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EX-15 - AWARENESS LETTER - SONOCO PRODUCTS COq32014ex15.htm
EX-10 - CREDIT AGREEMENT - SONOCO PRODUCTS COq32014ex10.htm
EX-31 - EXHIBIT - SONOCO PRODUCTS COq32014ex31.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2014
or
 
¨
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. 001-11261
SONOCO PRODUCTS COMPANY
 
Incorporated under the laws
of South Carolina
 
I.R.S. Employer Identification
No. 57-0248420
1 N. Second St.
Hartsville, South Carolina 29550
Telephone: 843/383-7000
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨(do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock at October 16, 2014:
Common stock, no par value: 101,260,106




SONOCO PRODUCTS COMPANY
INDEX
 
 
 
 
Item 1.
 
 
 
 
Condensed Consolidated Balance Sheets - September 28, 2014 (unaudited) and December 31, 2013 (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 6.

2



Part I. FINANCIAL INFORMATION
 
Item 1. Financial Statements.
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars and shares in thousands) 
 
 
September 28,
2014
 
December 31, 2013*
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
231,556

 
$
217,567

Trade accounts receivable, net of allowances
 
707,311

 
614,053

Other receivables
 
35,427

 
38,995

Inventories:
 
 
 
 
Finished and in process
 
138,507

 
158,256

Materials and supplies
 
265,073

 
252,531

Prepaid expenses
 
55,199

 
57,666

Deferred income taxes
 
37,734

 
39,406

 
 
1,470,807

 
1,378,474

Property, Plant and Equipment, Net
 
1,018,780

 
1,021,920

Goodwill
 
1,089,700

 
1,099,207

Other Intangible Assets, Net
 
222,536

 
243,920

Long-term Deferred Income Taxes
 
37,723

 
67,364

Other Assets
 
173,458

 
168,406

Total Assets
 
$
4,013,004

 
$
3,979,291

Liabilities and Equity
 
 
 
 
Current Liabilities
 
 
 
 
Payable to suppliers
 
$
514,397

 
$
491,809

Accrued expenses and other
 
336,416

 
331,566

Notes payable and current portion of long-term debt
 
71,700

 
35,201

Accrued taxes
 
6,161

 
8,649

 
 
928,674

 
867,225

Long-term Debt, Net of Current Portion
 
945,900

 
946,257

Pension and Other Postretirement Benefits
 
222,933

 
263,718

Deferred Income Taxes
 
134,583

 
128,006

Other Liabilities
 
45,088

 
48,760

Commitments and Contingencies
 

 

Sonoco Shareholders’ Equity
 
 
 
 
Common stock, no par value
 
 
 
 
Authorized 300,000 shares
101,356 and 102,147 shares issued and outstanding at
September 28, 2014 and December 31, 2013, respectively
 
7,175

 
7,175

Capital in excess of stated value
 
426,088

 
457,190

Accumulated other comprehensive loss
 
(404,907
)
 
(358,520
)
Retained earnings
 
1,692,139

 
1,604,892

Total Sonoco Shareholders’ Equity
 
1,720,495

 
1,710,737

Noncontrolling Interests
 
15,331

 
14,588

Total Equity
 
1,735,826

 
1,725,325

Total Liabilities and Equity
 
$
4,013,004

 
$
3,979,291

 
*
The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
See accompanying Notes to Condensed Consolidated Financial Statements

3



SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(Dollars and shares in thousands except per share data)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
Net sales
 
$
1,263,574

 
$
1,227,749

 
$
3,696,580

 
$
3,633,218

Cost of sales
 
1,035,910

 
1,003,712

 
3,024,876

 
2,980,901

Gross profit
 
227,664

 
224,037

 
671,704

 
652,317

Selling, general and administrative expenses
 
110,507

 
117,935

 
360,712

 
359,794

Restructuring/Asset impairment charges
 
5,908

 
5,818

 
11,571

 
18,785

Income before interest and income taxes
 
111,249

 
100,284

 
299,421

 
273,738

Interest expense
 
13,620

 
15,119

 
40,574

 
45,400

Interest income
 
702

 
833

 
1,878

 
2,439

Income before income taxes
 
98,331

 
85,998

 
260,725

 
230,777

Provision for income taxes
 
28,891

 
27,085

 
82,053

 
74,746

Income before equity in earnings of affiliates
 
69,440

 
58,913

 
178,672

 
156,031

Equity in earnings of affiliates, net of tax
 
2,294

 
2,512

 
6,896

 
8,233

Net income
 
$
71,734

 
$
61,425

 
$
185,568

 
$
164,264

Net (income)/loss attributable to noncontrolling interests
 
(810
)
 
