purchase obligations4 | 99.4 | | | 39.7 | | | 44.1 | | | 12.6 | | | 3.0 | | | — | |
Total contractual obligations5 | $ | 3,004.8 | | | $ | 630.0 | | | $ | 791.7 | | | $ | 191.4 | | | $ | 1,378.7 | | | $ | 13.0 | |
| | | | | |
1 | Includes interest payments on outstanding fixed-rate, long-term debt obligations, as well as financing fees on the backstop line of credit. |
2 | The Company recognized a transition tax of $80.6 million on certain accumulated foreign earnings in order to comply with the Tax Act. The liability for this tax is payable in installments through 2025. |
3 | Due to the nature of this obligation, the Company is unable to estimate the timing of the cash outflows. Includes gross unrecognized tax benefits of $17.7,$12.2 million, plus accrued interest associated with the unrecognized tax benefit of $2.3,$2.0 million, adjusted for the deferred tax benefit associated with the future deduction of unrecognized tax benefits and the accrued interest of $2.3$0.8 million and $0.8,$0.4 million, respectively. |
34
| Includes only long-term contractual commitments. (DoesDoes not include short-term obligations for the purchase of goods and services used in the ordinary course of business.) |
45
| Excludes potential cash funding requirements of the Company’s retirement plans and retiree health and life insurance plans. |
Current assets increased year over year by $1.9 million to $1,521.2 million at December 31, 2019, and current liabilities increased by $321.6 million to $1,404.5 million, resulting in a decrease in the Company’s current ratio to 1.1 at December 31, 2019 from 1.4 at December 31, 2018. Current liabilities were higher year over year due to an increase in outstanding commercial paper and the new term loan referred to above.
The Company’s cash balances are held in numerous locations throughout the world. At December 31,
20162019 and
2015,2018, approximately
$174.7$115.0 million and
$96.3$107.7 million, respectively, of the Company’s reported cash and cash equivalents balances of
$257.2$145.3 million and
$182.4$120.4 million, respectively, were held outside of the United States by its foreign subsidiaries. Cash held outside of the United States is available to meet local liquidity needs, or
forto fund capital expenditures, acquisitions, and other offshore growth opportunities.
Under current law, cash repatriated to the U.S. is subject to federal income taxes, less applicable foreign tax credits. As the Company enjoys ample domestic liquidity through a combination of operating cash flow generation and access to bank and capital markets borrowings, we have generally considered our
offshore cash balancesforeign unremitted earnings to be indefinitely invested outside the United States and currently have no plans to repatriate
such earnings, other than excess cash
balances.balances that can be repatriated at minimal tax cost. Accordingly, as of December 31,
2016,2019, the Company is not providing for
U.S. federal tax liabilitytaxes on these amounts for financial reporting purposes.
However, if any such balances were to be repatriated, additional U.S. federal income tax payments could result. Computation of the
potential deferred tax liability associated with unremitted earnings deemed to be indefinitely reinvested is not
practicable.Under Internal Revenue Service rules,practicable at this time.
The Company’s total debt at December 31, 2019, was $1,681 million, a year-over-year increase of $296 million. This year-over-year increase includes a $200million term loan, the proceeds from which were used to fund voluntary contributions to the U.S. corporations may borrow funds from foreign subsidiaries for updefined benefit pension plans, and includes additional short-term borrowings to 30 days without | | | | | | |
SONOCO 2016 ANNUAL REPORT
| | 27
| | | | FORM 10-K
|
unfavorable tax consequences.fund the acquisitions of Corenso and TEQ, partially offset by repayments of short-term debt using free cash flow generated during the year. The Company has utilized these ruleshad $250 million of commercial paper outstanding at various times in prior years to temporarily access offshore cash in lieu of issuing commercial paper. The Company did not access any offshore cash under these rules in 2016. However, depending on its immediate offshore cash needs, the Company may choose to access such funds again in the future as allowed under the rules.
December 31, 2019 and $120 million at December 31, 2018.
The Company operates a
$350$500 million commercial paper program, supported by a
committed$500 million five-year revolving
bank credit
facility of the same amount.facility. In
October 2014,July 2017, the Company entered into a new credit agreement with a syndicate of eight banks for that revolving facility, together with a
new $250 million
three-yearfive-year term loan. The revolving bank credit facility is committed through
October 2019.July 2022. If circumstances were to prevent the Company from issuing commercial paper, it has the contractual right to draw funds directly on the underlying revolving bank credit facility.
Borrowings under the credit agreement may be prepaid at any time at the discretion of the Company. The
Company had no outstanding
commercial paperbalance of the five-year term loan was $147 million at December 31,
2016 or 2015.The Company’s total debt at2019, reflecting a $75 million prepayment made by the Company during 2018 and required amortization payments totaling $12.5 million per year.
At December 31,
2016, was $1,0532019, the Company's short-term debt and current portion of long-term debt totaled $488 million,
a year-over-year decreaseprimarily consisting of
$82$250 million
driven primarily byof commercial paper and the
repayment of$200 million 2019 term loan which matures in May 2020. The Company expects to exercise its
5.625% debentures upon their maturity in June 2016.one-time right to extend the term loan for an additional 364-day period.
The Company uses a notional pooling arrangement with an international bank to help manage global liquidity requirements. Under this pooling arrangement, the Company and its participating subsidiaries may maintain either a cash deposit or borrowing position through local currency accounts with the bank, so long as the aggregate position of the global pool is a notionally calculated net cash deposit. Because it maintains a security interest in the cash deposits, and has the right to offset the cash deposits against the borrowings, the bank provides the Company and its participating subsidiaries favorable interest terms on both.
Acquisitions and internal investments are key elements of the Company’s growth strategy. The Company believes that
its cash on hand, cash generated from operations and borrowing capacity will enable it to support this strategy. Although the Company believes that it has excess borrowing capacity beyond its current lines, there can be no assurance that such financing would be available or, if so, at terms that are acceptable to the Company.
The net underfunded position of the Company’s various U.S and international defined benefit pension and postretirement plans was approximately $446$294 million at the end of 2016. During 2016, the2019. The Company contributed approximately $47$231 million to its benefit plans in 2019, including $200 million to its U.S. pension plans. On July 17, 2019, the Company's Board of Directors approved a resolution to terminate the Sonoco Pension Plan for Inactive Participants (the "Inactive Plan"), a tax-qualified defined benefit plan, effective September 30, 2019. Upon approval from the Pension Benefit Guaranty Corporation, and following completion of a limited lump-sum offering, the Company is expected to settle all remaining liabilities under the Inactive Plan through the purchase of annuities. The Company anticipates thatmaking additional contributions to the Inactive Plan of approximately $150 million in late 2020 or early 2021 in order to be fully funded on a termination basis at the time of the annuity purchase.
26 FORM 10-K SONOCO 2019 ANNUAL REPORT
Contributions to all other defined benefit
plan contributionsplans in
2017 will2020 are expected to total approximately
$58$25 million. Future funding requirements will depend largely on
the nature and timing of participant settlements, actual investment returns,
and future actuarial
assumptions. Participation in the U.S. qualified defined benefit pension plan is frozen for salariedassumptions, and
non-union hourly U.S. employees hired on or after January 1, 2004. In February 2009, the plan was further amended to freeze service credit earned effective December 31, 2018. This change is expected to moderately reduce the volatility of long-term funding exposure and expenses. legislative actions.
Total equity increased
$21.8$43 million during
20162019 as net income of
$287.9$293 million
wasand stock-based compensation of $14 million were partially offset by
an other comprehensive
losses totaling $34.9loss of $77 million,
dividend paymentsdividends of
$147.7$172 million,
and share repurchases of
$106.7$10 million, and the impact to retained earnings of adopting the new leasing standard of $7 million. The primary components of other comprehensive loss were
a $32.4an $8 million translation
lossgain from the impact of a
strongerweaker U.S. dollar on the Company’s foreign investments and
an increase inadditional actuarial losses totaling
$9.6$87 million, net of tax, in the Company’s various defined benefit plans resulting primarily from lower
year-over-year discountinterest rates.
Total equity increased $29.0 million during 2015 as net income of $250.6 million was partially offset by other comprehensive losses totaling $97.8 million, dividend payments of $139.2 million, and share repurchases of $7.9 million. The primary components of other comprehensive loss were a $129.7 million translation loss from the impact of a stronger U.S. dollar on the Company’s foreign investments and a $31.0 million reduction, net of tax, of actuarial losses in the Company’s various defined benefit plans resulting from amortization recognized during the year partially offset by additional net losses due primarily to the weak investment performance of plan assets in 2015.On February 10, 2016, the Company’s Board of Directors authorized the repurchase of up to 5 million shares of the Company’s common stock. During 2016, a total of 2.03 million shares were repurchased under this authorization at a cost of $100 million.
No shares were repurchased under this authorization during 2017, 2018, or 2019. Accordingly, at December 31,
2016,2019 a total of 2.97 million shares remain available for repurchase under this authorization.
Although the ultimate determination of whether to pay dividends is within the sole discretion of the Board of Directors, the Company plans to increase dividends as earnings grow. Dividends per common share were
$1.46$1.70 in
2016, $1.372019, $1.62 in
20152018 and
$1.27$1.54 in
2014.2017. On February
8, 2017,12, 2020, the Company declared a regular quarterly dividend of
$0.37$0.43 per common share payable on March 10,
2017,2020, to shareholders of record on February
22, 2017.26, 2020.
Off-balance sheet arrangements
The Company had no material
off-balance sheet arrangements at December 31,
2016.2019.
As a result of operating globally, the Company is exposed to changes in foreign exchange rates. The exposure is well diversified, as the Company’s facilities are spread throughout the world, and the Company generally sells in the same countries where it produces. The Company monitors these exposures and may use traditional currency swaps and forward exchange contracts to hedge a portion of forecasted transactions that are denominated in foreign currencies, foreign currency assets and liabilities or net investment in foreign subsidiaries. The Company’s foreign operations are exposed to political and cultural risks, but the risks are mitigated by diversification and the relative stability of the countries in which the Company has significant operations.
Prior
Due to
July 1, 2015,the highly inflationary economy in Venezuela, the Company
used Venezuela’s official exchange rateconsiders the U.S. dollar to
reportbe the
results of its operations in Venezuela. As a result of significant inflationary increases, and to avoid distortion of its consolidated results from translationfunctional currency of its Venezuelan operations
and uses the
Company concluded that it was an appropriate time to begin translating its Venezuelan operations using an alternative exchange rate. Accordingly, effective July 1, 2015, the Company began translating its Venezuelan operations using the most current published Venezuelanofficial exchange rate
(which atwhen 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
time was known asconditions are due to improve in the
SIMADI rate). This resultedforeseeable future. Further deterioration could result in
the recognition of an impairment charge or a
foreign exchange remeasurement loss on net monetary assets. In addition, the usedeconsolidation of the
significantly higher SIMADI rate resulted in the need to recognize impairment charges against inventories and certain long-term nonmonetary assets as the U.S. dollar value of projected future cash flows from these assets was no longer sufficient to recover their U.S. dollar carrying values. The combined impact of the impairment charges and remeasurement loss was $12.1 million on both a before andafter-tax basis, recognized in the third quarter of 2015.subsidiary. At December 31,
2016,2019, the carrying value of the
Company’sCompany's net investment in its Venezuelan operations was approximately
$2.7$2.0 million. In addition, at December 31,
2016,2019, the
Company’sCompany's Accumulated Other Comprehensive Loss included a cumulative
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translation adjustment loss of $3.8 million related to its Venezuela operations which would need to be reclassified to net income in the event of a complete exit of the business or a decisiondeconsolidation of these operations.
The Company has operations in the United Kingdom and elsewhere in Europe that could be impacted by the exit of the U.K. from the European Union (Brexit) at the end of January 2020. Our U.K. operations have been making contingency plans regarding potential customs clearance issues, tariffs and other uncertainties resulting from Brexit. Although it is difficult to
deconsolidate.predict all of the possible impacts to our supply chain or in our customers' downstream markets, the Company has evaluated the potential operational impacts and uncertainties of Brexit and at this time believes that the likelihood of a material impact on our future results of operations is low. Although there are some cross-border sales made out of and into the U.K., most of what we produce in the U.K. is also sold in the U.K. and the same is true for continental Europe. In some cases, companies that have been importing from Europe into the U.K. are now seeking local sources, which has actually been positive for our U.K. operations. Annual sales of the Company's U.K. operations totaled approximately $120 million in 2019.
The ongoing coronavirus outbreak emanating from China at the beginning of 2020 has impacted various Chinese and multi-national businesses, including travel restrictions and the extended shutdown of certain businesses in the region. Annual sales of the Company's China operations totaled approximately $130 million in 2019. To date, the Company's eight manufacturing locations in China have been somewhat negatively impacted by lower customer demand and certain supply chain disruptions. If the coronavirus outbreak situation should worsen, the Company may experience greater disruptions to both customer demand and supply chains in China and on a worldwide basis. The Company continues to evaluate the potential operational impacts and closely monitor developments as they are reported and will respond accordingly.
The Company is a purchaser of various raw material inputs such as recovered paper, energy, steel, aluminum and plastic resin. The Company generally does not engage in significant hedging activities for these purchases, other than for energy and, from time to time, aluminum, because there is usually a high correlation between the primary input costs and the ultimate selling price of its products. Inputs are generally purchased at market or at fixed prices that are established with individual suppliers as part of the purchase process for quantities expected to be consumed in the ordinary course of business. On occasion, where the correlation between selling price and input price is less direct, the Company may enter into derivative contracts such as futures or swaps to manage the effect of price fluctuations.
In addition, the Company may, from time to time, use traditional, unleveraged interest-rate swaps to manage its mix of fixed and variable rate debt and to control its exposure to interest rate movements within select ranges.
At December 31,
2016,2019, the Company had derivative contracts outstanding to hedge the price on a portion of anticipated commodity and energy purchases as well as to hedge certain foreign exchange risks for various periods through December 2019. These contracts included swaps to hedge the purchase price of approximately
8.54.4 million MMBTUs of natural gas in the U.S. and Canada representing approximately
79.5%, 37.3% and 17.8%61% of anticipated natural gas usage for
2017, 2018 and 2019, respectively.2020. Additionally, the Company had swap contracts covering
2,6291,225 metric tons of aluminum
and 660 short tons of OCC, representing approximately
59% and less than 1%, respectively,23% of anticipated usage for
2017.2020. The aluminum hedges relate to fixed-price customer contracts. At December 31,
2016,2018, the Company had a number of foreign currency contracts in place for both designated and undesignated hedges of either anticipated foreign currency denominated transactions or existing financial assets and liabilities. At December 31,
2016,2019, the total notional amount of these contracts, in U.S. dollar terms, was
$117$109 million, of which
$53$24 million related to the Canadian dollar,
$40$34 million to the Mexican peso,
$24 million to the Polish Zloty and
$24$27 million to all other currencies.
The total fair market value of the Company’sCompany's derivatives was a net favorableunfavorable position of $2.8$0.5 million atand $3.3 million at December 31, 2016,2019, and a net unfavorable position of $10.4 million at December 31, 2015.2018, respectively. Derivatives are marked to fair value using published market prices, if available, or using estimated values based on current price quotes and a discounted cash flow model. See Note 910 to the Consolidated Financial Statements for more information on financial instruments. Beginning in January 2020, the Company is party to a cross-currency swap agreement with a notional amount of $250 million to effectively convert a portion of the Company's fixed-rate U.S. dollar denominated debt, including the semi-annual interest payments, to fixed-rate euro-denominated debt. The swap agreement matures November 1, 2024. Under the terms of the swap agreement, the Company will receive semi-
27 FORM 10-K SONOCO 2019 ANNUAL REPORT
annual interest payments in U.S. dollars at a rate of 5.75% and pay interest in euros at a rate of 3.856%. The risk management objective is to manage foreign currency risk relating to net investments in certain European subsidiaries denominated in foreign currencies.
The Company is subject to various federal, state and local environmental laws and regulations concerning, among other matters, solid waste disposal, wastewater effluent and air emissions. Although the costs of compliance have not been significant due to the nature of the materials and processes used in manufacturing operations, such laws also make generators of hazardous wastes and their legal successors financially responsible for the cleanup of sites contaminated by those wastes. The Company has been named a potentially responsible party at several environmentally contaminated sites. These regulatory actions and a small number of private party lawsuits are believed to represent the Company’s largest potential environmental liabilities. The Company has accrued
$24.5$8.7 million at December 31,
2016,2019, compared with
$25.2$20.1 million at December 31,
2015,2018, with respect to these sites. See “Environmental Charges,” Item 3
–Legal– Legal Proceedings and Note
1416 to the Consolidated Financial Statements for more information on environmental matters.
RESULTS OF OPERATIONS – 2015 VERSUS 2014
Consolidated net sales for 2015 were $4.96 billion, a $53 million, or 1.0%, decrease from 2014.
The components of the sales change were:
| | | | | |
| ($ in millions) | | |
Volume/mix | | | $ | 53 | |
Selling price | | | | (49 | ) |
Acquisitions and divestitures | | | | 228 | |
Foreign currency translation and other, net | | | | (285 | ) |
Total sales decrease | | | $ | (53 | ) |
Total volume was up in all of the Company’s segments, except for Paper
Critical accounting policies and
Industrial Converted Products. For the most part, price changes for the Company’s products are driven by changes in the underlying raw materials costs. In 2015, many of the Company’s primary raw materials saw a decline in the market prices leading to lower selling prices for many of the Company’s products with the greatest impact in the Consumer and Paper and Industrial Converted Products segments. While the acquisitions of Weidenhammer at the end of 2014 and a majority ownership of Graffo during the first quarter of 2015 added to sales, those gains were more than offset by the translation impact of a stronger U.S. dollar. Total domestic sales were $3.2 billion, down 2.4% from 2014 levels. International sales were $1.8 billion, up 1.5% from 2014 with most of the increase coming in Europe which was largely driven by the Weidenhammer acquisition, and partially offset by the impact of foreign currency translation.Costs and expenses/margins
Cost of sales was down $74.2 million in 2015, or 2.0%, from the prior year primarily as a result of foreign currency translation and certain raw material price declines which more than offset higher volume and the impact of acquisitions. The decrease in cost of sales exceeded the decrease in sales reflecting the benefits of higher volume and improved manufacturing productivity, as well as the ability in 2015 for most of our businesses to maintain a positive price/cost relationship. Partially offsetting these benefits were higher pension, labor and other costs. As a result, gross profit margins improved to 18.7% in 2015 from 18.1% in the prior year.
Aggregate pension and postretirement plan expenses increased $16.9 million in 2015 to a total of $57.3 million, compared with $40.4 million in 2014. The increase was primarily the result of higher amortization expense as a result of actuarial losses recorded in 2014 attributable to lower discount rates and new mortality assumptions. Approximately 75% of these expenses are reflected in cost of sales and 25% in selling, general and administrative expenses.
Selling, general and administrative expenses decreased $10.8 million, or 2.1%, and were 10.0% of sales compared to 10.1% of sales in 2014. The decrease was primarily driven by the recognition of a $32.5 million gain in 2015 from the partial settlement of the Fox River environmental claim, decreases in both incentive compensation costs and acquisition-related professional fees, and the effects of foreign currency translation from a stronger U.S. dollar. These benefits were largely offset by selling, general and administrative
estimates | | | | | | |
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expenses added by the October 2014 acquisition of Weidenhammer, higher pension costs, wage and general inflation, and higher volume-driven costs such as commissions. GAAP earnings before interest and income taxes were 7.7% of sales in 2015, compared to 7.5% in 2014. Base earnings before interest and income taxes were 8.3% of sales in 2015 compared to 8.1% in 2014. The year-over-year improvement in both the GAAP and base measures were driven largely by the improved gross profit margins discussed above.
Restructuring and restructuring related asset impairment charges totaled $50.6 million and $22.8 million in 2015 and 2014, respectively. Additional information regarding restructuring actions and impairments is provided in Note 4 to the Company’s Consolidated Financial Statements.
Research and development costs, all of which were charged to expense, were $22.1 million in 2015 and $24.2 million in 2014. Management expects research and development spending to remain at a similar level in 2016.
Net interest expense totaled $54.6 million for the year ended December 31, 2015, compared with $52.4 million in 2014. The increase was due primarily to higher average debt levels stemming from the Weidenhammer acquisition in October 2014.
Reportable segments
Consolidated operating profits, also referred to as “Income before interest and income taxes” on the Consolidated Statements of Income, are comprised of the following:
| | | | | | | | | | | | | | | |
| ($ in millions) | | 2015 | | 2014 | | % Change |
Segment operating profit | | | | | | | | | | | | | | | |
Consumer Packaging | | | $ | 231.6 | | | | $ | 200.6 | | | | | 15.5 | % |
Display and Packaging | | | | 10.9 | | | | | 10.7 | | | | | 2.1 | % |
Paper and Industrial Converted Products | | | | 124.1 | | | | | 162.3 | | | | | (23.5 | )% |
Protective Solutions | | | | 46.0 | | | | | 34.0 | | | | | 35.3 | % |
Restructuring/Asset impairment charges | | | | (50.6 | ) | | | | (22.8 | ) | | | | 122.2 | % |
Acquisition-related costs | | | | (1.7 | ) | | | | (9.2 | ) | | | | (82.0 | )% |
Othernon-operational gains, net | | | | 22.3 | | | | | 2.6 | | | | | 767.6 | % |
Consolidated operating profits | | | $ | 382.5 | | | | $ | 378.1 | | | | | 1.2 | % |
Consumer Packaging
| | | | | | | | | | | | | | | |
| ($ in millions) | | 2015 | | 2014 | | % Change |
Trade sales | | | $ | 2,122.6 | | | | $ | 1,962.9 | | | | | 8.1% | |
Segment operating profits | | | | 231.6 | | | | | 200.6 | | | | | 15.5% | |
Depreciation, depletion and amortization | | | | 96.2 | | | | | 75.8 | | | | | 27.0% | |
Capital spending | | | | 76.0 | | | | | 63.1 | | | | | 20.4% | |
Sales increased year over year primarily due to the acquisitions of Weidenhammer in October 2014 and Graffo in March 2015. Higher volume in flexible packaging, plastic containers, and composite cans in Europe and Asia was partially offset by lower volume in composite cans in North America. The volume gain in flexible packaging was driven largely by increases in the cookies, crackers, and confection markets. Plastic containers saw growth in both the food, adhesives/sealants, and portion control market segments. Global composite can volume was modestly higher as growth in Europe and Asia was somewhat offset by continued decline in the frozen concentrate and refrigerated dough markets and product specific shifts by consumers in portion/package style preferences. Selling prices were down for the segment as a whole driven by market price declines in resins and film, the primary raw materials for the Company’s flexible packaging and plastics businesses. Trade sales in the segment were reduced by approximately $69 million year over year as a result of foreign currency translation due to a stronger U.S. dollar. Domestic sales were approximately $1,449 million, down 3.1%, or $47 million, from 2014, while international sales were approximately $674 million, up 44.5%, or $207 million, from 2015.
Segment operating profits increased by $31.0 million year over year and operating profit margins increased to 10.9% from 10.2% in 2014. The increase in segment operating profits was largely driven by the acquisitions of Weidenhammer and Graffo, a positive price/cost relationship, and solid gains in volume/mix and manufacturing productivity. These benefits were partially offset by inflation in labor and other costs, the impact of foreign currency translation and higher pension expense. Widespread material purchasing and logistics savings were key drivers of the positive price/cost relationship. Except for North American composite cans, all of the Company’s Consumer Packaging businesses saw year-over-year volume improvements.
Significant capital spending in the Consumer Packaging segment included numerous productivity projects, expansion of rigid paper manufacturing capabilities in Europe and Asia, and expansion of flexible packaging manufacturing capabilities in North America.
Display and Packaging
| | | | | | | | | | | | | | | |
| ($ in millions) | | 2015 | | 2014 | | % Change |
Trade sales | | | $ | 606.1 | | | | $ | 666.8 | | | | | (9.1 | )% |
Segment operating profits | | | | 10.9 | | | | | 10.7 | | | | | 2.1% | |
Depreciation, depletion and amortization | | | | 16.6 | | | | | 17.0 | | | | | (2.4 | )% |
Capital spending | | | | 10.9 | | | | | 9.4 | | | | | 15.6% | |
Domestic trade sales in the segment decreased $34 million, or 11%, to $259 million, while international trade sales decreased $27 million, or 8%, to $347 million. The decline in domestic trade sales resulted from the closure in late 2014 of a U.S. contract packaging facility. The decrease in international sales reflects a negative impact of approximately $69 million from foreign currency translation as a result of a weaker Mexican peso and Polish zloty relative to the U.S. dollar, partially offset by strong volume improvements inpoint-of-purchase displays.
The increase in segment operating profit was driven by manufacturing productivity and a positive price/cost relationship. These gains were partially offset by the impact of foreign currency translation and inflation of labor and other costs.
Capital spending in the segment included numerous productivity and customer development projects in North America.
Paper and Industrial Converted Products
| | | | | | | | | | | | | | | |
| ($ in millions) | | 2015 | | 2014 | | % Change |
Trade sales | | | $ | 1,729.8 | | | | $ | 1,902.4 | | | | | (9.1 | )% |
Segment operating profits | | | | 124.1 | | | | | 162.3 | | | | | (23.5 | )% |
Depreciation, depletion and amortization | | | | 76.7 | | | | | 83.1 | | | | | (7.6 | )% |
Capital spending | | | | 74.0 | | | | | 73.6 | | | | | 0.5% | |
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| | SONOCO 2016 ANNUAL REPORT
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The U.S. Dollar strengthened against the local currencies in virtually every international market where the segment operates, resulting in a $128 million year-over-year decrease in sales due to foreign currency translation. Also, average market costs for recovered paper in the U.S. were lower year over year resulting in lower average selling prices in all of the segment’s domestic businesses. Selling prices were slightly higher in Brazil and the Andean region, primarily due to overall inflation, and were up in Europe due to the pass through of higher material costs in that market. Total volume was down in the segment despite modest gains in Europe and Latin America which were due to a combination of market share gains and regional expansion. Volume decreased in our reels business on lower demand for steel reels used in bothon- andoff-shore applications in the oil and gas industry. In addition, volume decreased on our one corrugating medium machine due to general market softening. Total domestic sales in the segment decreased $46 million, or 4.2%, to $1,043 million while international sales decreased $126 million, or 15.6%, to $686 million.
Segment operating profit decreased year over year driven by the overall decline in volume, the negative impact of foreign currency translation and higher pension costs. These declines were partially offset by improved manufacturing productivity. Most of the operating profit declines occurred in the Company’s paper and recycling businesses due to lower volumes and margin compression, which was most notable in corrugating medium as a larger portion of output was sold in less-profitable foreign markets. Overall, tubes and cores operating profits were slightly up year over year driven by a positive price/cost relationship and manufacturing productivity.
Significant capital spending in the segment included the modification of several paper machines, primarily in North America and Europe, and numerous productivity projects.
Protective Solutions
| | | | | | | | | | | | | | | |
| ($ in millions) | | 2015 | | 2014 | | % Change |
Trade sales | | | $ | 505.9 | | | | $ | 484.8 | | | | | 4.3 | % |
Operating profits | | | | 46.0 | | | | | 34.0 | | | | | 35.3 | % |
Depreciation, depletion and amortization | | | | 23.6 | | | | | 22.8 | | | | | 3.3 | % |
Capital spending | | | | 15.7 | | | | | 22.2 | | | | | (29.3 | )% |
Sales increased year over year primarily due to higher volume in temperature-assured packaging, molded foam automotive components and paper-based protective packaging, partially reduced by the negative impact of foreign currency translation.
Segment operating profit increased year over year due to a positive price/cost relationship and higher volume which were partially offset by increases in labor, overhead and other costs.
Domestic sales were $422 million in 2015 up $16 million, 3.8%, from 2014. International sales increased more modestly to $84 million up $5 million, or 7.0%.
Capital spending in the segment included the start up of a new manufacturing facility in the United States and numerous productivity and customer development projects.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates and assumptions on an ongoing basis, including but not limited to those related to inventories, bad debts, derivatives, income taxes, share-based compensation, goodwill, intangible assets, restructuring, pension and other postretirement benefits, environmental liabilities, and contingencies and litigation. Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources. Actual results could differ from those estimates. The impact of and any associated risks related to estimates, assumptions and accounting policies are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Consolidated Financial Statements, if applicable, where such estimates, assumptions and accounting policies affect the Company’s reported and expected financial results.
The Company believes the accounting policies discussed in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form
10-K are critical to understanding the results of its operations. The following discussion represents those policies that involve the more significant judgments and estimates used in the preparation of the Company’s Consolidated Financial Statements.
Business Combinations
The Company’s acquisitions of businesses are accounted for in accordance with ASC 805, "Business Combinations." The Company recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquired business at their fair values as of the date of acquisition. Goodwill is measured as the excess of the consideration transferred, also measured at fair value, over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities including those related to debt, pensions and other postretirement plans, uncertain tax positions, contingent consideration and contingencies. This method also requires us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on our financial condition and results of operations.
Significant estimates and assumptions in estimating the fair value of acquired customer relationships, technology, and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be increased or decreased, or the acquired asset could be impaired.
Impairment of long-lived, intangible and other assets
Assumptions and estimates used in the evaluation of potential impairment can result in adjustments affecting the carrying values of long-lived, intangible and other assets and the recognition of impairment expense in the Company’s Consolidated Financial Statements. The Company evaluates its long-lived assets (property, plant and equipment), definite-lived intangible assets and other assets (including notes receivable and equity investments) for impairment whenever indicators of impairment exist, or when it commits to sell the asset. If the sum of the undiscounted expected future cash flows from a long-lived asset or definite-lived intangible asset group is less than the carrying value of that asset group, an asset impairment charge is recognized. Key assumptions and estimates used in the cash flow model generally include price levels, sales growth, profit margins and asset life. The amount of an impairment charge, if any, is calculated as the excess of the asset’s carrying value over its fair value, generally represented by the discounted future cash flows from that asset or, in the case of assets the Company evaluates for sale, as estimated proceeds less costs to sell. The Company takes into consideration historical data and experience together with all other relevant information available when estimating the fair values of its assets. However, fair values that could be realized in actual transactions may differ from the estimates used to evaluate impairment. In addition, changes in the assumptions and estimates may result in a different conclusion regarding impairment.
Impairment of goodwill
In accordance with ASC 350, the
The Company assesses its goodwill for impairment annually and from time to time when warranted by the facts and circumstances surrounding individual reporting
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units or the Company as a whole. If the fair value of a reporting unit exceeds the carrying value of the reporting unit's assets, including goodwill, there is no impairment. If the carrying value of a reporting unit’s goodwillunit exceeds the implied fair value of that goodwill,reporting unit, an impairment charge to goodwill is recognized for the excess. The Company’sCompany'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
2016.2019. For testing purposes, the Company performed an assessment of each reporting unit using either a qualitative evaluation or a quantitative test. The qualitative
evaluationevaluations considered factors such as the macroeconomic environment, Company stock price and market capitalization movement, business strategy changes, and significant customer wins and losses. The quantitative
testtests, described further below, considered factors such as
the amount by which estimated fair value exceeds current carrying value, current year operating performance as compared to prior projections and implied fair values from comparable trading and transaction multiples.
When performing a quantitative analysis, the Company estimates the fair value of its reporting units it does so using a discounted cash flow model based on projections of future years’ operating results and associated cash flows, corroboratedflows. The Company's assessments reflected a number of significant
28 FORM 10-K SONOCO 2019 ANNUAL REPORT
management assumptions and estimates including the Company's forecast of sales, profit margins, and discount rates, which are validated by
observed comparable trading and transaction multiples. The Company’s model discounts projected future cash flows, forecasted over a
ten-year period, with an estimated residual growth rate. The Company’s projections incorporate management’s
best estimates of
the most-likely expected future
results, including significant assumptions and estimates related to, among other things: sales volumes and prices, new business, profit margins, income taxes, capital expenditures and changes in working capital requirements and, where applicable, improved operating margins.results. Projected future cash flows are discounted to present value using
aan assumed discount rate
that management believes is
commensurate withappropriate for the
risks inherent in the cash flows for each reporting unit.
The Company’s assessments, whether qualitative or quantitative, incorporate management’s expectations for the future, including forecasted growth rates and/or margin improvements. Therefore, should there be changes in the relevant facts and circumstances and/or expectations, management’s assessmentconclusion regarding goodwill impairment may change as well. Management’s projections related to revenue growth and/or margin improvements are based on a combination of factors, including expectations for volume growth with existing customers and customer retention, product expansion, improvedchanges in price/cost relationship,relationships, productivity gains, fixed cost leverage, and stability or improvement in general
economic
conditions, increased operational capacity, and customer retention.conditions.
In considering the level of uncertainty regarding the potential for goodwill impairment, management has concluded that any such impairment would,
in most cases, likely be the result of adverse changes in more than one assumption. Management
does not consider any of itsconsiders the assumptions
used to be
either aggressive or conservative, but rather its best
estimateestimates across a range of possible outcomes based on available evidence at the time of the assessment. Other than in Display and Packaging,
and Paper and Industrial Converted Products – Europe, which
areis 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"Item 1A. Risk
Factors”Factors" on pages 7-15 of
thisthe Company's 2019 Annual Report on Form
10-K.As a result of its qualitative and quantitative assessments, 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 and political conditions in Brazil. This led management to reduce its expectations for financial growth in the future for this reporting unit and thereby resulted in lowered cash flow forecasts and unfavorable impacts to other assumptions being used in the impairment model. Accordingly, an impairment charge totaling $2.6 million, the entire amount of goodwill associated with this reporting unit, was recognized during the third quarter of 2016. The charge is included in “Restructuring/Asset impairment charges” in the Consolidated Statements of Income.
Although no
other reporting units failed the
testingannual impairment test noted above, in management’s opinion, the
reporting units havinggoodwill of the
greatest risk of a significant future impairment if actual results fall short of expectations are Display and Packaging
and Paper and Industrial Converted Products – Europe. Total goodwill associatedreporting unit is at risk of impairment in the near term if the reporting unit's operating performance does not continue to improve in line with
these reporting units was approximately $203 million and $87 million, respectively, at December 31, 2016.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. The Display and Packaging reporting unit designs, manufactures, assembles, packs and distributes temporary, semipermanentsemi-permanent and permanentpoint-of-purchase displays; provides supply chain management services, including contract packing, fulfillment and scalable service centers; and manufactures retail packaging, including printed backer cards, thermoformed blisters and heat sealing equipment. In late 2015, the Company was informed by its customer of their decision not to renew the Company’s contract to manage the Irapuato, Mexico packaging center. The Company transitioned the operation to the customer over the first half of 2016. While the loss of this business resulted in annualized lost sales of approximately $90 million, it had only a modest impact on future operating profits. Thecurrent goodwill impairment analysis reflects management’sincorporates management's expectations for multiple yearsslight sales growth and mild improvements to profit margin percentages which reflects the estimated benefits of solid and consistent volume growth based partially on projected new business driven by synergies between retail packaging manufacturing and packaging services. In addition, the analysis reflects expected cash flow improvements from future productivity initiatives. A large portion of projected sales in this reporting unit is concentrated in one customer,several major customers, the majorityloss of any of which is under contract until 2021. If a significant amountcould impact the Company's conclusion regarding the likelihood of this reporting unit’s business were lost and not replaced under similar terms, or the growth and productivity gains were not realized, it is likely that a goodwill impairment charge could be incurred.for the unit. Total goodwill associated with this reporting unit was approximately $203 million at December 31, 2016.2019. Based on the most recent valuation work performed,latest annual impairment test, the estimated fair value of the Display and Packaging reporting unit exceeded its carrying value
by approximately
64%, compared with 11% in the prior year.Paper and Industrial Converted Products – Europe manufactures paperboard tubes and cores, fiber-based construction tubes and forms and recycled paperboard and linerboard. Persistently weak European economic growth together withgeo-political developments/conflicts in Eastern Europe and the Middle East have constrained the growth and operating results of this reporting unit over the past few years. Despite these pressures, local currency financial performance has remained relatively steady. Management expects to continue to mitigate the impact of these factors as they currently exist and, in addition to35%.
In its
ongoing efforts to optimize the plant footprint and cost structure within Europe, believes the reporting | | | | | | |
FORM 10-K
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| | SONOCO 2016 ANNUAL REPORT
|
unit should be able to grow, on average, at or above the Eurozone’s projected GDP growth rate over the next several years. However, if economic conditions were to deteriorate in a sustained fashion, it is possible that a2019 annual goodwill impairment charge could be incurred. Based on the valuation work performed during the third quarter, the estimated fair value of Paper and Industrial Converted Products –Europe exceeded its carrying value by approximately 55%, compared with 31% in the prior year.
For the most recent analyses performed during 2016,analysis, projected future cash flows were discounted at 10.6% and 8.3% for Display and Packaging were discounted at 8.9%. Based on the discounted cash flow model and Paper and Industrial Converted Products –Europe, respectively. Holdingholding other valuation assumptions constant, Display and Packaging projected operating profits across all future periods would have to be reduced approximately 36%27%, or the discount rate increased to 16.7%12.5%, in order for the estimated fair value to fall below the reporting unit’s carrying value. The corresponding percentages for Paper and Industrial Converted Products –Europe are 31% and 12.0%.
As discussed in the "Report of Independent Registered Public Accounting Firm" with respect to our 2019 Consolidated Financial Statements, PricewaterhouseCoopers LLP has identified this as a "critical audit matter."
During the time subsequent to the annual evaluation, and at December 31,
2016,2019, the Company considered whether any events and/or changes in circumstances had resulted in the likelihood that the goodwill of any of its reporting units may have been impaired. It is management’s opinion that no such events have occurred.
The Company follows ASC 740, Accounting for Income Taxes, which requires a reduction of the carrying amounts of deferred tax assets by recording a valuation allowance if, based on the available evidence, it is more likely than not such assets will not be realized. Deferred tax assets generally represent expenses that have been recognized for financial reporting purposes, but for which the corresponding tax deductions will occur in future periods. The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns and future profitability. Our accounting for deferred tax consequences represents our best estimate of those future events. Changes in our current estimates, due to unanticipated events or otherwise, could have a material impact on our financial condition and results of operations.
For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those positions not meeting the
more-likely-than-not standard, no tax benefit has been recognized in the financial statements. Associated interest has also been recognized, where applicable.
In February 2017,
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’sIRS'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 million associated with the IRS’s recharacterization, as well as an Information Document Request (“IDR”) requesting the Company’s analysis of why such penalties should not apply. The Company responded to this IDR in April 2017. On October 5, 2017, the Company received two revised draft NOPAs proposing the same adjustments and penalties as in the prior NOPAs. On November 14, 2017, the Company received two final NOPAs proposing the same adjustments and penalties as in the prior draft NOPAs. On November 20, 2017, the Company received a Revenue Agent's Report (“RAR”) that included the same adjustments and penalties as in the prior NOPAs. At the time of 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 freetax-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 NOPARAR would be approximately $84$89 million, excluding interest and the previously referenced penalties. TheOn January 22, 2018, the Company expects a final NOPA to be issued during the first quarter of 2017, and intends to filefiled a protest to the proposed deficiency with the IRS. The Company received a rebuttal of its protest from the IRS which will causeon July 10, 2018, and the matter to behas now been referred to the Appeals Division of the IRS. The Company had a pre-conference hearing with IRS Appeals during the second quarter of 2019, and has had continued discussions with IRS Appeals throughout the year. If the matter is not resolved in IRS Appeals, the next step would be to file a petition in Tax Court. The Company strongly believes the position of the IRS with regard to this matter is inconsistent with the applicable tax laws and existing Treasury regulations, and that the Company’sCompany'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’sCompany's favor. Regardless of whether the matter is resolved in the Company’sCompany's favor, the final resolution of this matter could be expensive and time-consumingtime consuming to defend and/or
29 FORM 10-K SONOCO 2019 ANNUAL REPORT
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
future results of operations and financial condition.
The estimate for the potential outcome of any uncertain tax issue is highly judgmental. The Company believes it has adequately provided for any reasonably foreseeable outcome related to these matters. 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 limitations on potential assessments expire. Additionally, the jurisdictions in which earnings or deductions are realized may differ from current estimates. As a result, the eventual resolution of these matters could have a different impact on the effective rate than currently reflected or expected.
Stock-based compensation plans
The Company utilizes share-based compensation in the form of stock appreciation rights, restricted stock units and other share-based awards. Certain awards are in the form of contingent stock units where
both the ultimate number of units
and the vesting period are performance based. The amount
and timing of share-based compensation expense associated with these performance-based awards
areis based on estimates regarding future performance using measures defined in the plans. In
2016,2019, the performance measures consisted of
Base Earnings per Share and Return on Net Assets Employed. Changes in estimates regarding the future achievement of these performance measures may result in significant fluctuations from period to period in the amount of share-based compensation expense reflected in the Company’s Consolidated Financial Statements.
The Company uses an option-pricing model to determine the grant date fair value of its stock appreciation rights. Inputs to the model include a number of subjective assumptions. Management routinely assesses the assumptions and methodologies used to calculate
the estimated fair value of share-based compensation per share. Circumstances may change and additional data may become available over time that results in changes to these assumptions and methodologies, which could materially impact fair value determinations.
Pension and postretirement benefit plans
The Company has significant pension and postretirement benefit liabilities and costs that are measured using actuarial valuations. The largest of the Company's pension plans are the U.S. based Sonoco Pension Plan (the "Active Plan") and the Sonoco Pension Plan for Inactive Participants (the "Inactive Plan"). Benefits under these plans were frozen effective December 31, 2018 for all active, non-union participants. As of January 1, 2019, these participants became eligible for annual contributions under a noncontributory defined contribution plan. On July 17, 2019, the Company's Board of Directors approved a resolution to terminate the Inactive Plan effective September 30, 2019. Upon approval from the Pension Benefit Guaranty Corporation, and following completion of a limited lump-sum offering, the Company is expected to settle all remaining liabilities under the Inactive Plan through the purchase of annuities in late 2020 or early 2021.
The actuarial valuations
used to evaluate the plans employ key assumptions that can have a significant effect on the calculated amounts. The key assumptions used at December 31,
2016,2019 in determining the projected benefit obligation and the accumulated benefit obligation for U.S. retirement and retiree health and life insurance plans include: discount rates of
4.29%3.37% and
3.99%2.84% for the
activeActive Plan and
inactive qualifiedInactive Plan, respectively, 3.05% for the non-qualified retirement plans,
respectively, 3.97% for thenon-qualified retirement | | | | | | |
SONOCO 2016 ANNUAL REPORT
| | 33
| | | | FORM 10-K
|
plans, and 3.70%2.89% for the retiree health and life insurance plan; and ratesplan. The discount rate for the Inactive Plan was determined on a plan termination basis. The rate of compensation increases ranging from 3.32% to 4.87%increase for the retiree health and life insurance plan was 3.04%. The key assumptions used to determine 2016the 2019 net periodic benefit cost for U.S. retirement and retiree health and life insurance plans include: discount rates of 4.58%4.34% and 4.21%4.14% for the activeActive Plan and inactive qualified retirement plans,Inactive Plan, respectively, 4.16% for thenon-qualified retirement plans, and 3.78%4.02% for the retiree health and life insurance plan; an expected long-term rate of return on plan assets of 7.65%6.75% and 7.35%6.50% for the activeActive Plan and inactive qualified retirement plans,Inactive Plan, respectively; and ratesa rate of compensation increases ranging from 3.36% to 5.1%increase for the retiree health and life insurance plan of 3.06%.
During
2016,2019, the Company recorded total pension and postretirement benefit expenses of approximately
$45.3$52.7 million, compared with
$57.3$34.9 million during
2015.2018. The
20162019 amount reflects
$87.0$65.9 million of expected returns on plan assets at an average assumed rate of
6.8%6.13% and interest cost of
$60.2$57.8 million at a weighted-average discount rate of
3.55%3.96%. The
20152018 amount reflects
$96.0$92.2 million of expected returns on plan assets at an average assumed rate of
7.0%6.38% and interest cost of
$71.6$55.4 million at a weighted-average discount rate of
3.9%3.43%. During
2016,2019, the Company made contributions to its pension and postretirement plans of
$46.7$231.2 million, including voluntary contributions to the Active Plan and Inactive Plan totaling $200 million. In the prior year, the Company made contributions to its pension and postretirement plans totaling
$36.0$25.4 million. Contributions vary from year to year depending on various factors, the most significant being the market value of assets and interest rates. Cumulative net actuarial losses were approximately
$701$753 million at December 31,
2016,2019, and are primarily the result of low discount
rates and the poor asset performance in 2008.rates. Actuarial losses/gains outside of the 10% corridor defined by U.S. GAAP are amortized over the average remaining service life of the plan’s active participants or the average remaining life expectancy of the plan’s inactive participants if all, or almost all, of the plan’s participants are inactive.
Effective January 1, 2016, The majority of these actuarial losses are related to the Inactive Plan and will result in non-cash settlement charges of approximately $600 million beginning in 2020 as lump-sum payouts and annuity purchases are made.
Excluding the $600 million of expected settlement charges related to the Inactive Plan, the Company
changed the method used to estimate the service and interest cost components of net periodic benefit cost. Historically, these components were estimated using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation at the beginning of the period. The Company has elected to use a full yield curve approach in the estimation of these components of benefit cost by applying the specific spot rates along the yield curve used in the determination of the projected benefit obligation to the relevant projected cash flows. The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of interest cost. This change does not affect the measurement of the Company’s total pension and post-retirement obligations reported on the balance sheet as the change in the service and interest cost is completely offset by the actuarial gain or loss reported in the period, nor does it affect cash flows. The Company has accounted for this prospectively as a change in estimate beginning in 2016. This change in estimate reduced net periodic benefit cost by approximately $12 million in 2016.Excluding the impact of the potential settlements discussed below, the Company is projectingprojects total benefit plan expense to be approximately $5$4 million higherlower in 20172020 than in 20162019. This decrease is primarily due primarily to lower interest expense due to a decline in discount rates, partially offset by lower expected returns on theplan assets of the U.S. retirement and retiree health and life insurance plans. The lower returns are due to de-risking actions taken with the Inactive Plan's assets moving them to a 62 basis point drop in the expected return assumption for 2017, partially offset by a higher asset base due to forecasted market performance and Company contributions to the active qualified retirement plan. Lower discount rates are also contributing to higher year-over-year benefit plan expense, but the impact is offset by a reduction in expense from changing mortality assumptions to reflect Mortality Improvement ScaleMP-2016(MP-2015 had been used in determining 2016 expense).
In February 2017, the Company initiated a program through which it seeks to settle a portionmore conservative mix of the projected benefit obligation (PBO) relating to terminated vested participants in the U.S. qualified retirement plans. The terminated vested population comprises approximately 15% of the PBO of these plans and such participants are being given the option to receive their benefits early as either a lump sum or an annuity. If the election rates are in the expected range of 40% to 70%, the Company estimates it will be required to recognizenon-cash settlement charges of between $25 to $40 million in the second quarter of 2017. Related settlement payments will be funded from plan assets and will not require the Company to make any additional cash contributions in 2017.
primarily fixed income investments.
The Company adjusts its discount rates at the end of each fiscal year based on yield curves of high-quality debt instruments over durations that match the expected benefit payouts of each plan. The expected rate of return assumption is derived by taking into consideration the targeted plan asset allocation, projected future returns by asset class and active investment management. A third-party asset return model was used to develop an expected range of returns on plan investments over a
12- to
15-year period, with the expected rate of return selected from a best estimate range within the total range of projected results. The Company periodically
re-balances its plan asset portfolio in order to maintain the targeted allocation levels. The rate of compensation increase assumption is generally based on salary and incentive compensation increases. A key assumption for the U.S. retiree health and life insurance plan is a medical cost trend rate beginning at
7.0%6.25% for
post-age 65 participants and trending down to an ultimate rate of
4.8%4.5% in
2059.2026. The ultimate trend rate of
4.8%4.5% represents the Company’s best estimate of the long-term average annual medical cost increase over the duration of the plan’s liabilities. It provides for real growth in medical costs in excess of the overall inflation level.
Other assumptions and estimates impacting the projected liabilities of these plans include inflation, participant withdrawal and mortality rates and retirement ages. The Company annually reevaluates assumptions used in projecting the pension and postretirement liabilities and associated expense. These judgments, assumptions and estimates may affect the carrying value of pension and postretirement plan net assets and liabilities and pension and postretirement plan expenses in the Company’s Consolidated Financial Statements.
30 FORM 10-K SONOCO 2019 ANNUAL REPORT
The sensitivity to changes in the critical assumptions for the Company’s U.S. plans as of December 31, 2016,2019, is as follows: | | | | | | | | | | | | | | | |
Assumption ($ in millions) | | Percentage Point Change | | Projected Benefit Obligation Higher/(Lower) | | Annual Expense Higher/ (Lower) |
Discount rate | | | | -.25 pts | | | | $ | 44.4 | | | | $ | 2.9 | |
Expected return on assets | | | | -.25 pts | | | | | N/A | | | | $ | 2.5 | |
| | | | | | | | | | | | | | | | | |
Assumption ($ in millions) | Percentage Point Change | | Projected Benefit Obligation Higher/(Lower) | | Annual Expense Higher/ (Lower) |
| Discount rate | -.25 pts | | $53.4 | | | $2.4 | |
| Expected return on assets | -.25 pts | | N/A | | $2.4 | |
See Note
1213 to the Consolidated Financial Statements for additional information on the Company’s pension and postretirement plans.
| | | | | | |
FORM 10-K
| | | | 34
| | SONOCO 2016 ANNUAL REPORT
|
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements
Information regarding recent accounting pronouncements is provided in Note 2 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form
10-K.ITEM
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and qualitative disclosures about market risk
Information regarding market risk is provided in this Annual Report on Form
10-K under the following items and captions: “Our international operations subject us to various risks that could adversely affect our business operations and financial results” and “Currency exchange rate fluctuations may reduce operating results and
shareholders’shareholders' equity” in
Item 1A-Risk Factors; “Risk Management” in Item 7
–Management’s– Management’s Discussion and Analysis of Financial Condition and Results of Operations; and in Note
910 to the Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data.
ITEM
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAFinancial statements and supplementary data
The Consolidated Financial Statements and Notes to the Consolidated Financial Statements are provided on pages
F-1 through
F-32 F-40 of this report. Selected quarterly financial data is provided in Note
1820 to the Consolidated Financial Statements included in this Annual Report on Form
10-K. | | | | | | |
SONOCO 2016
31 FORM 10-K SONOCO 2019 ANNUAL REPORT
| | 35
| | | | FORM 10-K
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| | |
REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
TO THE SHAREHOLDERS AND DIRECTORS OF SONOCO PRODUCTS COMPANY:
In our opinion,INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Sonoco Products Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Sonoco Products Company and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of income, of comprehensive income, of changes in total equity and of cash flows present fairly, in all material respects, the financial position of Sonoco Products Company and its subsidiaries at December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20162019, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule appearing under Item 15(a) 2 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016,2019, based on criteria established in Internal Control –- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO.
Basis for Opinions
The Company’sCompany's management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s reportManagement's Report on internal control over financial reportingInternal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements the financial statement schedule, and on the Company’sCompany's internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the
consolidated financial statements
included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
supportingregarding the amounts and disclosures in the
consolidated financial
statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
andas well as evaluating the overall
presentation of the consolidated financial
statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As
discusseddescribed in
Note 2 toManagement’s Report on Internal Control Over Financial Reporting, management has excluded Corenso Holdings America, Inc. (“Corenso”) and Thermoform Engineered Quality, LLC and Plastique Holdings, LTD, (together “TEQ”), from its assessment of internal control over financial reporting as of December 31, 2019 because they were acquired by the
Company in purchase business combinations during 2019. We have also excluded Corenso and TEQ from our audit of internal control over financial reporting. Corenso and TEQ are wholly-owned subsidiaries whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting collectively represent 2.9% and 0.7% respectively, of the related consolidated financial
statements,statement amounts as of and for the
Company changed its method of accounting for Debt Issuance Costs in the periodyear ended December 31,
2016. The accompanying December 31, 2015 consolidated balance sheet reflects this change.2019.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-1 FORM 10-K SONOCO 2019 ANNUAL REPORT
Goodwill Impairment Assessment - Display and Packaging Reporting Unit
As described in Notes 1 and 8 to the consolidated financial statements, the Company’s consolidated goodwill balance was $1.4 billion as of December 31, 2019, and the goodwill associated with the Display and Packaging reporting unit was $203 million. Management assesses goodwill for impairment annually during the third quarter, or from time to time when warranted by the facts and circumstances surrounding individual reporting units or the Company as a whole. 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 is recognized for the excess. Fair value is estimated using a discounted cash flow model based on projections of future years’ operating results and associated cash flows corroborated by comparable trading and transaction multiples. The calculated reporting unit estimated fair value reflects a number of significant management assumptions and estimates including the forecast of sales, profit margins, and discount rate.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Display and Packaging reporting unitis a critical audit matter are there was significant judgment by management when developing the fair value measurement of the Display and Packaging reporting unit, which in turn led to significant auditor judgment, subjectivity, and effort, in performing procedures and evaluating audit evidence obtained related to management’s discounted cash flow model and the significant assumptions, including the forecast of sales, profit margins, and discount rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the determination of the fair value of the Display and Packaging reporting unit. These procedures also included, among others, testing management’s process for developing the fair value estimate; evaluating the appropriateness of the discounted cash flow model; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the significant assumptions used by management, including the forecast of sales, profit margins, and discount rate. Evaluating management’s assumptions related to the forecast of sales and profit margins involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the Company’s discounted cash flow model and the discount rate.
[PricewaterhouseCoopers LLP (signed)]
Charlotte, North Carolina
March 1, 2017
| | | | | | |
FORM 10-K
| | | | F1
| | SONOCO 2016 ANNUAL REPORT
|
February 28, 2020
We have served as the Company’s auditor since 1967.
F-2 FORM 10-K SONOCO 2019 ANNUAL REPORT
|
CONSOLIDATEDBALANCE SHEETS
Sonoco Products Company
|
| | | | | | | | | | |
(Dollars and shares in thousands) At December 31 | | 2016 | | 2015 |
Assets | | | | | | | | | | |
Current Assets | | | | | | | | | | |
Cash and cash equivalents | | | $ | 257,226 | | | | $ | 182,434 | |
Trade accounts receivable, net of allowances of $10,884 in 2016 and $11,069 in 2015 | | | | 625,411 | | | | | 627,962 | |
Other receivables | | | | 43,553 | | | | | 46,801 | |
Inventories | | | | | | | | | | |
Finished and in process | | | | 127,446 | | | | | 139,589 | |
Materials and supplies | | | | 245,368 | | | | | 245,894 | |
Prepaid expenses | | | | 49,764 | | | | | 64,698 | |
| | | | 1,348,768 | | | | | 1,307,378 | |
Property, Plant and Equipment, Net | | | | 1,060,017 | | | | | 1,112,036 | |
Goodwill | | | | 1,092,215 | | | | | 1,140,461 | |
Other Intangible Assets, Net | | | | 224,958 | | | | | 245,095 | |
Long-term Deferred Income Taxes | | | | 42,130 | | | | | 52,626 | |
Other Assets | | | | 155,115 | | | | | 156,089 | |
Total Assets | | | $ | 3,923,203 | | | | $ | 4,013,685 | |
Liabilities and Equity | | | | | | | | | | |
Current Liabilities | | | | | | | | | | |
Payable to suppliers | | | $ | 477,831 | | | | $ | 508,057 | |
Accrued expenses and other | | | | 205,303 | | | | | 225,303 | |
Accrued wages and other compensation | | | | 68,693 | | | | | 68,924 | |
Notes payable and current portion of long-term debt | | | | 32,045 | | | | | 113,097 | |
Accrued taxes | | | | 18,744 | | | | | 7,135 | |
| | | | 802,616 | | | | | 922,516 | |
Long-term Debt | | | | 1,020,698 | | | | | 1,015,270 | |
Pension and Other Postretirement Benefits | | | | 447,339 | | | | | 432,964 | |
Deferred Income Taxes | | | | 59,753 | | | | | 72,933 | |
Other Liabilities | | | | 38,092 | | | | | 37,129 | |
Commitments and Contingencies | | | | | | | | | | |
Sonoco Shareholders’ Equity | | | | | | | | | | |
Serial preferred stock, no par value | | | | | | | | | | |
Authorized 30,000 shares | | | | | | | | | | |
0 shares issued and outstanding as of December 31, 2016 and 2015 | | | | | | | | | | |
Common shares, no par value | | | | | | | | | | |
Authorized 300,000 shares | | | | | | | | | | |
99,193 and 100,944 shares issued and outstanding at December 31, 2016 and 2015, respectively | | | | 7,175 | | | | | 7,175 | |
Capital in excess of stated value | | | | 321,050 | | | | | 404,460 | |
Accumulated other comprehensive loss | | | | (738,380 | ) | | | | (702,533 | ) |
Retained earnings | | | | 1,942,513 | | | | | 1,803,827 | |
Total Sonoco Shareholders’ Equity | | | | 1,532,358 | | | | | 1,512,929 | |
Noncontrolling Interests | | | | 22,347 | | | | | 19,944 | |
Total Equity | | | | 1,554,705 | | | | | 1,532,873 | |
Total Liabilities and Equity | | | $ | 3,923,203 | | | | $ | 4,013,685 | |
CONSOLIDATED BALANCE SHEETS
Sonoco Products Company
| | | | | | | | | | | |
(Dollars and shares in thousands) At December 31 | 2019 | | 2018 |
| Assets | | | |
| Current Assets | | | |
| Cash and cash equivalents | $ | 145,283 | | | $ | 120,389 | |
| Trade accounts receivable, net of allowances of $14,382 in 2019 and $11,692 in 2018 | 698,149 | | | 737,420 | |
| Other receivables | 113,754 | | | 111,915 | |
| Inventories | | | |
| Finished and in process | 172,223 | | | 174,115 | |
| Materials and supplies | 331,585 | | | 319,649 | |
| Prepaid expenses | 60,202 | | | 55,784 | |
| 1,521,196 | | | 1,519,272 | |
| Property, Plant and Equipment, Net | 1,286,842 | | | 1,233,821 | |
| Goodwill | 1,429,346 | | | 1,309,167 | |
| Other Intangible Assets, Net | 388,292 | | | 352,037 | |
| Long-term Deferred Income Taxes | 46,502 | | | 47,297 | |
| Right of Use Asset-Operating Leases | 298,393 | | | — | |
| Other Assets | 155,718 | | | 121,871 | |
| Total Assets | $ | 5,126,289 | | | $ | 4,583,465 | |
| Liabilities and Equity | | | |
| Current Liabilities | | | |
| Payable to suppliers | $ | 537,764 | | | $ | 556,011 | |
| Accrued expenses and other | 289,067 | | | 237,197 | |
| Accrued wages and other compensation | 78,047 | | | 85,761 | |
| Notes payable and current portion of long-term debt | 488,234 | | | 195,445 | |
| Accrued taxes | 11,380 | | | 8,516 | |
| 1,404,492 | | | 1,082,930 | |
| Long-term Debt | 1,193,135 | | | 1,189,717 | |
| Noncurrent Operating Lease Liabilities | 253,992 | | | — | |
| Pension and Other Postretirement Benefits | 304,798 | | | 374,419 | |
| Deferred Income Taxes | 76,206 | | | 64,273 | |
| Other Liabilities | 77,961 | | | 99,848 | |
| Commitments and Contingencies | | | |
| Sonoco Shareholders’ Equity | | | |
| Serial preferred stock, no par value | | | |
| Authorized 30,000 shares | | | |
| 0 shares issued and outstanding as of December 31, 2019 and 2018 | | | |
| Common shares, no par value | | | |
| Authorized 300,000 shares | | | |
| 100,198 and 99,829 shares issued and outstanding as of December 31, 2019 and 2018, respectively | 7,175 | | | 7,175 | |
| Capital in excess of stated value | 310,778 | | | 304,709 | |
| Accumulated other comprehensive loss | (816,803) | | | (740,913) | |
| Retained earnings | 2,301,532 | | | 2,188,115 | |
| Total Sonoco Shareholders’ Equity | 1,802,682 | | | 1,759,086 | |
| Noncontrolling Interests | 13,023 | | | 13,192 | |
| Total Equity | 1,815,705 | | | 1,772,278 | |
| Total Liabilities and Equity | $ | 5,126,289 | | | $ | 4,583,465 | |
The Notes beginning on page
F-6 F-7 are an integral part of these
consolidated financial statements.
| | | | | | |
SONOCO 2016 ANNUAL REPORT
| | F2
| | | | FORM 10-K
|
F-3 FORM 10-K SONOCO 2019 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME
Sonoco Products Company
| | | | | | | | | | | | | | | | | |
(Dollars and shares in thousands except per share data) Years ended December 31 | 2019 | | 2018 | | 2017 |
| Net sales | $ | 5,374,207 | | | $ | 5,390,938 | | | $ | 5,036,650 | |
| Cost of sales | 4,316,378 | | | 4,349,932 | | | 4,077,998 | |
| Gross profit | 1,057,829 | | | 1,041,006 | | | 958,652 | |
| Selling, general and administrative expenses | 530,867 | | | 563,306 | | | 507,824 | |
| Restructuring/Asset impairment charges | 59,880 | | | 40,071 | | | 38,419 | |
| | | | | |
| Operating profit | 467,082 | | | 437,629 | | | 412,409 | |
| Non-operating pension costs | 24,713 | | | 941 | | | 45,110 | |
| Interest expense | 66,845 | | | 63,147 | | | 57,220 | |
| Interest income | 5,242 | | | 4,990 | | | 4,475 | |
| Income before income taxes | 380,766 | | | 378,531 | | | 314,554 | |
| Provision for income taxes | 93,269 | | | 75,008 | | | 146,589 | |
| Income before equity in earnings of affiliates | 287,497 | | | 303,523 | | | 167,965 | |
| Equity in earnings of affiliates, net of tax | 5,171 | | | 11,216 | | | 9,482 | |
| Net income | 292,668 | | | 314,739 | | | 177,447 | |
| Net (income) attributable to noncontrolling interests | (883) | | | (1,179) | | | (2,102) | |
| Net income attributable to Sonoco | $ | 291,785 | | | $ | 313,560 | | | $ | 175,345 | |
| Weighted average common shares outstanding: | | | | | |
| Basic | 100,742 | | | 100,539 | | | 100,237 | |
| Assuming exercise of awards | 434 | | | 477 | | | 615 | |
| Diluted | 101,176 | | | 101,016 | | | 100,852 | |
| Per common share | | | | | |
| Net income attributable to Sonoco: | | | | | |
| Basic | $ | 2.90 | | | $ | 3.12 | | | $ | 1.75 | |
| Diluted | $ | 2.88 | | | $ | 3.10 | | | $ | 1.74 | |
| | | | | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Sonoco Products Company
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) Years ended December 31 | 2019 | | 2018 | | 2017 |
| Net income | $ | 292,668 | | | $ | 314,739 | | | $ | 177,447 | |
| Other comprehensive income/(loss): | | | | | |
| Foreign currency translation adjustments | 8,270 | | | (54,763) | | | 89,108 | |
| Changes in defined benefit plans, net of tax | (87,033) | | | (20,244) | | | 59,924 | |
| Change in derivative financial instruments, net of tax | 2,035 | | | (1,614) | | | (2,580) | |
| Other comprehensive income/(loss) | (76,728) | | | (76,621) | | | 146,452 | |
| Comprehensive income/(loss) | 215,940 | | | 238,118 | | | 323,899 | |
| Net (income) attributable to noncontrolling interests | (883) | | | (1,179) | | | (2,102) | |
| Other comprehensive loss/(income) attributable to noncontrolling interests | 838 | | | 2,156 | | | (1,105) | |
| Comprehensive income attributable to Sonoco | $ | 215,895 | | | $ | 239,095 | | | $ | 320,692 | |
The Notes beginning on page F-7 are an integral part of these consolidated financial statements.
F-4 FORM 10-K SONOCO 2019 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY
Sonoco Products Company
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars and shares in thousands) | Total Equity | | Common Shares | | | | Capital in Excess of Stated Value | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Non- controlling Interests |
| | | Outstanding | | Amount | | | | | | | | |
| January 1, 2017 | $ | 1,554,705 | | | 99,193 | | | $ | 7,175 | | | $ | 321,050 | | | $ | (738,380) | | | $ | 1,942,513 | | | $ | 22,347 | |
| Net income | 177,447 | | | | | | | | | | | 175,345 | | | 2,102 | |
| Other comprehensive income/(loss): | | | | | | | | | | | | | |
| Translation gain | 89,108 | | | | | | | | | 88,003 | | | | | 1,105 | |
Defined benefit plan adjustment1 | 59,924 | | | | | | | | | 59,924 | | | | | |
Derivative financial instruments1 | (2,580) | | | | | | | | | (2,580) | | | | | |
| Other comprehensive loss | 146,452 | | | | | | | | | 145,347 | | | | | 1,105 | |
| Dividends | (154,773) | | | | | | | | | | | (154,773) | | | |
| Issuance of stock awards | 1,636 | | | 341 | | | | | 1,636 | | | | | | | |
| Shares repurchased | (6,335) | | | (120) | | | | | (6,335) | | | | | | | |
| Stock-based compensation | 13,488 | | | | | | | 13,488 | | | | | | | |
| Impact of new accounting pronouncements | — | | | | | | | | 318 | | | | (73,239) | | | | 72,921 | | | | |
| Noncontrolling interest from acquisition | (2,560) | | | | | | | | | | | | | (2,560) | |
| December 31, 2017 | $ | 1,730,060 | | | 99,414 | | | $ | 7,175 | | | $ | 330,157 | | | $ | (666,272) | | | $ | 2,036,006 | | | $ | 22,994 | |
| Net income | 314,739 | | | | | | | | | | | 313,560 | | | 1,179 | |
| Other comprehensive income/(loss): | | | | | | | | | | | | | |
| Translation loss | (54,763) | | | | | | | | | (52,607) | | | | | (2,156) | |
Defined benefit plan adjustment1 | (20,244) | | | | | | | | | (20,244) | | | | | |
Derivative financial instruments1 | (1,614) | | | | | | | | | (1,614) | | | | | |
| Other comprehensive income | (76,621) | | | | | | | | | (74,465) | | | | | (2,156) | |
| Dividends | (163,348) | | | | | | | | | | | (163,348) | | | |
| Issuance of stock awards | 1,688 | | | 682 | | | | | 1,688 | | | | | | | |
| Shares repurchased | (14,561) | | | (267) | | | | | (14,561) | | | | | | | |
| Stock-based compensation | 10,730 | | | | | | | 10,730 | | | | | | | |
| Impact of new accounting pronouncements | 1,721 | | | | | | | — | | | (176) | | | 1,897 | | | |
| Purchase of Sonoco Asia noncontrolling interest | (35,000) | | | | | | | | | | | (23,305) | | | | | | | | | | | | (11,695) | |
| Noncontrolling interest from acquisition | 2,870 | | | | | | | | | | | | | 2,870 | |
| | | | | | | | | | | | | |
| December 31, 2018 | $ | 1,772,278 | | | 99,829 | | | $ | 7,175 | | | $ | 304,709 | | | $ | (740,913) | | | $ | 2,188,115 | | | $ | 13,192 | |
| Net income | 292,668 | | | | | | | | | | | 291,785 | | | 883 | |
| Other comprehensive income/(loss): | | | | | | | | | | | | | |
| Translation gain | 8,270 | | | | | | | | | 9,108 | | | | | (838) | |
Defined benefit plan adjustment1 | (87,033) | | | | | | | | | (87,033) | | | | | |
Derivative financial instruments1 | 2,035 | | | | | | | | | 2,035 | | | | | |
| Other comprehensive loss | (76,728) | | | | | | | | | (75,890) | | | | | (838) | |
| Dividends paid to noncontrolling interests | (214) | | | | | | | | | | | | | | (214) | |
| Dividends | (171,597) | | | | | | | | | | | (171,597) | | | |
| Issuance of stock awards | 1,343 | | | 538 | | | | | 1,343 | | | | | | | |
| Shares repurchased | (9,608) | | | (169) | | | | | (9,608) | | | | | | | |
| Stock-based compensation | 14,334 | | | | | | | 14,334 | | | | | | | |
| Impact of new accounting pronouncements | (6,771) | | | | | | | | | — | | | (6,771) | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| December 31, 2019 | $ | 1,815,705 | | | 100,198 | | | $ | 7,175 | | | $ | 310,778 | | | $ | (816,803) | | | $ | 2,301,532 | | | $ | 13,023 | |
| | | | | |
CONSOLIDATEDSTATEMENTS OF INCOME
Sonoco Products Company
1 | net of tax |
| | | | | | | | | | | | | | | |
(Dollars and shares in thousands except per share data) Years ended December 31 | | 2016 | | 2015 | | 2014 |
Net sales | | | $ | 4,782,877 | | | | $ | 4,964,369 | | | | $ | 5,016,994 | |
Cost of sales | | | | 3,845,451 | | | | | 4,034,947 | | | | | 4,109,108 | |
Gross profit | | | | 937,426 | | | | | 929,422 | | | | | 907,886 | |
Selling, general and administrative expenses | | | | 506,001 | | | | | 496,241 | | | | | 506,996 | |
Restructuring/Asset impairment charges | | | | 42,883 | | | | | 50,637 | | | | | 22,792 | |
Gain on disposition of business, net | | | | 104,292 | | | | | — | | | | | — | |
Income before interest and income taxes | | | | 492,834 | | | | | 382,544 | | | | | 378,098 | |
Interest expense | | | | 54,170 | | | | | 56,973 | | | | | 55,140 | |
Interest income | | | | 2,613 | | | | | 2,375 | | | | | 2,749 | |
Income before income taxes | | | | 441,277 | | | | | 327,946 | | | | | 325,707 | |
Provision for income taxes | | | | 164,631 | | | | | 87,738 | | | | | 108,758 | |
Income before equity in earnings of affiliates | | | | 276,646 | | | | | 240,208 | | | | | 216,949 | |
Equity in earnings of affiliates, net of tax | | | | 11,235 | | | | | 10,416 | | | | | 9,886 | |
Net income | | | | 287,881 | | | | | 250,624 | | | | | 226,835 | |
Net (income) attributable to noncontrolling interests | | | | (1,447 | ) | | | | (488 | ) | | | | (919 | ) |
Net income attributable to Sonoco | | | $ | 286,434 | | | | $ | 250,136 | | | | $ | 225,916 | |
| | | |
Weighted average common shares outstanding: | | | | | | | | | | | | | | | |
Basic | | | | 101,093 | | | | | 101,482 | | | | | 102,215 | |
Assuming exercise of awards | | | | 689 | | | | | 910 | | | | | 957 | |
Diluted | | | | 101,782 | | | | | 102,392 | | | | | 103,172 | |
| | | |
Per common share | | | | | | | | | | | | | | | |
Net income attributable to Sonoco: | | | | | | | | | | | | | | | |
Basic | | | $ | 2.83 | | | | $ | 2.46 | | | | $ | 2.21 | |
Diluted | | | $ | 2.81 | | | | $ | 2.44 | | | | $ | 2.19 | |
| | | |
Cash dividends | | | $ | 1.46 | | | | $ | 1.37 | | | | $ | 1.27 | |
CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME
Sonoco Products Company
| | | | | | | | | | | | | | | |
(Dollars in thousands) Years ended December 31 | | 2016 | | 2015 | | 2014 |
Net income | | | $ | 287,881 | | | | $ | 250,624 | | | | $ | 226,835 | |
Other comprehensive income/(loss): | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | | (32,405 | ) | | | | (129,652 | ) | | | | (103,447 | ) |
Changes in defined benefit plans, net of tax | | | | (9,577 | ) | | | | 31,042 | | | | | (130,664 | ) |
Change in derivative financial instruments, net of tax | | | | 7,091 | | | | | 810 | | | | | (5,700 | ) |
Other comprehensive income/(loss) | | | | (34,891 | ) | | | | (97,800 | ) | | | | (239,811 | ) |
Comprehensive income/(loss) | | | | 252,990 | | | | | 152,824 | | | | | (12,976 | ) |
Net (income) attributable to noncontrolling interests | | | | (1,447 | ) | | | | (488 | ) | | | | (919 | ) |
Other comprehensive loss/(income) attributable to noncontrolling interests | | | | (956 | ) | | | | 4,118 | | | | | 829 | |
Comprehensive income/(loss) attributable to Sonoco | | | $ | 250,587 | | | | $ | 156,454 | | | | $ | (13,066 | ) |
The Notes beginning on page
F-6 F-7 are an integral part of these
consolidated financial statements.
| | | | | | |
FORM 10-K
| | | | F3
| | SONOCO 2016 ANNUAL REPORT
|
F-5 FORM 10-K SONOCO 2019 ANNUAL REPORT
| | | | | |
CONSOLIDATEDSTATEMENTS OF CHANGES IN TOTAL EQUITY
Sonoco Products Company
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars and shares in thousands) | | Total Equity | | Common Shares | | Capital in Excess of Stated Value | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Non- controlling Interests |
| | | Outstanding | | Amount | | | | |
January 1, 2014 | | | $ | 1,706,049 | | | | | 102,147 | | | | $ | 7,175 | | | | $ | 457,190 | | | | $ | (369,869 | ) | | | $ | 1,596,965 | | | | $ | 14,588 | |
Net income | | | | 226,835 | | | | | | | | | | | | | | | | | | | | | | | | | 225,916 | | | | | 919 | |
Other comprehensive income/(loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Translation loss | | | | (103,447 | ) | | | | | | | | | | | | | | | | | | | (102,618 | ) | | | | | | | | | (829 | ) |
Defined benefit plan adjustment1 | | | | (130,664 | ) | | | | | | | | | | | | | | | | | | | (130,664 | ) | | | | | | | | | | |
Derivative financial instruments1 | | | | (5,700 | ) | | | | | | | | | | | | | | | | | | | (5,700 | ) | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss | | | | (239,811 | ) | | | | | | | | | | | | | | | | | | | (238,982 | ) | | | | | | | | | (829 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends | | | | (129,990 | ) | | | | | | | | | | | | | | | | | | | | | | | | (129,990 | ) | | | | | |
Issuance of stock awards | | | | 10,491 | | | | | 583 | | | | | | | | | | 10,491 | | | | | | | | | | | | | | | | |
Shares repurchased | | | | (87,800 | ) | | | | (2,127 | ) | | | | | | | | | (87,800 | ) | | | | | | | | | | | | | | | |
Stock-based compensation | | | | 17,099 | | | | | | | | | | | | | | | 17,099 | | | | | | | | | | | | | | | | |
Non-controlling interest from acquisition | | | | 974 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 974 | |
December 31, 2014 | | | $ | 1,503,847 | | | | | 100,603 | | | | $ | 7,175 | | | | $ | 396,980 | | | | $ | (608,851 | ) | | | $ | 1,692,891 | | | | $ | 15,652 | |
Net income | | | | 250,624 | | | | | | | | | | | | | | | | | | | | | | | | | 250,136 | | | | | 488 | |
Other comprehensive income/(loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Translation loss | | | | (129,652 | ) | | | | | | | | | | | | | | | | | | | (125,534 | ) | | | | | | | | | (4,118 | ) |
Defined benefit plan adjustment1 | | | | 31,042 | | | | | | | | | | | | | | | | | | | | 31,042 | | | | | | | | | | | |
Derivative financial instruments1 | | | | 810 | | | | | | | | | | | | | | | | | | | | 810 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss | | | | (97,800 | ) | | | | | | | | | | | | | | | | | | | (93,682 | ) | | | | | | | | | (4,118 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends | | | | (139,200 | ) | | | | | | | | | | | | | | | | | | | | | | | | (139,200 | ) | | | | | |
Issuance of stock awards | | | | 6,091 | | | | | 514 | | | | | | | | | | 6,091 | | | | | | | | | | | | | | | | |
Shares repurchased | | | | (7,868 | ) | | | | (173 | ) | | | | | | | | | (7,868 | ) | | | | | | | | | | | | | | | |
Stock-based compensation | | | | 9,257 | | | | | | | | | | | | | | | 9,257 | | | | | | | | | | | | | | | | |
Non-controlling interest from acquisition | | | | 7,922 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7,922 | |
December 31, 2015 | | | $ | 1,532,873 | | | | | 100,944 | | | | | 7,175 | | | | | 404,460 | | | | | (702,533 | ) | | | | 1,803,827 | | | | | 19,944 | |
Net income | | | | 287,881 | | | | | | | | | | | | | | | | | | | | | | | | | 286,434 | | | | | 1,447 | |
Other comprehensive income/(loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Translation gain/(loss) | | | | (32,405 | ) | | | | | | | | | | | | | | | | | | | (33,361 | ) | | | | | | | | | 956 | |
Defined benefit plan adjustment1 | | | | (9,577 | ) | | | | | | | | | | | | | | | | | | | (9,577 | ) | | | | | | | | | | |
Derivative financial instruments1 | | | | 7,091 | | | | | | | | | | | | | | | | | | | | 7,091 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income/(loss) | | | | (34,891 | ) | | | | | | | | | | | | | | | | | | | (35,847 | ) | | | | | | | | | 956 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends | | | | (147,748 | ) | | | | | | | | | | | | | | | | | | | | | | | | (147,748 | ) | | | | | |
Issuance of stock awards | | | | 4,040 | | | | | 428 | | | | | | | | | | 4,040 | | | | | | | | | | | | | | | | |
Shares repurchased | | | | (106,739 | ) | | | | (2,179 | ) | | | | | | | | | (106,739 | ) | | | | | | | | | | | | | | | |
Stock-based compensation | | | | 19,289 | | | | | | | | | | | | | | | 19,289 | | | | | | | | | | | | | | | | |
Non-controlling interest from acquisition | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | |
December 31, 2016 | | | $ | 1,554,705 | | | | | 99,193 | | | | $ | 7,175 | | | | $ | 321,050 | | | | $ | (738,380 | ) | | | $ | 1,942,513 | | | | $ | 22,347 | |
CONSOLIDATED STATEMENTS OF CASH FLOWS
Sonoco Products Company
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) Years ended December 31 | 2019 | | 2018 | | 2017 |
| Cash Flows from Operating Activities | | | | | |
| Net income | $ | 292,668 | | | $ | 314,739 | | | $ | 177,447 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Asset impairment | 25,026 | | | 5,794 | | | 20,017 | |
| Depreciation, depletion and amortization | 239,140 | | | 236,245 | | | 217,625 | |
| Gain on adjustment of environmental reserves | (10,675) | | | — | | | — | |
| Share-based compensation expense | 14,334 | | | 10,730 | | | 13,488 | |
| Equity in earnings of affiliates | (5,171) | | | (11,216) | | | (9,482) | |
| Cash dividends from affiliated companies | 6,620 | | | 7,570 | | | 6,967 | |
| Loss on remeasurement of previously held interest in Conitex Sonoco | — | | | 4,784 | | | — | |
| Net loss on disposition of assets | 746 | | | 8,635 | | | 2,039 | |
| | | | | |
| Pension and postretirement plan expense | 52,741 | | | 34,885 | | | 78,506 | |
| Pension and postretirement plan contributions | (231,234) | | | (25,373) | | | (108,579) | |
| Net (decrease)/increase in deferred taxes | 16,958 | | | (9,420) | | | (20,553) | |
| Change in assets and liabilities, net of effects from acquisitions, dispositions and foreign currency adjustments | | | | | |
| Trade accounts receivable | 59,615 | | | 38,193 | | | (43,773) | |
| Inventories | 2,631 | | | (6,150) | | | (16,067) | |
| Payable to suppliers | (25,383) | | | (4,380) | | | 4,226 | |
| Prepaid expenses | 4,030 | | | (5,093) | | | (110) | |
| Accrued expenses | 7,471 | | | 19,153 | | | (14,606) | |
| Income taxes payable and other income tax items | (6,201) | | | (19,014) | | | 70,180 | |
| Other assets and liabilities | (17,466) | | | (10,184) | | | (29,071) | |
| Net cash provided by operating activities | 425,850 | | | 589,898 | | | 348,254 | |
| Cash Flows from Investing Activities | | | | | |
| Purchase of property, plant and equipment | (195,934) | | | (192,574) | | | (188,913) | |
| Cost of acquisitions, net of cash acquired | (298,380) | | | (277,177) | | | (383,725) | |
| | | | | |
| Proceeds from the sale of assets | 14,614 | | | 24,288 | | | 5,271 | |
| Other | 603 | | | 1,335 | | | 2,791 | |
| Net cash used by investing activities | (479,097) | | | (444,128) | | | (564,576) | |
| Cash Flows from Financing Activities | | | | | |
| Proceeds from issuance of debt | 276,843 | | | 226,885 | | | 448,511 | |
| Principal repayment of debt | (139,582) | | | (281,262) | | | (217,320) | |
| Net increase/(decrease) in commercial paper borrowings | 130,000 | | | (4,000) | | | 124,000 | |
| Net increase/(decrease) in outstanding checks | (4,486) | | | (4,282) | | | 7,518 | |
| Payment of contingent consideration | (5,500) | | | — | | | — | |
| Cash dividends – common | (170,253) | | | (161,434) | | | (153,137) | |
| Dividends paid to noncontrolling interests | (214) | | | — | | | — | |
| Purchase of Sonoco Asia noncontrolling interest | — | | | (35,000) | | | — | |
| Shares acquired | (9,608) | | | (14,561) | | | (6,335) | |
| | | | | |
| Net cash provided/(used) by financing activities | 77,200 | | | (273,654) | | | 203,237 | |
| Effects of Exchange Rate Changes on Cash | 941 | | | (6,639) | | | 10,771 | |
| Increase/(Decrease) in Cash and Cash Equivalents | 24,894 | | | (134,523) | | | (2,314) | |
| Cash and cash equivalents at beginning of year | 120,389 | | | 254,912 | | | 257,226 | |
| Cash and cash equivalents at end of year | $ | 145,283 | | | $ | 120,389 | | | $ | 254,912 | |
| Supplemental Cash Flow Disclosures | | | | | |
| Interest paid, net of amounts capitalized | $ | 66,768 | | | $ | 63,147 | | | $ | 57,170 | |
| Income taxes paid, net of refunds | $ | 82,512 | | | $ | 103,442 | | | $ | 96,962 | |
The Notes beginning on page
F-6 F-7 are an integral part of these
consolidated financial statements.
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F-6 FORM 10-K SONOCO 2019 ANNUAL REPORT
| | |
CONSOLIDATEDSTATEMENTS OF CASH FLOWS
Sonoco Products Company
|
| | | | | | | | | | | | | | | |
(Dollars in thousands) Years ended December 31 | | 2016 | | 2015 | | 2014 |
Cash Flows from Operating Activities | | | | | | | | | | | | | | | |
Net income | | | $ | 287,881 | | | | $ | 250,624 | | | | $ | 226,835 | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | | | | | | |
Asset impairment | | | | 7,122 | | | | | 24,408 | | | | | 8,155 | |
Depreciation, depletion and amortization | | | | 205,182 | | | | | 213,161 | | | | | 198,718 | |
(Gain)/Loss on adjustment of Fox River environmental reserves | | | | 850 | | | | | (32,543 | ) | | | | — | |
Share-based compensation expense | | | | 19,289 | | | | | 9,257 | | | | | 17,099 | |
Equity in earnings of affiliates | | | | (11,235 | ) | | | | (10,416 | ) | | | | (9,886 | ) |
Cash dividends from affiliated companies | | | | 10,231 | | | | | 8,131 | | | | | 9,809 | |
(Loss)/Gain on disposition of assets, net | | | | 14,173 | | | | | (5,719 | ) | | | | (2,103 | ) |
Gain on disposition of business | | | | (108,699 | ) | | | | — | | | | | — | |
Pension and postretirement plan expense | | | | 45,281 | | | | | 57,308 | | | | | 40,435 | |
Pension and postretirement plan contributions | | | | (46,716 | ) | | | | (36,009 | ) | | | | (65,944 | ) |
Tax effect of share-based compensation exercises | | | | 2,654 | | | | | 3,601 | | | | | 3,918 | |
Excess tax benefit of share-based compensation | | | | (2,695 | ) | | | | (3,622 | ) | | | | (4,126 | ) |
Net (decrease) increase in deferred taxes | | | | 2,591 | | | | | (3,737 | ) | | | | 38,760 | |
Change in assets and liabilities, net of effects from acquisitions, dispositions and foreign currency adjustments | | | | | | | | | | | | | | | |
Trade accounts receivable | | | | (44,672 | ) | | | | (15,398 | ) | | | | (35,920 | ) |
Inventories | | | | (11,515 | ) | | | | (2,567 | ) | | | | 6,230 | |
Payable to suppliers | | | | 5,550 | | | | | 12,349 | | | | | 26,850 | |
Prepaid expenses | | | | 5,125 | | | | | (6,766 | ) | | | | (13,282 | ) |
Accrued expenses | | | | (11,742 | ) | | | | 15,299 | | | | | (8,713 | ) |
Income taxes payable and other income tax items | | | | 21,913 | | | | | (17,118 | ) | | | | (1,111 | ) |
Fox River environmental reserves | | | | (1,043 | ) | | | | (1,335 | ) | | | | (14,349 | ) |
Other assets and liabilities | | | | 9,154 | | | | | (5,978 | ) | | | | (3,460 | ) |
Net cash provided by operating activities | | | | 398,679 | | | | | 452,930 | | | | | 417,915 | |
Cash Flows from Investing Activities | | | | | | | | | | | | | | | |
Purchase of property, plant and equipment | | | | (186,741 | ) | | | | (192,295 | ) | | | | (177,076 | ) |
Cost of acquisitions, net of cash acquired | | | | (88,632 | ) | | | | (17,447 | ) | | | | (334,132 | ) |
Cash paid for disposition of assets | | | | (8,436 | ) | | | | — | | | | | — | |
Proceeds from the sale of assets | | | | 280,373 | | | | | 32,530 | | | | | 7,758 | |
Investment in affiliates and other | | | | 294 | | | | | (2,657 | ) | | | | (3,983 | ) |
Net cash used by investing activities | | | | (3,142 | ) | | | | (179,869 | ) | | | | (507,433 | ) |
Cash Flows from Financing Activities | | | | | | | | | | | | | | | |
Proceeds from issuance of debt | | | | 241,180 | | | | | 68,182 | | | | | 294,846 | |
Principal repayment of debt | | | | (306,305 | ) | | | | (182,900 | ) | | | | (49,624 | ) |
Net increase in commercial paper borrowings | | | | — | | | | | — | | | | | — | |
Net (decrease) increase in outstanding checks | | | | (163 | ) | | | | (684 | ) | | | | 1,335 | |
Cash dividends — common | | | | (146,364 | ) | | | | (138,032 | ) | | | | (128,793 | ) |
Excess tax benefit of share-based compensation | | | | 2,695 | | | | | 3,622 | | | | | 4,126 | |
Shares acquired | | | | (106,739 | ) | | | | (7,868 | ) | | | | (87,800 | ) |
Shares issued | | | | — | | | | | 1,324 | | | | | 5,373 | |
Net cash (used) provided by financing activities | | | | (315,696 | ) | | | | (256,356 | ) | | | | 39,463 | |
Effects of Exchange Rate Changes on Cash | | | | (5,049 | ) | | | | 4,561 | | | | | (6,344 | ) |
Increase (Decrease) in Cash and Cash Equivalents | | | | 74,792 | | | | | 21,266 | | | | | (56,399 | ) |
Cash and cash equivalents at beginning of year | | | | 182,434 | | | | | 161,168 | | | | | 217,567 | |
Cash and cash equivalents at end of year | | | $ | 257,226 | | | | $ | 182,434 | | | | $ | 161,168 | |
Supplemental Cash Flow Disclosures | | | | | | | | | | | | | | | |
Interest paid, net of amounts capitalized | | | $ | 53,411 | | | | $ | 57,551 | | | | $ | 54,496 | |
Income taxes paid, net of refunds | | | $ | 134,777 | | | | $ | 104,922 | | | | $ | 67,192 | |
The Notes beginning on pageF-6 are an integral partNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Sonoco Products Company (dollars in thousands except per share data)
1. Summary of
these financial statements. | | | | | | |
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| | SONOCO 2016 ANNUAL REPORT
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significant accounting policies | | |
NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS
Sonoco Products Company (dollars in thousands except per share data)
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The Consolidated Financial Statements include the accounts of Sonoco Products Company and its majority-owned subsidiaries (the “Company” or “Sonoco”) after elimination of intercompany accounts and transactions.