(185
)
 
(858
)
 
103

Net income attributable to Sonoco
 
$
70,924

 
$
61,240

 
$
184,710

 
$
164,367

Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
102,128

 
102,835

 
102,451

 
102,586

Diluted
 
103,087

 
103,510

 
103,425

 
103,164

Per common share:
 
 
 
 
 
 
 
 
Net income attributable to Sonoco:
 
 
 
 
 
 
 
 
Basic
 
$
0.69

 
$
0.60

 
$
1.80

 
$
1.60

Diluted
 
$
0.69

 
$
0.59

 
$
1.79

 
$
1.59

Cash dividends
 
$
0.32

 
$
0.31

 
$
0.95

 
$
0.92

See accompanying Notes to Condensed Consolidated Financial Statements

4



SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (unaudited)
(Dollars in thousands)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
Net income
 
$
71,734

 
$
61,425

 
$
185,568

 
$
164,264

Other comprehensive income/(loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(48,018
)
 
20,351

 
(46,854
)
 
(20,348
)
Changes in defined benefit plans, net of tax
 
4,386

 
7,782

 
387

 
20,507

Changes in derivative financial instruments, net of tax
 
(1,229
)
 
1,462

 
80

 
4,352

Other comprehensive income/(loss)
 
(44,861
)
 
29,595

 
(46,387
)
 
4,511

Comprehensive income
 
26,873

 
91,020

 
139,181

 
168,775

Net (income)/loss attributable to noncontrolling interests
 
(810
)
 
(185
)
 
(858
)
 
103

Other comprehensive (income)/loss attributable to noncontrolling interests
 
250

 
(32
)
 
115

 
595

Comprehensive income attributable to Sonoco
 
$
26,313

 
$
90,803

 
$
138,438

 
$
169,473

See accompanying Notes to Condensed Consolidated Financial Statements

5



SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
 
 
Nine Months Ended
 
 
September 28,
2014
 
September 29,
2013
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
185,568

 
$
164,264

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Asset impairment
 
4,139

 
7,352

Depreciation, depletion and amortization
 
144,728

 
145,574

Share-based compensation expense
 
11,789

 
7,658

Equity in earnings of affiliates
 
(6,896
)
 
(8,233
)
Cash dividends from affiliated companies
 
5,494

 
8,636

Gain on disposition of assets
 
(1,173
)
 
(1,286
)
Pension and postretirement plan expense
 
29,780

 
46,678

Pension and postretirement plan contributions
 
(58,421
)
 
(30,514
)
Tax effect of share-based compensation exercises
 
2,341

 
6,867

Excess tax benefit of share-based compensation
 
(2,511
)
 
(3,324
)
Net increase in deferred taxes
 
18,076

 
22,504

Change in assets and liabilities, net of effects from acquisitions, dispositions, and foreign currency adjustments:
 
 
 
 
Trade accounts receivable
 
(102,862
)
 
(78,003
)
Inventories
 
1,018

 
(13,069
)
Payable to suppliers
 
28,661

 
75,207

Prepaid expenses
 
(10,772
)
 
(1,958
)
Accrued expenses
 
20,823

 
25,078

Income taxes payable and other income tax items
 
13,776

 
43,796

Fox River environmental reserves
 
(15,000
)
 
(1,592
)
Other assets and liabilities
 
(1,161
)
 
5,649

Net cash provided by operating activities
 
267,397

 
421,284

Cash Flows from Investing Activities:
 
 
 
 
Purchase of property, plant and equipment
 
(135,287
)
 
(143,926
)
Cost of acquisitions, net of cash acquired
 
(10,964
)
 
(3,728
)
Proceeds from the sale of assets
 
6,451

 
8,950

Investment in affiliates and other, net
 
(4,520
)
 
(3,542
)
Net cash used in investing activities
 
(144,320
)
 
(142,246
)
Cash Flows from Financing Activities:
 
 
 