Investments in affiliated companies in which the Company shares control over the financial and operating decisions, but in which the Company is not the primary beneficiary, are accounted for by the equity method of accounting. Income applicable to these equity investments is reflected in “Equity in earnings of affiliates, net of tax” in the Consolidated Statements of Income. The aggregate carrying value of equity investments is reported in “Other Assets” in the Company’s Consolidated Balance SheetsSheets and totaled $106,956$54,339 and $111,051$55,516 at December 31, 20162019 and 2015,2018, respectively. Affiliated companies over which the Company exercised a significant influence at December 31,
2016,2019, included:
| | | | | |
| Entity | | December 31, 20162019 |
RTS Packaging JVCO | 35.0 | | | 35.0% | % |
Cascades Conversion, Inc. | 50.0 | | | 50.0% | % |
Cascades Sonoco, Inc. | 50.0 | | | 50.0% | % |
Showa Products Company Ltd. | 22.2 | | | 20.0% | % |
Conitex Sonoco Holding BVI Ltd.
Crown Fibre Tube. Inc. | 20.0 | | | 30.0% | % |
Papertech Energía, S.L. | 25.0 | % |
| Weidenhammer New Packaging, LLC | 40.0 | | | 40.0% | % |
Also includedincluded in the investment totals above is the Company’s 19.5% ownership in a small tubes and cores business in Chile and its 12.19% ownership in a small paper recycling business in Finland. These investments are accounted for under the cost method as the Company does not have the ability to exercise significant influence over them. Estimates and assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Beginning in 2018, the Company records revenue when control is transferred to the customer, which is either upon shipment or over time in cases where the Company is entitled to payment with margin for products produced that are customer specific without alternative use. The Company recordsrecognizes over time revenue under the input method as goods are produced. Revenue that is recognized at a point in time is recognized when the customer obtains control of the goods. Customers obtain control either when goods are delivered to the customer facility, if the Company is responsible for arranging transportation, or when picked up by the customer's designated carrier. The Company commonly enters into Master Supply Arrangements (MSA) with customers to provide goods and/or services over specific time periods. Customers submit purchase orders with quantities and prices to create a contract for accounting purposes. Shipping and handling expenses are considered a fulfillment cost, and included in "Cost of Sales," and freight charged to customers is included in "Net Sales" in the Company's Consolidated Statements of Income.
Prior to 2018, the Company recorded revenue when title and risk of ownership
passpassed to the customer, and when persuasive evidence of an arrangement
exists,existed, delivery
hashad occurred or services
havehad been rendered, the sales price to the customer
iswas fixed or determinable and when collectibility
iswas reasonably assured. Certain judgments, such as provisions for estimates of sales returns and allowances,
arewere required in the application of the Company’s revenue policy and, therefore,
arewere included in the results of operations in its Consolidated Financial Statements. Shipping and handling expenses
arewere included in “Cost of sales,” and freight charged to customers
iswas included in “Net sales” in the Company’s Consolidated Statements of
Income.Income for the year ended December 31, 2017.
The Company has rebate agreements with certain customers. These rebates are recorded as reductions of sales and are accrued using sales data and rebate percentages specific to each customer agreement. Accrued customer rebates are included in
“Accrued"Accrued expenses and
other”other" in the
Company’sCompany's Consolidated Balance Sheets.
Payment terms under the Company's arrangements are short term in nature, generally no longer than 120 days. The Company does provide prompt payment discounts to certain customers if invoices are paid within a predetermined period. Prompt payment discounts are treated as a reduction of revenue and are determinable within a short period after the originating sale.
Accounts receivable and allowance for doubtful accounts
The Company’s trade accounts receivable are
non-interest bearing and are recorded at the invoiced amounts. The allowance for doubtful accounts represents the Company’s best estimate of the amount of probable credit losses in existing accounts receivable. Provisions are made to the allowance for doubtful accounts at such time that collection of all or part of a trade account receivable is in question. The allowance for doubtful accounts is monitored on a regular basis and adjustments are made as needed to ensure that the account properly reflects the Company’s best estimate of uncollectible trade accounts receivable. Account balances are charged off against the allowance for doubtful accounts when the Company determines that the receivable will not be recovered.
F-7 FORM 10-K SONOCO 2019 ANNUAL REPORT
Sales to one of the Company’s customerslargest customer accounted for approximately 5% of the Company’s net sales in 2016, 6%2019, 4% in 20152018 and 7%4% in 2014,2017, primarily in the Display and Packaging and Consumer Packaging segments. Receivables from this customer accounted for approximately 3% and 6%8% of the Company’s total trade accounts receivable at December 31, 20162019 and 2015, respectively.4% at December 31, 2018. The Company’s next largest customer comprised approximately 4% of the Company’sCompany’s net sales in 2016,2019, 4% in 20152018 and 3% in 2014.Many2017.
Certain of the Company’s customers sponsor and actively promote multi-vendor supply chain finance arrangements and, in a limited number of cases, the Company has agreed to participate. Accordingly, approximately 6% and 5%approximately 9% of consolidated annual sales were settled under these arrangements in 2016both 2019 and 2015, respectively.2018.
Research and development costs are charged to expense as incurred and include salaries and other directly related expenses. Research and development costs totaling approximately $22,500$23,300 in 2016, $22,1002019, $23,200 in 20152018 and $24,200$21,000 in 2014 2017 are included in “Selling, general and administrative expenses” in the Company’s Consolidated Statements of Income. Restructuring and asset impairment
Costs associated with exit or disposal activities are recognized when the liability is incurred. If assets become impaired as a result of a restructuring action, the assets are written down to fair value, less estimated costs to sell, if applicable. A number of significant estimates and assumptions are involved in the determination of fair value. The Company considers historical experience and all available information at the time the estimates are made; however, the amounts that are ultimately realized upon the sale of divested assets may differ from the estimated fair values reflected in the Company’s Consolidated Financial Statements.
Cash and cash equivalents
Cash equivalents are composed of highly liquid investments with an original maturity to the Company of generally three months or less when purchased. Cash equivalents are recorded at cost, which approximates market.
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SONOCO 2016 ANNUAL REPORT
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Inventories
Inventories
Inventories are stated at the lower of cost or
market.net realizable value. The
last-in,first-out (LIFO) method is used for the valuation of certain of the Company’s domestic inventories, primarily metal, internally manufactured paper and paper purchased from third parties.
The LIFO method of accounting was used to determine the carrying costs of approximately 19%approximately 13% and 19% of14% of total inventories at December 31, 20162019 and 2015,2018, respectively. The remaining inventories are determined on thefirst-in,first-out (FIFO) method. If the FIFO method of accounting had been used for all inventories, total inventory would have been higherhigher by $17,319$20,203 and $18,894 $18,854 at December 31, 20162019 and 2015,2018, respectively. Property, plant and equipment
Plant assets represent the original cost of land, buildings and equipment, less depreciation, computed under the straight-line method over the estimated useful lives of the assets, and are reviewed for impairment whenever events indicate the carrying value may not be recoverable. Equipment lives generally range from 3 to 11 years, and buildings from 15 to 40 years.
Timber resources are stated at cost. Depletion is charged to operations based on the estimated number of units of timber cut during the year.
Goodwill and other intangible assets
The Company assesses its goodwill for impairment annually
andduring the third quarter, or from time to time when warranted by the facts and circumstances surrounding individual reporting units or the Company as a whole. In performing the impairment test, the Company
uses either a qualitative evaluation or a quantitative test. The qualitative evaluation considers factors such ascompares the
macroeconomic environment, Company stock pricefair value of the reporting unit with its carrying amount and
market capitalization movement, business strategy changes, and significant customer wins and losses. Therecognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. This quantitative test considers factors such as the amount by which estimated fair value exceeds current carrying value, current year operating performance as compared to prior projections, and implied fair values from comparable trading and transaction multiples.
Calculated
The calculated reporting unit estimated fair values reflect a number of significant management assumptions and estimates including the
Company’sCompany's forecast of sales,
volumes and prices, profit margins,
income taxes, capital expenditures and
changes in working capital requirements.discount rate. Changes in these assumptions
and/or discount rates could materially impact the estimated fair values.
When the Company estimates the fair value of a reporting unit, it does so using a discounted cash flow model based on projections of future
years’years' operating results and associated cash flows, corroborated by comparable trading and transaction multiples. The
Company’sCompany's projections incorporate
management’smanagement's best estimates of the expected future results, which include expectations related to new and retained business and future operating margins. Projected future cash flows are then discounted to present value using a discount rate management believes is commensurate with the risks inherent in the cash flows.
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
not, and the carrying value of the reporting
unit’s goodwillunit exceeds the
implied fair value of that
goodwill,reporting unit, an impairment charge is recognized for the excess. Goodwill is not amortized.
Intangible assets are amortized, usually on a straight-line basis, over their respective useful lives, which generally range from 3 to 40 years. The Company evaluates its intangible assets for impairment whenever indicators of impairment exist. The Company has no intangibles with indefinite lives.
The Company provides for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting requirements and tax laws. Assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The Company recognizes liabilities for uncertain income tax positions based on our estimate of whether it is more likely than not that additional taxes will be required and we report related interest and penalties as income taxes.
The Company elected to early adopt Accounting Standards Update (ASU) 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities," as of January 1, 2018. The Company uses derivatives to mitigate the effect of fluctuations in some of its raw material and energy costs, foreign currencies, and, from time to time, interest rates. The Company purchases commodities such as recovered paper, metal, resins and energy, generally at market or at fixed prices that are established with the vendor as part of the purchase process for quantities expected to be consumed in the ordinary course of business. The Company may enter into commodity futures or swaps to manage the
F-8 FORM 10-K SONOCO 2019 ANNUAL REPORT
effect of price fluctuations. The Company may use foreign currency forward contracts and other risk management instruments to manage exposure to changes in foreign currency cash flows and the translation of monetary assets and liabilities on the Company’s consolidated financial statements. The Company is exposed to interest-rate fluctuations as a result of using debt as a source of financing for its operations. The Company may from time to time use traditional, unleveraged interest rate swaps to adjust its mix of fixed and variable rate debt to manage its exposure to interest rate movements.
The Company records its derivatives as assets or liabilities on the balance sheet at fair value using published market prices or estimated values based on current price and/or rate quotes and discounted estimated cash flows. Changes in the fair value of derivatives are recognized either in net income or in other comprehensive income, depending on the designated purpose of the derivative. Amounts in accumulated other comprehensive income are reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. It is the Company’s policy not to speculate in derivative instruments.
Business combinations
The Company’s acquisitions of businesses are accounted for in accordance with ASC 805, "Business Combinations." The Company recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquired business at their fair values as of the date of acquisition. Goodwill is measured as the excess of consideration transferred, also measured at fair value, over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities including those related to debt, pensions and other postretirement plans, uncertain tax positions, contingent consideration and contingencies. This method also requires us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on our financial condition and results of operations.
Significant estimates and assumptions in estimating the fair value of acquired customer relationships, technology, and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be increased or decreased, or the acquired asset could be impaired.
The Company identifies its reportable segments by evaluating the level of detail reviewed by the chief operating decision maker, gross profit margins, nature of products sold, nature of the production processes, type and class of customer, methods used to distribute products, and nature of the regulatory environment. Of these factors, the Company believes that the most significant in determining the aggregation of operating segments are the nature of the products and the type of customers served.
Pursuant to U.S. GAAP for accounting for contingencies, accruals for estimated losses are recorded at the time information becomes available indicating that losses are probable and that the amounts are reasonably estimable. Amounts so accrued are not discounted.
2.
NEW ACCOUNTING PRONOUNCEMENTSNew accounting pronouncements
In
January 2017,December 2019, the Financial Accounting Standards Board
(FASB)(“FASB”) issued
Accounting Standards Update (“ASU”) ASU
2017-04, “Simplifying 2019-12 "Income Taxes," which provides for certain updates to reduce complexity in the Testaccounting for Goodwill Impairment,” eliminatingincome taxes, including the
requirement to determine the fair value | | | | | | |
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| | SONOCO 2016 ANNUAL REPORT
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of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under ASU2017-04, goodwill impairment testing will be performed by comparing the fair valueutilization of the reporting unit with its carrying amount and recognizing an impairment chargeincremental approach for the amount by which the carrying amount exceeds the reporting unit’s fair value.intraperiod tax allocation, among others. The new standard is effective for annual and interim goodwill impairment testsamendments in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. The Company does not expect the implementation of ASU2017-04 to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU2017-01, “Clarifying the Definition of a Business,” providing guidance to entities to assist with evaluating when a set of transferred assets and activities (collectively, the “set”) is a business and provides a screen to determine when a set is not a business. Under the new guidance, when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset, or group of similar assets, the assets acquired would not represent a business. Also, to be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to produce outputs. The new standard is 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a prospective basis to any transactions occurring within the period of adoption.2020. The Company does not expect the implementation of ASU2017-01 to have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU2016-18, “Restricted Cash,” requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling thebeginning-of-period andend-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of restricted cash or restricted cash equivalents. The guidance is effective for periods beginning after December 15, 2017 on a retrospective basis. Although the presentational format of the statement of cash flows will be updated to conform with this guidance, the Company does not expect the implementation of ASU2016-18 to have a material impact on its consolidated financial statements.
In October 2016, the FASB issued ASU2016-16,“Intra-Entity Transfers of Assets Other Than Inventory” as part of its simplification initiative to reduce complexity in accounting standards. This update requires that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance is effective for periods beginning after December 15, 2017 on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company does not expect the implementation of ASU2016-16 2019-12 to have a material effect on its consolidated financial statements.
In August 2016,December 2018, the FASB issued ASU2016-15,“Classification 2018-16 “Derivatives and Hedging: Inclusion of Certain Cash Receiptsthe Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes,” which allows the use of the SOFR and Cash Payments,”providing clarificationOIS rate as benchmark rates after the Federal Reserve started publishing such daily rates on eight cash flow classification issues, including 1) debt prepaymentApril 3, 2018. The Company adopted the standard effective January 1, 2019 using the prospective basis. The adoption did not have a material effect on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14 "Compensation-Retirement Benefits-Defined Benefit Plans-General," which modifies certain disclosure requirements for employers that sponsor defined benefit pension or
debt extinguishment costs, 2) settlement of relatively insignificant debt instruments, 3) contingent consideration payments, 4) insurance claim settlements, 5) life insurance settlements, 6) distributions received from equity method investees, 7) beneficial interestsother postretirement plans. The amendments in
securitization transactions, and 8) separately identifiable cash flows. The guidance isASU 2018-14 are effective
for public business entities for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years.2020. The Company does not expect the implementation of ASU
2016-15 2019-12 to have a material effect on its consolidated financial statements.
In June 2016, the FASB issued ASU
2016-13,“Measurement "Measurement of Credit Losses on Financial Instruments,”" which requires measurement and recognition of expected versus incurred credit losses for financial assets held.
The measurement of expected credit losses should be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those annual periods. The Company
will adopt this standard using a modified retrospective approach by recording a cumulative-effect adjustment to retained earnings of approximately $200 as of January 1, 2020. The Company does not expect the implementation of ASU
2016-13 to have a material effect on its consolidated financial statements.
In
MarchJanuary 2016, the
FASBFinancial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") ASU
2016-09,“Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for share-based payment transactions, including 1) accounting for income taxes, 2) classification of excess tax benefits in the statement of cash flows, 3) forfeitures, 4) minimum statutory tax withholding requirements, 5) cash flow classification of employee taxes withheld in the form of shares, 6) the practical expedient for estimating the expected term, and 7) intrinsic value. The guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. The Company does not expect the implementation of 2016-02, "Leases" (“ASU
2016-09 to have a material effect on its consolidated financial statements.In March 2016, the FASB issued ASU2016-08,“Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net),”which provides guidance on recording revenue on a gross basis versus a net basis based on the determination of whether an entity is a principal or an agent when another party is involved in providing goods or services to a customer. The amendments in this update affect the guidance in ASUNo. 2014-09 and are effective in the same time frame as ASU2014-09 as discussed below.
In February 2016, the FASB issued ASU2016-02, which changes accounting for leases and requires 2016-02”) requiring lessees to recognize the assets and liabilities arising from all leases, including those classified as operating leases under previous accounting guidance on the balance sheet a right-of-use asset and requireslease liability for all long-term leases and requiring disclosure of key information about leasing arrangements in order to increase transparency and comparability among organizations. The accounting for lessors does not fundamentally change except for changes to conform and align guidance to the lessee guidance. The guidance is effective for reporting periods beginning after December 15, 2018, including interim periods within those fiscal years and requires retrospective application.the revenue recognition standard adopted in 2018. The Company is still assessingestablished a cross-functional team to implement certain software solutions as part of its newly integrated enterprise-wide lease management system. The implementation plan included developing business processes, accounting systems, and internal controls to ensure the impactCompany's compliance with reporting and disclosure requirements of the new standard. The Company elected the package of practical expedients permitted under the transition guidance and, as also provided for under the standard, has made an accounting policy election to exclude from the balance sheet leases with a term of 12 months or less. The Company also elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases and has elected to combine lease and non-lease components as a single lease component for all classes of assets.
F-9 FORM 10-K SONOCO 2019 ANNUAL REPORT
The Company adopted ASU
2016-02 as of January 1, 2019, using the modified retrospective transition method and elected to apply the optional transition approach prescribed by ASU 2018-11 which allows entities to initially apply the new leases standard at the adoption date, without adjusting comparative periods. Upon the adoption of ASU 2016-02, the Company recorded on its consolidated
financial statements.In May 2015, the FASB issued ASU2015-07, “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”,which removed the requirement to categorize within the fair value hierarchy investments for which fair value is measured using the net asset value per share practical expedient provided by Accounting Standards Codification 820, “Fair Value Measurement.” Disclosures about investments in certain entities that calculate net asset value per share are limited under ASU2015-07 to those investments for which the entity has elected to estimate the fair value using the net asset value practical expedient. This guidance became effective for reporting periods beginning after December 15, 2015, with retrospective application to all periods presented. Accordingly, common collective trusts and cer-
| | | | | | |
SONOCO 2016 ANNUAL REPORT
| | F8
| | | | FORM 10-K
|
tain other investments are no longer categorized within the fair value hierarchy in Note 10.
In April 2015, the FASB issued ASU2015-03,“Simplifying the Presentation of Debt Issuance Costs,”which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet right of use assets totaling $336,083 and lease liabilities totaling $344,362, as well as a direct deduction from the carrying amountcumulative effect adjustment to retained earnings of that debt liability, consistent with debt discounts,$6,771 and not recorded as separate assets. This update was effective for reporting periods beginning after December 15, 2015, and was requireda $1,508 reduction to be applied on a retrospective basis. Accordingly, the Company adopted ASU2015-03 on January 1, 2016. Debt issuance costs totaling $6,584 previously included in “Other Assets” have been reclassified to “Long-Term Debt, Net of Current Portion” on the Company’s Consolidated Balance Sheets as of December 31, 2015.
In May 2014, the FASB issued ASU2014-09, “Revenue From Contracts With Customers,”which changes the definitions/criteria used to determine when revenue should be recognized from being based on risks and rewards to being based on control. Among other changes, ASU2014-09 changes the manner in which variable consideration is recognized, requires recognition of the time value of money when payment terms exceed one year, provides clarification on accounting for contract costs, and expands disclosure requirements. The effective date for implementation of ASU2014-09 has been deferred and is now effective for reporting periods beginning after December 15, 2017. The Company is in the process of finalizing its assessment of the impact of ASU2014-09 on its consolidated financial statements, but expects the adoption to have the effect of accelerating the timing of revenue recognition compared to current standards for those arrangements under which the Company is producing customer-specific products without alternative use and would be entitled to payment for work completed, including a reasonable margin. The Company has selected the modified retrospective method of adoption and is currently expecting to adopt this standard in the first quarter of fiscal 2018.
tax liabilities.
Other than the pronouncements discussed above, there have been no other newly issued nor newly applicable accounting pronouncements that have had, or are expected to have, a material impact on the Company’s financial statements. Further, at December 31,
2016,2019, there were no other pronouncements pending adoption that are expected to have a material impact on the Company’s
consolidated financial statements.
3.
ACQUISITIONS AND DISPOSITIONSAcquisitions
and dispositions
Acquisitions
The Company completed four2 acquisitions during 20162019 at a net cash cost of $88,632.$297,926. On November 1, 2016,December 31, 2019, the Company completed the acquisition of Plastic Packaging Inc. (“PPI”Thermoform Engineered Quality, LLC, and Plastique Holdings, LTD, (together "TEQ"), a privately held Hickory, N.C.-based flexible packaging company for $67,568,$187,292, net of cash acquired. Founded in 1957, PPI, which is partThe operations acquired consist of the Company’s Consumer Packaging segment, specializes inshort-run, customized flexible packaging for consumer brands in markets including food products, pet products, confection,three thermoforming and health and personal care. PPI operates two manufacturingextrusion facilities in North Carolinathe United States along with a thermoforming operation in the United Kingdom and thermoforming and molded-fiber manufacturing in Poland, which together employ approximately 170 employees. In conjunction with this500 associates. The acquisition of TEQ provides a strong platform to further expand Sonoco's growing healthcare packaging business. Final consideration is subject to a post-closing adjustment for the Company recorded net tangible assetschange in working capital to the date of $22,756, identifiable intangibles of $18,900, and goodwill of $25,912, none ofclosing, which is expected to be tax deductible. Factors comprising goodwill includecompleted by the end of the first quarter of 2020. The acquisition was financed using short-term credit facilities.
On August 9, 2019, the Company completed the acquisition of Corenso Holdings America, Inc. ("Corenso") for $110,634, net of cash acquired. Corenso is a leading manufacturer of uncoated recycled paperboard (URB) and high-performance cores used in the paper, packaging films, tape, and specialty industries. Corenso operates a 108,000-ton per year URB mill and core converting facility in Wisconsin Rapids, Wisconsin, as well as a core converting facility in Richmond, Virginia, expanding the Company's ability to leverage product offerings acrossproduce a broader customer basewide variety of sustainable coreboard grades. The acquisition was financed using available cash and short-term borrowings.
The preliminary fair values of the valueassets acquired and liabilities assumed in connection with the TEQ and Corenso acquisitions for the year ended December 31, 2019 are as follows:
| | | | | | | | | | | | | | |
| | | TEQ | | Corenso |
| Trade Accounts Receivable | | $ | 11,781 | | | $ | 8,673 | |
| Inventories | | 4,262 | | | 8,707 | |
| Property, Plant and Equipment | | 42,005 | | | 36,928 | |
| Goodwill | | 75,595 | | | 43,427 | |
| Other intangible assets | | 56,170 | | | 29,170 | |
| Payable to suppliers | | (4,965) | | | (5,963) | |
| Other net tangible assets/(liabilities) | | 3,243 | | | 405 | |
| Deferred income taxes, net | | (799) | | | (10,713) | |
| Net assets | | $ | 187,292 | | | $ | 110,634 | |
The amount of goodwill expected to be deductible for income tax purposes is $58,544 for TEQ and $0 for Corenso. Goodwill for TEQ and Corenso is comprised of the assembled workforce. workforce and increased access to certain markets. As the acquisition of TEQ was completed on December 31, 2019, none of its results are reflected in the Company's Consolidated Statement of income for the year ended December 31, 2019. Beginning in the first quarter of 2020, TEQ's results will be reflected in the Company's Consumer Packaging segment. Corenso's financial results from August 9, 2019 to December 31, 2019 are included in the Company's Paper and Industrial Converted Products segment.
The allocation of the purchase price of PPICorenso and TEQ to the tangible and intangible assets acquired and liabilities assumed was based on the Company’sCompany's preliminary estimates of their fair value, basedrelying on information currently available. Management is continuing to finalize its valuationvaluations of certain assets and liabilities listed in the table above, and expects to complete its valuations within one year of the allocationdate of the respective acquisitions.
The Company does not believe that the results of the business acquired in 2019 were material to the years presented, individually or in the first quarteraggregate, and are therefore not subject to the supplemental pro-forma information required by ASC 805. Accordingly, this information is not presented herein.
The Company completed 3 acquisitions during 2018 at a net cash cost of
2017.$278,777. On September 19, 2016,October 1, 2018, the Company completed the acquisition of Laminar Medica (“Laminar”the remaining 70 percent interest in Conitex Sonoco (BVI), Ltd. ("Conitex Sonoco") from Texpack Investments, Inc. ("Texpack") for total consideration of $134,847, including net cash payments of $127,782 and debt assumed of $7,065. Final consideration was subject to a post-closing adjustment for the change in working capital to the United Kingdomdate of closing. This adjustment was settled in February 2019 for an additional cash payment to the seller of $84. The Conitex Sonoco joint venture was formed in 1998 with Texpack, a Spanish-based global provider of paperboard and Czech Republic,paper-based packaging products. Conitex Sonoco produces uncoated recycled paperboard and tubes and cones for the global spun yarn industry, as well as adhesives, flexible intermediate bulk containers and corrugated pallets. Conitex Sonoco has approximately 1,250 employees across 13 manufacturing locations in 10 countries (principally in Asia), including 4 paper mills and 7 cone and tube converting operations and 2 other production facilities. Also on October 1, 2018, the Company acquired a rigid paper facility in Spain ("Compositub") from Clinimed (Holdings) Limited,Texpack Group Holdings B.V. for a privately held specialty medical products company basedcash payment of $9,956. Final consideration was subject to a post-closing adjustment for the change in working capital to the U.K.date of closing. This adjustment was settled in February 2019 for $17,201, netan additional cash payment to the seller of cash acquired. In conjunction$371.
Immediately prior to the acquisition, the fair value of the Company's 30 percent interest in Conitex Sonoco was determined to be $52,543 with a carrying value of $57,327. As the carrying value of the investment exceeded its acquisition-date fair value, the investment was written down to
F-10 FORM 10-K SONOCO 2019 ANNUAL REPORT
fair value resulting in a charge of $4,784 in "Selling, general and administrative expenses" on the Company's Consolidated Statements of Income for the year ended December 31, 2018. Additionally, foreign currency translation losses related to the Company's investment in Conitex Sonoco were reclassified out of accumulated other comprehensive loss resulting in a charge of $897 in "Selling, general and administrative expenses" on the Company's Consolidated Statements of Income for the year ended December 31, 2018.
On April 12, 2018, the Company completed the acquisition of Highland Packaging Solutions ("Highland"). Total consideration for this acquisition which is accounted for as partwas $148,539, including net cash paid of the Company’s Protective Solutions segment,$141,039, along with a contingent purchase liability of $7,500 payable in 2 annual installments if certain sales metrics are achieved. The first year's metric was met and the Company recorded net tangible assetspaid the first installment of $2,739, identifiable intangibles$5,000 in 2019. The second installment of $5,654, and goodwill of $8,808, none of which$2,500 is expected to be tax deductible. paid in the second quarter of 2020. The liability for the remaining installment is included in "Accrued expenses and other" on the Company's Consolidated Balance Sheet at December 31, 2019. Highland manufactures thermoformed plastic packaging for fresh produce and dairy products from a single production facility in Plant City, Florida, providing total packaging solutions for customers that include sophisticated engineered containers, flexographic printed labels, and inventory management through distribution warehouses in the Southeast and West Coast of the United States.
During the year ended December 31, 2019, the Company finalized its valuations of the assets acquired and liabilities assumed in acquisitions completed during 2018. As a result, the following measurement period adjustments were made to the previously disclosed provisional fair values of assets and liabilities acquired and are as follows:
| | | | | | | | | | | | | | | | | |
| Conitex Sonoco | | Compositub | | Highland |
| Trade accounts receivable | $ | (77) | | | $ | 203 | | | $ | — | |
| Inventories | — | | | 50 | | | — | |
| Property, plant and equipment | (199) | | | (1,026) | | | 1,895 | |
| Goodwill | 2,246 | | | (566) | | | (1,895) | |
| Other intangible assets | 300 | | | 1,888 | | | — | |
| Accrued expenses and other | (1,782) | | | (138) | | | — | |
| Other net tangible assets/(liabilities) | (404) | | | (40) | | | — | |
| Additional cash consideration | $ | 84 | | | $ | 371 | | | $ | — | |
Factors comprising the goodwill for Conitex Sonoco and Compositub, of which $2,000 and $1,965, respectively, is expected to be deductible for income tax purposes, include increased access to certain markets as well as the value of the assembled workforce. The allocationfinancial results of Conitex Sonoco and Compositub are included in the Company's Paper and Industrial Converted Products segment and Consumer Packaging segment, respectively.
All of the purchase pricegoodwill for Highland is expected to be deductible for income tax purposes, and is comprised of Laminarincreased access to certain markets as well as the value of the assembled workforce. Highland's financial results are included in the Company's Consumer Packaging segment and the business operates within the Company's global plastics division.
The Company does not believe that the results of the businesses acquired in 2018 were material to the tangible and intangible assets acquired and liabilities assumed was based on the Company’s preliminary estimates of their fair value, based on information currently available. Management is continuing to finalize its valuation of certain assets and liabilities and expects to complete the allocationyears presented, individually or in the first quarteraggregate, and are therefore not subject to the supplemental pro-forma information required by ASC 805. Accordingly, this information is not presented herein.
The Company completed 2 acquisitions during 2017 at a net cash cost of
2017.$383,725. On August 30, 2016,July 24, 2017, the Company completed the acquisition of the temperature-controlled cargo container assets, licenses, trademarks, and manufacturing rights from AAR Corporation. TotalClear Lam Packaging, Inc. ("Clear Lam") for $164,951, net of cash acquired. Final consideration was subject to an adjustment for this business was $6,000, includingworking capital, which resulted in cash paid of $3,000,non-contingent deferred payments of $2,000, and a contingent purchase liability totaling $1,000. Thenon-contingent deferred payments are due in two installments, $1,000 payable 12 months from the closing date, and $1,000 payable 24 months from the closing date. The contingent purchase liability is based upon a highly attainable metric which$1,600 being returned to the Company expectsin 2018. Clear Lam manufactures high barrier flexible and forming films used to be met. The contingent liability is payablepackage a variety of products for consumer packaged goods companies, retailers and other industrial manufacturers, with a focus on structures used for perishable foods. It has production facilities in two installments, $500 due 36 months fromElk Grove Village, Illinois, and Nanjing, China. Clear Lam's financial results are included in the closing date and $500 due 48 months from the closing date. In relation to this acquisition, which is accounted for as part of the Protective Solutions segment, the Company recorded net tangible assets of $200, identifiable intangibles of $4,100, and goodwill of $1,700, all of which will be tax deductible.
Company's Consumer Packaging segment.
On
June 24, 2016,March 14, 2017, the Company completed the acquisition of
a small tube and core business in Australia. Theall-cash purchase price of the business was $863. In conjunction with this acquisition, which is part of the Paper and Industrial Converted Products segment, the Company recorded net tangible assets of $149, identifiable intangibles of $297, and goodwill of $417, none of which is expected to be tax deductible.The Company completed two acquisitions during 2015 at an aggregate cost of $21,184, of which $17,447 was paid in cash. On April 1, 2015, the Company completed the acquisition of a 67% controlling interest in Graffo Paranaense de Embalagens S/A (“Graffo”), a flexible packaging business located in Brazil. Graffo, which is part of the Company’s Consumer Packaging segment, serves the confectionery, dairy, pharmaceutical and tobacco markets in Brazil with approximately 230 employees. Total consideration paid for Graffo was approximately $18,334, including cash of $15,697, and assumed debt of $2,637.
Subsequent to year end, on February 15, 2017, the Company signed a definitive agreement to acquire Packaging Holdings, Inc. (Packaging),and subsidiaries, including Peninsula Packaging LLC ("Packaging Holdings"), for approximately $230 million in cash.$218,774, net of cash acquired. Packaging Holdings manufactures thermoformed packaging for a wide range of whole fresh fruits,pre-cut fruits and produce, prepared salad mixes, as well as baked goods in retail supermarkets. Founded in 2001 and based in Exeter, California, Packaging operates fivesupermarkets from 5 manufacturing facilities, fourincluding 4 in the United
States and 1 in Mexico. Packaging Holding's financial results are included in the Company's Consumer Packaging segment and the business operates as the Peninsula brand of thermoformed packaging products within the Company's global plastics division. Although neither of the acquisitions completed during 2017 were considered individually material, they were considered material on a combined basis. The following table presents the Company's estimated pro forma consolidated results for 2017, assuming both acquisitions had occurred January 1, 2016. This pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisitions had been completed as of the beginning of 2016, nor are they necessarily indicative of future consolidated results.
| | | | | | | | |
FORM 10-K
| Consolidated Pro Forma Supplemental Information | | Year Ended
December 31, 2017 |
| Packaging Holdings and Clear Lam | F9
| (unaudited) |
| Net sales | SONOCO 2016 ANNUAL REPORT
| $ | 5,143,066 | |
| Net income attributable to Sonoco | | $ | 178,205 | |
| Earnings per share: | | |
| Pro forma basic | | $ | 1.78 | |
| Pro forma diluted | | $ | 1.77 | |
F-11 FORM 10-K SONOCO 2019 ANNUAL REPORT
States
The pro forma information above does not project the Company’s expected results of any future period and
one in Mexico. The transaction is subject to normal regulatory review and is expected to close by the endgives no effect for any future synergistic benefits that may result from consolidating these subsidiaries or costs from integrating their operations with those of the
second quarterCompany. Pro forma information for 2017 includes adjustments to depreciation, amortization, interest expense, and income taxes. Acquisition-related costs of
2017. Packaging will become part$4,345 and non-recurring expenses related to fair value adjustments to acquisition-date inventory of
the Company’s Consumer Packaging segment.On September 21, 2015, the Company acquired the high-density wood plug business from Smith Family Companies, Inc. Total consideration for the acquisition was $2,850, including cash of $1,750 and a contingent purchase liability of $1,100. The Company will manufacture these wood plugs at its existing facility$5,750 were recognized in Hartselle, Alabama. The acquisition is part of the Paper and Industrial Converted Products segment. The contingent liability will be paid within 30 days of the second anniversary of the acquisition if targeted levels of sales are maintained.
The Company completed two acquisitions during 2014 at an aggregate cost of $366,280, of which $334,132 was paid in cash. The most significant of these was the October 31, 2014, acquisition in the Consumer Packaging segment of the privately held Weidenhammer Packaging Group (“Weidenhammer”), a manufacturer of composite cans, drums, and luxury tubes, as well as rigid plastic containers using thin-walled injection molding technology within-mold labeling. Markets served include processed foods, powdered beverages, tobacco, confectionery, personal care, pet food, pharmaceuticals, and home and garden products. Headquartered in Hockenheim, Germany, Weidenhammer has approximately 1,100 employees and operates 13 production facilities, including five in Germany, along with individual plants in Belgium, France, the Netherlands, the United Kingdom, the United States, Chile, Greece, and Russia. Total consideration paid for Weidenhammer was approximately $355,316, including cash of $323,168, and debt and other liabilities assumed totaling $32,148.
On May 2, 2014, the Company completed the acquisition of Dalton Paper Products, Inc., a manufacturer of tubes and cores, for a net cash cost of $11,286. The acquisition consisted of a single manufacturing facility located in Dalton, Georgia, and is accounted for in the Company’s Paper and Industrial Converted Products segment. Also during 2014, the Company received cash totaling $3222017 in connection with the final working capital settlement related to a 2013 acquisition.
acquisitions of Packaging Holdings and Clear Lam. These costs are excluded from 2017 pro forma net income.
The following table presents the aggregate, unaudited financial results for Packaging Holdings and Clear Lam from their respective dates of acquisition:
| | | | | | | | |
Packaging Holdings and Clear Lam
Post-Acquisition | | Year Ended
December 31, 2017 |
| Actual net sales | | $ | 215,227 | |
| Actual net income | | $ | 3,886 | |
| | |
Acquisition-related costs of
$4,569, $1,663$8,842, $14,446 and
$9,221$13,790 were incurred in
2016, 20152019, 2018 and
2014,2017, respectively. These costs, consisting primarily of legal and professional fees, are included in “Selling, general and administrative expenses” in the Company’s Consolidated Statements of Income.
Acquisition-related costs incurred in 2018 also include the previously discussed charge related to the acquisition-date fair value remeasurement of the Company's 30 percent investment in Conitex Sonoco and the foreign currency translation losses related to this investment.
The Company has accounted for these acquisitions as business combinations under the acquisition method of accounting, in accordance with the business combinations subtopic of the Accounting Standards Codification and, accordingly, has included their results of operations in the Company’s consolidated statements of net income from the respective dates of acquisition. The Company does not believe
Dispositions
There were no dispositions during the 2016 acquisitions summarized above are material transactions, individuallyyears ended 2019, 2018 or in2017.
4. Restructuring and asset impairment
Due to its geographic footprint and the
aggregate, subject to the disclosures and supplementalpro-forma information required by ASC 805. Accordingly, this information is not presented.Dispositions
On November 7, 2016cost-competitive nature of its businesses, the Company completedis constantly seeking the sale ofmost cost-effective means and structure to serve its rigid plastics blow molding operationscustomers and to Amcor Rigid Plastics USA, LLCrespond to fundamental changes in its markets. As such, restructuring costs have been and Amcor Packaging Canada, Inc. These operations manufactured containers serving the personal care and food and beverage markets and consisted of seven manufacturing facilities (six in the U.S. and one in Canada), with approximately 850 employees. The selling price was approximately $280,000, with the Company receiving net cash proceeds of $271,817 at closing with another $7,775 held in escrow pending resolution ofare expected to be a contingency. In conjunction with the sale, the Company wrote off the following assets and liabilities: trade accounts receivable of $35,031; inventory of $14,700; trade accounts payable of $18,494; property, plant and equipment of $41,210; other net tangible liabilities totaling $499; goodwill of $76,435; and identifiable intangibles (primarily customer lists) of $14,735. Disposal-related costs totaled $4,407, resulting in the recognition of a gain on the disposition of $104,292. Any proceeds released from escrow upon resolutionrecurring component of the aforementioned contingency, which is expectedCompany's operating costs. The amount of these costs can vary significantly from year to occur byyear depending upon the endscope and location of the first quarter of 2017, will result in an additional gain on the sale. The decision to sell the blow molding operations was made in order to allow the Company to focus on, and provide resources to further enhance, its targeted growth businesses, including flexible packaging, thermoformed rigid plastics, and temperature-assurance packaging. The sale is not expected to notably affect the operating margin percentages for the Company’s Consumer Packaging segment. The sale did not represent a strategic shift for the Company that will have a major effect on the entity’s operations and financial results. Consequently, the sale did not meet the criteria for reporting as a discontinued operation.
4. RESTRUCTURING AND ASSET IMPAIRMENT
The Company has engaged in a number of restructuring actions over the past several years. Actions initiated in 2016 and 2015 are reported as “2016 Actions” and “2015 Actions,” respectively. Actions initiated prior to 2015, all of which were substantially complete at December 31, 2016, are reported as “2014 and Earlier Actions.”
activities.
Following are the total restructuring and asset impairment charges, net of adjustments, recognized during the periods presented:
| | | | | | | | | | | | | | | |
| | | Year Ended December 31 |
| | | 2016 | | 2015 | | 2014 |
Restructuring/Asset impairment: | | | | | | | | | | | | | | | |
2016 Actions | | | $ | 32,997 | | | | $ | — | | | | $ | — | |
2015 Actions | | | | 7,239 | | | | | 35,837 | | | | | — | |
2014 and Earlier Actions | | | | 30 | | | | | 2,735 | | | | | 18,088 | |
Other asset impairments | | | | 2,617 | | | | | 12,065 | | | | | 4,704 | |
Restructuring/Asset impairment charges | | | $ | 42,883 | | | | $ | 50,637 | | | | $ | 22,792 | |
Income tax benefit | | | | (7,520 | ) | | | | (22,641 | ) | | | | (5,732 | ) |
Restructuring cost/(benefit) attributable to noncontrolling interests, net of tax | | | | (161 | ) | | | | (93 | ) | | | | (52 | ) |
Total impact of restructuring/asset impairment charges, net of tax | | | $ | 35,202 | | | | $ | 27,903 | | | | $ | 17,008 | |
Pretax restructuring
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
| Restructuring and restructuring-related asset impairment charges | $ | 44,819 | | | $ | 40,071 | | | $ | 19,834 | |
| Other asset impairments | 15,061 | | | — | | | 18,585 | |
| Restructuring/Asset impairment charges | $ | 59,880 | | | $ | 40,071 | | | $ | 38,419 | |
| | | | | |
"Restructuring and
restructuring-related asset impairment
chargescharges" and "Other asset impairments" are included in “Restructuring/Asset impairment charges” in the Consolidated Statements of Income.
The Company expects to recognize future additional costs totaling approximately $2,100$2,800 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. 2020.
The table below sets forth restructuring and restructuring-related asset impairment charges by type incurred:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
| Severance and Termination Benefits | $ | 24,864 | | | $ | 15,224 | | | $ | 12,684 | |
| Asset Impairment/Disposal of Assets | 9,674 | | | 6,193 | | | 120 | |
| Other Costs | 10,281 | | | 18,654 | | | 7,030 | |
| Total restructuring and restructuring-related asset impairment charges | $ | 44,819 | | | $ | 40,071 | | | $ | 19,834 | |
The table below sets forth restructuring and restructuring-related asset impairment charges by reportable segment:
F-12 FORM 10-K SONOCO 2019 ANNUAL REPORT
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
| Consumer Packaging | $ | 34,850 | | | $ | 15,205 | | | $ | 6,751 | |
| Display and Packaging | 2,459 | | | 18,800 | | | 2,048 | |
| Paper and Industrial Converted Products | 4,927 | | | 4,301 | | | 7,410 | |
| Protective Solutions | 519 | | | 1,532 | | | 3,162 | |
| Corporate | 2,064 | | | 233 | | | 463 | |
| Total restructuring and restructuring-related asset impairment charges | $ | 44,819 | | | $ | 40,071 | | | $ | 19,834 | |
The following table sets forth the activity in the restructuring accrual included in “Accrued expenses and other” on the Company’s Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | | | | |
Accrual Activity | Severance and Termination Benefits | | Asset Impairment/ Disposal of Assets | | Other Costs | | Total |
| Liability, December 31, 2017 | $ | 5,982 | | | $ | — | | | $ | 1,164 | | | $ | 7,146 | |
| 2018 charges | 15,224 | | | 6,193 | | | 18,654 | | | 40,071 | |
| Cash (payments)/receipts | (15,844) | | | 26,566 | | | (17,541) | | | (6,819) | |
| Asset write downs/disposals | — | | | (32,759) | | | — | | | (32,759) | |
| Foreign currency translation | (69) | | | — | | | 2 | | | (67) | |
| Liability, December 31, 2018 | $ | 5,293 | | | $ | — | | | $ | 2,279 | | | $ | 7,572 | |
| 2019 charges | 24,864 | | | 9,674 | | | 10,281 | | | 44,819 | |
| | | | | | | |
| Cash (payments)/receipts | (19,386) | | | 5,225 | | | (11,983) | | | (26,144) | |
| Asset write downs/disposals | — | | | (14,899) | | | — | | | (14,899) | |
| Foreign currency translation | (6) | | | — | | | 15 | | | 9 | |
| Liability, December 31, 2019 | $ | 10,765 | | | $ | — | | | $ | 592 | | | $ | 11,357 | |
The Company
continually evaluates its cost structure, including its manufacturing capacity, and additionalexpects to pay the majority of the remaining restructuring
actions are likely to be undertaken.reserves by the end of 2020 using cash generated from operations. | | | | | | |
SONOCO 2016 ANNUAL REPORT
| | F10
| | | | FORM 10-K
|
2016 actions
During 2016,2019, the Company announced the elimination of a forming film production line at a flexible packaging facility in Illinois, and initiated the closure of four tubesa composite can and cores plants—oneinjection molding facility in Germany, a composite can plant in Malaysia, a molded plastics plant in the United States one(all part of the Consumer Packaging segment), and 3 tube and core plants - 1 in Canada, onethe United Kingdom, 1 in Ecuador,Norway, and one1 in SwitzerlandEstonia (all part of the Paper and Industrial Converted Products segment). The Company closed a packaging services centerRestructuring actions in Mexico (part of the Display and Packaging segment) and a fulfillment service center in Brazil (part ofProtective Solutions segment included charges associated with 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), completed the salesexit of a paper millprotective packaging facility 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).Texas. In addition the Company continued to realign its cost structure, resulting in the elimination of approximately 180223 positions.
Below is a summary of 2016 Actions and related expenses by type incurred and estimated to be incurred through completion.
| | | | | | | | | | |
| 2016 Actions | | Year Ended
December 31,
2016 | | Estimated Total Cost |
Severance and Termination Benefits | | | | | | | | | | |
Consumer Packaging | | | $ | 2,407 | | | | $ | 3,057 | |
Display and Packaging | | | | 4,304 | | | | | 4,354 | |
Paper and Industrial Converted Products | | | | 5,887 | | | | | 5,887 | |
Protective Solutions | | | | 678 | | | | | 678 | |
Corporate | | | | 1,550 | | | | | 1,550 | |
Asset Impairment/Disposal of Assets | | | | | | | | | | |
Consumer Packaging | | | | (306 | ) | | | | (306 | ) |
Display and Packaging | | | | 2,712 | | | | | 2,712 | |
Paper and Industrial Converted Products | | | | 13,300 | | | | | 13,300 | |
Other Costs | | | | | | | | | | |
Consumer Packaging | | | | 731 | | | | | 831 | |
Display and Packaging | | | | 286 | | | | | 536 | |
Paper and Industrial Converted Products | | | | 1,298 | | | | | 1,548 | |
Protective Solutions | | | | 150 | | | | | 150 | |
Total Charges and Adjustments | | | $ | 32,997 | | | | $ | 34,297 | |
The following table sets forth the activity in the 2016 Actions restructuring accrual included in “Accrued expenses and other” on the Company’s Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | |
2016 Actions
Accrual Activity | | Severance and Termination Benefits | | Asset Impairment/ Disposal of Assets | | Other Costs | | Total |
Liability, December 31, 2015 | | | $ | — | | | | $ | — | | | | $ | — | | | | $ | — | |
2016 charges | | | | 14,826 | | | | | 15,706 | | | | | 2,465 | | | | | 32,997 | |
Cash payments | | | | (11,244 | ) | | | | (7,322 | ) | | | | (1,819 | ) | | | | (20,385 | ) |
Asset write downs/disposals | | | | — | | | | | (8,384 | ) | | | | — | | | | | (8,384 | ) |
Foreign currency translation | | | | (24 | ) | | | | — | | | | | (6 | ) | | | | (30 | ) |
Liability, December 31, 2016 | | | $ | 3,558 | | | | $ | — | | | | $ | 640 | | | | $ | 4,198 | |
Included in “Asset
"Asset Impairment/Disposal of Assets” above isAssets" recognized in 2019 consist primarily of the following asset impairment charges: $4,124 from the elimination of a lossforming film line at a flexible packaging facility in Illinois; $3,663 from the closure of $12,694a composite can and injection molding facility in Germany; $909 from the closure of a thermoformed packaging plant in California; $325 from the closure of a composite can plant in Malaysia; and $1,827 from various other restructuring actions during 2019. Partially offsetting these losses was a $1,173 gain from the sale of a paperboard millvacant Protective Solutions facility in France in May 2016,Connecticut for which includes the payment of $8,436 of cash required in order to consummate the disposition with the acquiror. Other assets divested in connection with the sale included net fixed assets of $3,201, and other tangible assets, net of liabilities disposed, of $1,057. Also included in “Asset Impairment/Disposal of Assets” is a loss of $2,421 from the sale of a retail security packaging business in Puerto Rico in July 2016. The Company received cash proceeds of $1,816 from$929, released an environmental reserve of $675, the saleliability for which was assumed by the buyer, and wrote off assets with a book value of this business. Assets written off$431.
"Other costs" in
connection with the sale included net fixed assets of $217, other tangible assets, net of liabilities disposed, of $858, goodwill of $1,215, and other intangible assets (customer lists) of $1,947. Additional disposals of fixed assets totaling $591 were recognized from restructuring actions initiated in 2016.“Other costs”2019 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.
2015 actions
During
2015,2018, the Company initiated the
following restructuring actionsclosures of a flexible packaging plant in
itsNorth Carolina, a global brand management facility in Canada, and a thermoformed packaging plant in California (all part of the Consumer Packaging
segment: the closure of six rigid paper facilities (twosegment), and 5 tube and core plants - 1 in
the United States, oneAlabama, 1 in Canada,
one1 in Indonesia, 1 in Russia,
oneand 1 in
Germany, and one in the United Kingdom); the closureNorway (all part of
a production line at a thermoforming plant in the United States; and the sale of two metal ends and closures plants in the United States. Restructuring actions initiated in the Paper and Industrial Converted Products
segment include the closures of a tubes and cores plantsegment), and a
recycling businessprotective packaging plant in
North Carolina (part of the
United States. The Company also recognized an asset impairment charge related to the potential disposition of a paper mill in France.Protective Solutions segment). Restructuring actions
initiated in the Display and Packaging segment
consisted of the closure ofincluded charges associated with exiting a
printed backer card facilitysingle-customer contract at a packaging center in
the United States.Atlanta, Georgia. In addition, the Company continued to realign its cost structure, resulting in the elimination of approximately
235120 positions.
Below is a summary of 2015 Actions and related expenses by type incurred and estimated to be incurred through completion.
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Total Incurred to Date | | Estimated Total Cost |
| 2015 Actions | | 2016 | | 2015 | | |
Severance and Termination Benefits | | | | | | | | | | | | | | | | | | | | |
Consumer Packaging | | | $ | 3,147 | | | | $ | 15,047 | | | | $ | 18,194 | | | | $ | 18,294 | |
Display and Packaging | | | | 97 | | | | | 1,115 | | | | | 1,212 | | | | | 1,212 | |
Paper and Industrial Converted Products | | | | (18 | ) | | | | 8,479 | | | | | 8,461 | | | | | 8,461 | |
Protective Solutions | | | | — | | | | | 39 | | | | | 39 | | | | | 39 | |
Corporate | | | | (19 | ) | | | | 2,775 | | | | | 2,756 | | | | | 2,756 | |
Asset Impairment/Disposal of Assets | | | | | | | | | | | | | | | | | | | | |
Consumer Packaging | | | | 1,658 | | | | | (4,303 | ) | | | | (2,645 | ) | | | | (2,645 | ) |
Display and Packaging | | | | 335 | | | | | 474 | | | | | 809 | | | | | 809 | |
Paper and Industrial Converted Products | | | | 587 | | | | | 10,198 | | | | | 10,785 | | | | | 10,785 | |
| | | | | | |
FORM 10-K
| | | | F11
| | SONOCO 2016 ANNUAL REPORT
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Total Incurred to Date | | Estimated Total Cost |
| 2015 Actions | | 2016 | | 2015 | | |
Other Costs | | | | | | | | | | | | | | | | | | | | |
Consumer Packaging | | | | 949 | | | | | 1,400 | | | | | 2,349 | | | | | 2,749 | |
Display and Packaging | | | | 206 | | | | | 351 | | | | | 557 | | | | | 557 | |
Paper and Industrial Converted Products | | | | 297 | | | | | 251 | | | | | 548 | | | | | 698 | |
Corporate | | | | — | | | | | 11 | | | | | 11 | | | | | 11 | |
Total Charges and Adjustments | | | $ | 7,239 | | | | $ | 35,837 | | | | $ | 43,076 | | | | $ | 43,726 | |
The following table sets forth the activity in the 2015 Actions restructuring accrual included in “Accrued expenses and other” on the Company’s Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | |
2015 Actions
Accrual Activity | | Severance and Termination Benefits | | Asset Impairment/ Disposal of Assets | | Other Costs | | Total |
Liability, December 31, 2014 | | | $ | — | | | | $ | — | | | | $ | — | | | | $ | — | |
2015 charges | | | | 27,455 | | | | | 6,369 | | | | | 2,013 | | | | | 35,837 | |
Cash receipts/(payments) | | | | (11,856 | ) | | | | 29,145 | | | | | (2,013 | ) | | | | 15,276 | |
Asset write downs/disposals | | | | — | | | | | (35,514 | ) | | | | — | | | | | (35,514 | ) |
Foreign currency translation | | | | (223 | ) | | | | — | | | | | — | | | | | (223 | ) |
Liability, December 31, 2015 | | | $ | 15,376 | | | | $ | — | | | | $ | — | | | | $ | 15,376 | |
2016 charges | | | | 5,083 | | | | | 3,182 | | | | | 4,673 | | | | | 12,938 | |
Adjustments | | | | (1,876 | ) | | | | (602 | ) | | | | (3,221 | ) | | | | (5,699 | ) |
Cash (payments)/receipts | | | | (14,982 | ) | | | | 602 | | | | | (1,457 | ) | | | | (15,837 | ) |
Asset write downs/disposals | | | | — | | | | | (3,182 | ) | | | | — | | | | | (3,182 | ) |
Foreign currency translation | | | | (205 | ) | | | | — | | | | | 5 | | | | | (200 | ) |
Liability, December 31, 2016 | | | $ | 3,396 | | | | $ | — | | | | $ | — | | | | $ | 3,396 | |
Included in “Asset"Asset Impairment/Disposal of Assets”Assets" above in 2015 above is a gain of $7,2242018 are losses totaling $4,516 from the saledisposition of two metal ends and closures production facilitiescertain assets as a result of exiting a single-customer contract associated with a packaging center in Canton, Ohio.Atlanta, Georgia. The Company received proceeds of $29,128 from$22,163 in conjunction with the sale of these operationsfixed assets with a net book value of $24,869, and disposedwrote off inventory with a book value of net assets totaling $21,904 in connection with the sale. Beneficial tax attributes associated with the sale provided an income tax benefit of approximately $10,100.$1,810. Also included in "Asset Impairment/Disposal of Assets" are charges fornet losses totaling $1,677 from various other restructuring actions during 2018.
"Other Costs" in 2018 include a contract termination fee of $9,600 relating to exiting the
impairmentsingle-customer contract, a one-time building lease contract termination fee of
fixed assets totaling $6,688 related to the potential disposition of a paper mill in France and impairments related$1,931 relating to the closure of a
recycling businesspackaging services center in
the United States including goodwill of $1,686 and other intangible assets of $1,251. Additional impairments of fixed assets totaling $3,985 were recognized from restructuring actions initiated in 2015.“Other Costs” in both 2015 and 2016 consist primarily ofMexico, as well as costs related to plant closures including equipment removal, utilities, plant security, property taxes and insurance.
“Adjustments” in 2016 relate primarily to severance, equipment removal, transport, and duplicate fixed costs reimbursed by a customer for a plant relocation initiated in 2015 due to customer requirements.
The Company expects to pay
Other Asset Impairments
During the
majorityCompany's 2019 long-lived asset impairment testing, management concluded that certain assets within the temperature-controlled shipping solution business associated with the ThermoSafe division, part of the
remaining 2015 Actions restructuring costs byProtective Packaging segment, were impaired as the
endvalue of
2017 usingthe projected cash
generatedflows from
operations.2014these assets was no longer sufficient to recover their carrying values. As a result, the Company recognized a pretax asset impairment charge of $10,099. Also during this testing, the Company impaired the assets and Earlier Actions
2014 and Earlier Actions are comprised ofinventory associated with a number of plant closures and workforce reductions initiated prior to 2015.
Below is a summary of 2014 and Earlier Actions and related expenses by type incurred.
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| 2014 and Earlier Actions | | 2016 | | 2015 | | 2014 |
Severance and Termination Benefits | | | | | | | | | | | | | | | |
Consumer Packaging | | | $ | — | | | | $ | 836 | | | | $ | 966 | |
Display and Packaging | | | | — | | | | | (121 | ) | | | | 1,139 | |
Paper and Industrial Converted Products | | | | 12 | | | | | 250 | | | | | 4,077 | |
Protective Solutions | | | | — | | | | | (14 | ) | | | | 539 | |
Corporate | | | | — | | | | | — | | | | | (27 | ) |
Asset Impairment/Disposal of Assets | | | | | | | | | | | | | | | |
Consumer Packaging | | | | — | | | | | — | | | | | 2,446 | |
Display and Packaging | | | | — | | | | | — | | | | | 972 | |
Paper and Industrial Converted Products | | | | (397 | ) | | | | (101 | ) | | | | (931 | ) |
Protective Solutions | | | | 3 | | | | | 133 | | | | | 185 | |
Other Costs | | | | | | | | | | | | | | | |
Consumer Packaging | | | | — | | | | | 90 | | | | | 5,302 | |
Display and Packaging | | | | — | | | | | 21 | | | | | 113 | |
Paper and Industrial Converted Products | | | | 225 | | | | | 1,109 | | | | | 2,853 | |
Protective Solutions | | | | 187 | | | | | 532 | | | | | 454 | |
Total Charges and Adjustments | | | $ | 30 | | | | $ | 2,735 | | | | $ | 18,088 | |
The following table sets forth the activity in the 2014 and Earlier Actions restructuring accrual included in “Accrued expenses and other” on the Company’s Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | |
2014 and Earlier
Actions
Accrual Activity | | Severance and Termination Benefits | | Asset Impairment/ Disposal of Assets | | Other Costs | | Total |
Liability, December 31, 2014 | | | $ | 1,849 | | | | $ | — | | | | $ | 1,463 | | | | $ | 3,312 | |
2015 charges | | | | 1,256 | | | | | 373 | | | | | 1,935 | | | | | 3,564 | |
Adjustments | | | | (305 | ) | | | | (341 | ) | | | | (183 | ) | | | | (829 | ) |
Cash receipts/(payments) | | | | (2,400 | ) | | | | 341 | | | | | (2,731 | ) | | | | (4,790 | ) |
Asset write downs/disposals | | | | — | | | | | (373 | ) | | | | — | | | | | (373 | ) |
Foreign currency translation | | | | (46 | ) | | | | — | | | | | (14 | ) | | | | (60 | ) |
Liability, December 31, 2015 | | | $ | 354 | | | | $ | — | | | | $ | 470 | | | | $ | 824 | |
2016 charges | | | | 12 | | | | | 3 | | | | | 412 | | | | | 427 | |
Adjustments | | | | — | | | | | (397 | ) | | | | — | | | | | (397 | ) |
Cash receipts/(payments) | | | | (142 | ) | | | | 1,552 | | | | | (882 | ) | | | | 528 | |
Asset write downs/disposals | | | | — | | | | | (1,158 | ) | | | | — | | | | | (1,158 | ) |
Foreign currency translation | | | | (12 | ) | | | | — | | | | | — | | | | | (12 | ) |
Liability, December 31, 2016 | | | $ | 212 | | | | $ | — | | | | $ | — | | | | $ | 212 | |
| | | | | | |
SONOCO 2016 ANNUAL REPORT
| | F12
| | | | FORM 10-K
|
Included in “Asset Impairment/Disposal of Assets” in 2016 are the proceeds and gain from the sale of an asset related to the disposition of a former paper mill facility in Pennsylvania.
“Other Costs” include costs related to plant closures including equipment removal, utilities, plant security, property taxes and insurance. “Other Costs” in 2014 also include lease termination fees and cancellation fees on assets under construction related to the Company’s decision not to continue with the planned start up of a compositeplastic can operation in Belgium following the Weidenhammer acquisition and costs related to the demolition and cleanup costs at two former paper millsbusiness line in the United States.
The Company expectsStates (part of the Consumer Packaging segment) due to recognize future pretax charges of approximately $150the inability to generate sufficient revenues associated with 2014 and Earlier Actions, and expects to paythis product offering. As a result, the majorityCompany recognized an asset impairment charge of $4,054. In addition, the single customer served using certain proprietary technology in our flexible packaging business ended its relationship with Sonoco in 2019, resulting in the recognition of a pretax asset impairment charge for the remaining 2014net book value of fixed assets and Earlier Actions restructuring costs byintangible assets totaling $908.
During the
endfourth quarter of 2017,
using cash generated from operations.Other asset impairments
In addition to the restructuring charges discussed above, duringCompany recognized the Company’s annual goodwill impairment testing conducted duringof a power generating facility at its Hartsville manufacturing complex. The facility, which is part of the third quarter of 2016, management concluded that goodwill associated with the Company’s Paper and Industrial Converted Products —Brazil reporting unit had become impairedsegment, was determined to have been rendered obsolete by
F-13 FORM 10-K SONOCO 2019 ANNUAL REPORT
the Company's new biomass facility and was closed during the first quarter of 2018. As a result, the Company recognized a pretax asset impairment charge of $17,822 in December 2017.
Also in 2017, as a result of the continued
deteriorationdevaluation of
economic conditions in Brazil. Accordingly, an impairment charge totaling $2,617, the
entire amount of goodwill associated with this reporting unit, was recognized during the third quarter of 2016. No other impairments were identified during this most recently completed annual goodwill impairment testing.Prior to July 1, 2015,Venezuelan Bolivar, the Company used Venezuela’s official exchange rate to report the results of its operations in Venezuela. As a result of significant inflationary increases, and to avoid distortion of its consolidated results from translation of its Venezuelan operations, the Company concluded that it was an appropriate time to begin translating its Venezuelan operations using an alternative exchange rate. Accordingly, effective July 1, 2015, the Company began translating its Venezuelan operations using the most current published Venezuelan exchange rate (which at that time was known as the SIMADI rate). This resulted in a foreign exchange remeasurement loss on net monetary assets. In addition, the use of the significantly higher SIMADI rate resulted in the need to recognizerecognized impairment charges against inventories and certain long-term nonmonetary assets totaling $338. The assets were deemed to be impaired as the U.S. dollar value of the projected future cash flows from these assets was no longer sufficient to recover their U.S. dollar carrying values. The combined impact of the impairment charges and remeasurement loss was $12,065 on both a before andafter-tax basis, recognized in the third quarter of 2015.
The Company recorded a pretax asset impairment charge of $2,730 in the third quarter of 2014 to write off the customer list obtained in the 2008 acquisition of a small packaging fulfillment business included in the Company’s Display and Packaging segment. This business provided display assembly and fulfillment services to a single customer in the pharmaceutical industry. As a result of losing this business,In addition, the Company has impaired the remaining unamortized balancerecognized foreign exchange remeasurement losses on net monetary assets of the customer list.
In the fourth quarter of 2014, the Company recorded an additional pretax impairment charge of $1,974 related to the trade name intangible assets acquired in its purchase of Weidenhammer Packaging Group. The Company did not intend to utilize the acquired Company’s trade name and, accordingly, determined that the fair value of the affected asset was impaired.
$425.
These asset impairment charges are included in “Restructuring/Asset impairment charges” in the Company’s Consolidated Statements of Income.
5.
BOOK OVERDRAFTS AND CASH POOLINGBook overdrafts and cash pooling
At December 31,
20162019 and
2015,2018, outstanding checks totaling
$10,073$8,796 and
$10,148,$13,205, respectively, were included in “Payable to suppliers” on the Company’s Consolidated Balance Sheets. In addition, outstanding payroll checks of
$11$38 and
$37$114 as of December 31,
20162019 and
2015,2018, respectively, were included in “Accrued wages and other compensation” on the Company’s Consolidated Balance Sheets.
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 cash deposit or borrowing positions through local currency accounts with the bank, so long as the aggregate position of the global pool is a notionally calculated net cash deposit. Because it maintains a security interest in the cash deposits, and has the right to offset the cash deposits against the borrowings, the bank provides the Company and its participating subsidiaries favorable interest terms on both. The Company’s Consolidated Balance Sheets reflect a net cash deposit under this pooling arrangement of
$2,789$4,409 and
$22,905$2,562 as of December 31,
20162019 and
2015,2018, respectively.
6.
PROPERTY, PLANT AND EQUIPMENTProperty, plant and equipment
Details of the
Company’sCompany's property, plant and equipment at December 31 are as follows:
| | | | | | | | | | |
| | | 2016 | | 2015 |
Land | | | $ | 84,404 | | | | $ | 84,811 | |
Timber resources | | | | 41,441 | | | | | 41,152 | |
Buildings | | | | 478,924 | | | | | 479,845 | |
Machinery and equipment | | | | 2,637,753 | | | | | 2,796,257 | |
Construction in progress | | | | 113,118 | | | | | 116,081 | |
| | | | 3,355,640 | | | | | 3,518,146 | |
Accumulated depreciation and depletion | | | | (2,295,623 | ) | | | | (2,406,110 | ) |
Property, plant and equipment, net | | | $ | 1,060,017 | | | | $ | 1,112,036 | |
| | | | | | | | | | | |
| 2019 | | 2018 |
| Land | $ | 114,443 | | | $ | 110,698 | |
| Timber resources | 42,338 | | | 41,862 | |
| Buildings | 560,334 | | | 535,433 | |
| Machinery and equipment | 3,077,500 | | | 2,977,156 | |
| Construction in progress | 143,021 | | | 159,661 | |
| 3,937,636 | | | 3,824,810 | |
| Accumulated depreciation and depletion | (2,650,794) | | | (2,590,989) | |
| Property, plant and equipment, net | $ | 1,286,842 | | | $ | 1,233,821 | |
Estimated costs for completion of capital additions under construction totaled approximately
$82,000$102,836 at December 31,
2016.2019.
Depreciation and depletion expense amounted to
$173,295$186,540 in
2016, $179,8882019, $188,533 in
20152018 and
$169,911$178,049 in
2014.2017.
7. Leases
The Company has certain propertiesroutinely enters into leasing arrangements for real estate (including manufacturing facilities, office space, warehouses, and packaging centers), transportation equipment (automobiles, forklifts, and trailers), and office equipment (copiers and postage machines). The assessment of the certainty associated with the exercise of various lease renewal, termination, and purchase options included in the Company's lease contracts is at the Company's sole discretion. Most real estate leases, in particular, include 1 or more options to renew, with renewal terms that are leased under noncancelable operating leases. Future minimum rentals under noncancelable operatingcan extend the lease term from one to 50 years. The Company's leases do not have any significant residual value guarantees or restrictive covenants.
As the implicit rate in the Company's leases is not readily determinable, the Company calculates its right of use lease liabilities using discount rates based upon the Company’s incremental secured borrowing rate, which contemplates and reflects a particular geographical region’s interest rate for the leases active within that region of the Company’s global operations. The Company further utilizes a portfolio approach by assigning a “short” rate to contracts with lease terms of more10 years or less and a “long” rate for contracts greater than one year are as follows: 2017 –$38,700; 2018 – $32,900;10 years. See Note 2 for further information regarding the Company's adoption of ASU 2016-02, "Leases."
F-14 FORM 10-K SONOCO 2019 – $26,600; 2020 – $19,700; 2021 –$13,200ANNUAL REPORT
The following table sets forth the balance sheet location and
thereafter –$21,600. Total rental expense under operating leases was approximately $71,800 in 2016, $72,400 in 2015values of the Company’s lease assets and
$70,300 in 2014.lease liabilities at December 31, 2019: | | | | | | | | | | | | | | |
FORM 10-K
| Classification | | Balance Sheet Location | F13
| December 31, 2019 |
| Lease Assets | SONOCO 2016 ANNUAL REPORT
| | | |
| Operating lease assets | | Right of Use Asset - Operating Leases | | $ | 298,393 | |
| Finance lease assets | | Other Assets | | 34,858 | |
| Total lease assets | | | | $ | 333,251 | |
| | | | | |
| Lease Liabilities | | | | | |
| Current operating lease liabilities | | Accrued expenses and other | | $ | 54,048 | |
| Current finance lease liabilities | | Notes payable and current portion of debt | | 10,803 | |
| Total current lease liabilities | | | | $ | 64,851 | |
| | | | | |
| Noncurrent operating lease liabilities | | Noncurrent Operating Lease Liabilities | | $ | 253,992 | |
| Noncurrent finance lease liabilities | | Long-term Debt, Net of Current Portion | | 22,274 | |
| Total noncurrent lease liabilities | | | | $ | 276,266 | |
| | | | | |
| Total lease liabilities | | | | $ | 341,117 | |
As of December 31, 2019, the Company has entered into additional leases that have not yet commenced. The associated contracts include payments over the respective lease terms totaling $6,200, which are not reflected in the Company's liabilities recorded as of December 31, 2019. These leases should commence during fiscal year 2020 with lease terms of approximately 12 years.
Certain of the Company’s leases include variable costs. Variable costs include lease payments that were volume or usage-driven in accordance with the use of the underlying asset, and also non-lease components that were incurred based upon actual terms rather than contractually fixed amounts. In addition, variable costs are incurred for lease payments that are indexed to a change in rate or index. Because the right of use asset recorded on the balance sheet was determined based upon factors considered at the commencement date, subsequent changes in the rate or index that were not contemplated in the right of use asset balances recorded on the balance sheet result in variable expenses being incurred when paid during the lease term.
The following table sets forth the components of the Company's total lease cost for the year ended December 31, 2019:
| | | | | | | | |
| Lease Cost | | Twelve months ended December 31, 2019 |
| Operating lease cost | (a) | $ | 61,845 | |
| Finance lease cost: | | |
| Amortization of lease asset | (a) (b) | 6,965 | |
| Interest on lease liabilities | (c) | 763 | |
| Variable lease cost | (a) (d) | 51,616 | |
| | | |
| Total lease cost | | $ | 121,189 | |
(a) Production-related and administrative amounts are included in cost of sales and selling, general and administrative expenses, respectively.
(b) Included in depreciation and amortization.
(c) Included in interest expense.
(d) Also includes short term lease costs, which are deemed immaterial.
In compliance with ASC 842, the Company must provide the prior year disclosures required under the previous lease guidance (ASC 840) for comparative periods presented herein. Rental expense under operating leases for the year ended December 31, 2018 was $80,300 and $68,900 for the year ended December 31, 2017.
F-15 FORM 10-K SONOCO 2019 ANNUAL REPORT
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table sets forth the five-year maturity schedule of the Company's lease liabilities as of December 31, 2019:
| | | | | | | | | | | | | | | | | | | | |
| Maturity of Lease Liabilities | | Operating Leases | | Finance Leases | | Total |
| 2020 | | $ | 55,681 | | | $ | 11,124 | | | $ | 66,805 | |
| 2021 | | 49,474 | | | 9,258 | | | 58,732 | |
| 2022 | | 43,418 | | | 7,322 | | | 50,740 | |
| 2023 | | 39,831 | | | 4,569 | | | 44,400 | |
| 2024 | | 33,424 | | | 2,355 | | | 35,779 | |
| Beyond 2024 | | 167,463 | | | 227 | | | 167,690 | |
| Total lease payments | | $ | 389,291 | | | $ | 34,855 | | | $ | 424,146 | |
| Less: Interest | | 81,251 | | | 1,778 | | | 83,029 | |
| Lease Liabilities | | $ | 308,040 | | | $ | 33,077 | | | $ | 341,117 | |
The following tables set forth the Company's weighted average remaining lease term and discount rates used in the calculation of its outstanding lease liabilities at December 31, 2019, along with other lease-related information for the year ended December 31, 2019:
| | | | | | | | |
| Lease Term and Discount Rate | | As of December 31, 2019 |
| Weighted-average remaining lease term (years): | | |
| Operating leases | | 10.2 |
| Finance leases | | 3.8 |
| Weighted-average discount rate: | | |
| Operating leases | | 4.74% | |
| Finance leases | | 2.97% | |
| | |
| Other Information | | Twelve Months Ended December 31, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows used by operating leases | | $ | 61,532 | |
| Operating cash flows used by finance leases | | 763 | |
| Financing cash flows used by finance leases | | 7,989 | |
| Leased assets obtained in exchange for new operating lease liabilities | | 28,762 | |
| Leased assets obtained in exchange for new finance lease liabilities | | 24,106 | |
8. Goodwill
and other intangible assets
Goodwill
The changes in the carrying amount of goodwill by segment for the year ended December 31,
2016,2019, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Consumer Packaging | | Display and Packaging | | Paper and Industrial Converted Products | | Protective Solutions | | Total |
Balance as of January 1, 2016 | | | $ | 487,342 | | | | $ | 204,629 | | | | $ | 227,325 | | | | $ | 221,165 | | | | $ | 1,140,461 | |
Acquisitions | | | | 25,912 | | | | | — | | | | | 417 | | | | | 10,508 | | | | | 36,837 | |
Dispositions | | | | (76,435 | ) | | | | (1,215 | ) | | | | — | | | | | — | | | | | (77,650 | ) |
Impairment loss | | | | — | | | | | — | | | | | (2,617 | ) | | | | — | | | | | (2,617 | ) |
Other | | | | (71 | ) | | | | — | | | | | — | | | | | — | | | | | (71 | ) |
Foreign currency translation | | | | (1,158 | ) | | | | — | | | | | (3,142 | ) | | | | (445 | ) | | | | (4,745 | ) |
Balance as of December 31, 2016 | | | $ | 435,590 | | | | $ | 203,414 | | | | $ | 221,983 | | | | $ | 231,228 | | | | $ | 1,092,215 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer Packaging | | Display and Packaging | | Paper and Industrial Converted Products | | Protective Solutions | | Total |
| Balance as of January 1, 2019 | $ | 617,332 | | | $ | 203,414 | | | $ | 256,947 | | | $ | 231,474 | | | $ | 1,309,167 | |
| Acquisitions | 75,595 | | | — | | | 43,427 | | | — | | | 119,022 | |
| | | | | | | | | |
| | | | | | | | | |
| Measurement period adjustments | | (2,461) | | | — | | | 2,246 | | | | | | (215) | |
| Foreign currency translation | 777 | | | — | | | 421 | | | 174 | | | 1,372 | |
| Balance as of December 31, 2019 | $ | 691,243 | | | $ | 203,414 | | | $ | 303,041 | | | $ | 231,648 | | | $ | 1,429,346 | |
Acquisitions in
20162019 resulted in the addition of
$36,837$119,022 of
goodwill. Of this total, $417 was recorded in connection with the June 2016 acquisition of a small tubes and cores business in Australia, $1,700 was recordedgoodwill, including $43,427 in connection with the August
20162019 acquisition of
temperature-controlled cargo container assets, licenses, trademarks,Corenso and
manufacturing rights from AAR Corporation, $8,808 was recorded$75,595 in connection with the
September 2016December 2019 acquisition of
Laminar Medica,TEQ. Additionally, measurement period adjustments were made in 2019 to the fair values of the assets acquired and
$25,912 was recordedthe liabilities assumed in
connection with the
November 2016 acquisition2018 acquisitions of
Plastics Packaging, Inc.Compositub, Highland, and Conitex Sonoco resulting in increases/(decreases) in goodwill of $(566), $(1,895) and $2,246, respectively. These adjustments are reflected above in "Measurement period adjustments." See Note 3 for additional information.
In November 2016, the Company completed the sale of its rigid plastics blow molding operations. In connection with this disposal, the Company wrote off $76,435 of goodwill. See Note 3 for additional information.
In July 2016, the Company disposed of a retail security packaging plant in Juncos, Puerto Rico. In connection with this disposal, the Company wrote off $1,215 of goodwill. See Note 4 for additional information.
In addition, the Company made a small adjustment to the goodwill related to the April 2015 acquisition of a flexible packaging business in Brazil decreasing goodwill by $71.
The Company assesses goodwill for impairment annually
andduring the third quarter, or from time to time when warranted by the facts and circumstances surrounding individual reporting units or the Company as a whole. The Company completed its most recent annual goodwill impairment testing during the third quarter of
2016.2019. As part of this testing, the Company
analyzesanalyzed certain qualitative and quantitative factors in determining goodwill impairment.
Goodwill is tested for impairment using either a qualitative evaluation or a quantitative test. The
qualitative evaluation considers factors such as the macroeconomic environment, Company stock price and market capitalization movement, business strategy changes, and significant customer wins and losses. The quantitative test considers factors such as the amount by which estimated fair value exceeds current carrying value, current year operating performance as compared to prior projections, and implied fair values from comparable trading and transaction multiples. When calculated, reporting unit estimated fair values reflectCompany's assessments reflected a number of significant management assumptions and estimates including the
Company’sCompany's forecast of sales,
volumes and prices, profit margins,
income taxes, capital expenditures and
changes in working capital requirements.discount rates. Changes in these assumptions
and/or discount rates could materially impact the
estimated fair values. When the Company estimates the fair value of a reporting unit, it does so using a discounted cash flow model based on projections of future years’ operating results and associated cash flows, together with comparable trading and transaction multiples. The Company’s projections incorporate management’s best estimates of the expected future results, which include expectations related to new business, and, where applicable, improved operating margins. Management’s projections related to revenue growth and/or margin improvements arise from a combination of factors, including expectations for volume growth with existing customers, product expansion, improved price/cost, productivity gains, fixed cost leverage, improvement in general economic conditions, increased operational capacity, and customer retention. Projected future cash flows are then discounted to present value using a discount rate management believes is commensurate with the risks inherent in the cash flows for each reporting unit. Because the Company’s assessments incorporate management’s expectations for the future, including forecasted growth and/or margin improvements, if there are changes in the relevant facts and circumstances and/or expectations, management’s assessment regarding goodwill impairment may change as well. In considering the level of uncertainty regarding the potential for goodwill impairment, management has concluded that any such impairment would likely be the result of adverse changes in more than one assumption.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, an impairment charge totaling $2,617, the entire amount of goodwill associated with this reporting unit, was recognized during the third quarter of 2016. The charge is included in “Restructuring/Asset impairment charges” in the Consolidated Statements of Income.
F-16 FORM 10-K SONOCO 2019 ANNUAL REPORT
Company's conclusions. 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 reporting units failed the assessments noted above, in management’s opinion, the reporting units having the greatest riskgoodwill 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 approximately $203,000 and $87,000, respectively, at December 31, 2016. A large portion of sales in the Display and Packaging reporting unit is at risk of impairment in the near term if there is a negative change in the long-term outlook for the business or in other factors such as the discount rate. A large portion of projected sales in this reporting unit is concentrated in one customer,several major customers, the majorityloss of any of which could impact the Company's conclusion regarding the likelihood of goodwill impairment for the unit. Total goodwill associated with this reporting unit was $203,414 at December 31, 2019. Based on the latest annual impairment test, the estimated fair value of the Display and Packaging reporting unit exceeded its carrying value by approximately 35%. In its 2019 annual goodwill impairment analysis, projected future cash flows for Display and Packaging were discounted at 8.9%. Based on the discounted cash flow model and holding other valuation assumptions constant, Display and Packaging projected operating profits across all future periods would have to be reduced approximately 27%, or the discount rate increased to 12.5%, in order for the estimated fair value to fall below the reporting unit’s carrying value.
During the time subsequent to the annual evaluation, and at December 31, 2019, the Company considered whether any events and/or changes in circumstances had resulted in the likelihood that the goodwill of any of its reporting units may have been impaired. It is
under contract until 2021.management's opinion that no such events have occurred. | | | | | | |
SONOCO 2016 ANNUAL REPORT
| | F14
| | | | FORM 10-K
|
Details at December 31 are as follows:
| | | | | | | | | | |
| | | 2016 | | 2015 |
Other Intangible Assets, Gross: | | | | | | | | | | |
Patents | | | $ | 13,164 | | | | $ | 12,716 | |
Customer lists | | | | 362,162 | | | | | 381,938 | |
Trade names | | | | 19,902 | | | | | 19,246 | |
Proprietary technology | | | | 20,721 | | | | | 17,738 | |
Land use rights | | | | 288 | | | | | 297 | |
Other | | | | 1,701 | | | | | 1,223 | |
Other Intangible Assets, Gross | | | $ | 417,938 | | | | $ | 433,158 | |
Accumulated Amortization: | | | | | | | | | | |
Patents | | | $ | (5,647 | ) | | | $ | (3,784 | ) |
Customer lists | | | | (172,292 | ) | | | | (171,590 | ) |
Trade names | | | | (2,733 | ) | | | | (2,171 | ) |
Proprietary technology | | | | (11,236 | ) | | | | (9,518 | ) |
Land use rights | | | | (41 | ) | | | | (40 | ) |
Other | | | | (1,031 | ) | | | | (960 | ) |
Accumulated Amortization | | | $ | (192,980 | ) | | | $ | (188,063 | ) |
Other Intangible Assets, Net | | | $ | 224,958 | | | | $ | 245,095 | |
| | | | | | | | | | | |
| 2019 | | 2018 |
| Other Intangible Assets, Gross: | | | |
| Patents | $ | 26,096 | | | $ | 22,509 | |
| Customer lists | 632,036 | | | 548,038 | |
| Trade names | 32,427 | | | 31,174 | |
| Proprietary technology | 24,525 | | | 28,748 | |
| Land use rights | 172 | | | 282 | |
| Other | 2,125 | | | 2,093 | |
| Other Intangible Assets, Gross | $ | 717,381 | | | $ | 632,844 | |
| Accumulated Amortization: | | | |
| Patents | $ | (11,669) | | | $ | (9,539) | |
| Customer lists | (287,831) | | | (246,946) | |
| Trade names | (9,985) | | | (7,413) | |
| Proprietary technology | (17,910) | | | (15,400) | |
| Land use rights | (51) | | | (48) | |
| Other | (1,643) | | | (1,461) | |
| Accumulated Amortization | $ | (329,089) | | | $ | (280,807) | |
| Other Intangible Assets, Net | $ | 388,292 | | | $ | 352,037 | |
The
Company recorded $28,951acquisitions of
identifiable intangiblesCorenso in
connection with 2016 acquisitions, $24,578August 2019 and TEQ in December 2019 resulted in the addition of $29,170 and $56,170, respectively, of intangible assets, mostly related to customer
lists. In addition, measurement period adjustments were made in 2019 to finalize the fair values of the assets acquired and the liabilities assumed in the 2018 acquisitions of Compositub and Conitex Sonoco resulting in increases in other intangible assets, primarily customer lists,
$3,000 related to proprietary technology, $700 related to tradenames, $475 related tonon-compete agreements,of $1,888 and
$198 related to patents. These intangibles will be amortized over an average life$300, respectively. See Note 3 for additional information. In the fourth quarter of
8.6 years.2019, the Company wrote off patents with a net book value totaling $340 resulting from the loss of the single flexible packaging customer it served using the particular technology.
Aggregate amortization expense on intangible assets was
$31,887, $33,273$51,580, $47,177 and
$28,807$38,165 for the years ended December 31,
2016, 20152019, 2018 and
2014,2017, respectively. Amortization expense on intangible assets is expected to approximate
$31,100 in 2017, $30,700 in 2018, $29,400 in 2019, $28,000$54,200 in 2020,
$52,500 in 2021, $49,700 in 2022, $44,500 in 2023 and
$26,700$35,000 in
2021.8. DEBT
2024.
9. Debt
Details of the Company's debt at December 31
waswere as follows:
| | | | | | | | | | |
| | | 2016 | | 2015 |
5.75% debentures due November 2040 | | | $ | 599,136 | | | | $ | 599,100 | |
4.375% debentures due November 2021 | | | | 248,490 | | | | | 248,178 | |
9.2% debentures due August 2021 | | | | 4,309 | | | | | 4,309 | |
5.625% debentures due June 2016 | | | | — | | | | | 75,214 | |
1.00% foreign loan due May 2021 | | | | 154,936 | | | | | — | |
Term loan, due October 2017 | | | | — | | | | | 149,705 | |
Commercial paper, average rate of 0.63% in 2016 and 0.39% in 2015 | | | | — | | | | | — | |
Other foreign denominated debt, average rate of 3.8% in 2016 and 4.3% in 2015 | | | | 33,254 | | | | | 39,070 | |
Other notes | | | | 12,618 | | | | | 12,791 | |
Total debt | | | | 1,052,743 | | | | | 1,128,367 | |
Less current portion and short-term notes | | | | 32,045 | | | | | 113,097 | |
Long-term debt | | | $ | 1,020,698 | | | | $ | 1,015,270 | |
The Company operates a $350,000 commercial paper program, supported by a committed revolving bank credit facility of the same amount. In October 2014,
| | | | | | | | | | | |
| 2019 | | 2018 |
| 5.75% debentures due November 2040 | $ | 599,244 | | | $ | 599,208 | |
| 4.375% debentures due November 2021 | 249,428 | | | 249,116 | |
| 9.2% debentures due August 2021 | 4,318 | | | 4,315 | |
| 1.00% Euro loan due May 2021 | 167,272 | | | 169,976 | |
| Term loan, due May 2020 | 200,000 | | | — | |
| Term loan, due July 2022 | 146,569 | | | 158,949 | |
| Commercial paper, average rate of 2.40% in 2019 and 2.15% in 2018 | 250,000 | | | 120,000 | |
| Other foreign denominated debt, average rate of 5.3% in 2019 and 3.7% in 2018 | 16,734 | | | 57,867 | |
| Finance lease obligations | 33,077 | | | — | |
| Other notes | 14,727 | | | 25,731 | |
| Total debt | 1,681,369 | | | 1,385,162 | |
| Less current portion and short-term notes | 488,234 | | | 195,445 | |
| Long-term debt | $ | 1,193,135 | | | $ | 1,189,717 | |
F-17 FORM 10-K SONOCO 2019 ANNUAL REPORT
On May 17, 2019, the Company entered into a 364-day, $200,000 term loan with Wells Fargo Bank, National Association. The full $200,000 was drawn from this facility on May 20, 2019, and the proceeds were used to make voluntary contributions to the Company's U.S. defined benefit pension plans. This unsecured loan has a 364-day term and the Company has a one-time option to request an extension of the term for an additional 364 days if it meets certain conditions. Interest is assessed at the London Interbank Offered Rate (LIBOR) plus a margin based on a pricing grid that uses the Company's credit agreementratings. The LIBOR margin at December 31, 2019 was 100 basis points. There is no required amortization and repayment can be accelerated at any time at the discretion of the Company.
On July 20, 2017, the Company entered into a Credit Agreement in connection with a new $750,000 bank credit facility with a syndicate of eight8 banks for thatreplacing an existing credit facility entered into on October 2, 2014, and reflecting substantially the same terms and conditions. Included in the new facility are a $500,000 five-year revolving credit facility which is committed through October 2019.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 of 112.5 basis points above the LIBOR. 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. Proceeds from this term loan were used to repay an earlier term loan and to partially fund the Clear Lam acquisition. During 2018, the Company prepaid an additional $75,000 of the term loan.
The $500,000 revolving credit facility supports the Company's $500,000 commercial paper program. If circumstances were to prevent the Company from issuing commercial paper, it has the contractual right to draw funds directly on the underlying bank credit facility. The Company had
no$250,000 of outstanding commercial paper at December 31,
2016 or 2015.In May 2016, the Company’s wholly-owned subsidiary Sonoco Deutschland Holdings GmbH entered into a Euro 150,000, unsecured five-year fixed-rate assignable loan agreement guaranteed by the Company. The loan bears interest2019 and $120,000 at a rate of 1.00% and is due in May 2021. The loan may be redeemed in whole by the Company at any time with notice. The proceeds of the loan were used primarily to settle the remaining balance of the three-year term loan used to fund the November 2014 acquisition of Weidenhammer Packaging Group.
December 31, 2018.
In addition to the
$350,000$500,000 committed revolving bank credit facility, the Company had approximately
$113,000$237,000 available under unused short-term lines of credit at December 31,
2016.2019. These short-term lines of credit are for general Company purposes, with interest at mutually agreed-upon rates.
The Company utilized cash on hand to fund the repayment of its 5.625% debentures upon their maturity in June 2016.
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
covenantcovenants currently
requiresrequire the Company to maintain a minimum level of interest coverage, and a minimum level of net worth, as defined. As of December 31,
2016,2019, the Company had substantial tolerance above the minimum levels required under these covenants.
The principal requirements of debt maturing in the next five years are: 2017 – $32,045; 2018 – $1,846; 2019 – $1,793; 2020 – $1,762
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 | | 2023 | | 2024 |
| Debt maturities by year | $ | 488,234 | | | $ | 444,715 | | | $ | 130,812 | | | $ | 6,639 | | | $ | 3,646 | |
10. Financial instruments and
2021 – $409,437.9. FINANCIAL INSTRUMENTS AND DERIVATIVES
derivatives
The following table sets forth the carrying amounts and fair values of the Company’s significant financial instruments where the carrying amount differs from the fair value.
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2016 | | December 31, 2015 |
| | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Long-term debt | | | $ | 1,020,698 | | | | $ | 1,116,336 | | | | $ | 1,015,270 | | | | $ | 1,075,146 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | | | December 31, 2018 | | |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| Long-term debt | $ | 1,193,135 | | | $ | 1,351,397 | | | $ | 1,189,717 | | | $ | 1,270,521 | |
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 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.
At December 31,
20162019 and
2015,2018, the Company had derivative financial instruments outstanding to hedge anticipated transactions and certain asset and liability related cash flows. To the extent considered effective, the changes in fair value of these contracts are
| | | | | | |
FORM 10-K
| | | | F15
| | SONOCO 2016 ANNUAL REPORT
|
recorded in other comprehensive income and reclassified to income or expense in the period in which the hedged item impacts earnings.