 
Proceeds from issuance of debt
 
30,526

 
51,799

Principal repayment of debt
 
(30,267
)
 
(172,056
)
Net increase/(decrease) in commercial paper
 
36,000

 
(152,000
)
Net decrease in outstanding checks
 
(712
)
 
(1,196
)
Excess tax benefit of share-based compensation
 
2,511

 
3,324

Cash dividends
 
(96,446
)
 
(93,216
)
Shares acquired
 
(48,731
)
 
(8,835
)
Shares issued
 
2,482

 
13,443

Net cash used in financing activities
 
(104,637
)
 
(358,737
)
Effects of Exchange Rate Changes on Cash
 
(4,451
)
 
(5,808
)
Net Increase/(Decrease) in Cash and Cash Equivalents
 
13,989

 
(85,507
)
Cash and cash equivalents at beginning of period
 
217,567

 
373,084

Cash and cash equivalents at end of period
 
$
231,556

 
$
287,577

See accompanying Notes to Condensed Consolidated Financial Statements

6

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)


Note 1: Basis of Interim Presentation
In the opinion of the management of Sonoco Products Company (the “Company” or “Sonoco”), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments, unless otherwise stated) necessary to state fairly the consolidated financial position, results of operations and cash flows for the interim periods reported herein. Operating results for the three and nine months ended September 28, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
Effective January 1, 2014, the Company began reporting Sonoco Alloyd, the Company’s retail packaging business and previously part of the Protective Solutions segment, as part of the Display and Packaging segment. Prior period results for the affected segments have been retrospectively revised to reflect this change.
Results for the nine months ended September 28, 2014, include an out-of-period adjustment in the second quarter of 2014 to record a valuation allowance on deferred tax assets primarily related to the pension plan of a foreign subsidiary. This valuation allowance should have been established in prior years when the deferred tax assets were recognized. The cumulative adjustment made to correct this error resulted in a reduction of reported long-term deferred income tax assets of $11,771, with a corresponding increase in accumulated other comprehensive loss through a decrease in year to date comprehensive income. The effect of this error was not considered material to any of the Company's previously issued financial statements or to the current year consolidated financial statements.
With respect to the unaudited condensed consolidated financial information of the Company for the three- and nine-month periods ended September 28, 2014 and September 29, 2013 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated October 29, 2014 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
 
Note 2: New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, "Revenue From Contracts With Customers." ASU 2014-09 changes the definitions/criteria used to determine when revenue should be recognized from being based on risks and rewards to being based on control. It also 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. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016. Due to the nature of the Company's business and its standard terms of sale, there is likely to be little practical difference for Sonoco between the current transfer of risks and rewards model and the new transfer of control model. In addition, few of the Company's sales, if any, contain an element of variable consideration or have payment terms exceeding one year. Accordingly, we do not expect the implementation of ASU 2014-09 to have a material impact on Sonoco's financial statements.
In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASU 2013-11 clarified guidance and eliminated diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance became effective for reporting periods beginning on or after December 15, 2013; accordingly, the Company implemented ASU 2013-11 effective January 1, 2014. The impact on the Company's condensed consolidated financial statements from applying this new guidance was immaterial.
During the three- and nine-month periods ended September 28, 2014, 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 September 28, 2014, there were no other pronouncements pending adoption that are expected to have a material impact on the Company’s financial statements. 

7

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

Note 3: Acquisitions
The Company completed the acquisition of Dalton Paper Products, Inc., a manufacturer of tubes and cores, on May 2, 2014 for a net cash cost of $11,286. The acquisition consists of a single manufacturing facility located in Dalton, Georgia, and is expected to generate annual sales of approximately $20,000 for the Paper and Industrial Converted Products segment. In connection with this acquisition, the Company recorded net tangible assets of $4,656, identifiable intangible assets of $3,380, and goodwill of $3,250. The goodwill is not deductible for income tax purposes.
The Company has accounted for this acquisition as a purchase and, accordingly, has included its results of operations in consolidated net income from the date of acquisition. Pro forma results have not been provided, as the acquisition was not material to the Company's financial statements individually, or in the aggregate.
The Company also received cash totaling $322 during the second quarter of 2014 in connection with the final working capital settlement related to its 2013 acquisition of Imagelinx, a global brand artwork management business in the United Kingdom.
In August 2014, the Company entered into an agreement to acquire Weidenhammer Packaging Group (Weidenhammer), a leading provider of composite cans in Europe, for an all-cash purchase price of approximately $383,000, subject to a normal adjustment of net working capital. Weidenhammer, headquartered in Hockenheim, Germany, focuses mainly on the production of composite cans along with composite drums and rigid plastic containers which the Company produces using thin-walled injection molding technology with modern in-mold labeling. The acquisition is expected to close in the fourth quarter of 2014.
Acquisition-related costs of $1,680 and $171 were incurred in the three months ended September 28, 2014 and September 29, 2013, respectively. These costs totaled $2,950 and $180 for the nine months ended September 28, 2014 and September 29, 2013, respectively. Acquisition-related costs consist primarily of legal and professional fees and are included in "Selling, general and administrative expenses" in the Company's Condensed Consolidated Statements of Income.