Commodity cash flow hedges
The Company has entered into certain derivative contracts to manage some of the cost of anticipated purchases of natural gas aluminum and old corrugated containers (OCC). aluminum. At December 31, 2016,2019, natural gas swaps covering approximately 8.54.4 million MMBTUs were outstanding. These contracts represent approximately 79.5%, 37.3% and 17.8%61% of anticipated U.S. and Canadian usage for 2017, 2018 and 2019, respectively.2020. Additionally, the Company had swap contracts covering 2,6291,225 metric tons of aluminum and 660 short tons of OCC, representing approximately 59% and less than 1%23% of anticipated usage for 2017, respectively.2020. The total fair values of the Company’s commodity cash flow hedges were in a net gain positionloss positions totaling $3,636$(1,625) and $(1,571) at December 31, 2016,2019 and a net loss position totaling $(3,611) at December 31, 2015.2018, respectively. The amount of the gainloss included in accumulated other comprehensive loss at December 31, 2016,2019, expected to be reclassified to the income statement during the next twelve months is $2,856.$(1,578).
F-18 FORM 10-K SONOCO 2019 ANNUAL REPORT
Foreign currency cash flow hedges
The Company has entered into forward contracts to hedge certain anticipated foreign currency denominated sales and purchases forecasted to occur in
2017.2020. The net positions of these contracts at December 31,
2016,2019, were as follows:
| | | | | | | | | | |
| Currency | Action | Action | | Quantity |
Colombian peso | Purchase | Purchase15,486,745 | | | | 2,059,287 | |
Mexican peso | | Purchase | | 335,494 | | 585,283 | |
Canadian dollar
Polish zloty | Purchase | Purchase89,750 | | | | 57,290 | |
Turkish lira
Czech koruna | | Purchase | | 40,333 | | 12,650 | |
Russian ruble
Canadian dollar | Purchase | Purchase20,812 | | | | 10,924 | |
British pound | | Purchase | | 6,187 | | 2,945 | |
Turkish lira | Purchase | 3,419 | |
| New Zealand dollar | | Sell | | (439) | | (932 | ) |
Australian dollar | Sell | Sell(929) | | | | (2,259 | ) |
Polish zloty
Swedish krona | | Sell | | (3,933) | | (2,812 | ) |
Euro | Sell | Sell(30,323) | |
| Russian ruble | | Sell | (7,987 | )(182,187) | |
The
total net fair values of the Company’s foreign currency cash flow hedges
were $(184)related to forecasted sales and
$(4,612)purchases netted to a gain position of $1,058 at December 31,
20162019 and
2015, respectively. During 2016 and 2015,a loss position of $(1,712) at December 31, 2018. Gains of $1,057 are expected to be reclassified from accumulated other comprehensive loss to the income statement during the next twelve months. In addition, the Company has entered into forward contracts to hedge certain foreign currency cash flow
hedgestransactions related to construction in
progress were settled asprogress. As of December 31, 2019 and December 31, 2018, the
capital expenditures were made.net position of these contracts was $1 and $(305) respectively. Gains totaling
$59$107 and
$528losses of $(88) were reclassified from accumulated other comprehensive loss and netted against the carrying value of the capitalized expenditures during the years ended December 31,
20162019 and
2015,December 31, 2018, respectively.
The amountGains of
the loss included in$1 are expected to be reclassified from accumulated other comprehensive loss
at December 31, 2016, expected to be reclassified toand included in the
income statementcarrying value of the related fixed assets acquired during the next twelve
months is $(217).months.
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 December 31,
2016,2019, were as follows:
| | | | | | | | | | | | | | | | | |
| Currency | Action | ActionQuantity | | Quantity |
Mexican peso
| | Purchase | | | | 244,600 | |
Canadian dollar
Colombian peso | | Purchase | | 10,536,995 | | 14,089 | | |
ColombianMexican peso
| | SellPurchase | | 320,964 | | (28,300,164 | ) | |
| Canadian dollar | | Purchase | | 10,931 | | | | |
| | | | | |
| | | | | |
The fair value of the Company’s other derivatives was
$(696)$54 and
$(2,180)$166 at December 31,
20162019 and
2015,2018, respectively.
The Company has determined all derivatives for which it has applied hedge accounting under ASC 815 to be highly effective and as a result no material ineffectiveness has been recorded during the periods presented.
The following table sets forth the location and fair values of the Company’s derivative instruments:
| | | | | | | | | | | | | | | |
| | | | | Fair Value at
December 31 |
| Description | | Balance Sheet Location | | 2016 | | 2015 |
Derivatives designated as hedging instruments: | | | | | | | | | | | | |
Commodity Contracts | | Prepaid expenses | | | $ | 3,240 | | | | $ | — | |
Commodity Contracts | | Other assets | | | $ | 527 | | | | $ | 8 | |
Commodity Contracts | | Accrued expenses and other | | | $ | (89 | ) | | | $ | (3,425 | ) |
Commodity Contracts | | Other liabilities | | | $ | (42 | ) | | | $ | (194 | ) |
Foreign Exchange Contracts | | Prepaid expenses | | | $ | 761 | | | | $ | 156 | |
Foreign Exchange Contracts | | Accrued expenses and other | | | $ | (946 | ) | | | $ | (4,768 | ) |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
Foreign Exchange Contracts | | Prepaid expenses | | | $ | 194 | | | | $ | 50 | |
Foreign Exchange Contracts | | Accrued expenses and other | | | $ | (890 | ) | | | $ | (2,230 | ) |
| | | | | | | | | | | | | | | | | |
| | | | Fair Value at December 31 | | |
| Description | Balance Sheet Location | | 2019 | | 2018 |
| Derivatives designated as hedging instruments: | | | | | |
| Commodity Contracts | Prepaid expenses | | $ | — | | | $ | 282 | |
| Commodity Contracts | Other assets | | $ | — | | | $ | — | |
| Commodity Contracts | Accrued expenses and other | | $ | (1,625) | | | $ | (1,843) | |
| Commodity Contracts | Other liabilities | | $ | — | | | $ | (10) | |
| Foreign Exchange Contracts | Prepaid expenses | | $ | 1,236 | | | $ | 770 | |
| Foreign Exchange Contracts | Accrued expenses and other | | $ | (178) | | | $ | (2,482) | |
| Derivatives not designated as hedging instruments: | | | | | |
| Foreign Exchange Contracts | Prepaid expenses | | $ | 88 | | | $ | 727 | |
| | | | | |
| Foreign Exchange Contracts | Accrued expenses and other | | $ | (34) | | | $ | (561) | |
While certain of the
Company’sCompany'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 2016 ANNUAL REPORT
| | F16
| | | | FORM 10-K
|
Beginning in January 2020, the Company is party to a cross-currency swap agreement with a notional amount of $250,000 to effectively convert a portion of the Company's fixed-rate U.S. dollar denominated debt, including the semi-annual interest payments, to fixed-rate euro-denominated debt. The swap agreement matures November 1, 2024. Under the terms of the swap agreement, the Company will receive semi-annual interest payments in U.S. dollars at a rate of 5.75% and pay interest in euros at a rate of 3.856%.
F-19 FORM 10-K SONOCO 2019 ANNUAL REPORT
The following table sets forth the effect of the Company’s derivative instruments on financial performance for the twelve months ended December 31,
2016,2019, excluding the gains on foreign currency cash flow hedges that were reclassified from accumulated other comprehensive loss to the carrying value of the capitalized expenditures:
| | | | | | | | | | | | | | | | | | | | |
| Description | | Amount of Gain or (Loss) Recognized in OCI on Derivative (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 Derivative (Ineffective Portion) | | | Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) | |
Derivatives in Cash Flow Hedging Relationships: | | | | | | | | | | | | | | | | | | | | |
Foreign Exchange Contracts | | $ | (420 | ) | | | Net sales | | | $ | (8,769 | ) | | | Net sales | | | $ | — | |
| | | | | | | Cost of sales | | | $ | 3,981 | | | | Cost of sales | | | $ | — | |
Commodity Contracts | | $ | 3,032 | | | | Cost of sales | | | $ | (3,583 | ) | | | Cost of sales | | | $ | (444 | ) |
| | | | | |
| | | | | | Location of Gain or (Loss) Recognized in Income Statement | | | Gain or (Loss) Recognized | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | |
Foreign Exchange Contracts | | | | | | | Cost of sales | | | $ | — | | | | | | | | | |
| | | | | |
| Selling, general and
administrative |
| | $ | (2,118 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Description | Amount of Gain or (Loss) Recognized in OCI on Derivatives | | Location of Gain or (Loss) Reclassified from Accumulated OCI Into Income | | Amount of Gain or (Loss) Reclassified from Accumulated OCI Into Income |
| Derivatives in Cash Flow Hedging Relationships: | | | | | |
| Foreign Exchange Contracts | $ | 2,495 | | | Net sales | | $ | 1,381 | |
| | | Cost of sales | | $ | (1,758) | |
| Commodity Contracts | $ | 216 | | | Cost of sales | | $ | 270 | |
| | | Location of Gain or (Loss) Recognized in Income Statement | | Gain or (Loss) Recognized |
| Derivatives not designated as hedging instruments: | | | | | |
| Foreign Exchange Contracts | | | Cost of sales | | $ | — | |
| | | Selling, general and administrative | | $ | (704) | |
| Description | Revenue | | Cost of Sales | | |
| Total amount of income and expense line items presented in the Consolidated Statements of Income | $ | 1,381 | | | $ | (1,488) | | | | |
| | | | | |
| The effects of cash flow hedging: | | | | | |
| | | | | |
| Gain or (loss) on cash flow hedging relationships: | | | | | |
| Foreign exchange contracts: | | | | | |
| Amount of gain or (loss) reclassified from accumulated other comprehensive income into net income | $ | 1,381 | | | $ | (1,758) | | | |
| | | | | |
| Commodity contract: | | | | | |
| Amount of gain or (loss) reclassified from accumulated other comprehensive income into net income | $ | — | | | $ | 270 | | | |
F-20 FORM 10-K SONOCO 2019 ANNUAL REPORT
The following table sets forth the effect of the Company’s derivative instruments on financial performance for the twelve months ended December 31,
2015,2018, excluding the gains on foreign currency cash flow hedges that were reclassified from accumulated other comprehensive loss to the carrying value of the capitalized expenditures:
| | | | | | | | | | | | | | | | | | |
| Description | | Amount of Gain or (Loss) Recognized in OCI on Derivative (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 Derivative (Ineffective Portion) | | | Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) | |
Derivatives in Cash Flow Hedging Relationships: | | | | | | | | | | | | | | | | | | |
Foreign Exchange Contracts | | | $(10,908) | | | Net sales | | $ | (21,454 | ) | | | Net sales | | | $ | — | |
| | | | | | Cost of sales | | $ | 12,154 | | | | Cost of sales | | | $ | — | |
Commodity Contracts | | | $(7,258) | | | Cost of sales | | $ | (9,920 | ) | | | Cost of sales | | | $ | 213 | |
| | | | | |
| | | | | | Location of Gain or (Loss) Recognized in Income Statement | | Gain or (Loss) Recognized | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | |
Foreign Exchange Contracts | | | | | | Cost of sales | | $ | — | | | | | | | | | |
| | | | | | Selling, general
and administrative | | $ | (6,638 | ) | | | | | | | | |
10. FAIR VALUE MEASUREMENTS
| | | | | | | | | | | | | | | | | | | | |
| Description | Amount of Gain or (Loss) Recognized in OCI on Derivatives | | Location of Gain or (Loss) Reclassified from Accumulated OCI Into Income | | Amount of Gain or (Loss) Reclassified from Accumulated OCI Into Income | |
| Derivatives in Cash Flow Hedging Relationships: | | | | | | |
| Foreign Exchange Contracts | $ | (2,354) | | | Net sales | | $ | (203) | | |
| | | Cost of sales | | $ | (20) | | |
| Commodity Contracts | $ | 258 | | | Cost of sales | | $ | 115 | | |
| | | Location of Gain or (Loss) Recognized in Income Statement | | Gain or (Loss) Recognized | |
| Derivatives not designated as hedging instruments: | | | | | | |
| Foreign Exchange Contracts | | | Cost of sales | | $ | — | | |
| | | Selling, general and administrative | | $ | 41 | | |
| Description | Revenue | | Cost of Sales | | | |
| Total amount of income and expense line items presented in the Condensed Consolidated Statements of Income | $ | (203) | | | $ | 95 | | | | |
| | | | | | |
| The effects of cash flow hedging: | | | | | | |
| | | | | | |
| Gain or (loss) on cash flow hedging relationships: | | | | | | |
| Foreign exchange contracts: | | | | | | |
| Amount of gain or (loss) reclassified from accumulated other comprehensive income into net income | $ | (203) | | | $ | (20) | | | | |
| | | | | | |
| Commodity contract: | | | | | | |
| Amount of gain or (loss) reclassified from accumulated other comprehensive income into net income | $ | — | | | $ | 115 | | | | |
F-21 FORM 10-K SONOCO 2019 ANNUAL REPORT
11. Fair value measurements
Fair value is defined as 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 at the measurement date. 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. |
| | | | | | |
FORM 10-K
| | | | F17
| | SONOCO 2016 ANNUAL REPORT
|
The following tables set forth information regarding the Company’s financial assets and financial liabilities that are measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | December 31,
2016 | | Assets
measured
at NAV (g) | | 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 | | | | $ | — | | | | $ | — | |
Postretirement benefit plan assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Common Collective Trust(a) | | | $ | 874,996 | | | | $ | 874,996 | | | | $ | — | | | | $ | — | | | | $ | — | |
Mutual funds(b) | | | | 213,244 | | | | | — | | | | | | | | | | 213,244 | | | | | — | |
Fixed income securities(c) | | | | 118,224 | | | | | — | | | | | — | | | | | 118,224 | | | | | — | |
Short-term investments(d) | | | | 7,686 | | | | | 6,090 | | | | | 513 | | | | | 1,083 | | | | | — | |
Hedge fund of funds(e) | | | | 72,003 | | | | | 72,003 | | | | | — | | | | | — | | | | | — | |
Real estate funds(f) | | | | 62,694 | | | | | 62,694 | | | | | — | | | | | — | | | | | — | |
Cash and accrued income | | | | 390 | | | | | — | | | | | 390 | | | | | — | | | | | — | |
Total postretirement benefit plan assets | | | $ | 1,349,237 | | | | $ | 1,015,783 | | | | $ | 903 | | | | $ | 332,551 | | | | $ | — | |
| | | | | |
| Description | | December 31,
2015 | | Assets
measured
at NAV (g) | | Level 1 | | Level 2 | | Level 3 |
Hedge derivatives, net: | | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity contracts | | | $ | (3,611 | ) | | | $ | — | | | | $ | — | | | | $ | (3,611 | ) | | | $ | — | |
Foreign exchange contracts | | | | (4,612 | ) | | | | — | | | | | — | | | | | (4,612 | ) | | | | — | |
Non-hedge derivatives, net: | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | | $ | (2,180 | ) | | | $ | — | | | | $ | — | | | | $ | (2,180 | ) | | | $ | — | |
Deferred compensation plan assets | | | $ | 460 | | | | $ | — | | | | $ | 460 | | | | $ | — | | | | $ | — | |
Postretirement benefit plan assets: | | | | | | | | | | | | | | | | | | | 0 | | | | | | |
Common Collective Trust(a) | | | $ | 852,680 | | | | $ | 852,680 | | | | $ | — | | | | $ | — | | | | $ | — | |
Mutual funds(b) | | | | 213,646 | | | | | — | | | | | — | | | | | 213,646 | | | | | — | |
Fixed income securities(c) | | | | 110,439 | | | | | — | | | | | — | | | | | 110,439 | | | | | — | |
Short-term investments(d) | | | | 3,304 | | | | | 1,482 | | | | | 524 | | | | | 1,298 | | | | | — | |
Hedge fund of funds(e) | | | | 81,746 | | | | | 81,746 | | | | | — | | | | | — | | | | | — | |
Real estate funds(f) | | | | 57,850 | | | | | 57,850 | | | | | — | | | | | — | | | | | — | |
Cash and accrued income | | | | 771 | | | | | — | | | | | 771 | | | | | — | | | | | — | |
Total postretirement benefit plan assets | | | $ | 1,320,436 | | | | $ | 993,758 | | | | $ | 1,295 | | | | $ | 325,383 | | | | $ | — | |
(a) | Common collective trust investments consist of domestic and international large and mid capitalization equities, including emerging markets and funds invested in both short-term and long-term bonds. Underlying investments are generally valued at closing prices from national exchanges. Commingled funds, private securities, and limited partnerships are valued at unit values or net asset values provided by the investment managers. |
(b) | Mutual fund investments are comprised of equity securities of corporations with large capitalizations and also include funds invested in corporate equities in international and emerging markets and funds invested in long-term bonds, which are valued at closing prices from national exchanges. |
(c) | Fixed income securities include funds that invest primarily in government securities and long-term bonds. Underlying investments are generally valued at closing prices from national exchanges, fixed income pricing models, and independent financial analysts. Fixed income commingled funds are valued at unit values provided by the investment managers. |
(d) | Short-term investments include several money market funds used for managing overall liquidity. Underlying investments are generally valued at closing prices from national exchanges. Commingled funds are valued at unit values provided by the investment managers. |
(e) | The hedge fund of funds category includes investments in funds representing a variety of strategies intended to diversify risks and reduce volatility. It includes event-driven credit and equity investments targeted at economic policy decisions, long and short positions in U.S. and international equities, arbitrage investments and emerging market equity investments. Investments are valued at unit values or net asset values provided by the investment managers. |
(f) | This category includes investments in real estate funds (including office, industrial, residential and retail) primarily throughout the United States. Underlying real estate securities are generally valued at closing prices from national exchanges. Commingled
|
| | | | | | |
SONOCO 2016 ANNUAL REPORT
| | F18
| | | | FORM 10-K
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | December 31, 2019 | | Assets measured at NAV (g) | | Level 1 | | Level 2 | | Level 3 |
| Hedge derivatives, net: | | | | | | | | | |
| Commodity contracts | $ | (1,625) | | | $ | — | | | $ | — | | | $ | (1,625) | | | $ | — | |
| Foreign exchange contracts | 1,058 | | | — | | | — | | | 1,058 | | | — | |
| Non-hedge derivatives, net: | | | | | | | | | |
| Foreign exchange contracts | 54 | | | — | | | — | | | 54 | | | — | |
| | | | | | | | | |
| Postretirement benefit plan assets: | | | | | | | | | |
| Common Collective Trust (a) | $ | 1,212,114 | | | $ | 1,212,114 | | | $ | — | | | $ | — | | | $ | — | |
| Mutual funds(b) | 171,198 | | | — | | | — | | | 171,198 | | | — | |
| Fixed income securities(c) | 192,598 | | | — | | | — | | | 192,598 | | | — | |
| | | | | | | | | |
| Short-term investments(d) | 1,201 | | | | | 23 | | | 1,178 | | | — | |
| Hedge fund of funds(e) | 75,108 | | | 75,108 | | | — | | | — | | | — | |
| Real estate funds(f) | 938 | | | 938 | | | — | | | — | | | — | |
| Cash and accrued income | 43,244 | | | — | | | 43,244 | | | — | | | — | |
| | | | | | | | | |
| Total postretirement benefit plan assets | $ | 1,696,401 | | | $ | 1,288,160 | | | $ | 43,267 | | | $ | 364,974 | | | $ | — | |
| Description | December 31, 2018 | | Assets measured at NAV (g) | | Level 1 | | Level 2 | | Level 3 |
| Hedge derivatives, net: | | | | | | | | | |
| Commodity contracts | $ | (1,571) | | | $ | — | | | $ | — | | | $ | (1,571) | | | $ | — | |
| Foreign exchange contracts | (1,712) | | | — | | | — | | | (1,712) | | | — | |
| Non-hedge derivatives, net: | | | | | | | | | |
| Foreign exchange contracts | 166 | | | — | | | — | | | 166 | | | — | |
| Deferred compensation plan assets | 260 | | | — | | | 260 | | | — | | | — | |
| | | | | | | | | |
| Postretirement benefit plan assets: | | | | | | | | | |
| Common Collective Trust (a) | $ | 862,565 | | | $ | 862,565 | | | $ | — | | | $ | — | | | $ | — | |
| Mutual funds(b) | 157,088 | | | — | | | — | | | 157,088 | | | — | |
| Fixed income securities(c) | 175,543 | | | — | | | — | | | 175,543 | | | — | |
| | | | | | | | | |
| Short-term investments(d) | 1,166 | | | | | 38 | | | 1,128 | | | — | |
| Hedge fund of funds(e) | 71,354 | | | 71,354 | | | — | | | — | | | — | |
| Real estate funds(f) | 61,249 | | | 61,249 | | | — | | | — | | | — | |
| Cash and accrued income | 786 | | | — | | | 786 | | | — | | | — | |
| | | | | | | | | |
| Total postretirement benefit plan assets | $ | 1,329,751 | | | $ | 995,168 | | | $ | 824 | | | $ | 333,759 | | | $ | — | |
a.Common collective trust investments consist of domestic and international large and mid capitalization equities, including emerging markets and funds invested in both short-term and long-term bonds. Underlying investments are generally valued at closing prices from national exchanges. Commingled funds, private securities, and limited partnerships are valued at unit values or net asset values provided by the investment managers.
b.Mutual fund investments are comprised of equity securities of corporations with large capitalizations and also include funds invested in corporate equities in international and emerging markets and funds invested in long-term bonds, which are valued at closing prices from national exchanges.
c.Fixed income securities include funds that invest primarily in government securities and long-term bonds. Underlying investments are generally valued at closing prices from national exchanges, fixed income pricing models, and independent financial analysts. Fixed income commingled funds are valued at unit values provided by the investment managers.
d.Short-term investments include several money market funds used for managing overall liquidity. Underlying investments are generally valued at closing prices from national exchanges. Commingled funds are valued at unit values provided by the investment managers.
e.The hedge fund of funds category includes investments in funds representing a variety of strategies intended to diversify risks and reduce volatility. It includes event-driven credit and equity investments targeted at economic policy decisions, long and short positions in U.S. and
F-22 FORM 10-K SONOCO 2019 ANNUAL REPORT
| funds, private securities, and limited partnerships are valued at unit values or net asset values provided by the investment managers.
|
(g) | Certain assets that are measured at fair value using the net asset value (NAV) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. |
international equities, arbitrage investments and emerging market equity investments. Investments are valued at unit values or net asset values provided by the investment managers.
f.This category includes investments in real estate funds (including office, industrial, residential and retail). Underlying real estate securities are generally valued at closing prices from national exchanges.
g.Certain assets that are measured at fair value using the net asset value (NAV) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
The Company’s pension plan assets comprise more than 98%99% of its total postretirement benefit plan assets. The assets of the Company’s various pension plans and retiree health and life insurance plans are largely invested in the same funds and investments and in similar proportions and, as such, are not shown separately, but are combined in the tables above. Postretirement benefit plan assets are netted against postretirement benefit obligations to determine the funded status of each plan. The funded status is recognized in the Company’s Consolidated Balance Sheets as shown in Note 12.13
. As discussed inin Note 9, 10, the Company uses derivatives to mitigate some of 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. Certain deferred compensation plan liabilities are funded and the 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 nonfinancial assets or liabilities that are recognized or disclosed at fair value on a recurring basis. None of the Company’sCompany's financial assets or liabilities isare 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 years ended December 31, 20162019 or 2015.2018. For additional fair value information on the Company’sCompany's financial instruments, see Note 9.11. SHARE-BASED COMPENSATION PLANS
10
. 12. Share-based compensation plans
The Company provides share-based compensation to certain employees and
non-employee directors in the form of stock appreciation rights, restricted stock units and other share-based awards. Beginning in
2014,2019, share-based awards
were issued pursuant to the Sonoco Products Company 2019 Omnibus Incentive Plan (the "2019 Plan"), which became effective upon approval by the shareholders on April 17, 2019. Awards issued from 2014 through 2018 were issued pursuant to the Sonoco Products Company 2014 Long-Term Incentive Plan (the “2014 Plan”)
, which became effective upon approval by the shareholders on April 16, 2014. Awards; awards issued from 2012 through 2013 were issued pursuant to the Sonoco Products Company 2012 Long-Term Incentive Plan (the “2012 Plan”)
; and awards issued from 2009 through 2011 were issued pursuant to the Sonoco Products Company 2008 Long-Term Incentive Plan (the “2008 Plan”). Awards issued prior to 2009 were issued pursuant to the 1991 Key Employee Stock Plan (the “1991 Plan”) or the 1996
Non-Employee Directors Stock Plan (the “1996 Plan”).
The maximum number
A total of
12,000,000 shares of common stock
thatare reserved for awards granted under the 2019 Plan. As of the April 17, 2019 effective date, the 2019 Plan superseded the 2014 Plan and became the only plan under which equity-based compensation may be
awarded to employees and non-employee directors. However, any awards under any of the prior plans that were outstanding on the effective date of the 2019 Plan remain subject to the terms and conditions, and continue to be governed, by such prior plans. Awards issued
between January 1 and April 16, 2019 were effectively issued under the 2019 Plan when such awards were transferred over to be applied against the 2019 Plan’s reserve. Share reserve reductions for restricted and performance-based stock awards originally granted under the 2014 Plan
was originally set at 10,381,533 shares, which includes all shares then remaining underwere weighted higher than stock appreciation rights in accordance with the
2012 Plan and an additional 4,500,000 shares authorized undershareholder-approved conversion formula included within the
20142019 Plan. Awards granted under all previous plans which are forfeited, expire or are
cancelledcanceled without delivery of shares, or which result in forfeiture of shares back to the Company, will be added to the total shares available under the
20142019 Plan. At December 31,
2016,2019, a total of
7,522,65810,765,398 shares remain available for future grant under the
20142019 Plan. The Company issues new shares for stock appreciation right exercises and stock unit conversions. The Company’s stock-based awards to
non-employee directors have not been material.
Accounting for share-based compensation
Total compensation cost for share-based payment arrangements was
$19,289, $9,257$14,334, $10,730 and
$17,099,$13,488, for
2016, 20152019, 2018 and
2014,2017, respectively. The related tax benefit recognized in net income was
$7,040, $3,379,$3,500, $2,678, and
$6,414,$5,058, for the same years, respectively. Share-based compensation expense is included in “Selling, general and administrative expenses” in the Consolidated Statements of Income.
An “excess” tax benefit is created when the tax deduction for an exercised stock appreciation right, exercised stock option or converted stock unit exceeds the compensation cost that has been recognized in income.
For the years 2016, 2015, and 2014, the excess tax benefits were not recognized on the income statement, but rather on the consolidated balance sheet within the line item “Capital in excess of stated value.” The additional net excess tax benefit realized was
$2,695, $3,622$3,520, $3,528 and
$4,126$2,453 for
2016, 20152019, 2018 and
2014,2017, respectively.
Stock appreciation rights
and stock optionsBeginning in 2015, stock
Stock appreciation rights (SARs) granted vest over three years and expense is recognized following the graded-vesting method, which results in front-loaded expense being recognized during the early years of the required service period. Unvested SARs are cancelable upon termination of employment, except in the case of death, disability, or involuntary (or good reason) termination within two years of a change in control.
The Company grants SARs granted prior to 2015 vested over one year.Since 2006, the Company has granted stock appreciation rights (SARs) annually on a discretionary basis to key employees. These SARs are granted at market (havehave an exercise price equal to the closing market price on the date of the grant)grant and can be settled only in stock. The SARs granted in 2016 and since 2015 vest over three years, withone-third vesting on each anniversary date of the grant, and have10-year terms, while the SARs granted from 2006 through 2014 vested over one year and have seven-year terms. As of December 31, 2016,2019, unrecognized compensation cost related to nonvested SARs totaled $2,447.$2,413. This cost will be recognized over the remaining weighted-average vesting period of approximately 24 months. Noncash stock-based compensation associated with SARs totaled $3,227,
$2,415, and stock options totaled $2,878, $2,750,$3,719 for 2019, 2018, and $4,488 for 2016, 2015, and 2014,2017, respectively. F-23 FORM 10-K SONOCO 2019 ANNUAL REPORT
The aggregate intrinsic value of SARS exercised during
2016, 2015,2019, 2018, and
20142017 was
$9,510, $11,888,$11,836, $9,029, and
$13,831,$3,786, respectively. The weighted-average grant date fair value of SARs granted was
$5.04, $6.49$8.30, $6.55 and
$4.72$7.29 per share in
2016, 20152019, 2018 and
2014,2017, respectively. The Company computed the estimated fair values of all SARs using the Black-Scholes option-pricing model applying the assumptions set forth in the following table:
| | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | 2014 |
Expected dividend yield | | | | 3.5% | | | | | 2.8% | | | | | 3.0% | |
Expected stock price volatility | | | | 18.5% | | | | | 18.2% | | | | | 18.4% | |
Risk-free interest rate | | | | 1.3% | | | | | 1.7% | | | | | 1.2% | |
Expected life of SARs | | | | 6 years | | | | | 6 years | | | | | 4 years | |
| | | | | | |
FORM 10-K
| | | | F19
| | SONOCO 2016 ANNUAL REPORT
|
| | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| Expected dividend yield | 2.7 | % | | 3.1 | % | | 2.7 | % |
| Expected stock price volatility | 16.6 | % | | 16.2 | % | | 17.2 | % |
| Risk-free interest rate | 2.6 | % | | 2.8 | % | | 2.0 | % |
| Expected life of SARs | 6 years | | 6 years | | 6 years |
The assumptions employed in the calculation of the fair value of SARs were determined as follows: •Expected dividend yield – the Company’s annual dividend divided by the stock price at the time of grant.
•Expected stock price volatility – based on historical volatility of the Company’s common stock measured weekly for a time period equal to the expected life.
•Risk-free interest rate – based on U.S. Treasury yields in effect at the time of grant for maturities equal to the expected life.
•Expected life – calculated using the simplified method as prescribed in U.S. GAAP, where the expected life is equal to the sum of the vesting period and the contractual term divided by two.
The activity related to the Company’s SARs is as follows: | | | | | | | | | | | | | | | | | | | | |
| | | Nonvested | | Vested | | Total | | Weighted- average Exercise Price |
Outstanding, December 31, 2015 | | | | 593,443 | | | | | 1,413,069 | | | | | 2,006,512 | | | | $ | 40.35 | |
Vested | | | | (197,371 | ) | | | | 197,371 | | | | | — | | | | | | |
Granted | | | | 820,266 | | | | | — | | | | | 820,266 | | | | $ | 40.41 | |
Exercised | | | | — | | | | | (837,573 | ) | | | | (837,573 | ) | | | $ | 38.57 | |
Forfeited/Expired | | | | (69,589 | ) | | | | (3,970 | ) | | | | (73,559 | ) | | | $ | 44.17 | |
| | | | | | | | | | |
Outstanding, December 31, 2016 | | | | 1,146,749 | | | | | 768,897 | | | | | 1,915,646 | | | | $ | 41.06 | |
Exercisable, December 31, 2016 | | | | — | | | | | 768,897 | | | | | 768,897 | | | | $ | 40.53 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nonvested | | Vested | | Total | | Weighted- average Exercise Price |
| Outstanding, December 31, 2018 | 1,119,602 | | | 712,756 | | | 1,832,358 | | | $ | 47.41 | |
| Vested | (620,026) | | | 620,026 | | | — | | | |
| Granted | 543,278 | | | — | | | 543,278 | | | $ | 60.76 | |
| Exercised | — | | | (664,797) | | | (664,797) | | | $ | 43.92 | |
| Forfeited/Expired | (135,841) | | | (12,875) | | | (148,716) | | | $ | 53.36 | |
| Outstanding, December 31, 2019 | 907,013 | | | 655,110 | | | 1,562,123 | | | $ | 52.95 | |
| Exercisable, December 31, 2019 | — | | | 655,110 | | | 655,110 | | | $ | 47.69 | |
The weighted average remaining contractual life for SARs outstanding and exercisable at December 31,
20162019 was
77.5 years and
4.56.0 years, respectively. The aggregate intrinsic value for SARs outstanding and exercisable at December 31,
20162019 was
$22,200$13,375 and
$10,323,$8,931, respectively. At December 31,
2016,2019, the fair market value of the Company’s stock used to calculate intrinsic value was
$52.70$61.72 per share.
There were no stock options outstanding at December 31, 2016. The aggregate intrinsic value of stock options exercised during 2015 and 2014 was $975 and $3,497, respectively. Cash received by the Company on option exercises was $1,324 and $5,951 for 2015 and 2014, respectively. There were no stock options exercised during 2016.
Performance-based stock awards
The Company grants performance contingent restricted stock units (PCSUs) annually on a discretionary basis to executive officers and certain key management employees. The ultimate number of PCSUs awarded is dependent upon the degree to which performance, relative to defined targets related to earnings and return on net assets employed, are achieved over a three-yearthree-year performance cycle. PCSUs granted in 2015 and afterwards vest at the end of the three-yearthree-year performance period if the respective performance targets are met. No units will be awarded if the performance targets are not met. For PCSUs granted in 2014 and earlier, units awarded vested at the end of the three-year performance period if the respective performance targets were met. In the event performance targets were not met, a minimum number of outstanding units were awarded and vested at the end of the performance period, 50% of the remaining number of threshold shares vested at the end of the fourth year and the remaining 50% at the end of the fifth year. Regardless of grant date, uponUpon vesting, PCSUs are convertible into common shares on aone-for-one 1-for-one basis. Except in the event of the participant’sparticipant's death, disability, or retirement, if a participant is not employed by the Company at the end of the performance period, no PCSU’sPCSU's will vest. However, in the event of the participant’s death, disability or retirement prior to full vesting, shares will be issued on a pro rata basis up through the time the participant’s employment or service ceases. In the event of a change in control, as defined under the 2014 Plan and the 2019 Plan, all unvested PCSUs will vest at target on a pro rata basis if the change in control occurs during the three-yearthree-year performance period.
The activity related to performance contingent restricted stock units is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Nonvested | | Vested | | Total | | Average Grant
Date Fair
Value per Share |
Outstanding, December 31, 2015 | | | | 350,510 | | | | | 524,985 | | | | | 875,495 | | | | $ | 32.12 | |
Granted | | | | 188,181 | | | | | — | | | | | 188,181 | | | | $ | 36.33 | |
Performance adjustments | | | | 207,583 | | | | | — | | | | | 207,583 | | | | $ | 40.77 | |
Vested | | | | (251,694 | ) | | | | 251,694 | | | | | — | | | | | | |
Converted | | | | — | | | | | (201,246 | ) | | | | (201,246 | ) | | | $ | 28.38 | |
Cancelled | | | | (8,535 | ) | | | | (33,798 | ) | | | | (42,333 | ) | | | $ | 30.26 | |
Dividend equivalents | | | | — | | | | | 9,385 | | | | | 9,385 | | | | $ | 48.20 | |
| | | | | | | | | | |
Outstanding, December 31, 2016 | | | | 486,045 | | | | | 551,020 | | | | | 1,037,065 | | | | $ | 35.56 | |
2016
| | | | | | | | | | | | | | | | | | | | | | | |
| Nonvested | | Vested | | Total | | Average Grant Date Fair Value per Share |
| Outstanding, December 31, 2018 | 329,532 | | | 322,287 | | | 651,819 | | | $40.21 | |
| Granted | 115,412 | | | — | | | 115,412 | | | $56.04 | |
| Performance adjustments | (42,866) | | | — | | | (42,866) | | | $45.75 | |
| Vested | (84,522) | | | 84,522 | | | — | | | |
| Converted | — | | | (177,902) | | | (177,902) | | | $35.55 | |
| Cancelled | (18,720) | | | — | | | (18,720) | | | $47.75 | |
| Dividend equivalents | — | | | 4,190 | | | 4,190 | | | $60.42 | |
| Outstanding, December 31, 2019 | 298,836 | | | 233,097 | | | 531,933 | | | $44.65 | |
F-24 FORM 10-K SONOCO 2019 ANNUAL REPORT
2019 PCSU.As of December 31, 2016,2019, the 20162019 PCSUs to be awarded are estimated to range from 0 to 373,522228,650 units and are tied to the three-yearthree-year performance period ending December 31, 2018.2015 PCSU.2021.
2018 PCSU. As of December 31, 2016,2019, the 20152018 PCSUs to be awarded are estimated to range from 0 to 334,382253,962 units and are tied to the three-yearthree-year performance period ending December 31, 2017.20142020.
2017 PCSU.The three-year performance cycle for the 20142017 PCSUs was completed on December 31, 2016.2019. Outstanding stock units of 247,55484,522 units were determined to have been earned. The fair value of these units was $5,217 as of December 31, 2019.
2016 PCSU. The performance cycle for the 2016 PCSUs was completed on December 31, 2018. Outstanding stock units of 132,534 units were determined to have been earned, all of which qualified for vesting on December 31, 2016.2018. The fair value of these units was $13,046$7,042 as of December 31, 2016.20132018.
2015 PCSU.The three-year performance cycle for the 20132015 PCSUs was completed on December 31, 2015. Based on performance and the terms2017. Outstanding stock units of the awards as of December 31, 2015, 205,673 stock135,695 units were determined to have been earned, all of which qualified for vesting on December 31, 2015.2017. The fair value of these units was $8,406$7,211 as of December 31, 2015.2012 PCSU. The three-year performance cycle for the 2012 PCSUs was completed on December 31, 2014. Based on the performance achieved and the terms of the award, 143,519 stock units qualified for vesting on December 31, 2014 with a fair value of
2017. | | | | | | |
SONOCO 2016 ANNUAL REPORT
| | F20
| | | | FORM 10-K
|
$6,272. A total of 4,387 units vested on December 31, 2015, and 4,140 units vested on December 31, 2016. The fair value of the stock units vesting in 2015 and 2016 was $179 and $218, respectively.
2011 PCSU.The three-year performance cycle for the 2011 PCSUs was completed on December 31, 2013. Based on the performance achieved and the terms of the award, 123,414 stock units were awarded. A total of 61,707 stock units vested on December 31, 2014, with the remaining 61,707 stock units vesting on December 31, 2015. The fair value of the stock units vesting in 2014 and 2015 was $2,697 and $2,522, respectively.
The weighted-average grant-date fair value of PCSUs granted was $36.33, $42.44,$56.04, $46.33, and $38.04$50.11 per share in 2016, 20152019, 2018 and 2014,2017, respectively. Noncash stock-based compensation associated with PCSUs totaled $10,568, $2,271$5,171, $4,725 and $9,719$3,896 for 2016, 20152019, 2018 and 2014,2017, respectively. As of December 31, 2016,2019, there was approximately $8,854$6,806 of total unrecognized compensation cost related to nonvested PCSUs. This cost is expected to be recognized over a weighted-average period of 2019 months.
Restricted stock awards
In 2016
During 2019, 2018 and 2015,2017, the Company granted awards of restricted stocks units (RSUs) to executive officers and certain key management employees. These awards vest over a three-yearthree-year period withone-third vesting on each anniversary date of the grant. Participants must be actively employed by the Company on the vesting date for shares to be issued, except in the event of the participant’s death, disability, or involuntary (or good reason) termination within two years of a change in control prior to full vesting, in which case shares will immediately vest. Once vested, these awards do not expire.Prior to 2015, the
The Company from time to time
grantedgrants special RSUs to certain of its executive officers and directors. These awards normally
vestedvest over a five-year period with
one-third vesting on each of the third, fourth and fifth anniversaries of the grant, but in some circumstances
vestedmay vest over a shorter
period, or cliff vest at the end of the five-year period. A participant must be actively employed by, or serving as a director of, the Company on the vesting date for shares to be issued. However, certain award agreements
providedprovide that in the event of the participant’s death, disability or retirement prior to full vesting, shares would be issued on a pro rata basis up through the time the participant’s employment or service ceases.
Officers and directors can elect to defer receipt of RSUs, but key management employees are required to take receipt of stock issued.
The weighted-average grant-date fair value of RSUs granted was $38.40, $43.35$57.76, $48.36 and $39.14$51.68 per share in 2016, 20152019, 2018 and 2014,2017, respectively. The fair value of shares vesting during the year was $1,291, $2,066,$3,217, $6,900, and $1,094$2,790 for 2016, 2015,2019, 2018 and 2014,2017, respectively.
Noncash stock-based compensation associated with restricted stock grants totaled
$3,122, $2,336$3,351, $2,138 and
$1,153$3,554 for
2016, 20152019, 2018 and
2014,2017, respectively. As of December 31,
2016,2019, there was
$2,856$3,768 of total unrecognized compensation cost related to nonvested restricted stock units. This cost is expected to be recognized over a weighted-average period of
2433 months.
The activity related to restricted stock units is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Nonvested | | Vested | | Total | | Average Grant Date Fair Value Per Share |
Outstanding, December 31, 2015 | | | | 157,766 | | | | | 158,169 | | | | | 315,935 | | | | $ | 34.90 | |
Granted | | | | 96,356 | | | | | — | | | | | 96,356 | | | | $ | 38.40 | |
Vested | | | | (36,173 | ) | | | | 36,173 | | | | | — | | | | | | |
Converted | | | | — | | | | | (20,732 | ) | | | | (20,732 | ) | | | $ | 36.19 | |
Cancelled | | | | (8,197 | ) | | | | — | | | | | (8,197 | ) | | | $ | 42.15 | |
Dividend equivalents | | | | 594 | | | | | 4,900 | | | | | 5,494 | | | | $ | 56.54 | |
| | | | | | | | | | |
Outstanding, December 31, 2016 | | | | 210,346 | | | | | 178,510 | | | | | 388,856 | | | | $ | 35.85 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nonvested | | Vested | | Total | | Average Grant Date Fair Value Per Share |
| Outstanding, December 31, 2018 | 158,381 | | | 151,414 | | | 309,795 | | | $ | 38.41 | |
| Granted | 69,686 | | | — | | | 69,686 | | | $ | 57.76 | |
| Vested | (54,352) | | | 54,352 | | | — | | | |
| Converted | — | | | (114,981) | | | (114,981) | | | $ | 40.00 | |
| Cancelled | (18,701) | | | — | | | (18,701) | | | $ | 50.69 | |
| Dividend equivalents | 1,563 | | | 3,923 | | | 5,486 | | | $ | 60.71 | |
| Outstanding, December 31, 2019 | 156,577 | | | 94,708 | | | 251,285 | | | $ | 46.14 | |
Deferred compensation plans
Certain officers of the Company receive a portion of their compensation, either current or deferred, in the form of stock
equivalent units. Units are granted as of the day the cash compensation would have otherwise been paid using the closing price of the Company’s common stock on that day. Deferrals into stock equivalent units are converted into phantom stock equivalents as if Sonoco shares were actually purchased. The units immediately vest and earn dividend equivalents. Units are distributed in the form of common stock upon retirement over a period elected by the employee.
Non-employee directors may elect to defer a portion of their cash retainer or other fees (except chair retainers) into phantom stock equivalent units as if Sonoco shares were actually purchased. The deferred stock equivalent units accrue dividend equivalents, and are issued in shares of Sonoco common stock six months following termination of Board service. Directors must elect to receive these deferred distributions in
one, three1, 3 or
five5 annual installments.
The activity related to deferred compensation for equity award units granted to both employees and
non-employee directors combined is as follows:
| | | | | |
| | Total |
Outstanding, December 31, 2015 2018 | 390,354 | | | 285,098 | |
Deferred | 46,065 | | | 46,780 | |
Converted | (80,288) | | | (14,567 | ) |
Dividend equivalents | 11,016 | | | 5,967 | |
Outstanding, December 31, 2016 2019 | 367,147 | | | 323,278 | |
Deferred compensation for employees and directorsof $2,721, $1,947,$2,585, $1,452, and $1,850,$2,850, which will be settled in Company stock at retirement, was deferred during 2016, 2015,2019, 2018, and 2014,2017, respectively.12. EMPLOYEE BENEFIT PLANS
F-25 FORM 10-K SONOCO 2019 ANNUAL REPORT
13. Employee benefit plans
Retirement plans and retiree health and life insurance plans
The Company provides
non-contributory defined benefit pension plans for certain of its employees in the United States, Mexico, Belgium, Germany, Greece, France, and Turkey. The Company also sponsors contributory defined benefit pension plans covering
the majoritycertain of its employees in the United Kingdom, Canada and the Netherlands, and 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.
| | | | | | |
FORM 10-K
| | | | F21
| | SONOCO 2016 ANNUAL REPORT
|
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.