Note 4: Shareholders' Equity
Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share: 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to Sonoco
 
$
70,924

 
$
61,240

 
$
184,710

 
$
164,367

Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
102,128,000

 
102,835,000

 
102,451,000

 
102,586,000

Dilutive effect of stock-based compensation
 
959,000

 
675,000

 
974,000

 
578,000

Diluted
 
103,087,000

 
103,510,000

 
103,425,000

 
103,164,000

Reported net income attributable to Sonoco per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.69

 
$
0.60

 
$
1.80

 
$
1.60

Diluted
 
$
0.69

 
$
0.59

 
$
1.79

 
$
1.59

Certain stock appreciation rights to purchase shares of the Company's common stock are not dilutive because the exercise price is greater than the market price of the stock at the end of the reporting period. The average number of stock appreciation rights that were not dilutive and therefore not included in the computation of diluted earnings per share was 638,160 and 640,901 during the three- and nine-month periods ended September 28, 2014, respectively, and 498,000 and 1,276,472 for the three- and nine-month periods ended September 29, 2013. No adjustments were made to reported net income attributable to Sonoco in the computations of earnings per share.

8

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)


Stock Repurchases
The Company’s Board of Directors has authorized the repurchase of up to 5,000,000 shares of the Company’s common stock. A total of 132,500 shares were repurchased under this authorization in 2013. During the nine months ended September 28, 2014, an additional 1,088,618 shares were purchased at a cost of $45,013; accordingly, at September 28, 2014, a total of 3,778,882 shares remain available for repurchase.
The Company frequently repurchases shares of its common stock to satisfy employee tax withholding obligations in association with certain share-based compensation awards. These repurchases, which are not part of a publicly announced plan or program, totaled 87,583 shares in the first nine months of 2014 at a cost of $3,718, and 111,612 shares in the first nine months of 2013 at a cost of $3,783.
Dividend Declarations
On July 16, 2014 , the Board of Directors declared a regular quarterly dividend of $0.32 per share. This dividend was paid on September 10, 2014 to all shareholders of record as of August 15, 2014.
On October 13, 2014, the Board of Directors declared a regular quarterly dividend of $0.32 per share. This dividend is payable December 10, 2014 to all shareholders of record as of November 14, 2014. 

Note 5: Restructuring and Asset Impairment
The Company has engaged in a number of restructuring actions over the past several years. Actions initiated in 2014 and 2013 are reported as “2014 Actions” and “2013 Actions,” respectively. Actions initiated prior to 2013, all of which were substantially complete at September 28, 2014, are reported as “2012 and Earlier Actions.”
Following are the total restructuring and asset impairment charges/(credits), net of adjustments, recognized by the Company during the periods presented: 
 
 
2014
 
2013
 
 
Third Quarter
 
Nine Months
 
Third Quarter
 
Nine Months
Restructuring/Asset impairment:
 
 
 
 
 
 
 
 
2014 Actions
 
$
1,928

 
$
6,256

 
$

 
$

2013 Actions
 
350

 
2,315

 
3,978

 
13,780

2012 and Earlier Actions
 
900

 
270

 
1,840

 
5,005

Other asset impairments
 
2,730

 
2,730

 

 

Restructuring/Asset impairment charges
 
$
5,908

 
$
11,571

 
$
5,818

 
$
18,785

Income tax benefit
 
(1,954
)
 
(3,342
)
 
(1,957
)
 