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 aone-time option effective January 1, 2010.On February 4, 2009, the U.S. qualified defined benefit pension plan was
further amended to freeze plan benefits for all active,
non-union participants effective December 31, 2018. Remaining active participants in the U.S. qualified plan
will becomebecame eligible for SRC contributions effective January 1, 2019.
The components of net periodic benefit cost include the following:
| | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | 2014 |
Retirement Plans | | | | | | | | | | | | | | | |
Service cost | | | $ | 19,508 | | | | $ | 23,366 | | | | $ | 21,826 | |
Interest cost | | | | 59,719 | | | | | 70,797 | | | | | 73,505 | |
Expected return on plan assets | | | | (85,466 | ) | | | | (94,307 | ) | | | | (93,198 | ) |
Amortization of net transition obligation | | | | — | | | | | 65 | | | | | 405 | |
Amortization of prior service cost | | | | 809 | | | | | 745 | | | | | 697 | |
Amortization of net actuarial loss | | | | 39,009 | | | | | 42,584 | | | | | 26,523 | |
Other | | | | — | | | | | 49 | | | | | 77 | |
Net periodic benefit cost | | | $ | 33,579 | | | | $ | 43,299 | | | | $ | 29,835 | |
Retiree Health and Life Insurance Plans | | | | | | | | | | | | | | | |
Service cost | | | $ | 309 | | | | $ | 711 | | | | $ | 726 | |
Interest cost | | | | 482 | | | | | 766 | | | | | 1,034 | |
Expected return on plan assets | | | | (1,579 | ) | | | | (1,661 | ) | | | | (1,599 | ) |
Amortization of prior service credit | | | | (498 | ) | | | | (104 | ) | | | | (1,381 | ) |
Amortization of net actuarial gain | | | | (667 | ) | | | | (673 | ) | | | | (259 | ) |
Net periodic benefit income | | | $ | (1,953 | ) | | | $ | (961 | ) | | | $ | (1,479 | ) |
| | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| Retirement Plans | | | | | |
| Service cost | $ | 3,968 | | | $ | 18,652 | | | $ | 18,543 | |
| Interest cost | 57,348 | | | 54,970 | | | 55,873 | |
| Expected return on plan assets | (65,143) | | | (91,021) | | | (81,212) | |
| | | | | |
| Amortization of prior service cost | 1,022 | | | 916 | | | 910 | |
| Amortization of net actuarial loss | 30,681 | | | 37,391 | | | 39,209 | |
| Effect of settlement loss | 2,377 | | | 730 | | | 32,761 | |
| Effect of curtailment loss | — | | | 256 | | | — | |
| Net periodic benefit cost | $ | 30,253 | | | $ | 21,894 | | | $ | 66,084 | |
| Retiree Health and Life Insurance Plans | | | | | |
| Service cost | $ | 308 | | | $ | 297 | | | $ | 313 | |
| Interest cost | 467 | | | 452 | | | 463 | |
| Expected return on plan assets | (718) | | | (1,135) | | | (1,636) | |
| Amortization of prior service credit | (498) | | | (498) | | | (499) | |
| Amortization of net actuarial gain | (823) | | | (1,120) | | | (759) | |
| Net periodic benefit income | $ | (1,264) | | | $ | (2,004) | | | $ | (2,118) | |
F-26 FORM 10-K SONOCO 2019 ANNUAL REPORT
The following tables set forth the Plans’ obligations and assets at December 31:
| | | | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Retiree Health and Life Insurance Plans |
| | | 2016 | | 2015 | | 2016 | | 2015 |
Change in Benefit Obligation | | | | | | | | | | | | | | | | | | | | |
Benefit obligation at January 1 | | | $ | 1,733,596 | | | | $ | 1,857,106 | | | | $ | 19,053 | | | | $ | 27,451 | |
Service cost | | | | 19,508 | | | | | 23,366 | | | | | 309 | | | | | 711 | |
Interest cost | | | | 59,719 | | | | | 70,797 | | | | | 482 | | | | | 766 | |
Plan participant contributions | | | | 439 | | | | | 452 | | | | | 888 | | | | | 1,046 | |
Plan amendments | | | | 812 | | | | | 519 | | | | | — | | | | | (2,273 | ) |
Actuarial loss/(gain) | | | | 93,772 | | | | | (106,211 | ) | | | | (1,223 | ) | | | | (6,004 | ) |
Benefits paid | | | | (89,455 | ) | | | | (87,626 | ) | | | | (1,956 | ) | | | | (2,556 | ) |
Impact of foreign exchange rates | | | | (40,856 | ) | | | | (25,822 | ) | | | | 15 | | | | | (88 | ) |
Other | | | | (111 | ) | | | | 1,015 | | | | | — | | | | | — | |
Benefit obligation at December 31 | | | $ | 1,777,424 | | | | $ | 1,733,596 | | | | $ | 17,568 | | | | $ | 19,053 | |
| | | | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Retiree Health and Life Insurance Plans |
| | | 2016 | | 2015 | | 2016 | | 2015 |
Change in Plan Assets | | | | | | | | | | | | | | | | | | | | |
Fair value of plan assets at January 1 | | | $ | 1,298,186 | | | | $ | 1,407,461 | | | | $ | 22,250 | | | | $ | 23,064 | |
Actual return on plan assets | | | | 130,717 | | | | | (13,886 | ) | | | | 1,872 | | | | | (107 | ) |
Company contributions | | | | 32,504 | | | | | 22,233 | | | | | 860 | | | | | 911 | |
Plan participant contributions | | | | 439 | | | | | 452 | | | | | 888 | | | | | 1,046 | |
Benefits paid | | | | (89,455 | ) | | | | (87,626 | ) | | | | (1,956 | ) | | | | (2,556 | ) |
Impact of foreign exchange rates | | | | (39,147 | ) | | | | (24,271 | ) | | | | — | | | | | — | |
Expenses paid | | | | (7,855 | ) | | | | (6,177 | ) | | | | (66 | ) | | | | (108 | ) |
Fair value of plan assets at December 31 | | | $ | 1,325,389 | | | | $ | 1,298,186 | | | | $ | 23,848 | | | | $ | 22,250 | |
Funded Status of the Plans | | | $ | (452,035 | ) | | | $ | (435,410 | ) | | | $ | 6,280 | | | | $ | 3,197 | |
| | | | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Retiree Health and Life Insurance Plans |
| | | 2016 | | 2015 | | 2016 | | 2015 |
Total Recognized Amounts in the Consolidated Balance Sheets | | | | | | | | | | | | | | | | | | | | |
Noncurrent assets | | | $ | 3,863 | | | | $ | 4,635 | | | | $ | 7,506 | | | | $ | 4,057 | |
Current liabilities | | | | (9,409 | ) | | | | (8,678 | ) | | | | (802 | ) | | | | (860 | ) |
Noncurrent liabilities | | | | (446,489 | ) | | | | (431,367 | ) | | | | (424 | ) | | | | — | |
Net (liability)/asset | | | $ | (452,035 | ) | | | $ | (435,410 | ) | | | $ | 6,280 | | | | $ | 3,197 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Retirement Plans | | | | Retiree Health and Life Insurance Plans | | |
| 2019 | | 2018 | | 2019 | | 2018 |
| Change in Benefit Obligation | | | | | | | |
| Benefit obligation at January 1 | $ | 1,684,277 | | | $ | 1,837,938 | | | $ | 14,048 | | | $ | 15,691 | |
| Service cost | 3,968 | | | 18,652 | | | 308 | | | 297 | |
| Interest cost | 57,348 | | | 54,970 | | | 467 | | | 452 | |
| Plan participant contributions | 224 | | | 429 | | | 680 | | | 620 | |
| Plan amendments | 1,343 | | | 155 | | | — | | | — | |
| Actuarial loss/(gain) | 316,547 | | | (115,153) | | | 589 | | | (398) | |
| Benefits paid | (92,636) | | | (93,053) | | | (1,621) | | | (2,569) | |
| Impact of foreign exchange rates | 11,952 | | | (21,636) | | | 24 | | | (45) | |
| Effect of settlements | (8,101) | | | (2,210) | | | — | | | — | |
| Effect of curtailments | — | | | (253) | | | — | | | — | |
| Acquisitions | 1,275 | | | 4,438 | | | — | | | — | |
| | | | | | | |
| Benefit obligation at December 31 | $ | 1,976,197 | | | $ | 1,684,277 | | | $ | 14,495 | | | $ | 14,048 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Retirement Plans | | | | Retiree Health and Life Insurance Plans | | |
| 2019 | | 2018 | | 2019 | | 2018 |
| Change in Plan Assets | | | | | | | |
| Fair value of plan assets at January 1 | $ | 1,318,832 | | | $ | 1,494,713 | | | $ | 10,919 | | | $ | 27,177 | |
| Actual return on plan assets | 242,823 | | | (78,447) | | | 2,327 | | | (915) | |
| Company contributions | 215,979 | | | 24,524 | | | 682 | | | (13,302) | |
| Plan participant contributions | 224 | | | 429 | | | 680 | | | 620 | |
| Benefits paid | (92,636) | | | (93,053) | | | (1,621) | | | (2,569) | |
| Impact of foreign exchange rates | 12,869 | | | (22,380) | | | — | | | — | |
| Effect of settlements | (8,101) | | | (2,210) | | | — | | | — | |
| Expenses paid | (7,084) | | | (6,670) | | | (106) | | | (92) | |
| Acquisitions | 614 | | | 1,926 | | | — | | | — | |
| Fair value of plan assets at December 31 | $ | 1,683,520 | | | $ | 1,318,832 | | | $ | 12,881 | | | $ | 10,919 | |
| Funded Status of the Plans | $ | (292,677) | | | $ | (365,445) | | | $ | (1,614) | | | $ | (3,129) | |
The negative contribution reported in 2018 for the Company's Retiree Health and Life Insurance Plans reflects $14,025 of cash withdrawn from a collectively bargained VEBA in 2018 pursuant to an IRS private letter ruling dated April 1, 2018, permitting the Company to amend the VEBA to provide benefits to active, non-collectively bargained employees in addition to retired collectively bargained employees.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Retirement Plans | | | | Retiree Health and Life Insurance Plans | | |
| 2019 | | 2018 | | 2019 | | 2018 |
| Total Recognized Amounts in the Consolidated Balance Sheets | | | | | | | |
| Noncurrent assets | $ | 24,196 | | | $ | 18,520 | | | $ | — | | | $ | — | |
| Current liabilities | (13,913) | | | (12,935) | | | (784) | | | (983) | |
| Noncurrent liabilities | (302,960) | | | (371,030) | | | (830) | | | (2,146) | |
| Net liability | $ | (292,677) | | | $ | (365,445) | | | $ | (1,614) | | | $ | (3,129) | |
Items not yet recognized as a component of net periodic pension cost that are included in Accumulated Other Comprehensive Loss (Income) as of December 31,
20162019 and
2015,2018, are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Retiree Health and Life Insurance Plans |
| | | 2016 | | 2015 | | 2016 | | 2015 |
Net actuarial loss/(gain) | | | $ | 708,533 | | | | $ | 691,482 | | | | $ | (7,056 | ) | | | $ | (6,274 | ) |
Prior service cost/(credit) | | | | 4,051 | | | | | 3,791 | | | | | (1,774 | ) | | | | (2,272 | ) |
| | | | $ | 712,584 | | | | $ | 695,273 | | | | $ | (8,830 | ) | | | $ | (8,546 | ) |
| | | | | | |
SONOCO 2016 ANNUAL REPORT
| | F22
| | | | FORM 10-K
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Retirement Plans | | | | Retiree Health and Life Insurance Plans | | |
| 2019 | | 2018 | | 2019 | | 2018 |
| Net actuarial loss/(gain) | $ | 759,610 | | | $ | 646,254 | | | $ | (7,055) | | | $ | (6,964) | |
| Prior service cost/(credit) | 6,159 | | | 5,514 | | | (279) | | | (777) | |
| | | | | | | |
| | $ | 765,769 | | | $ | 651,768 | | | $ | (7,334) | | | $ | (7,741) | |
F-27 FORM 10-K SONOCO 2019 ANNUAL REPORT
The amounts recognized in Other Comprehensive Loss/(Income)
during December 31, 2016 and 2015 include the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Retirement Plans | | Retiree Health and Life Insurance Plans |
| | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
Adjustments arising during the period: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net actuarial loss/(gain) | | | $ | 56,060 | | | | $ | 8,352 | | | | $ | 233,962 | | | | $ | (1,449 | ) | | | $ | (4,129 | ) | | | $ | 101 | |
Prior service cost/(credit) | | | | 1,069 | | | | | 513 | | | | | 729 | | | | | — | | | | | (2,273 | ) | | | | (46 | ) |
Net settlements/curtailments | | | | — | | | | | — | | | | | — | | | | | — | | | | | — | | | | | — | |
Reversal of amortization: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net actuarial (loss)/gain | | | | (39,009 | ) | | | | (42,584 | ) | | | | (26,523 | ) | | | | 667 | | | | | 673 | | | | | 259 | |
Prior service (cost)/credit | | | | (809 | ) | | | | (745 | ) | | | | (697 | ) | | | | 498 | | | | | 104 | | | | | 1,381 | |
Net transition obligation | | | | — | | | | | (65 | ) | | | | (405 | ) | | | | — | | | | | — | | | | | — | |
Total recognized in other comprehensive loss/(income) | | | $ | 17,311 | | | | $ | (34,529 | ) | | | $ | 207,066 | | | | $ | (284 | ) | | | $ | (5,625 | ) | | | $ | 1,695 | |
Total recognized in net periodic benefit cost and other comprehensive loss/(income) | | | $ | 50,890 | | | | $ | 8,770 | | | | $ | 236,901 | | | | $ | (2,237 | ) | | | $ | (6,586 | ) | | | $ | 216 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Retirement Plans | | | | | | Retiree Health and Life Insurance Plans | | | | |
| 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Adjustments arising during the period: | | | | | | | | | | | |
| Net actuarial loss/(gain) | $ | 146,414 | | | $ | 58,544 | | | $ | (10,732) | | | $ | (914) | | | $ | 1,738 | | | $ | (3,525) | |
| Prior service cost/(credit) | 1,667 | | | 2,906 | | | 639 | | | — | | | — | | | — | |
| Net settlements/curtailments | (2,377) | | | (986) | | | (32,761) | | | — | | | — | | | — | |
| Reversal of amortization: | | | | | | | | | | | |
| Net actuarial (loss)/gain | (30,681) | | | (37,391) | | | (39,209) | | | 823 | | | 1,120 | | | 759 | |
| Prior service (cost)/credit | (1,022) | | | (916) | | | (910) | | | 498 | | | 498 | | | 499 | |
| | | | | | | | | | | |
| Total recognized in other comprehensive loss/(income) | $ | 114,001 | | | $ | 22,157 | | | $ | (82,973) | | | $ | 407 | | | $ | 3,356 | | | $ | (2,267) | |
| Total recognized in net periodic benefit cost and other comprehensive loss/(income) | $ | 144,254 | | | $ | 44,051 | | | $ | (16,889) | | | $ | (857) | | | $ | 1,352 | | | $ | (4,385) | |
Of the amounts included in Accumulated Other Comprehensive Loss/(Income) as of December 31,
2016,2019, the portions the Company expects to recognize as components of net periodic benefit cost in
20172020 are as follows:
| | | | | | | | | | |
| | | Retirement Plans | | Retiree Health and Life Insurance Plans |
Net actuarial loss/(gain) | | | $ | 40,064 | | | | $ | (611 | ) |
Prior service cost/(credit) | | | | 846 | | | | | (498 | ) |
Net transition obligation | | | | — | | | | | — | |
| | | | $ | 40,910 | | | | $ | (1,109 | ) |
| | | | | | | | | | | |
| Retirement Plans | | Retiree Health and Life Insurance Plans |
| Net actuarial loss/(gain) | $ | 22,486 | | | $ | (808) | |
| Prior service cost/(credit) | 1,037 | | | (279) | |
| | | |
| | $ | 23,523 | | | $ | (1,087) | |
The accumulated benefit obligation for all defined benefit plans was
$1,738,196$1,959,010 and
$1,691,589$1,668,396 at December 31,
20162019 and
2015,2018, respectively.
The projected benefit obligation (PBO), accumulated benefit obligation (ABO) and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were,
$1,474,993, $1,446,624$1,658,018, $1,651,740 and
$1,019,094,$1,341,556, respectively, as of December 31,
2016,2019, and
$1,656,174, $1,617,051$1,397,040, $1,391,129 and
$1,216,128,$1,013,173, respectively, as of December 31,
2015.2018.
The following table sets forth the Company’s projected benefit payments for the next ten years:
| | | | | | | | |
| Year | | Retirement Plans | | | Retiree Health and Life Insurance Plans | |
2017 | | $ | 89,743 | | | $ | 1,920 | |
2018 | | $ | 91,769 | | | $ | 1,881 | |
2019 | | $ | 93,782 | | | $ | 1,853 | |
2020 | | $ | 96,630 | | | $ | 1,542 | |
2021 | | $ | 97,838 | | | $ | 1,478 | |
2022-2026 | | $ | 520,839 | | | $ | 6,201 | |
| | | | | | | | | | | |
| Year | Retirement Plans | | Retiree Health and Life Insurance Plans |
| 2020 | $ | 96,448 | | | $ | 1,344 | |
| 2021 | $ | 93,436 | | | $ | 1,305 | |
| 2022 | $ | 94,786 | | | $ | 1,269 | |
| 2023 | $ | 95,830 | | | $ | 1,230 | |
| 2024 | $ | 97,372 | | | $ | 1,173 | |
| 2025-2029 | $ | 508,354 | | | $ | 5,344 | |
Plan termination, settlements, changes and amendments
In July 2019, the Company's Board of Directors approved a resolution to terminate the Sonoco Pension Plan for Inactive Participants (the "Inactive Plan"), a tax-qualified defined benefit plan, effective September 30, 2019. Upon approval from the Pension Benefit Guaranty Corporation, and following completion of a limited lump sum offering, the Company is expected to settle all remaining liabilities under the Inactive Plan through the purchase of annuities. The Company anticipates making additional contributions to the Inactive Plan of approximately $150,000 in late 2020 or early 2021 in order to be fully funded on a termination basis at the time of the annuity purchase. However, the actual amount of the Company's long-term liability when it is transferred, and the related cash contribution requirement, will depend upon the nature and timing of participant settlements, as well as prevailing market conditions. Non-cash, pretax settlement charges totaling approximately $600,000 are expected to be recognized beginning in 2020 as the lump sum payouts and annuity purchases are made. The termination of the Inactive Plan will apply to participants who have separated service from Sonoco and to non-union active employees who no longer accrue pension benefits. There is no change in the cumulative benefit previously earned by the approximately 11,000 impacted participants as a result of these actions, and the Company will continue to manage and support the Active Plan, comprised of approximately 600 active participants who continue to accrue benefits in accordance with a flat-dollar multiplier formula.
Settlement charges totaling $2,377 and $730 were recognized in 2019 and 2018, respectively, primarily as a result of payments made to certain participants of the Company's Canadian pension plan who elected a lump-sum distribution option upon retirement.
In February 2017, the Company initiated a program to settle a portion of the projected benefit obligation (PBO) relating to terminated vested participants in the U.S. qualified retirement plans through either a single, lump-sum payment or the purchase of an annuity. The terminated vested population comprised approximately 15% of the beginning of year PBO of these plans. The Company successfully settled approximately 47% of the PBO for the terminated vested plan participants. As a result of these and other smaller settlements, the Company recognized non-cash settlement charges of $32,761 in 2017. All settlement payments were funded from plan assets and did not require the Company to make any additional cash contributions.
F-28 FORM 10-K SONOCO 2019 ANNUAL REPORT
The following tables set forth the major actuarial assumptions used in determining the
PBO, ABObenefit obligation and net periodic cost:
| | | | | | | | | | | | | | | |
Weighted-average
assumptions used to determine benefit obligations at
December 31 | | U.S. Retirement Plans | | U.S. Retiree Health and Life Insurance Plans | | Foreign
Plans |
Discount Rate | | | | | | | | | | | | | | | |
2016 | | | | 4.12% | | | | | 3.70% | | | | | 2.95% | |
2015 | | | | 4.36% | | | | | 3.78% | | | | | 3.71% | |
Rate of Compensation Increase | | | | | | | | | | | | | | | |
2016 | | | | 3.60% | | | | | 3.32% | | | | | 3.65% | |
2015 | | | | 3.69% | | | | | 3.36% | | | | | 3.52% | |
| | | | | | | | | | | | | | | |
Weighted-average
assumptions used to determine net
periodic benefit cost for years ended
December 31 | | U.S. Retirement Plans | | U.S. Retiree Health and Life Insurance Plans | | Foreign Plans |
Discount Rate | | | | | | | | | | | | | | | |
2016 | | | | 4.36% | | | | | 3.78% | | | | | 3.71% | |
2015 | | | | 4.00% | | | | | 3.52% | | | | | 3.49% | |
2014 | | | | 4.78% | | | | | 4.03% | | | | | 4.51% | |
Expected Long-term Rate of Return | | | | | | | | | | | | | | | |
2016 | | | | 7.47% | | | | | 7.31% | | | | | 4.75% | |
2015 | | | | 7.67% | | | | | 7.39% | | | | | 4.92% | |
2014 | | | | 7.66% | | | | | 7.39% | | | | | 5.57% | |
Rate of Compensation Increase | | | | | | | | | | | | | | | |
2016 | | | | 3.69% | | | | | 3.36% | | | | | 3.52% | |
2015 | | | | 3.99% | | | | | 3.42% | | | | | 3.51% | |
2014 | | | | 3.99% | | | | | 3.44% | | | | | 3.80% | |
| | | | | | |
FORM 10-K
| | | | F23
| | SONOCO 2016 ANNUAL REPORT
|
| | | | | | | | | | | | | | | | | |
Weighted-average assumptions used to determine benefit obligations at December 31 | U.S. Retirement Plans | | U.S. Retiree Health and Life Insurance Plans | | Foreign Plans |
| Discount Rate | | | | | |
| 2019 | 2.87 | % | | 2.89 | % | | 2.28 | % |
| 2018 | 4.24 | % | | 4.02 | % | | 3.11 | % |
| Rate of Compensation Increase | | | | | |
| 2019 | — | % | | 3.04 | % | | 3.37 | % |
| 2018 | — | % | | 3.06 | % | | 3.65 | % |
| | | | | | | | | | | | | | | | | |
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 | U.S. Retirement Plans | | U.S. Retiree Health and Life Insurance Plans | | Foreign Plans |
| Discount Rate | | | | | |
| 2019 | 4.24 | % | | 4.02 | % | | 3.11 | % |
| 2018 | 3.59 | % | | 3.36 | % | | 2.78 | % |
| 2017 | 4.12 | % | | 3.70 | % | | 2.95 | % |
| Expected Long-term Rate of Return | | | | | |
| 2019 | 6.63 | % | | 6.73 | % | | 4.62 | % |
| 2018 | 6.87 | % | | 6.95 | % | | 4.84 | % |
| 2017 | 6.86 | % | | 6.98 | % | | 4.52 | % |
| Rate of Compensation Increase | | | | | |
| 2019 | — | % | | 3.06 | % | | 3.65 | % |
| 2018 | 3.40 | % | | 3.28 | % | | 3.62 | % |
| 2017 | 3.60 | % | | 3.32 | % | | 3.65 | % |
The Company adjusts its discount rates at the end of each fiscal year based on yield curves of high-quality debt instruments over durations that match the expected benefit payouts of each plan.
The discount rate used to calculate the benefit obligation and funded status of the Inactive Plan at December 31, 2019, was determined on a plan termination basis. The expected long-term rate of return assumption is based on the Company’s current and expected future portfolio mix by asset class, and expected nominal returns of these asset classes using an economic “building block” approach. Expectations for inflation and real interest rates are developed and various risk premiums are assigned to each asset class based primarily on historical performance. The expected long-term rate of return also gives consideration to the expected level of outperformance to be achieved on that portion of the Company’s investment portfolio under active management. The assumed rate of compensation increase reflects historical experience and management’s expectations regarding future salary and incentive increases.
The U.S. Retiree Health and Life Insurance Plan makes up approximately
97%96% of the Retiree Health liability. Therefore, the following information relates to the U.S. plan only.
| | | | | | | | | | |
| Healthcare Cost Trend Rate | | Pre-age 65 | | Post-age 65 |
2016 | | | | 7.00% | | | | | 7.00% | |
2015 | | | | 7.00% | | | | | 6.00% | |
| | |
| Ultimate Trend Rate | | Pre-age 65 | | Post-age 65 |
2016 | | | | 4.80% | | | | | 4.80% | |
2015 | | | | 4.90% | | | | | 4.90% | |
| | |
Year at which the Rate Reaches the Ultimate Trend Rate | | Pre-age 65 | | Post-age 65 |
2016 | | | | 2059 | | | | | 2059 | |
2015 | | | | 2039 | | | | | 2041 | |
| | | | | | | | | | | |
| Healthcare Cost Trend Rate | Pre-age 65 | | Post-age 65 |
| 2019 | 6.25 | % | | 6.25 | % |
| 2018 | 6.50 | % | | 6.50 | % |
| Ultimate Trend Rate | Pre-age 65 | | Post-age 65 |
| 2019 | 4.50 | % | | 4.50 | % |
| 2018 | 4.50 | % | | 4.50 | % |
Year at which the Rate Reaches the Ultimate Trend Rate | Pre-age 65 | | Post-age 65 |
| 2019 | 2026 | | 2026 |
| 2018 | 2026 | | 2026 |
Increasing the assumed trend rate for healthcare costs by one percentage point would increase the accumulated postretirement benefit obligation (the APBO) and total service and interest cost component approximately
$228$124 and
$17,$12, respectively. Decreasing the assumed trend rate for healthcare costs by one percentage point would decrease the APBO and total service and interest cost component approximately
$212$115 and
$16,$11, respectively. Based on amendments to the U.S. plan approved in 1999, which became effective in 2003, cost increases borne by the Company are limited to the Urban CPI, as defined.
Plan changes, amendments and settlements
During 2015, the Company’s U.S. Retiree Medical and Life Insurance Plan was amended to eliminate certain life insurance benefits for all nonunion and applicable union participants. The effect of this and other smaller amendments was a reduction in the accumulated postretirement benefit obligation of $2,273.
During 2010, certain retiree medical benefits and life insurance coverage under the Company’s U.S. Retiree Medical and Life Insurance Plan were changed, reducing the accumulated postretirement benefit obligation by $4,566. The resulting prior service credit was amortized over a four year period ending in 2014.
In February 2017, the Company initiated a program through which it seeks to settle a portion of the projected benefit obligation (PBO) relating to terminated vested participants in the U.S. qualified retirement plans. The terminated vested population comprises approximately 15% of the PBO of these plans and such participants are being given the option to receive their benefits early as either a lump sum or an annuity. If the election rates are in the expected range of 40% to 70%, the Company estimates it will be required to recognizenon-cash settlement charges of between $25,000 and $40,000 in the second quarter of 2017. Related settlement payments will be funded from plan assets and will not require the Company to make any additional cash contributions in 2017.
F-29 FORM 10-K SONOCO 2019 ANNUAL REPORT
The following table sets forth the weighted-average asset allocations of the Company’s retirement plans at
December 31, 20162019 and
2015,2018, by asset category.
| | | | | | | | | | | | | | | | | | | | |
| Asset Category | | | | U.S. | | U.K. | | Canada |
Equity securities | | | | 2016 | | | | | 51.4% | | | | | 46.6% | | | | | 64.9% | |
| | | | 2015 | | | | | 49.0% | | | | | 49.0% | | | | | 62.9% | |
Debt securities | | | | 2016 | | | | | 34.7% | | | | | 52.8% | | | | | 35.0% | |
| | | | 2015 | | | | | 36.8% | | | | | 50.2% | | | | | 36.8% | |
Alternative | | | | 2016 | | | | | 13.9% | | | | | —% | | | | | —% | |
| | | | 2015 | | | | | 14.2% | | | | | —% | | | | | —% | |
Cash and short-term investments | | | | 2016 | | | | | —% | | | | | 0.6% | | | | | 0.1% | |
| | | | 2015 | | | | | —% | | | | | 0.8% | | | | | 0.3% | |
Total | | | | 2016 | | | | | 100.0% | | | | | 100.0% | | | | | 100.0% | |
| | | | 2015 | | | | | 100.0% | | | | | 100.0% | | | | | 100.0% | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Asset Category | | | U.S. | | U.K. | | Canada |
| Equity securities | 2019 | | — | % | | 42.1 | % | | 67.9 | % |
| 2018 | | 48.3 | % | | 38.9 | % | | 55.4 | % |
| Debt securities | 2019 | | 91.6 | % | | 57.3 | % | | 31.6 | % |
| 2018 | | 38.4 | % | | 60.5 | % | | 44.0 | % |
| Alternative | 2019 | | 5.7 | % | | — | % | | — | % |
| 2018 | | 13.3 | % | | — | % | | — | % |
| Cash and short-term investments | 2019 | | 2.7 | % | | 0.6 | % | | 0.5 | % |
| 2018 | | — | % | | 0.6 | % | | 0.6 | % |
| Total | 2019 | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| 2018 | | 100.0 | % | | 100.0 | % | | 100.0 | % |
The Company employs a total-return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a desired level of risk. Alternative assets such as real estate funds, private equity funds and hedge funds
aremay also be used to enhance expected long-term returns while improving portfolio diversification. Risk tolerance is established through consideration of plan liabilities, plan funded status and corporate financial condition. Investment risk is measured and monitored on an ongoing basis through periodic investment portfolio reviews and periodic asset/liability studies.
The assets of the Company's U.S. pension plans were subject to de-risking measures during 2019 and reallocated to a more conservative mix of primarily fixed income investments pending the annuitization of the Inactive Plan expected in late 2020 or early 2021.
At December 31,
2016,2019, postretirement benefit plan assets totaled
$1,349,236,$1,696,401, of which
$1,004,732$1,322,822 were assets of the U.S. Defined Benefit Plans.
U.S. defined benefit plans
The
equity investments consist of direct ownership and funds and are diversified among U.S. andnon-U.S. stocks of small to large capitalizations. Following the December 2010 amendment that split the U.S. qualified defined benefit pension plan into the Active Plan and the Inactive Plan effective January 1, 2011, the Company completed separate asset/liability studies for both
plansthe Active Plan and Inactive Plan during 2011 and adopted
revised investment guidelines for each.
The revisedThese guidelines
establishestablished a dynamic
de-risking framework
that willfor gradually
shiftshifting the allocation of assets to long-duration domestic fixed income from equity and other asset categories, as the relative funding ratio of each plan
increasesincreased over time.
Beginning in 2019, the Company accelerated the de-risking measures in its U.S. defined benefit plans by making voluntary contributions totaling $200,000 to the plans and by reallocating plan assets to a more conservative mix of primarily fixed income investments. Subsequent to these de-risking actions, the Inactive Plan was terminated effective September 30, 2019. The current target allocation (midpoint) for the Inactive Plan investment portfolio is:
Equity Securities – 49%, Debt Securities –
40%, Alternative – 11%97% and Cash
–0%– 3%. The current target allocation (midpoint) for the Active Plan investment portfolio is:
Equity Securities – 57%, Debt Securities –
30%, Alternative – 13%97% and Cash –
0%3%.
| | | | | | |
SONOCO 2016 ANNUAL REPORT
| | F24
| | | | FORM 10-K
|
United Kingdom defined benefit plan
The equity investments consist of direct ownership and funds and are diversified among U.K. and international stocks of small and large capitalizations. The current target allocation (midpoint) for the investment portfolio is: Equity Securities –
48%,42% and Debt Securities –
52%, Alternative – 0% and Cash – 0%58%.
Canada defined benefit plan
The equity investments consist of direct ownership and funds and are diversified among Canadian and international stocks of primarily large capitalizations and short to intermediate duration corporate and government bonds. The current target allocation (midpoint) for the investment portfolio is: Equity Securities –
60%55%, Debt Securities –
39%, Alternative – 0%44% and Cash – 1%.
Retiree health and life insurance plan assets
The following table sets forth the weighted-average asset allocations by asset category of the Company’s retiree health and life insurance plan.
| | | | | | | | | | |
| Asset Category | | December 31,
2016 | | December 31,
2015 |
Equity securities | | | | 61.9% | | | | | 59.8% | |
Debt securities | | | | 31.2% | | | | | 33.0% | |
Alternative | | | | 6.8% | | | | | 7.1% | |
Cash | | | | 0.1% | | | | | 0.1% | |
Total | | | | 100.0% | | | | | 100.0% | |
| | | | | | | | | | | |
| Asset Category | 2019 | | 2018 |
| Equity securities | —% | | | 48.3% | |
| Debt securities | 91.6% | | | 38.4% | |
| Alternative | 5.7% | | | 13.3% | |
| Cash | 2.7% | | | —% | |
| Total | 100.0% | | | 100.0% | |
Based on current actuarial estimates, the Company anticipates that
the total contributions to its
retirement plans and retiree health and life insurancedefined benefit plans, excluding
contributions to the
Sonoco SavingsInactive Plan, will be approximately
$57,900$25,000 in
2017.2020. Contributions to the Inactive Plan of approximately $150,000 are expected to be made in late 2020 or early 2021 in order for the plan to be fully funded on a termination basis at the time of the annuity purchase. No assurances can be made, however, about funding requirements beyond
2017,2020, as they will depend largely on actual investment returns,
and future actuarial
assumptions.assumptions, and timing of annuity purchases.
Sonoco Savings and Retirement Plan
The Sonoco Savings and Retirement Plan is a defined contribution retirement
contributionplan provided for certain of the Company’s U.S. employees. The plan is comprised of both an elective and non-elective component.
The elective component of the plan, which is designed to meet the requirements of section 401(k) of the Internal Revenue Code, allows participants to set aside a portion of their wages and salaries for retirement and encourages saving by matching a portion of their contributions with contributions from the Company. The plan provides for participant contributions of 1% to 100% of gross pay. Since January 1, 2010, the
F-30 FORM 10-K SONOCO 2019 ANNUAL REPORT
Company has matched 50% on the first 4% of compensation contributed by the participant as pretax contributions which are immediately fully vested. The Company’s expenses related to the plan for 2019, 2018 and 2017 were approximately $13,400, $12,500 and $11,200, respectively.
The non-elective component of the plan, the Sonoco Retirement Contribution (SRC)
, is
a defined contribution pension plan provided for the Company’s salaried andnon-union U.S.available to certain employees who
were hired on or after January 1, 2004, or those formerare not currently active participants in the Company’s U.S. qualified defined benefit pension
plan who elected to transfer into the SIRP under aone-time option effective January 1, 2010.plan. The
Company makesSRC provides for an annual
Company contribution of 4% of all eligible pay plus 4% of eligible pay in excess of the Social Security wage base to eligible participant accounts. Participants are fully vested after three years of service or upon reaching age 55, if earlier. The Company’s expenses related to the plan for
2016, 20152019, 2018 and
20142017 were approximately
$13,655, $14,970$23,752, $14,995 and
$12,079,$14,540, respectively. Cash contributions to the SRC totaled
$13,352, $12,865$14,573, $14,151 and
$12,049$14,066 in
2016, 20152019, 2018 and
2014, respectively.Sonoco savings plan
The Sonoco Savings Plan is a defined contribution retirement plan provided for the Company’s U.S. employees. The plan provides for participant contributions of 1%2017, respectively, and are expected to 30% of gross pay. Since January 1, 2010, the Company has matched 50% on the first 4% of compensation contributed by the participant as pretax contributions. The Company’s expenses related to the plan for 2016, 2015 and 2014 weretotal approximately $11,400, $11,500 and $11,400, respectively.
$23,000 in 2020.
The Company also provides retirement and postretirement benefits to certain other
non-U.S. employees through various Company-sponsored and local government sponsored defined contribution arrangements. For the most part, the liabilities related to these arrangements are funded in the period they arise. The Company’s expenses for these plans were not material for all years presented.
13. INCOME TAXES
14. Income taxes
The provision for taxes on income for the years ended December 31 consists of the following:
| | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | 2014 |
Pretax income | | | | | | | | | | | | | | | |
Domestic | | | $ | 318,702 | | | | $ | 255,897 | | | | $ | 224,683 | |
Foreign | | | | 122,575 | | | | | 72,049 | | | | | 101,024 | |
Total pretax income | | | $ | 441,277 | | | | $ | 327,946 | | | | $ | 325,707 | |
Current | | | | | | | | | | | | | | | |
Federal | | | $ | 110,567 | | | | $ | 55,678 | | | | $ | 40,600 | |
State | | | | 10,808 | | | | | 6,000 | | | | | 6,889 | |
Foreign | | | | 40,788 | | | | | 31,610 | | | | | 29,630 | |
Total current | | | $ | 162,163 | | | | $ | 93,288 | | | | $ | 77,119 | |
Deferred | | | | | | | | | | | | | | | |
Federal | | | $ | (861 | ) | | | $ | 11,002 | | | | $ | 29,078 | |
State | | | | (869 | ) | | | | (2,359 | ) | | | | 5,067 | |
Foreign | | | | 4,198 | | | | | (14,193 | ) | | | | (2,506 | ) |
Total deferred | | | $ | 2,468 | | | | $ | (5,550 | ) | | | $ | 31,639 | |
Total taxes | | | $ | 164,631 | | | | $ | 87,738 | | | | $ | 108,758 | |
| | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| Pretax income | | | | | |
| Domestic | $ | 217,098 | | | $ | 225,442 | | | $ | 168,180 | |
| Foreign | 163,668 | | | 153,089 | | | 146,374 | |
| Total pretax income | $ | 380,766 | | | $ | 378,531 | | | $ | 314,554 | |
| Current | | | | | |
| Federal | $ | 14,933 | | | $ | 37,345 | | | $ | 120,398 | |
| State | 2,565 | | | 6,164 | | | 5,623 | |
| Foreign | 45,911 | | | 38,648 | | | 40,328 | |
| Total current | $ | 63,409 | | | $ | 82,157 | | | $ | 166,349 | |
| Deferred | | | | | |
| Federal | $ | 25,064 | | | $ | (5,571) | | | $ | (16,797) | |
| State | 8,599 | | | $ | (738) | | | 3,499 | |
| Foreign | (3,803) | | | (840) | | | (6,462) | |
| Total deferred | $ | 29,860 | | | $ | (7,149) | | | $ | (19,760) | |
| Total taxes | $ | 93,269 | | | $ | 75,008 | | | $ | 146,589 | |
Deferred tax
liabilities/(assets)(liabilities)/assets are comprised of the following at December 31:
| | | | | | | | | | |
| | | 2016 | | 2015 |
Property, plant and equipment | | | $ | 115,946 | | | | $ | 118,216 | |
Intangibles | | | | 219,584 | | | | | 232,420 | |
Gross deferred tax liabilities | | | $ | 335,530 | | | | $ | 350,636 | |
Retiree health benefits | | | $ | (971 | ) | | | $ | (2,078 | ) |
Foreign loss carryforwards | | | | (61,381 | ) | | | | (65,123 | ) |
U.S. Federal loss carryforwards | | | | (10,105 | ) | | | | (1,214 | ) |
Capital loss carryforwards | | | | (20 | ) | | | | (69 | ) |
Employee benefits | | | | (202,085 | ) | | | | (192,798 | ) |
Accrued liabilities and other | | | | (93,142 | ) | | | | (118,511 | ) |
Gross deferred tax assets | | | $ | (367,704 | ) | | | $ | (379,793 | ) |
Valuation allowance on deferred tax assets | | | $ | 49,797 | | | | $ | 49,464 | |
Total deferred taxes, net | | | $ | 17,623 | | | | $ | 20,307 | |
Federal
| | | | | | | | | | | |
| 2019 | | 2018 |
| Property, plant and equipment | $ | (91,207) | | | $ | (102,007) | |
| Intangibles | (134,868) | | | (178,883) | |
| Leases | (79,332) | | | — | |
| Gross deferred tax liabilities | $ | (305,407) | | | $ | (280,890) | |
| Retiree health benefits | $ | 2,405 | | | $ | 2,989 | |
| Foreign loss carryforwards | 58,527 | | | 57,581 | |
| U.S. Federal loss and credit carryforwards | 86,748 | | | 86,655 | |
| Capital loss carryforwards | 2,703 | | | 2,757 | |
| Employee benefits | 87,295 | | | 114,872 | |
| Leases | 79,673 | | | — | |
| Accrued liabilities and other | 63,700 | | | 102,349 | |
| Gross deferred tax assets | $ | 381,051 | | | $ | 367,203 | |
| Valuation allowance on deferred tax assets | $ | (105,347) | | | $ | (103,289) | |
| Total deferred taxes, net | $ | (29,703) | | | $ | (16,976) | |
The Company has total federal net operating loss carryforwards of approximately $2,600$77,200 remaining fromat December 31, 2019. These losses are limited based upon future taxable earnings of the Tegrant acquisition were fully utilized in 2016. Federal lossrespective entities and expire between 2030 and 2036. U.S. foreign tax credit carryforwards of approximately $29,000 were acquired$70,400 exist at December 31, 2019 and expire in 2027. The Company is evaluating the 2016 acquisitionfeasibility of Plastic Packaging Inc.tax planning strategies which could allow a release of valuation allowance related to its foreign tax credits. A conclusion on this matter is expected to be reached in a subsequent quarter and it is reasonably possible that a benefit material to the Company's financial statements will be recognized at that time. Foreign subsidiary loss carryforwards of approximately $241,000$238,600 remain at December 31, 2016.2019. Their use is limited to future taxable earnings of the respective foreign subsidiaries.subsidiaries or filing groups. Approximately $226,200$212,400 of these loss carryforwards do not have an expiration date. Of the remaining foreign subsidiary loss carryforwards, approximately $7,700$9,200 expire within the next five years and approximately $7,100$17,000 expire between 20222025 and 2034. 2039. Foreign subsidiary capital loss carryforwards of approximately $15,800 exist at December 31, 2019 and do not have an expiration date. Their use is limited to future capital gains of the respective foreign subsidiaries.
Approximately
$8,200$12,300 in tax value
| | | | | | |
FORM 10-K
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| | SONOCO 2016 ANNUAL REPORT
|
of state loss carryforwards and $16,000$17,600 of state credit carryforwards remain at December 31, 2016.2019. These state loss and credit carryforwards are limited based upon future taxable earnings of the respective entities and expire between 20172020 and 2036.2039. State loss and credit carryforwards are reflected at their “tax”"tax" value, as opposed to the amount of expected gross deduction due to the vastly different apportionment and statutory tax rates applicable to the various entities and states in which they file.
The Company has recorded a $15,900 deferred tax asset in France primarily related to cumulative net operating losses. These losses have an indefinite carryforward period and the Company expects to utilize them over the next 20 to 25 years. Accordingly, a valuation allowance on the deferred asset has not been provided.
files.
F-31 FORM 10-K SONOCO 2019 ANNUAL REPORT
A reconciliation of the U.S. federal statutory tax rate to the actual consolidated tax expense is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | | | 2015 | | | | 2014 | | |
Statutory tax rate | | | $ | 154,447 | | | | | 35.0 | % | | | $ | 114,781 | | | | | 35.0 | % | | | $ | 113,998 | | | | | 35.0 | % |
State income taxes, net of federal tax benefit | | | | 7,477 | | | | | 1.7 | | | | | 4,872 | | | | | 1.5 | % | | | | 8,465 | | | | | 2.6 | % |
Valuation allowance | | | | 639 | | | | | 0.1 | | | | | (8,080 | ) | | | | (2.5 | )% | | | | (2,264 | ) | | | | (0.7 | )% |
Tax examinations including change in reserve for uncertain tax positions | | | | 732 | | | | | 0.2 | | | | | (3,245 | ) | | | | (1.0 | )% | | | | (2,109 | ) | | | | (0.6 | )% |
Adjustments to prior year deferred taxes | | | | (2,401 | ) | | | | (0.5 | ) | | | | 1,596 | | | | | 0.5 | % | | | | (518 | ) | | | | (0.2 | )% |
Foreign earnings taxed at other than U.S. rates | | | | (15,930 | ) | | | | (3.6 | ) | | | | (9,065 | ) | | | | (2.8 | )% | | | | (8,891 | ) | | | | (2.7 | )% |
Disposition of business | | | | 22,810 | | | | | 5.2 | | | | | (11,996 | ) | | | | (3.6 | )% | | | | — | | | | | — | % |
Effect of tax rate changes enacted during the year | | | | 2,517 | | | | | 0.6 | | | | | (2,235 | ) | | | | (0.7 | )% | | | | 81 | | | | | — | % |
Deduction related to qualified production activities | | | | (5,215 | ) | | | | (1.2 | ) | | | | (5,968 | ) | | | | (1.8 | )% | | | | (4,003 | ) | | | | (1.2 | )% |
Other, net | | | | (445 | ) | | | | (0.1 | ) | | | | 7,078 | | | | | 2.2 | % | | | | 3,999 | | | | | 1.2 | % |
Total taxes | | | $ | 164,631 | | | | | 37.3 | % | | | $ | 87,738 | | | | | 26.8 | % | | | $ | 108,758 | | | | | 33.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | | | 2018 | | | | 2017 | | |
| Statutory tax rate | $ | 79,961 | | | 21.0 | % | | $ | 79,491 | | | 21.0 | % | | $ | 110,094 | | | 35.0 | % |
| State income taxes, net of federal tax benefit | 7,767 | | | 2.0 | % | | 7,534 | | | 2.0 | % | | 4,780 | | | 1.5 | % |
| Valuation allowance | 3,174 | | | 0.8 | % | | (14,902) | | | (3.9) | % | | (3,333) | | | (1.1) | % |
| Tax examinations including change in reserve for uncertain tax positions | (1,639) | | | (0.4) | % | | (3,076) | | | (0.8) | % | | 4,895 | | | 1.6 | % |
| Adjustments to prior year deferred taxes | (499) | | | (0.1) | % | | (1,899) | | | (0.5) | % | | (1,415) | | | (0.4) | % |
| Foreign earnings taxed at other than U.S. rates | 5,083 | | | 1.3 | % | | 8,224 | | | 2.2 | % | | (16,233) | | | (5.2) | % |
| Disposition of business | — | | | — | % | | — | | | — | % | | 537 | | | 0.2 | % |
| Effect of tax rate changes | 531 | | | 0.1 | % | | (6,218) | | | (1.6) | % | | (22,183) | | | (7.1) | % |
| Deduction related to qualified production activities | — | | | — | % | | 341 | | | 0.1 | % | | (5,384) | | | (1.7) | % |
| Transition tax | — | | | — | % | | 3,647 | | | 1.0 | % | | 76,933 | | | 24.5 | % |
| Tax credits | (13,310) | | | (3.5) | % | | (10,083) | | | (2.7) | % | | (1,197) | | | (0.4) | % |
| Global intangible low-taxed income (GILTI) | 12,340 | | | 3.2 | % | | 12,878 | | | 3.4 | % | | — | | | — | % |
| Foreign-derived intangible income | (1,225) | | | (0.3) | % | | (1,174) | | | (0.3) | % | | — | | | — | % |
| Other, net | 1,086 | | | 0.3 | % | | 245 | | | 0.1 | % | | (905) | | | (0.3) | % |
| Total taxes | $ | 93,269 | | | 24.5 | % | | $ | 75,008 | | | 19.8 | % | | $ | 146,589 | | | 46.6 | % |
The total amount of the one-time transition tax on certain accumulated foreign earnings as part of the Tax Cuts and Jobs Act ("Tax Act") was $80,580. Under the provisions of the Tax Act, the transition tax is payable in installments over a period of 8 years. The first two installments were paid in 2018 and 2019 with the filing of the Company's 2017 and 2018 federal income tax returns. The liability is further reduced by the deemed overpayment of federal income taxes. The remaining obligation of $46,295 is included in "Other Liabilities" in the Company's Consolidated Balance Sheet at December 31, 2019.
The change in “Tax examinations including change in reserve for uncertain tax positions” is shown net of associated deferred taxes and accrued interest. Included in the change are net increases
in reserves for uncertain tax positions of approximately
$3,000, $3,200$1,800, $1,700 and
$3,500$2,600 for uncertain items arising in
2016, 20152019, 2018 and
2014,2017, respectively, combined with adjustments related to prior year items, primarily decreases related to lapses of statutes of limitations in international, federal and state jurisdictions as well as overall changes in facts and judgment. These adjustments decreased the reserve by a total of approximately
$(2,300)$(3,500),
$(6,500)$(2,900) and
$(5,600)$(2,300) in
2016, 20152019, 2018 and
2014,2017, respectively.
In many of the countries in which the Company operates, earnings are taxed at rates
lowerdifferent than in the U.S. This
benefitdifference is reflected in “Foreign earnings taxed at other than U.S. rates” along with other items, if any, that impacted taxes on foreign earnings in the periods presented.
The effect on tax expense for “Disposition of business” in 2016 relates to the sale of the Company’s rigid plastic blow molding operations, its retail security packaging operation in Juncos, Puerto Rico, and its paper mill in France. The above adjustment reflects the recognition of tax gains in excess of book gains due to basis differences, and losses on which no future tax benefit will be recognized. For 2015, the adjustment pertains primarily to recognition of beneficial tax attributes related to the disposition of a portion of the Company’s metal ends and closures business.
The benefits included in “Adjustments to prior year deferred taxes” for each of the years presented consist primarily of adjustments to deferred tax assets and liabilities arising from changes in estimates.
Undistributed The 2017 benefit included in the "Effect of tax rate changes for the year" relates primarily to changes made as a result of the Tax Act.
The 2018 benefits included in "Valuation allowance" includes a benefit of $16,100 related to the revaluation of the valuation allowance on foreign tax credits due to the Tax Act.
Of the $13,310 of tax credits for 2019, $10,484 directly offsets the $12,340 of GILTI tax, resulting in a net GILTI tax of $1,856. This net GILTI tax includes a favorable adjustment for revising the estimate of net GILTI tax due on the 2018 tax return of $2,097.
The Company maintains its assertion that its undistributed foreign earnings
are indefinitely reinvested and, accordingly, has not recorded any deferred income tax liabilities that would be due if those earnings were repatriated. As of
international subsidiaries totaled approximately $799,373 at December 31,
2016. Deferred taxes have not been provided on the2019, these undistributed earnings
astotal $916,457. While the
Company considersmajority of these
amountsearnings have already been taxed in the U.S., a portion would be subject to
be indefinitely reinvested to finance the growthforeign withholding and
expansion of its international operations.U.S. income taxes and credits if distributed. Computation of the
potential deferred tax liability associated with
those undistributedunremitted earnings
deemed to be indefinitely reinvested is not
practicable. All or a portion of these earnings could become subject to current tax if they were remitted or loaned to the U.S. parent company, the stock of the foreign subsidiaries were sold, or through a future change in U.S. tax law.practicable at this time.
Reserve for uncertain tax positions
The following table sets forth the reconciliation of the gross amounts of unrecognized tax benefits at the beginning and ending of the periods indicated: | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | 2014 |
Gross Unrecognized Tax Benefits at January 1 | | | $ | 17,200 | | | | $ | 26,000 | | | | $ | 28,800 | |
Increases in prior years’ unrecognized tax benefits | | | | 1,400 | | | | | 1,500 | | | | | 6,800 | |
Decreases in prior years’ unrecognized tax benefits | | | | (3,500 | ) | | | | (2,100 | ) | | | | (5,500 | ) |
Increases in current year’s unrecognized tax benefits | | | | 3,000 | | | | | 1,700 | | | | | 4,600 | |
Decreases in unrecognized tax benefits from the lapse of statutes of limitations | | | | (100 | ) | | | | (9,200 | ) | | | | (5,900 | ) |
Settlements | | | | (300 | ) | | | | (700 | ) | | | | (2,800 | ) |
Gross Unrecognized Tax Benefits at December 31 | | | $ | 17,700 | | | | $ | 17,200 | | | | $ | 26,000 | |
| | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| Gross Unrecognized Tax Benefits at January 1 | $ | 14,400 | | | $ | 17,100 | | | $ | 17,700 | |
| Increases in prior years’ unrecognized tax benefits | — | | | — | | | 700 | |
| Decreases in prior years’ unrecognized tax benefits | (1,300) | | | (700) | | | (2,400) | |
| Increases in current year's unrecognized tax benefits | 1,300 | | | 1,200 | | | 1,600 | |
| Decreases in unrecognized tax benefits from the lapse of statutes of limitations | (2,300) | | | (2,600) | | | (300) | |
| Settlements | 100 | | | (600) | | | (200) | |
| Gross Unrecognized Tax Benefits at December 31 | $ | 12,200 | | | $ | 14,400 | | | $ | 17,100 | |
Of the unrecognized tax benefit balances at December 31,
20162019 and December 31,
2015,2018, approximately
$15,300$11,400 and
$15,000,$13,500, respectively, would have an impact on the effective tax rate if ultimately recognized.
Interest and/or penalties related to income taxes are reported as part of income tax expense. The Company had approximately $2,300$2,000 and $2,200$2,100 accrued for interest related to uncertain tax positions at December 31, 20162019 and December 31, 2015,2018, respectively. Tax expense for the year ended December 31, 2016,2019, includes approximately $200$600 of interest expense, which is comprised of an interest benefit of approximately $550$900 related to the adjustment of prior years’years' items and interest expense of $750$1,500 on unrecognized tax benefits. The amounts listed above for
F-32 FORM 10-K SONOCO 2019 ANNUAL REPORT
accrued interest and interest expense do not reflect the benefit of a federal tax deduction which would be available if the interest were ultimately paid.
Activity for the year also included $700 of settlements.
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, ornon-U.S.,income tax examinations by tax authorities for years before 2012.
With respect to state and local income taxes, | | | | | | |
SONOCO 2016 ANNUAL REPORT
| | F26
| | | | FORM 10-K
|
the Company is no longer subject to examination prior to 2012, with few exceptions.
The Company has $1,900 of reserves for uncertain tax benefits for which it believes that it is reasonably possible that a resolution may be reached withinthe amount reserved for uncertain tax positions at December 31, 2019 will decrease by approximately $900 over the next twelve months. TheThis change includes the anticipated increase in reserves related to existing positions offset by settlements of issues currently under examination and the release of existing reserves due to the expiration of the statute of limitations. Although the Company's estimate for the potential outcome offor any uncertain tax issue is highly judgmental. The Companyjudgmental, management believes it has adequately provided forthat any reasonably foreseeable outcomeoutcomes related to these matters.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 effective tax rate may fluctuate significantly on a quarterly basis. The Company has operations in many countries outside of the United States and the taxes paid 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’sCompany's overall effective tax rate.
In February 2017,
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’sIRS's recharacterization of a distribution of an intercompany note made in 2012, and the subsequent repayment of the note over the course of 2013, as if it were a cash distribution made in 2013.
In March 2017, the Company received a draft NOPA proposing penalties of $18,000 associated with the IRS’s recharacterization, as well as an Information Document Request (“IDR”) requesting the Company’s analysis of why such penalties should not apply. The Company responded to this IDR in April 2017. On October 5, 2017, the Company received 2 revised draft NOPAs proposing the same adjustments and penalties as in the prior NOPAs. On November 14, 2017, the Company received 2 final NOPAs proposing the same adjustments and penalties as in the prior draft NOPAs. On November 20, 2017, the Company received a Revenue Agent's Report (“RAR”) that included the same adjustments and penalties as in the prior NOPAs. At the time
of 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
NOPARAR would be approximately
$84,000,$89,000, excluding interest and
the previously referenced penalties.
TheOn January 22, 2018, the Company
expects a final NOPA to be issued during the first quarter of 2017, and intends to filefiled a protest to the proposed deficiency with the
IRS. The Company received a rebuttal of its protest from the IRS
which will causeon July 10, 2018, and the matter
to behas now been referred to the Appeals Division of the IRS.
The Company had a pre-conference hearing with IRS Appeals during the second quarter of 2019, and has had continued discussions with IRS Appeals throughout the year. If the matter is not resolved in IRS Appeals, the next step would be to file a petition in Tax Court. The Company strongly believes the position of the IRS with regard to this matter is inconsistent with applicable tax laws and existing Treasury regulations, and that the
Company’sCompany'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’sCompany's favor. Regardless of whether the matter is resolved in the
Company’sCompany'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.
14. COMMITMENTS AND CONTINGENCIES
15. Revenue Recognition
The Company records revenue when control is transferred to the customer, which is either upon shipment or over time in cases where the Company is entitled to payment with margin for products produced that are customer specific without alternative use. The Company recognizes over time revenue under the input method as goods are produced. Revenue that is recognized at a point in time is recognized when the customer obtains control of the goods. Customers obtain control either when goods are delivered to the customer facility, if the Company is responsible for arranging transportation, or when picked up by the customer's designated carrier. The Company commonly enters into Master Supply Arrangements (MSA) with customers to provide goods and/or services over specific time periods. Customers submit purchase orders with quantities and prices to create a contract for accounting purposes. Shipping and handling expenses are included in "Cost of Sales," and freight charged to customers is included in "Net Sales" in the Company's Consolidated Statements of Income.
The Company has rebate agreements with certain customers. These rebates are recorded as reductions of sales and are accrued using sales data and rebate percentages specific to each customer agreement. Accrued customer rebates are included in "Accrued expenses and other" in the Company's Consolidated Balance Sheets.
Payment terms under the Company's arrangements are short term in nature, generally no longer than 120 days. The Company does provide prompt payment discounts to certain customers if invoices are paid within a predetermined period. Prompt payment discounts are treated as a reduction of revenue and are determinable within a short period after the originating sale.
The following table sets forth information about contract assets and liabilities from contracts with customers. The balances of the contract assets and liabilities are located in "Other receivables" and "Accrued expenses and other" on the Consolidated Balance Sheets.
| | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| Contract Assets | | $ | 56,364 | | | $ | 48,786 | |
| Contract Liabilities | | (17,047) | | | (18,533) | |
F-33 FORM 10-K SONOCO 2019 ANNUAL REPORT
Significant changes in the contract assets and liabilities balances during the period were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | | | December 31, 2018 | | |
| | Contract Asset | | Contract Liability | | Contract Asset | | Contract Liability |
| Beginning balance | | $ | 48,786 | | | $ | (18,533) | | | $ | 45,877 | | | $ | (17,736) | |
| Revenue deferred or rebates accrued | | — | | | (29,062) | | | — | | | (19,730) | |
| Recognized as revenue | | — | | | 8,473 | | | — | | | 1,652 | |
| Rebates paid to customers | | — | | | 22,075 | | | — | | | 17,281 | |
| Increases due to rights to consideration for customer specific goods produced, but not billed during the period | | 51,797 | | | — | | | 48,786 | | | — | |
| Transferred to receivables from contract assets recognized at the beginning of the period | | (48,786) | | | — | | | (45,877) | | | — | |
| Increase as a result of cumulative catch-up arising from changes in the estimate of completion, excluding amounts transferred to receivables during the period | | — | | | — | | | — | | | — | |
| Impairment of contract asset | | — | | | — | | | — | | | — | |
| Contract asset acquired in a business combination | | 4,567 | | | — | | | — | | | — | |
| Ending balance | | $ | 56,364 | | | $ | (17,047) | | | $ | 48,786 | | | $ | (18,533) | |
Contract assets and liabilities are generally short in duration given the nature of products produced by the Company. Contract assets represents goods produced without alternative use for which the Company is entitled to payment with margin prior to shipment. Upon shipment, the Company is entitled to bill the customer, and therefore amounts included in contract assets will be reduced with the recording of an account receivable as they represent an unconditional right to payment. Contract liabilities represent revenue deferred due to pricing mechanisms utilized by the Company in certain multi-year arrangements, volume rebates, and receipts of advanced payments. For multi-year arrangements with pricing mechanisms, the Company will generally defer revenue during the initial term of the arrangement, and will release the deferral over the back half of the contract term. The Company's reportable segments are aligned by product nature as disclosed in Note 18.
The following tables set forth information about revenue disaggregated by primary geographic regions for the years ended December 31, 2019 and 2018. The tables also include a reconciliation of disaggregated revenue with reportable segments.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, 2019 | | Consumer Packaging | | Display and Packaging | | Paper and Industrial Converted Products | | Protective Solutions | | Total |
| Primary geographical markets: | | | | | | | | | | |
| United States | | $ | 1,659,071 | | | $ | 246,735 | | | $ | 1,095,437 | | | $ | 407,216 | | | $ | 3,408,459 | |
| Europe | | 407,759 | | | 301,866 | | | 346,102 | | | 23,039 | | | 1,078,766 | |
| Canada | | 108,848 | | | — | | | 117,201 | | | — | | | 226,049 | |
| Asia Pacific | | 70,504 | | | — | | | 277,385 | | | 2,370 | | | 350,259 | |
| Other | | 87,204 | | | 5,524 | | | 138,614 | | | 79,332 | | | 310,674 | |
| Total | | $ | 2,333,386 | | | $ | 554,125 | | | $ | 1,974,739 | | | $ | 511,957 | | | $ | 5,374,207 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, 2018 | | Consumer Packaging | | Display and Packaging | | Paper and Industrial Converted Products | | Protective Solutions | | Total | | | | | | |
| Primary geographical markets: | | | | | | | | | | | | | | | | |
| United States | | $ | 1,676,204 | | | $ | 290,295 | | | $ | 1,108,735 | | | $ | 415,135 | | | | $ | 3,490,369 | | | | | | | |
| Europe | | 418,129 | | | 294,156 | | | 354,705 | | | 25,664 | | | | 1,092,654 | | | | | | | |
| Canada | | 115,183 | | | — | | | 131,025 | | | — | | | | 246,208 | | | | | | | |
| Asia Pacific | | 69,242 | | | — | | | 178,509 | | | 3,548 | | | | 251,299 | | | | | | | |
| Other | | 81,241 | | | 7,858 | | | 137,979 | | | 83,330 | | | | 310,408 | | | | | | | |
| Total | | $ | 2,359,999 | | | $ | 592,309 | | | $ | 1,910,953 | | | $ | 527,677 | | | | $ | 5,390,938 | | | | | | | |
F-34 FORM 10-K SONOCO 2019 ANNUAL REPORT
16. Commitments and contingencies
Pursuant to U.S. GAAP, accruals for estimated losses are recorded at the time information becomes available indicating that losses are probable and that the amounts are reasonably estimable. As is the case with other companies in similar industries, the Company faces exposure from actual or potential claims and legal proceedings from a variety of sources. Some of these exposures, as discussed below, have the potential to be material.
The Company is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which it operates.
Fox River Settlement and Remaining Claim
As previously disclosed, the Company’s wholly owned subsidiary U.S. Paper Mills Corp. (U.S. Mills) was previously identified as a potentially responsible party (PRP) for the Wisconsin Fox River environmental cleanup and U.S. Mills has been involved
Spartanburg
In connection with its acquisition of Tegrant in
subsequent Superfund litigation related to the Fox River. In March 2014, U.S. Mills settled claims brought by the U. S. Environmental Protection Agency (EPA) and the Wisconsin Department of Natural Resources (WDNR) for $14,700, which settlement provided U.S. Mills with protection from the contribution claims of other PRPs. As a result of the settlement becoming final, the Company reversed $32,543 of the reserves it had previously established for the related claims, resulting in the recognition of a gain in the Company’s Consolidated Financial Statements in the first quarter of 2015.This settlement left intact a cost recovery claim by Appvion, Inc., under Section 107 of CERCLA against eight defendants, including U.S. Mills, to recover response costs allegedly incurred by Appvion consistent with the national contingency plan for responding to release or threatened release of hazardous substances into the lower Fox River (Civil Action No.8-CV-16-WCG in the United States District Court for the Eastern District of Wisconsin). In January 2017, U.S. Mills obtained Court Approval of a final settlement of the claims made by Appvion for $3,334. As a result of this 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 governmental authorities.
A reserve of $5,000 had been set aside for the potential liabilities associated with the Appvion claim. During 2016 and 2015, the Company spent approximately $1,043 and $1,104, respectively, against the reserve on legal costs related to the Appvion claim. Based on the settlement that was reached in January 2017, the Company increased the reserve by $850 during the fourth quarter of 2016 to a total of $3,703 at December 31, 2016, to cover both the settlement and related legal costs. The majority of this reserve is expected to be paid during the first quarter of 2017.
Tegrant
On November 8, 2011, the Company completed the acquisition of Tegrant. During its due diligence, the Company identified several potentially environmentally contaminated sites.potential environmental contamination at a site in Spartanburg, South Carolina. The total remediation cost of these sitesthe Spartanburg site was estimated to be $18,850$17,400 at the time of the 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 $845$1,611 on remediation of these sites. During 2015 and 2014,the Spartanburg site.
Based on favorable developments at the Spartanburg site, the Company increasedreduced its reserves for these sitesestimated environmental reserve by $68 and $324, respectively,$10,000 during the third quarter of 2019 in order to reflect its revised best estimate of what it is likely to pay in order to complete the remediation. This adjustment resulted in a $10,000 reduction in "Selling, general and administrative expenses" in the Company's Consolidated Statement of Income for the year ended December 31, 2019.
At December 31,
20162019 and
2015,2018, the
Company’sCompany's accrual for
Tegrant’s environmental contingencies
related to the Spartanburg site totaled
$18,397$5,789 and
$18,521,$15,964, 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’sCompany's financial statements.
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
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| | SONOCO 2016 ANNUAL REPORT
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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’sCompany's financial statements.
At December 31, 2019 and 2018, the Company's accrual for these other sites totaled $2,938 and $4,136, respectively.
As of December 31,
20162019 and
2015,2018, the Company (and its subsidiaries) had accrued
$24,515$8,727 and
$25,195,$20,100, respectively, related to environmental contingencies. These accruals are included in “Accrued expenses and other” on the Company’s Consolidated Balance Sheets.
Other legal and regulatory matters
As described more fully in Note
1314 to these Consolidated Financial Statements, the Company has received a
draft Notice of Proposed Adjustment (“NOPA”final Revenue Agent's Report ("RAR") from the IRS proposing an adjustment to income for the 2013 tax year. The incremental tax liability associated with the proposed adjustment would be approximately
$84,000,$89,000, excluding interest and penalties.
TheOn January 22, 2018, the Company
expects a final NOPA to be issued during the first quarter of 2017 and intends to filefiled a protest to the proposed deficiency with the
IRS. The Company received a rebuttal of its protest from the IRS
which will causeon July 10, 2018, and the matter
to behas now been referred to the Appeals Division of the IRS.
The Company had a pre-conference hearing with IRS Appeals during the second quarter of 2019, and has had continued discussions with IRS Appeals throughout the year. If the matter is not resolved in IRS appeals, the next step would be to file a petition in Tax Court. The Company strongly believes the position of the IRS with regard to this matter is inconsistent with applicable tax laws and existing Treasury regulations, and that
itsthe 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’sCompany's favor. Regardless of whether
thisthe matter is resolved in the
Company’sCompany's favor, the final resolution of this matter could be expensive and
time-consumingtime 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.
In addition to those described above, the Company is subject to other various legal proceedings, claims and litigation arising in the normal course of business. While the outcome of these matters could differ from management’s expectations, 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.
As of December 31,
2016,2019, the Company had long-term obligations to purchase electricity and steam, which it uses in its production processes, as well as long-term purchase commitments for certain raw materials, principally old corrugated containers. These purchase commitments require the Company to make total payments of approximately
$339,500,$99,323, as follows:
$102,600$39,707 in
2017; $91,7002020; $20,960 in
2018; $91,1002021; $23,134 in
2019, $42,0002022, $9,325 in
20202023 and a total of
$12,100$6,197 from
20212024 through
2025.15. SHAREHOLDERS’ EQUITY AND EARNINGS PER SHARE
2028.
17. Shareholders’ equity and earnings per share
The Company occasionally repurchases shares of its common stock to satisfy employee tax withholding obligations in association with the exercise of stock appreciation rights,
restricted stock, and performance-based stock awards. These repurchases, which are not part of a publicly announced plan or program, totaled
148,129169,290 shares during
2016, 172,8842019, 266,652 shares during
2015,2018, and
126,670119,349 shares during
2014,2017, at a cost of
$6,739, $7,868$9,608, $14,561 and
$5,378,$6,335, respectively.
On February 10, 2016, the Company’s Board of Directors authorized the repurchase of up to 5,000,000 shares of the Company’s common stock. During 2016, a total of 2,030,389 shares were repurchased under this authorization at a cost of $100,000.
NaN shares were repurchased during 2017 and 2018. Accordingly, at December 31,
2016,2019, a total of 2,969,611 shares remain available for repurchase under this authorization.
The Company repurchased a total of 2,000,000 shares of its common stock during 2014 under a previous authorization at a cost of $82,422. No shares were repurchased during 2015.
F-35 FORM 10-K SONOCO 2019 ANNUAL REPORT
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
| | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | 2014 |
Numerator: | | | | | | | | | | | | | | | |
Net income attributable to Sonoco | | | $ | 286,434 | | | | $ | 250,136 | | | | $ | 225,916 | |
Denominator: | | | | | | | | | | | | | | | |
Weighted average common shares outstanding | | | | 101,093 | | | | | 101,482 | | | | | 102,215 | |
Dilutive effect of stock-based compensation | | | | 689 | | | | | 910 | | | | | 957 | |
Diluted outstanding shares | | | | 101,782 | | | | | 102,392 | | | | | 103,172 | |
Per common share: | | | | | | | | | | | | | | | |
Net income attributable to Sonoco: | | | | | | | | | | | | | | | |
Basic | | | $ | 2.83 | | | | $ | 2.46 | | | | $ | 2.21 | |
Diluted | | | $ | 2.81 | | | | $ | 2.44 | | | | $ | 2.19 | |
| | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| Numerator: | | | | | |
| Net income attributable to Sonoco | $ | 291,785 | | | $ | 313,560 | | | $ | 175,345 | |
| Denominator: | | | | | |
| Weighted average common shares outstanding | 100,742 | | | 100,539 | | | 100,237 | |
| Dilutive effect of stock-based compensation | 434 | | | 477 | | | 615 | |
| Diluted outstanding shares | 101,176 | | | 101,016 | | | 100,852 | |
| Per common share: | | | | | |
| Net income attributable to Sonoco: | | | | | |
| Basic | $ | 2.90 | | | $ | 3.12 | | | $ | 1.75 | |
| Diluted | $ | 2.88 | | | $ | 3.10 | | | $ | 1.74 | |
| Cash dividends | $ | 1.70 | | | $ | 1.62 | | | $ | 1.54 | |
No adjustments were made to reported net income in the computation of earnings per share.
The Company paid dividends totaling $1.46, $1.37, and $1.27 per share in 2016, 2015 and 2014, respectively.
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.
The average number of shares that were not dilutive and therefore not included in the computation of diluted income per share was as follows for the years ended December 31,
2016, 20152019, 2018 and
20142017 (in thousands):
| | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | 2014 |
Anti-dilutive stock appreciation rights | | | | 357 | | | | | 902 | | | | | 720 | |
| | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| Anti-dilutive stock appreciation rights | 475 | | | 786 | | | 487 | |
These stock appreciation rights may become dilutive in future periods if the market price of the Company’s common stock appreciates.
In April 2015,1994, the Company entered into a joint venture agreement with two partners in Asia for the manufacturing and marketing of products in the Asian markets. Prior to December 31, 2018, the Company owned a controlling interest of 79.25% of the joint venture and consolidated the net assets of the Asia joint venture. On December 31, 2018, the Company acquired the 19.08% ownership interest of PFE Hong Kong Limited, one of the joint venture partners, for $35,000 in cash, bringing the Company’s total ownership in the Asia joint venture to 98.33%. As a 67% controllingresult of the purchase, the Company wrote off the $11,695 book value of the noncontrolling interest and recorded a $23,305 reduction in Capital in Excess of Stated Value. One of the Company's directors, Harry A. Cockrell, is a principal shareholder of PFE Hong Kong Limited.
On October 1, 2018, the Company completed the acquisition of the remaining 70% interest in
Graffo Paranaense de Embalagens S/A (“Graffo”)Conitex Sonoco (see Note 3). The
Company | | | | | | |
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consolidates 100%acquisition of Graffo, withConitex Sonoco included joint ventures in Indonesia and China in which the partner’s 33% share included in “Noncontrolling Interests”Company owns a controlling interest. The noncontrolling interests relating to these joint ventures were recorded on the Consolidated Balance Sheet. Theopening balance sheet at their fair value of this$2,655.
During the third quarter of 2017, the Company recorded a $1,341 noncontrolling interest
was $7,922 atrelated to the
timecreation of
a joint venture for the
acquisition.In October 2014, as partmanufacture of its acquisition of the Weidenhammer Packaging Group (“Weidenhammer”), the Company acquiredtubes and cores from a 65% ownershipfacility in Weidenhammer’s Chilean affiliate – Weidenhammer Chile Ltda.Saudi Arabia. The Company consolidates 100% ofowns a 51% share in the Chilean subsidiary, withjoint venture and the partner’s 35% share included in “Noncontrolling Interests” on the Consolidated Balance Sheet. On the date of the acquisition, the fair value of this noncontrolling interest was $974.
16. SEGMENT REPORTING
assets have been consolidated.
18. Segment reporting
The Company reports its financial results in
four4 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: designing, manufacturing, assembling, packing and distributing temporary,
semipermanentsemi-permanent and permanent
point-of-purchase displays; supply chain management services, including contract packing, fulfillment and scalable service centers; retail packaging, including printed backer cards, thermoformed blisters and heat sealing equipment; and paper amenities, such as coasters and glass covers.
The Paper and Industrial Converted Products segment includes the following products: paperboard tubes,
cones and cores; fiber-based construction
tubes and forms;tubes; 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-assurance packaging.
Restructuring charges, asset impairment charges, gains from the disposition of businesses, insurance settlement gains, acquisition-related costs,
non-operating pension costs, interest expense and interest income are included in income before income taxes under “Corporate.”
F-36 FORM 10-K SONOCO 2019 ANNUAL REPORT
The following table sets forth financial information about each of the
Company’sCompany's business segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31 |
| | | Consumer Packaging | | Display
and
Packaging | | Paper and
Industrial
Converted
Products | | Protective Solutions | | Corporate | | Consolidated |
Total Revenue | |
2016 | | | $ | 2,048,621 | | | | $ | 522,955 | | | | $ | 1,793,512 | | | | $ | 527,450 | | | | $ | — | | | | $ | 4,892,538 | |
2015 | | | | 2,126,916 | | | | | 608,064 | | | | | 1,835,896 | | | | | 508,182 | | | | | — | | | | | 5,079,058 | |
2014 | | | | 1,966,989 | | | | | 668,407 | | | | | 2,010,160 | | | | | 487,171 | | | | | — | | | | | 5,132,727 | |
Intersegment Sales1 | |
2016 | | | $ | 5,509 | | | | $ | 2,542 | | | | $ | 100,059 | | | | $ | 1,551 | | | | $ | — | | | | $ | 109,661 | |
2015 | | | | 4,357 | | | | | 1,953 | | | | | 106,110 | | | | | 2,269 | | | | | — | | | | | 114,689 | |
2014 | | | | 4,092 | | | | | 1,592 | | | | | 107,712 | | | | | 2,337 | | | | | — | | | | | 115,733 | |
Sales to Unaffiliated Customers | |
2016 | | | $ | 2,043,112 | | | | $ | 520,413 | | | | $ | 1,693,453 | | | | $ | 525,899 | | | | $ | — | | | | $ | 4,782,877 | |
2015 | | | | 2,122,559 | | | | | 606,111 | | | | | 1,729,786 | | | | | 505,913 | | | | | — | | | | | 4,964,369 | |
2014 | | | | 1,962,897 | | | | | 666,815 | | | | | 1,902,448 | | | | | 484,834 | | | | | — | | | | | 5,016,994 | |
Income Before Income Taxes2 | |
2016 | | | $ | 240,925 | | | | $ | 14,797 | | | | $ | 129,678 | | | | $ | 51,526 | | | | $ | 4,351 | | | | $ | 441,277 | |
2015 | | | | 231,590 | | | | | 10,904 | | | | | 124,057 | | | | | 46,013 | | | | | (84,618 | ) | | | | 327,946 | |
2014 | | | | 200,591 | | | | | 10,680 | | | | | 162,269 | | | | | 34,003 | | | | | (81,836 | ) | | | | 325,707 | |
Identifiable Assets3 | |
2016 | | | $ | 1,447,886 | | | | $ | 446,906 | | | | $ | 1,164,365 | | | | $ | 573,949 | | | | $ | 290,097 | | | | $ | 3,923,203 | |
2015 | | | | 1,507,621 | | | | | 491,268 | | | | | 1,199,280 | | | | | 561,592 | | | | | 253,924 | | | | | 4,013,685 | |
2014 | | | | 1,579,950 | | | | | 495,604 | | | | | 1,299,356 | | | | | 564,468 | | | | | 247,328 | | | | | 4,186,706 | |
Depreciation, Depletion and Amortization4 | |
2016 | | | $ | 88,875 | | | | $ | 16,716 | | | | $ | 74,742 | | | | $ | 24,849 | | | | $ | — | | | | $ | 205,182 | |
2015 | | | | 96,220 | | | | | 16,623 | | | | | 76,744 | | | | | 23,574 | | | | | — | | | | | 213,161 | |
2014 | | | | 75,782 | | | | | 17,034 | | | | | 83,076 | | | | | 22,826 | | | | | — | | | | | 198,718 | |
Capital Expenditures | |
2016 | | | $ | 86,369 | | | | $ | 11,542 | | | | $ | 60,601 | | | | $ | 12,860 | | | | $ | 15,369 | | | | $ | 186,741 | |
2015 | | | | 75,986 | | | | | 10,906 | | | | | 74,008 | | | | | 15,724 | | | | | 15,671 | | | | | 192,295 | |
2014 | | | | 63,117 | | | | | 9,432 | | | | | 73,636 | | | | | 22,238 | | | | | 8,653 | | | | | 177,076 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31 | | | | | | | | | | |
| Consumer Packaging | | Display and Packaging | | Paper and
Industrial
Converted
Products | | Protective Solutions | | Corporate | | Consolidated |
| Total Revenue | | | | | | | | | | | |
| 2019 | $ | 2,338,881 | | | $ | 558,747 | | | $ | 2,111,491 | | | $ | 513,584 | | | $ | — | | | $ | 5,522,703 | |
| 2018 | 2,363,292 | | | 595,855 | | | 2,042,732 | | | 529,324 | | | — | | | 5,531,203 | |
| 2017 | 2,129,022 | | | 511,099 | | | 2,007,321 | | | 540,665 | | | — | | | 5,188,107 | |
Intersegment Sales1 | | | | | | | | | | | |
| 2019 | $ | 5,495 | | | $ | 4,622 | | | $ | 136,752 | | | $ | 1,627 | | | $ | — | | | $ | 148,496 | |
| 2018 | 3,293 | | | 3,546 | | | 131,779 | | | 1,647 | | | — | | | 140,265 | |
| 2017 | 5,557 | | | 2,863 | | | 141,141 | | | 1,896 | | | — | | | 151,457 | |
| Sales to Unaffiliated Customers | | | | | | | | | | | |
| 2019 | $ | 2,333,386 | | | $ | 554,125 | | | $ | 1,974,739 | | | $ | 511,957 | | | $ | — | | | $ | 5,374,207 | |
| 2018 | 2,359,999 | | | 592,309 | | | 1,910,953 | | | 527,677 | | | — | | | 5,390,938 | |
| 2017 | 2,123,465 | | | 508,236 | | | 1,866,180 | | | 538,769 | | | — | | | 5,036,650 | |
Income Before Income Taxes2 | | | | | | | | | | | |
| 2019 | $ | 228,416 | | | $ | 27,723 | | | $ | 219,052 | | | $ | 50,201 | | | $ | (144,626) | | | $ | 380,766 | |
| 2018 | 224,505 | | | 13,291 | | | 211,122 | | | 42,902 | | | (113,289) | | | 378,531 | |
| 2017 | 255,759 | | | 2,632 | | | 161,591 | | | 42,357 | | | (147,785) | | | 314,554 | |
Identifiable Assets3 | | | | | | | | | | | |
| 2019 | $ | 2,239,674 | | | $ | 452,155 | | | $ | 1,701,902 | | | $ | 580,411 | | | $ | 152,147 | | | $ | 5,126,289 | |
| 2018 | 1,993,417 | | | 440,972 | | | 1,472,148 | | | 535,443 | | | 141,485 | | | 4,583,465 | |
| 2017 | 1,890,516 | | | 480,892 | | | 1,346,391 | | | 552,425 | | | 287,497 | | | 4,557,721 | |
Depreciation, Depletion and Amortization4 | | | | | | | | | | | |
| 2019 | $ | 111,919 | | | $ | 14,926 | | | $ | 85,619 | | | $ | 26,676 | | | $ | — | | | $ | 239,140 | |
| 2018 | 116,841 | | | 18,020 | | | 74,434 | | | 26,950 | | | — | | | 236,245 | |
| 2017 | 98,882 | | | 17,090 | | | 74,850 | | | 26,803 | | | — | | | 217,625 | |
| Capital Expenditures | | | | | | | | | | | |
| 2019 | $ | 64,590 | | | $ | 5,065 | | | $ | 112,308 | | | $ | 6,880 | | | $ | 7,091 | | | $ | 195,934 | |
| 2018 | 66,659 | | | 19,849 | | | 91,423 | | | 5,879 | | | 8,764 | | | 192,574 | |
| 2017 | 63,617 | | | 23,908 | | | 61,443 | | | 19,031 | | | 20,914 | | | 188,913 | |
| | | | | |
1 | Intersegment sales are recorded at a market-related transfer price. |
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| | SONOCO 2016 ANNUAL REPORT
|
2 | Included in Corporate above are restructuring, interest expense, interest income, restructuring/asset impairment charges, acquisition-related charges, gains from the sale of a business, environmental settlement gains, property insurance settlement gains, non-operating pension costs, acquisition-related charges, and othernon-operational income and expenses associated with the following segments: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Consumer Packaging | | Display
and
Packaging | | Paper and Industrial Converted Products | | Protective Solutions | | Corporate | | Total |
2016 | | | $ | (80,500 | ) | | | $ | 7,883 | | | | $ | 27,567 | | | | $ | 1,018 | | | | $ | (11,876 | ) | | | $ | (55,908 | ) |
2015 | | | | 15,097 | | | | | 1,812 | | | | | (490 | ) | | | | (1,469 | ) | | | | 15,070 | | | | | 30,020 | |
2014 | | | | 12,536 | | | | | 4,042 | | | | | 4,340 | | | | | 1,527 | | | | | 7,000 | | | | | 29,445 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer Packaging | | Display
and
Packaging | | Paper and Industrial Converted Products | | Protective Solutions | | Corporate | | Total |
| 2019 | $ | 41,155 | | | $ | (7,358) | | | $ | 5,270 | | | $ | 9,083 | | | $ | 96,476 | | | $ | 144,626 | |
| 2018 | 18,391 | | | 19,046 | | | 11,773 | | | 1,529 | | | 62,550 | | | 113,289 | |
| 2017 | 9,990 | | | 2,082 | | | 24,281 | | | 3,071 | | | 108,361 | | | 147,785 | |
| | | | | |
| The remaining amounts reported as Corporate consist of interest expense, interest income, non-operating pension costs, and interest income.other non-operational income and expenses not associated with a particular segment. |
3 | Identifiable assets are those assets used by each segment in its operations. Corporate assets consist primarily of cash and cash equivalents, investments in affiliates, headquarters facilities, deferred income taxes and prepaid expenses. |
4 | Depreciation, depletion and amortization incurred at Corporate are allocated to the reportable segments. |
F-37 FORM 10-K SONOCO 2019 ANNUAL REPORT
Sales to unaffiliated customers and long-lived assets by geographic region are as follows:
| | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | 2014 |
Sales to Unaffiliated Customers | | | | | | | | | | | | | | | |
United States | | | $ | 3,112,016 | | | | $ | 3,206,513 | | | | $ | 3,285,017 | |
Europe | | | | 951,783 | | | | | 971,302 | | | | | 841,452 | |
Canada | | | | 268,556 | | | | | 262,038 | | | | | 292,163 | |
All other | | | | 450,522 | | | | | 524,516 | | | | | 598,362 | |
Total | | | $ | 4,782,877 | | | | $ | 4,964,369 | | | | $ | 5,016,994 | |
Long-lived Assets | | | | | | | | | | | | | | | |
United States | | | $ | 1,671,168 | | | | $ | 1,719,746 | | | | $ | 1,738,648 | |
Europe | | | | 599,698 | | | | | 627,126 | | | | | 680,791 | |
Canada | | | | 111,452 | | | | | 157,208 | | | | | 184,879 | |
All other | | | | 101,828 | | | | | 104,563 | | | | | 117,249 | |
Total | | | $ | 2,484,146 | | | | $ | 2,608,643 | | | | $ | 2,721,567 | |
| | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| Sales to Unaffiliated Customers | | | | | |
| United States | $ | 3,408,459 | | | $ | 3,490,369 | | | $ | 3,263,975 | |
| Europe | 1,078,766 | | | 1,092,654 | | | 981,178 | |
| Canada | 226,049 | | | 246,208 | | | 245,992 | |
| All other | 660,933 | | | 561,707 | | | 545,505 | |
| Total | $ | 5,374,207 | | | $ | 5,390,938 | | | $ | 5,036,650 | |
| Long-lived Assets | | | | | |
| United States | $ | 2,177,918 | | | $ | 1,953,391 | | | $ | 1,962,196 | |
| Europe | 648,648 | | | 641,600 | | | 659,615 | |
| Canada | 107,470 | | | 113,782 | | | 120,062 | |
| All other | 224,783 | | | 241,767 | | | 108,395 | |
| Total | $ | 3,158,819 | | | $ | 2,950,540 | | | $ | 2,850,268 | |
Sales are attributed to countries/regions based upon the plant location from which products are shipped. Long-lived assets are comprised of property, plant and equipment, goodwill, intangible assets and investment in affiliates (see Notes 6 and
7)8).
17. ACCUMULATED OTHER COMPREHENSIVE LOSS
19. Accumulated other comprehensive loss
The following table summarizes the components of accumulated other comprehensive loss and the changes in accumulated other comprehensive loss, net of tax as applicable, for the years ended December 31,
20162019 and
2015: | | | | | | | | | | | | | | | | | | | | |
| | | Foreign Currency Items | | Defined Benefit Pension
Items | | Gains and
Losses on
Cash Flow
Hedges | | Accumulated Other Comprehensive Loss |
Balance at December 31, 2014 | | | $ | (127,603 | ) | | | $ | (475,286 | ) | | | $ | (5,962 | ) | | | $ | (608,851 | ) |
Other comprehensive income/(loss) before reclassifications | | | | (125,534 | ) | | | | 3,979 | | | | | (11,726 | ) | | | | (133,281 | ) |
Amounts reclassified from accumulated other comprehensive loss to net income | | | | — | | | | | 27,063 | | | | | 12,008 | | | | | 39,071 | |
Amounts reclassified from accumulated other comprehensive loss to fixed assets | | | | — | | | | | — | | | | | 528 | | | | | 528 | |
Other comprehensive income/(loss) | | | | (125,534 | ) | | | | 31,042 | | | | | 810 | | | | | (93,682 | ) |
Balance at December 31, 2015 | | | $ | (253,137 | ) | | | $ | (444,244 | ) | | | $ | (5,152 | ) | | | $ | (702,533 | ) |
Other comprehensive income/(loss) before reclassifications | | | | (33,361 | ) | | | | (35,841 | ) | | | | 1,673 | | | | | (67,529 | ) |
Amounts reclassified from accumulated other comprehensive loss to net income | | | | — | | | | | 26,264 | | | | | 5,359 | | | | | 31,623 | |
Amounts reclassified from accumulated other comprehensive loss to fixed assets | | | | — | | | | | — | | | | | 59 | | | | | 59 | |
Other comprehensive income/(loss) | | | | (33,361 | ) | | | | (9,577 | ) | | | | 7,091 | | | | | (35,847 | ) |
Balance at December 31, 2016 | | | $ | (286,498 | ) | | | $ | (453,821 | ) | | | $ | 1,939 | | | | $ | (738,380 | ) |
| | | | | | |
SONOCO 2016 ANNUAL REPORT
| | F30
| | | | FORM 10-K
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Items | | Defined Benefit Pension Items | | Gains and Losses on Cash Flow Hedges | | Accumulated Other Comprehensive Loss |
| Balance at December 31, 2017 | $ | (198,495) | | | $ | (467,136) | | | $ | (641) | | | $ | (666,272) | |
| Other comprehensive income/(loss) before reclassifications | (53,504) | | | (50,232) | | | (1,380) | | | (105,116) | |
| Amounts reclassified from accumulated other comprehensive loss to net income | 897 | | | 29,988 | | | 71 | | | 30,956 | |
| Amounts reclassified from accumulated other comprehensive loss to fixed assets | — | | | — | | | (305) | | | (305) | |
| Other comprehensive income/(loss) | (52,607) | | | (20,244) | | | (1,614) | | | (74,465) | |
| Amounts reclassified from accumulated other comprehensive loss to retained earnings | — | | | — | | | (176) | | | (176) | |
| Balance at December 31, 2018 | $ | (251,102) | | | $ | (487,380) | | | $ | (2,431) | | | $ | (740,913) | |
| Other comprehensive income/(loss) before reclassifications | 9,108 | | | (111,493) | | | 2,061 | | | (100,324) | |
| Amounts reclassified from accumulated other comprehensive loss to net income | — | | | 24,460 | | | 81 | | | 24,541 | |
| Amounts reclassified from accumulated other comprehensive loss to fixed assets | — | | | — | | | (107) | | | (107) | |
| Other comprehensive income/(loss) | 9,108 | | | (87,033) | | | 2,035 | | | (75,890) | |
| | | | | | | |
| Balance at December 31, 2019 | $ | (241,994) | | | $ | (574,413) | | | $ | (396) | | | $ | (816,803) | |
F-38 FORM 10-K SONOCO 2019 ANNUAL REPORT
The following table summarizes the amounts reclassified from accumulated other comprehensive loss and the affected line items in the consolidated statements of net income for the years ended December 31,
20162019 and
2015: | | | | | | | | | | | | | | | |
| | | Amount Reclassified from Accumulated Other
Comprehensive Loss | | |
Details about Accumulated Other Comprehensive
Loss Components | | Twelve Months Ended
December 31, 2016 | | Twelve Months Ended
December 31, 2015 | | Affected Line Item in the
Consolidated Statements of Net
Income |
Gains and losses on cash flow hedges | | | | | | | | | | | | | | | |
Foreign exchange contracts | | | $ | (8,769 | ) | | | $ | (21,454 | ) | | | | Net Sales | |
Foreign exchange contracts | | | | 3,981 | | | | | 12,154 | | | | | Cost of sales | |
Commodity contracts | | | | (3,583 | ) | | | | (9,920 | ) | | | | Cost of sales | |
| | | | (8,371 | ) | | | | (19,220 | ) | | | | Total before tax | |
| | | | | 3,012 | | | | | 7,212 | | | | | Tax benefit | |
| | | | $ | (5,359 | ) | | | $ | (12,008 | ) | | | | Net of tax | |
Defined benefit pension items | | | | | | | | | | | | | | | |
Amortization of defined benefit pension items | | | $ | (28,990 | ) | | | $ | (31,963 | ) | | | | Cost of sales | |
Amortization of defined benefit pension items | | | | (9,663 | ) | | | | (10,654 | ) | | | | Selling, general, and administrative | |
| | | | (38,653 | ) | | | | (42,617 | ) | | | | Total before tax | |
| | | | | 12,389 | | | | | 15,554 | | | | | Tax benefit | |
| | | | | (26,264 | ) | | | | (27,063 | ) | | | | Net of tax | |
Total reclassifications for the period | | | $ | (31,623 | ) | | | $ | (39,071 | ) | | | | Net of tax | |
2018:
| | | | | | | | | | | | | | | | | |
| | | | | |
| Details about Accumulated Other Comprehensive Loss Components | Twelve Months Ended
December 31, 2019 | | Twelve Months Ended
December 31, 2018 | | Affected Line Item in the Consolidated Statements of Net Income |
| Foreign currency items | | | | | |
| Amounts reclassified to net income | $ | — | | | $ | (897) | | | Selling, general and administrative expenses | |
| — | | | (897) | | | |
| | | | | |
| Defined benefit pension items (see Note 13) | | | | | |
| Effect of settlement loss | (2,377) | | | (730) | | | Non-operating pension cost | |
| Effect of curtailment loss | — | | | (256) | | | Non-operating pension cost | |
| Amortization of defined benefit pension items | (30,382) | | | (36,689) | | | Non-operating pension cost | |
| (32,759) | | | (37,675) | | | | |
| 8,299 | | | 7,687 | | | Provision for income taxes | |
| (24,460) | | | (29,988) | | | Net income | |
| | | | | |
| Gains and losses on cash flow hedges (see Note 10) | | | | | |
| Foreign exchange contracts | 1,381 | | | (203) | | | Net Sales | |
| Foreign exchange contracts | (1,758) | | | (20) | | | Cost of sales | |
| Commodity contracts | 270 | | | 115 | | | Cost of sales | |
| (107) | | | (108) | | | Income before income taxes | |
| 26 | | | 37 | | | Provision for income taxes | |
| (81) | | | (71) | | | Net income | |
| | | | | |
| Total reclassifications for the period | $ | (24,541) | | | $ | (30,956) | | | Net income | |
The following table summarizes the tax (expense) benefit amounts for the other comprehensive loss components for the years ended December 31,
20162019 and
2015: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the year ended December 31,
2016 | | For the year ended December 31,
2015 |
| | | Before Tax
Amount | | Tax
(Expense)
Benefit | | After Tax
Amount | | Before Tax
Amount | | Tax
(Expense)
Benefit | | After Tax
Amount |
Foreign currency items | | | $ | (33,361 | ) | | | $ | — | | | | $ | (33,361 | ) | | | $ | (125,534 | ) | | | $ | — | | | | $ | (125,534 | ) |
Defined benefit pension items: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income/(loss) before reclassifications | | | | (56,383 | ) | | | | 20,542 | | | | | (35,841 | ) | | | | (2,523 | ) | | | | 6,502 | | | | | 3,979 | |
Amounts reclassified from accumulated other comprehensive income/(loss) to net income | | | | 38,653 | | | | | (12,389 | ) | | | | 26,264 | | | | | 42,617 | | | | | (15,554 | ) | | | | 27,063 | |
Net other comprehensive income/(loss) from defined benefit pension items | | | | (17,730 | ) | | | | 8,153 | | | | | (9,577 | ) | | | | 40,094 | | | | | (9,052 | ) | | | | 31,042 | |
Gains and losses on cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income/(loss) before reclassifications | | | | 2,613 | | | | | (940 | ) | | | | 1,673 | | | | | (18,167 | ) | | | | 6,441 | | | | | (11,726 | ) |
Amounts reclassified from accumulated other comprehensive income/(loss) to net income | | | | 8,371 | | | | | (3,012 | ) | | | | 5,359 | | | | | 19,220 | | | | | (7,212 | ) | | | | 12,008 | |
Amounts reclassified from accumulated other comprehensive income/(loss) to fixed assets | | | | 59 | | | | | — | | | | | 59 | | | | | 528 | | | | | — | | | | | 528 | |
Net other comprehensive income/(loss) from cash flow hedges | | | | 11,043 | | | | | (3,952 | ) | | | | 7,091 | | | | | 1,581 | | | | | (771 | ) | | | | 810 | |
Other comprehensive income/(loss) | | | $ | (40,048 | ) | | | $ | 4,201 | | | | $ | (35,847 | ) | | | $ | (83,859 | ) | | | $ | (9,823 | ) | | | $ | (93,682 | ) |
2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, 2019 | | | | For the year ended December 31, 2018 | | |
| | Before Tax Amount | Tax (Expense) Benefit | After Tax Amount | | Before Tax Amount | Tax (Expense) Benefit | After Tax Amount |
| Foreign currency items: | | | | | | | | | | | | | | |
| Other comprehensive income/(loss) before reclassifications | | $ | 9,108 | | $ | — | | $ | 9,108 | | | $ | (53,504) | | $ | — | | $ | (53,504) | |
| Amounts reclassified from accumulated other comprehensive income/(loss) to net income | | — | | — | | — | | | 897 | | — | | 897 | |
| Gains and losses on foreign currency items: | | 9,108 | | — | | 9,108 | | | | (52,607) | | — | | (52,607) | |
| Defined benefit pension items: | | | | | | | | |
| Other comprehensive income/(loss) before reclassifications | | (147,948) | | 36,455 | | (111,493) | | | (63,259) | | 13,027 | | (50,232) | |
| Amounts reclassified from accumulated other comprehensive income/(loss) to net income | | 32,759 | | (8,299) | | 24,460 | | | 37,675 | | (7,687) | | 29,988 | |
| Net other comprehensive income/(loss) from defined benefit pension items | | (115,189) | | 28,156 | | (87,033) | | | (25,584) | | 5,340 | | (20,244) | |
| Gains and losses on cash flow hedges: | | | | | | | | |
| Other comprehensive income/(loss) before reclassifications | | 2,711 | | (650) | | 2,061 | | | (2,096) | | 716 | | (1,380) | |
| Amounts reclassified from accumulated other comprehensive income/(loss) to net income | | 107 | | (26) | | 81 | | | 108 | | (37) | | 71 | |
| Amounts reclassified from accumulated other comprehensive income/(loss) to fixed assets | | (107) | | — | | (107) | | | (305) | | — | | (305) | |
| Net other comprehensive income/(loss) from cash flow hedges | | 2,711 | | (676) | | 2,035 | | | (2,293) | | 679 | | (1,614) | |
| Other comprehensive income/(loss) | | $ | (103,370) | | $ | 27,480 | | $ | (75,890) | | | $ | (80,484) | | $ | 6,019 | | $ | (74,465) | |
The change in defined benefit plans includes pretax changes of
$(767)$(781) and
$(60)$(71) during the years ended December 31,
20162019 and
2015,2018, related to one of the Company’s equity method investments.
| | | | | | |
FORM 10-K
| | | | F31
| | SONOCO 2016 ANNUAL REPORT
|
F-39 FORM 10-K SONOCO 2019 ANNUAL REPORT
18. SELECTED QUARTERLY FINANCIAL DATA
20. Selected quarterly financial data
The following table sets forth selected quarterly financial data of the Company:
| | | | | | | | | | | | | | | | | | | | |
| (unaudited) | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter* |
2016 | | | | | | | | | | | | | | | | | | | | |
Net sales | | | $ | 1,226,276 | | | | $ | 1,205,680 | | | | $ | 1,208,724 | | | | $ | 1,142,197 | |
Gross profit | | | | 245,253 | | | | | 242,013 | | | | | 235,373 | | | | | 214,787 | |
Restructuring/Asset impairment charges | | | | 9,228 | | | | | 23,278 | | | | | 8,947 | | | | | 1,430 | |
Net income attributable to Sonoco | | | | 59,914 | | | | | 56,252 | | | | | 65,395 | | | | | 104,873 | |
Per common share: | | | | | | | | | | | | | | | | | | | | |
Net income attributable to Sonoco: | | | | | | | | | | | | | | | | | | | | |
- basic | | | $ | 0.59 | | | | $ | 0.56 | | | | $ | 0.65 | | | | $ | 1.04 | |
- diluted | | | | 0.59 | | | | | 0.55 | | | | | 0.64 | | | | | 1.04 | |
Cash dividends | | | | | | | | | | | | | | | | | | | | |
- common | | | | 0.35 | | | | | 0.37 | | | | | 0.37 | | | | | 0.37 | |
Market price | | | | | | | | | | | | | | | | | | | | |
- high | | | | 49.08 | | | | | 50.13 | | | | | 53.57 | | | | | 55.47 | |
- low | | | | 36.56 | | | | | 45.02 | | | | | 49.10 | | | | | 49.50 | |
2015 | | | | | | | | | | | | | | | | | | | | |
Net sales | | | $ | 1,206,052 | | | | $ | 1,248,590 | | | | $ | 1,242,592 | | | | $ | 1,267,135 | |
Gross profit | | | | 220,390 | | | | | 240,316 | | | | | 229,373 | | | | | 239,343 | |
Restructuring/Asset impairment charges | | | | (359 | ) | | | | 10,445 | | | | | 19,551 | | | | | 21,000 | |
Net income attributable to Sonoco | | | | 85,780 | | | | | 64,379 | | | | | 43,914 | | | | | 56,063 | |
Per common share: | | | | | | | | | | | | | | | | | | | | |
Net income attributable to Sonoco: | | | | | | | | | | | | | | | | | | | | |
- basic | | | $ | 0.85 | | | | $ | 0.63 | | | | $ | 0.43 | | | | $ | 0.55 | |
- diluted | | | | 0.84 | | | | | 0.63 | | | | | 0.43 | | | | | 0.55 | |
Cash dividends | | | | | | | | | | | | | | | | | | | | |
- common | | | | 0.32 | | | | | 0.35 | | | | | 0.35 | | | | | 0.35 | |
Market price | | | | | | | | | | | | | | | | | | | | |
- high | | | | 47.94 | | | | | 46.50 | | | | | 44.13 | | | | | 44.56 | |
- low | | | | 42.44 | | | | | 43.89 | | | | | 34.68 | | | | | 37.01 | |
* | Net income attributable to Sonoco in the fourth quarter of 2016 includes a netafter-tax gain of $49,341 from the sale of the Company’s rigid plastic blow molding operations. |
| | | | | | |
SONOCO 2016 ANNUAL REPORT
| | F32
| | | | FORM 10-K
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (unaudited) | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| 2019 | | | | | | | |
| Net sales | $ | 1,351,705 | | | $ | 1,359,721 | | | $ | 1,353,931 | | | $ | 1,308,850 | |
| Gross profit | 270,121 | | | 275,336 | | | 265,485 | | | 246,887 | |
| Restructuring/Asset impairment charges | 10,672 | | | 13,355 | | | 6,615 | | | 29,238 | |
| Net income attributable to Sonoco | 73,663 | | | 81,159 | | | 92,064 | | | 44,899 | |
| Per common share: | | | | | | | |
| Net income attributable to Sonoco: | | | | | | | |
| - basic | $ | 0.73 | | | $ | 0.81 | | | $ | 0.91 | | | $ | 0.45 | |
| - diluted | $ | 0.73 | | | $ | 0.80 | | | $ | 0.91 | | | $ | 0.44 | |
| Cash dividends | | | | | | | |
| - common | $ | 0.41 | | | $ | 0.43 | | | $ | 0.43 | | | $ | 0.43 | |
| Market price | | | | | | | |
| - high | $ | 61.79 | | | $ | 66.23 | | | $ | 66.57 | | | $ | 62.77 | |
| - low | $ | 51.29 | | | $ | 59.65 | | | $ | 55.44 | | | $ | 55.12 | |
| 2018 | | | | | | | |
| Net sales | $ | 1,304,187 | | | $ | 1,366,373 | | | $ | 1,364,762 | | | $ | 1,355,616 | |
| Gross profit | 250,602 | | | 276,460 | | | 259,636 | | | 254,308 | |
| Restructuring/Asset impairment charges | 3,063 | | | 3,567 | | | 22,061 | | | 11,380 | |
| Net income attributable to Sonoco | 74,055 | | | 89,412 | | | 72,415 | | | 77,678 | |
| Per common share: | | | | | | | |
| Net income attributable to Sonoco: | | | | | | | |
| - basic | $ | 0.74 | | | $ | 0.89 | | | $ | 0.72 | | | $ | 0.78 | |
| - diluted | $ | 0.73 | | | $ | 0.88 | | | $ | 0.72 | | | $ | 0.77 | |
| Cash dividends | | | | | | | |
| - common | $ | 0.39 | | | $ | 0.41 | | | $ | 0.41 | | | $ | 0.41 | |
| Market price | | | | | | | |
| - high | $ | 55.43 | | | $ | 53.80 | | | $ | 58.69 | | | $ | 58.31 | |
| - low | $ | 46.55 | | | $ | 46.94 | | | $ | 51.18 | | | $ | 50.30 | |
F-40 FORM 10-K SONOCO 2019 ANNUAL REPORT
ITEMItem 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREChanges in and disagreements with accountants on accounting and financial disclosure
Item 9A.
CONTROLS AND PROCEDURESControls and procedures
Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer
(“CEO”("CEO") and Chief Financial Officer
(“CFO”("CFO"), conducted an evaluation of our disclosure controls and procedures as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”"Exchange Act"). Our disclosure controls and procedures are designed to
ensureprovide reasonable assurance that information disclosed in the reports that we file or submit is recorded, processed, summarized and reported within the relevant time periods specified in SEC rules and forms. For this purpose, disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information that is required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to the
Company’sCompany's management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures. Based on this evaluation, our CEO and CFO concluded that such controls and procedures, as of December 31,
2016,2019, the end of the period covered by this Annual Report on Form
10-K, were
effective.effective at a reasonable assurance level.
Management’s
reportReport on
internal control over financial reportingInternal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Our internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31,
2016,2019, the end of the period covered by this report based on the framework in Internal
Control—Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”("COSO").
Based on our evaluation under the framework in Internal
Control—Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31,
2016.2019. In conducting management's evaluation as described above, Corenso Holdings America, Inc. ("Corenso") acquired August 9, 2019, as well as Thermoform Engineered Quality, LLC, and Plastique Holdings, LTD, (together "TEQ"), acquired December 31, 2019, were excluded. The operations of Corenso and TEQ, excluded from management's assessment of internal control over financial reporting, collectively represent approximately 0.7% of the Company's consolidated revenues and approximately 2.9% of total assets as of December 31, 2019.
PricewaterhouseCoopers LLP,
ouran independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31,
20162019 as stated in their report, which appears at the beginning of Item 8 of this Annual Report on Form
10-K.Changes in
internal control over financial reportingInternal Control Over Financial Reporting
There have been no changes in the
Company’sCompany's internal control over financial reporting during the three months ended December 31,
2016,2019, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the
effectivenessEffectiveness of
controlsControls
The
Company’sCompany's management, including the
Chief Executive OfficerCEO and
Chief Financial Officer,CFO, does not expect that the
Company’sCompany's disclosure controls and procedures or internal control over financial reporting will prevent all error and all fraud. Internal control over financial reporting, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives will be met. Because of the inherent limitations in internal control over financial reporting, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected timely.
ITEM
Item 9B.
OTHER INFORMATIONOther information
Not applicable.
| | | | | | |
FORM 10-K
| | | | 36
| | SONOCO 2016 ANNUAL REPORT
|
32 FORM 10-K SONOCO 2019 ANNUAL REPORT
ITEMPART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEDirectors, executive officers and corporate governance
The information set forth in the Company’s definitive Proxy Statement for the annual meeting of shareholders to be held on April
19, 201715, 2020 (the Proxy Statement), under the captions “Proposal 1: Election of Directors,”
“Information Concerning Directors Whose Terms Continue,” and
“Section 16(a) Beneficial Ownership Reporting Compliance,“Delinquent Section 16 Reports,” is incorporated herein by reference. Information about executive officers of the Company is set forth in Item 1 of this Annual Report on Form
10-K under the caption “Executive Officers of the Registrant.”
Code of Ethics — – The Company has adopted a code of ethics (as defined in Item 406 of RegulationS-K) that applies to its principal executive officer, principal financial officer, principal accounting officer, and other senior executive and senior financial officers. This code of ethics is available through the Company’s website,www.sonoco.com, and is available in print to any shareholder who requests it. Any waivers or amendments to the provisions of this code of ethics will be posted to this website within four business days after the waiver or amendment. Audit Committee Members – The Company has a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The audit committee is comprised of the following members: Thomas E. Whiddon, Chairman; Sundaram Nagajaran; Edgar H. Lawton III; John E. Linville;Philippe Guillemot; Marc D. Oken; andBlythe J. McGarvie; Richard G. Kyle.Kyle; Robert R. Hill; and Lloyd M. Yates.
Audit Committee Financial Expert – The Company’s Board of Directors has determined that the Company has at least twothree “audit committee financial experts,” as that term is defined by Item 407(d)(5) of RegulationS-K promulgated by the Securities and Exchange Commission, serving on its audit committee. Thomas E. Whiddon, Blythe J. McGarvie, and Marc D. Oken meet the terms of the definition and are independent based on the criteria in the New York Stock Exchange Listing Standards. Pursuant to the terms of Item 407(d)(5) of RegulationS-K, a person who is determined to be an “audit committee financial expert” will not be deemed an expert for any purpose as a result of being designated or identified as an “audit committee financial expert” pursuant to Item 407, and such designation or identification does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the audit committee and Board of Directors in the absence of such designation or identification. Further, the designation or identification of a person as an “audit committee financial expert” pursuant to Item 407 does not affect the duties, obligations or liability of any other member of the audit committee or Board of Directors. The Company’s Corporate Governance Guidelines, Audit Committee Charter, Corporate Governance and Nominating Committee Charter and Executive Compensation Committee Charter are available through the Company’s website,www.sonoco.com. This information is available in print to any shareholder who requests it.ITEM
Item 11.
EXECUTIVE COMPENSATIONExecutive compensation
The information set forth in the Proxy Statement under the caption “Compensation Committee Interlocks and Insider Participation,” under the caption “Executive Compensation,” and under the caption “Director Compensation” is incorporated herein by reference. The information set forth in the Proxy Statement under the caption “Compensation Committee Report” is also incorporated herein by reference, but pursuant to the Instructions to Item 407(e)(5) of Regulation
S-K, such report shall not be deemed to be “soliciting material” or subject to Regulation 14A, and shall be deemed to be “furnished” and not “filed” and will not be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 as a result of being so furnished.
ITEM
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSSecurity ownership of certain beneficial owners and management and related stockholder matters
The information set forth in the Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners,” and under the caption “Security Ownership of Management” is incorporated herein by reference.
Equity
compensation plan informationCompensation Plan Information
The following table sets forth aggregated information about all of the Company’s compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance as of December 31,
2016: | | | | | | | | | | | | | | | |
| Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))1 (c) |
Equity compensation plans approved by security holders | | | | 3,660,924 | | | | $ | 41.06 | | | | | 7,522,658 | |
Equity compensation plans not approved by security holders | | | | — | | | | | — | | | | | — | |
Total | | | | 3,660,924 | | | | $ | 41.06 | | | | | 7,522,658 | |
| | | | | | | | | | | | | | | | | |
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))1 (c) |
| Equity compensation plans approved by security holders | 2,711,373 | | | $ | 52.95 | | | 10,765,398 |
| Equity compensation plans not approved by security holders | — | | | — | | | — | |
| Total | 2,711,373 | | | $ | 52.95 | | | 10,765,398 | |
| | | | | |
1 | The Sonoco Products Company 2014 Long-term2019 Omnibus Incentive Plan (the "2019 Plan") was adopted at the Company’s 20142019 Annual Meeting of Shareholders. The maximum number of shares of common stock that may be issued under this plan was set at 10,381,53312,000,000 shares, which included all shares remaining under the 2012 Plan and an additional 4,500,000 shares authorized under the 2014 Plan. Awards granted under all previous plans which are forfeited, expire or are cancelled without delivery of shares, or which result in forfeiture of shares back to the Company, will be added to the total shares available under the 20142019 Plan. At December 31, 2016,2019, a total of 7,522,65810,765,398 shares remain available for future grant under the 20142019 Plan. |
| | | | | | |
SONOCO 2016 ANNUAL REPORT
| | 37
| | | | FORM 10-K
|
The weighted-average exercise price of
$41.06$52.95 relates to stock appreciation rights, which account for
1,915,6461,562,123 of the
3,660,9242,711,373 securities issuable upon exercise. The remaining
1,745,2781,149,250 securities relate to deferred compensation stock units, performance-contingent restricted stock units and restricted stock unit awards that have no exercise price requirement.
ITEM
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCECertain relationships and related transactions, and director independence
The information set forth in the Proxy Statement under the captions “Related Party Transactions” and “Corporate Governance – Director Independence Policies” is incorporated herein by reference. Each current member of the Audit, Corporate Governance and Nominating and Executive Compensation Committees is independent as defined in the listing standards of the New York Stock Exchange.
ITEM
33 FORM 10-K SONOCO 2019 ANNUAL REPORT
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICESPrincipal accountant fees and services
The information set forth in the Proxy Statement under the caption “Independent Registered Public Accounting Firm” is incorporated herein by reference.
PART IV
Item 15. Exhibits and financial statement schedules
| | | | | | | | | | | | | | |
FORM 10-K
| (a) | | 1 | 38
| | SONOCO 2016 ANNUAL REPORT
|
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| | | | |
(a) | | 1 | | Financial Statements – The following financial statements are provided under Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form10-K: |
| | |
| | | | |
| | |
| | | | |
| | |
| | | | |
| | |
| | | | |
| | |
| | | | |
| | |
| | | | |
| | |
| | | | |
| | 2 | | | Financial Statement Schedules |
| | |
| | 2 | | Financial Statement Schedules |
| | |
| | | | Schedule II – Valuation and Qualifying Accounts for the Years Ended December 31, 2016, 20152019, 2018 and 2014.2017 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Column A | | Column B | | Column C – Additions | | Column D | | Column E |
| Description | | Balance at Beginning of Year | | Charged to Costs and Expenses | | Charged to Other | | Deductions | | Balance at End of Year |
2016 | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Doubtful Accounts | | | $ | 11,069 | | | | $ | 1,566 | | | | $ | (86 | )1 | | | $ | 1,665 | 2 | | | $ | 10,884 | |
LIFO Reserve | | | | 18,894 | | | | | (1,575 | )3 | | | | — | | | | | — | | | | | 17,319 | |
Valuation Allowance on Deferred Tax Assets | | | | 49,464 | | | | | 3,273 | | | | | (306 | )4 | | | | 2,634 | 5 | | | | 49,797 | |
2015 | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Doubtful Accounts | | | $ | 8,547 | | | | $ | 2,501 | | | | $ | 467 | 1 | | | $ | 446 | 2 | | | $ | 11,069 | |
LIFO Reserve | | | | 17,908 | | | | | 986 | 3 | | | | — | | | | | — | | | | | 18,894 | |
Valuation Allowance on Deferred Tax Assets | | | | 63,231 | | | | | 2,248 | | | | | (5,686 | )4 | | | | 10,329 | 5 | | | | 49,464 | |
2014 | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Doubtful Accounts | | | $ | 9,771 | | | | $ | 2,350 | | | | $ | (411 | )1 | | | $ | 3,163 | 2 | | | $ | 8,547 | |
LIFO Reserve | | | | 18,146 | | | | | (238 | )3 | | | | — | | | | | — | | | | | 17,908 | |
Valuation Allowance on Deferred Tax Assets | | | | 60,856 | | | | | 828 | | | | | 5,367 | 4 | | | | 3,820 | 5 | | | | 63,231 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Column A | Column B | | Column C - Additions | | | | | | Column D | | | Column E |
| Description | Balance at Beginning of Year | | Charged to Costs and Expenses | | | Charged to Other | | | Deductions | | | Balance at End of Year |
| 2019 | | | | | | | | | | | | |
| Allowance for Doubtful Accounts | $ | 11,692 | | | $ | 4,320 | | | | $ | 322 | | 1 | | $ | 1,952 | | 2 | | $ | 14,382 | |
| LIFO Reserve | 18,854 | | | 1,349 | | 3 | | — | | | | — | | | | 20,203 | |
| Valuation Allowance on Deferred Tax Assets | 103,289 | | | 2,662 | | | | (1,116) | | 4 | | (512) | | 5 | | 105,347 | |
| 2018 | | | | | | | | | | | | |
| Allowance for Doubtful Accounts | $ | 9,913 | | | $ | 3,471 | | | | $ | (425) | | 1 | | $ | 1,267 | | 2 | | $ | 11,692 | |
| LIFO Reserve | 17,632 | | | 1,222 | | 3 | | — | | | | — | | | | 18,854 | |
| Valuation Allowance on Deferred Tax Assets | 47,199 | | | (11,187) | | | | 70,993 | | 4 | | 3,716 | | 5 | | 103,289 | |
| 2017 | | | | | | | | | | | | |
| Allowance for Doubtful Accounts | $ | 10,884 | | | $ | 1,439 | | | | $ | 243 | | 1 | | $ | 2,653 | | 2 | | $ | 9,913 | |
| LIFO Reserve | 17,319 | | | 313 | | 3 | | — | | | | — | | | | 17,632 | |
| Valuation Allowance on Deferred Tax Assets | 49,797 | | | 6,967 | | | | (2,365) | | 4 | | 7,200 | | 5 | | 47,199 | |
| | | | |
| | | | 1 Includes translation adjustments and other insignificant adjustments. |
| | | | 2 Includes amounts written off. |
| | | | 3 Includes adjustments based on pricing and inventory levels. |
| | | | 4 Includes translation adjustments and increases to deferred tax assets which were previously fully reserved. |
| | | | 5 Includes utilization of capital loss carryforwards, net operating loss carryforwards and other deferred tax assets. |
|
| | | All other schedules not included have been omitted because they are not required, are not applicable or the required information is given in the financial statements or notes thereto. |
| | | | | | | | | | | | | | |
| | 3 | | | The exhibits listed on the Exhibit Index to this Form 10-K are incorporated herein by reference.
|
Item 16. Form 10-K summary
The Company has chosen not to provide a Form 10-K summary.
34 FORM 10-K SONOCO 2019 ANNUAL REPORT
Exhibit Index
| | | | | | | | | | | | | | |
| | | | |
| | |
| | 3 | | Exhibits |
| 3-1 | | |
| | 3-1 | | |
| | 3-2 |
| | 3-2 | | |
| | 4-1 | | |
| | 4-14-2 | | |
| | |
| 4-3 | | 4-2 | | Form of Second Supplemental Indenture, dated as of November 1, 2010, between the Registrant and The Bank of New York Mellon Trust Company, N.A., as Trustee (including form of 5.75% Notes due 2040) (incorporated by reference to Registrant’s Form8-K filed October 28, 2010) |
| | | | | | |
SONOCO 2016 ANNUAL REPORT
| | 39
| | | | FORM 10-K
|
| | | | |
| | |
| | 4-3 | | Form of Third Supplemental Indenture (including form of 4.375% Notes due 2021), between Sonoco Products Company and the Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Registrant’s Form8-K filed October 27, 2011) |
| | |
| | 4-4 | | Form of Fourth Supplemental Indenture (including form of 5.75% Notes due 2040), between Sonoco Products Company and the Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Registrant’s Form8-K filed October 27, 2011) |
| | |
| | 10-1 | | 1991 Sonoco Products Company Key Employee Stock Plan, as amended (incorporated by reference to the Registrant’s Form10-Q for the quarter ended September 30, 2007) |
| | |
| | 10-2 | | Sonoco Products Company 1996Non-employee Directors’ Stock Plan, as amended (incorporated by reference to the Registrant’s Form10-Q for the quarter ended September 30, 2007) |
| | |
| | 10-3 | | Sonoco Retirement and Savings Plan (formerly the Sonoco Savings Plan), as amended (incorporated by reference to the Registrant’s Form10-K for the year ended December 31, 2012). |
| | |
| | 10-4 | | Sonoco Products Company 2008 Long-term Incentive Plan (incorporated by reference to the Company’s Proxy Statement for the Annual Meeting of Shareholders on April 16, 2008) |
| | |
| | 10-5 | | Sonoco Products Company 2012 Long-term Incentive Plan (incorporated by reference to the Company’s Proxy Statement for the Annual Meeting of Shareholders on April 18, 2012) |
| | |
| | 10-6 | | Sonoco Products Company 2014 Long-term Incentive Plan (incorporated by reference to the Company’s Proxy Statement for the Annual Meeting of Shareholders on April 16, 2014) |
| | |
| | 10-7 | | Deferred Compensation Plan for Key Employees of Sonoco Products Company (a.k.a. Deferred Compensation Plan for Corporate Officers of Sonoco Products Company), as amended (incorporated by reference to the Registrant’s Form10-Q for the quarter ended September 28, 2008) |
| | |
| | 10-8 | | Omnibus Benefit Restoration Plan of Sonoco Products Company, amended and restated as of January 1, 2015 (incorporated by reference to the Registrant’s Form10-K for the year ended December 31, 2014, filed on March 2, 2015) |
| | |
| | 10-9 | | Deferred Compensation Plan for Outside Directors of Sonoco Products Company, as amended (incorporated by reference to the Registrant’s Form10-Q for the quarter ended September 28, 2008) |
| | |
| | 10-10 | | Performance-based Annual Incentive Plan for Executive Officers (incorporated by reference to the Registrant’s Proxy Statement for the April 19, 2000, Annual Meeting of Shareholders) |
| | |
| | 10-11 | | Form of Executive Bonus Life Agreement between the Company and certain executive officers (incorporated by reference to the Registrant’s Form10-Q for the quarter ended September 26, 2004) |
| | |
| | 10-12 | | Credit Agreement, effective October 2, 2014 (incorporated by reference to the Registrant’s Form10-Q for the quarter ended September 28, 2014) |
| | |
| | 10-13 | | Sonoco Products Company Amended and Restated Trust Agreement for Executives, as of October 15, 2008 (incorporated by reference to the Registrant’s Form10-Q for the quarter ended September 28, 2008) |
| | |
| | 10-14 | | Sonoco Products Company Amended and Restated Directors Deferral Trust Agreement, as of October 15, 2008 (incorporated by reference to the Registrant’s Form10-Q for the quarter ended September 28, 2008) |
| | |
| | 10-15 | | Description of Stock Appreciation Rights and Performance Contingent Restricted Stock Units granted to executive officers of the Registrant on February 8, 2011 (incorporated by reference to Registrant’sForm 8-K filed February 14, 2011) |
| | |
| | 10-16 | | Description of Stock Appreciation Rights and Performance Contingent Restricted Stock Units granted to executive officers of the Registrant on February 7, 2012 (incorporated by reference to Registrant’sForm 8-K filed February 13, 2012) |
| | |
| | 10-17 | | Description of Stock Appreciation Rights and Performance Contingent Restricted Stock Units granted to executive officers of the Registrant on February 12, 2013 (incorporated by reference to Registrant’sForm 8-K filed February 19, 2013) |
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FORM 10-K
| | | | 40
| | SONOCO 2016 ANNUAL REPORT
|
| | | | |
| | |
| | 10-18 | | Description of Stock Appreciation Rights and Performance Contingent Restricted Stock Units granted to executive officers of the Registrant on February 12, 2014 (incorporated by reference to Registrant’sForm 8-K filed February 18, 2014) |
| | |
| | 10-19 | | Description of Stock Appreciation Rights, Restricted Stock Units and Performance Contingent Restricted Stock Units granted to executive officers of the Registrant on February 11, 2015 (incorporated by reference to Registrant’sForm 8-K filed February 17, 2015) |
| | |
| | 10-20 | | Description of Stock Appreciation Rights, Restricted Stock Units and Performance Contingent Restricted Stock Units granted to executive officers of the Registrant on February 10, 2016 (incorporated by reference to Registrant’sForm 8-K filed February 16, 2016) |
| | |
| | 10-21 | | Description of Stock Appreciation Rights, Restricted Stock Units and Performance Contingent Restricted Stock Units granted to executive officers of the Registrant on February 8, 2017 (incorporated by reference to Registrant’s Form8-K filed February 14, 2017) |
| | |
| | 10-22 | | Unsecured Five-Year Fixed Rate Assignable Loan Agreement, dated May 23, 2016 (incorporated by reference to Registrant’s Form10-Q for the quarter ended July 3, 2016) |
| | |
| | 10-23 | | Agreement and Plan of Merger, dated February 15, 2017, for the acquisition of Packaging Holdings, Inc. (incorporated by reference to Registrant’s Form 8-K filed February 21, 2017) |
| | |
| | 12 | | Statements regarding Computation of Ratio of Earnings to Fixed Charges |
| | |
| | 21 | | Subsidiaries of the Registrant |
| | |
| | 23 | | Consent of Independent Registered Public Accounting Firm with respect to Registrant’sForm 10-K |
| | |
| | 31 | | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and 17 C.F.R.240.13a-14(a) |
| | |
| | 32 | | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 17 C.F.R.240.13a-14(b) |
| | |
| | 99 | | Proxy Statement, filed in conjunction with annual shareholders’ meeting scheduled for April 19, 2017 (to be filed within 120 days after December 31, 2016) |
| | |
| | 101 | | The following materials from Sonoco Products Company’s Annual Report on Form10-K for the year ended December 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2016 and 2015, (ii) Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014, (iv) Consolidated Statements of Changes in Total Equity for the years ended December 31, 2016, 2015 and 2014, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014, and (vi) Notes to the Consolidated Financial Statements. |
ITEM 16. FORM10-K SUMMARY
The Company has chosen not to provide a Form10-K summary.
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SONOCO 2016 ANNUAL REPORT
| | 41
| | | | FORM 10-K
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 1st day of March 2017.
|
SONOCO PRODUCTS COMPANY |
|
/s/ M.J. Sanders
|
M.J. Sanders |
President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 1st day of March 2017.
|
/s/ Barry L. Saunders
|
Barry L. Saunders |
Senior Vice President and Chief Financial Officer |
(principal financial officer) |
|
/s/ James W. Kirkland
|
James W. Kirkland |
Corporate Controller |
(principal accounting officer) |
| | |
| |
/s/ H.E. DeLoach Jr.
H.E. DeLoach, Jr.
| | Director (Executive Chairman) |
| |
/s/ M.J. Sanders
M.J. Sanders
| | President, Chief Executive Officer and Director |
| |
/s/ H.A. Cockrell
H.A. Cockrell
| | Director |
| |
/s/ P.L. Davies
P.L. Davies
| | Director |
| |
/s/ J.R. Haley
J.R. Haley
| | Director |
| |
/s/ E.H. Lawton III
E.H. Lawton, III
| | Director |
| |
/s/ R.G. Kyle
R.G. Kyle
| | Director |
| |
/s/ J.E. Linville
J.E. Linville
| | Director |
| |
/s/ B.J. McGarvie
B.J. McGarvie
| | Director |
| |
/s/ J.M. Micali
J.M. Micali
| | Director |
| |
/s/ S. Nagarajan
S. Nagarajan
| | Director |
| |
/s/ M.D. Oken
M.D. Oken
| | Director |
| |
/s/ T.E. Whiddon
T.E. Whiddon
| | Director |
| | | | | | |
FORM 10-K
| | | | 42
| | SONOCO 2016 ANNUAL REPORT
|
EXHIBIT INDEX
| | |
| |
3-1 | | Articles of Incorporation, as amended (incorporated by reference to the Registrant’s Form8-K filed on February 8, 2012) |
| |
3-2 | | By-Laws, as amended (incorporated by reference to the Registrant’s Form10-Q for the quarter ended April 3, 2016) |
| |
4-1 | | Indenture, dated as of June 15, 1991, between Registrant and The Bank of New York, as Trustee (incorporated by reference to the Registrant’s FormS-4 (File Number333-119863)) |
| |
4-2 | | Form of Second Supplemental Indenture, dated as of November 1, 2010, between the Registrant and The Bank of New York Mellon Trust Company, N.A., as Trustee (including form of 5.75% Notes due 2040)(incorporated by reference to Registrant’s Form8-K filed October 28, 2010) |
| |
4-34-4 | | |
| |
4-44-5 | | |
| |
| 10-1 | | |
| |
| 10-2 | | |
| |
| 10-3 | |
|
| |
| 10-4 | | Sonoco Products Company 2008 Long-term Incentive Plan (incorporated by reference to the Company’s Proxy Statement for the Annual Meeting of Shareholders on April 16, 2008) |
| |
| 10-5 | | Sonoco Products Company 2012 Long-term Incentive Plan (incorporated by reference to the Company’s Proxy Statement for the Annual Meeting of Shareholders on April 18, 2012) |
| |
| 10-6 | | Sonoco Products Company 2014 Long-term Incentive Plan (incorporated by reference to the Company’s Proxy Statement for the Annual Meeting of Shareholders on April 16, 2014) |
| |
| 10-7 | | |
| |
| 10-8 | | Omnibus Benefit Restoration Plan of Sonoco Products Company, amended and restated as of January 1, 2015 (incorporated by reference to the Registrant’s Form10-K for the year ended December 31, 2014, filed on March 2, 2015) |
| |
10-9 | | |
| |
10-1010-9 | | Performance-based Annual Incentive Plan for Executive Officers (incorporated by reference to the Registrant’s Proxy Statement for the April 19, 2000, Annual Meeting of Shareholders) |
| |
10-11 | | Form of Executive Bonus Life Agreement between the Company and certain executive officers (incorporated by reference to the Registrant’s Form10-Q for the quarter ended September 26, 2004) |
| |
10-12 | | Credit Agreement, effective October 2, 2014 (incorporated by reference to the Registrant’s Form10-Q for the quarter ended September 28, 2014) |
| |
10-13 | | |
| |
10-1410-10 | | |
| |
10-1510-11 | | Description |
| |
10-16 | | Description of Stock Appreciation Rights and Performance Contingent Restricted Stock Units granted to executive officers of the Registrant on February 7, 2012 (incorporated by reference to Registrant’s Form8-K filed February 13, 2012) |
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10-17 | | Description of Stock Appreciation Rights and Performance Contingent Restricted Stock Units granted to executive officers of the Registrant on February 12, 2013 (incorporated by reference to Registrant’s Form8-K filed February 19, 2013) |
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10-18 | | Description of Stock Appreciation Rights and Performance Contingent Restricted Stock Units granted to executive officers of the Registrant on February 12, 2014 (incorporated by reference to Registrant’s Form8-K filed February 18, 2014) |
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10-19 | | Description of Stock Appreciation Rights, Restricted Stock Units and Performance Contingent Restricted Stock Units granted to executive officers of the Registrant on February 11,January 1, 2015 (incorporated by reference to Registrant’sthe Registrant's Form8-K filed February 17, 2015) 10-K for the year ended December 31, 2014)
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10-2010-12 | | Description |
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10-2110-13 | | |
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10-22 | | 10-15 | | |
| | 10-16 | | |
| | 10-17 | | |
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10-2310-18.1 | | |
| | 10-18.2 | | |
| | 10-19 | | |
| | 10-20 | | |
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| | 10-21 | | |
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1221 | | Statements regarding Computation |
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2123 | | Subsidiaries of the Registrant |
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23 | | |
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| 31 | | |
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| 32 | | |
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| 99 | | Proxy Statement, filed in conjunction with annual shareholders’ meeting scheduled for April 19, 201715, 2020 (to be filed within 120 days after December 31, 2016)2019) |
| | 101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101 | | The following materials from Sonoco Products Company’s Annual Report on Form10-K for the year ended December 31, 2016, formatted101.SCH | | Taxonomy Extension Schema Document |
| | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| | 101.LAB | | Taxonomy Exension Label Linkbase Document |
| | 101.PRE | | Taxonomy Extension Presentaiton Linkbase Document |
| | 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2016 and 2015, (ii) Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014, (iv) Consolidated Statements of Changes in Total Equity for the years ended December 31, 2016, 2015 and 2014, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014, and (vi) Notes to the Consolidated Financial Statements.Exhibit 101) |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 28th day of February 2020.
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| SONOCO PRODUCTS COMPANY |
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| /s/ R. Howard Coker |
| R. Howard Coker |
| President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 28th day of February 2020.
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| /s/ Julie C. Albrecht | | /s/ James W. Kirkland |
| Julie C. Albrecht | | James W. Kirkland |
| Vice President and Chief Financial Officer | | Corporate Controller |
| (principal financial officer) | | (principal accounting officer) |
| | | | | | | | |
| /s/ J.R. Haley | | Director (Chairman) |
| J.R. Haley | | |
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| /s/ R. H. Coker | | President, Chief Executive Officer and Director |
| R. H. Coker | | |
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| /s/ H.A. Cockrell | | Director |
| H.A. Cockrell | | |
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| /s/ P.L. Davies | | Director |
| P.L. Davies | | |
| | |
| /s/ T.J. Drew | | Director |
| T.J. Drew | | |
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| /s/ P. Guillemot | | Director |
| P. Guillemot | | |
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| /s/ R.R. Hill, Jr. | | Director |
| R.R. Hill, Jr. | | |
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| /s/ R.G. Kyle | | Director |
| R.G. Kyle | | |
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| /s/ B.J. McGarvie | | Director |
| B.J. McGarvie | | |
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| /s/ J.M. Micali | | Director |
| J.M. Micali | | |
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| /s/ S. Nagarajan | | Director |
| S. Nagarajan | | |
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| /s/ M.D. Oken | | Director |
| M.D. Oken | | |
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| /s/ T.E. Whiddon | | Director |
| T.E. Whiddon | | |
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| /s/ L.M. Yates | | Director |
| L.M. Yates | | |