(6,153
)
Cost/(Income) attributable to noncontrolling interests, net of tax
 
(11
)
 
(26
)
 
68

 
14

Total impact of restructuring/asset impairment
     charges, net of tax
 
$
3,943

 
$
8,203

 
$
3,929

 
$
12,646

Pre-tax restructuring and asset impairment charges are included in “Restructuring/Asset impairment charges” in the Condensed Consolidated Statements of Income.
The Company expects to recognize future additional charges totaling approximately $1,200 in connection with announced restructuring actions, when recognizable in accordance with GAAP, and believes that the majority of these charges will be incurred and paid by the end of 2014. The Company continually evaluates its cost structure, including its manufacturing capacity, and additional restructuring actions may be undertaken.



9

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

2014 Actions
During 2014, the Company announced the closure of two recycling facilities - one in the United States and one in Brazil, a tube and core plant in Canada (parts of the Paper and Industrial Converted Products segment), and a molded foam plant in the United States (part of the Protective Solutions segment). In addition, the Company continued its manufacturing rationalization efforts in its blow-molding business (part of the Consumer Packaging segment), and realigned its cost structure, resulting in the elimination of approximately 83 positions.
Below is a summary of 2014 Actions and related expenses by segment and by type incurred and estimated to be incurred through completion. 
2014 Actions
 
Third Quarter 2014
 
Total
Incurred
to Date
 
Estimated
Total Cost
Severance and Termination Benefits
 
 
 
 
 
 
Consumer Packaging
 
$
136

 
$
824

 
$
874

Display and Packaging
 
590

 
590

 
590

Paper and Industrial Converted Products
 
295

 
2,878

 
2,878

Protective Solutions
 
182

 
370

 
370

Asset Impairment / Disposal of Assets
 
 
 
 
 
 
Consumer Packaging
 
631

 
631

 
631

Paper and Industrial Converted Products
 
(27
)
 
665

 
665

Other Costs
 
 
 
 
 
 
Consumer Packaging
 
19

 
39

 
239

Display and Packaging
 
4

 
4

 
4

Paper and Industrial Converted Products
 
105

 
77

 
177

Protective Solutions
 
(7
)
 
178

 
278

Total Charges and Adjustments
 
$
1,928

 
$
6,256

 
$
6,706

The following table sets forth the activity in the 2014 Actions restructuring accrual included in “Accrued expenses and other” on the Company’s Condensed Consolidated Balance Sheets: 
2014 Actions
 
Severance
and
Termination
Benefits
 
Asset
Impairment/
Disposal
of Assets
 
Other
Costs
 
Total
Accrual Activity
2014 Year to Date
 
 
 
Liability at December 31, 2013
 
$

 
$

 
$

 
$

2014 charges
 
4,662

 
1,296

 
298

 
6,256

Cash receipts/(payments)
 
(3,885
)
 
150

 
(268
)
 
(4,003
)
Asset write downs/disposals
 

 
(1,446
)
 

 
(1,446
)
Foreign currency translation
 
(38
)
 

 

 
(38
)
Liability at September 28, 2014
 
$
739

 
$

 
$
30

 
$
769

Included in "Asset Impairment/Disposal of Assets" are non-cash charges stemming from the impairment of certain buildings and equipment associated with operations closed in 2014. "Other costs" consist primarily of costs related to plant closures including equipment removal, utilities, plant security, property taxes and insurance. The Company expects to pay the majority of the remaining 2014 Actions restructuring costs by the end of 2014 using cash generated from operations.




10

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

2013 Actions
During 2013, the Company announced the closures of a thermoforming plant in Ireland and a rigid paper packaging plant in the United States (parts of the Consumer Packaging segment), a small tube and core operation in Europe (part of the Paper and Industrial Converted Products segment), and a fulfillment service center in the United States (part of the Display and Packaging segment). The Company also sold a small corrugated box operation in the United States (part of the Protective Solutions segment) and realigned its cost structure, resulting in the elimination of approximately 120 positions.
Below is a summary of 2013 Actions and related expenses by segment and by type incurred and estimated to be incurred through completion. 
 
 
2014
 
2013
 
Total
Incurred
to Date
 
 Estimated
Total Cost
2013 Actions
 
Third Quarter
 
Nine Months
 
Third Quarter
 
Nine Months
 
 
Severance and Termination Benefits
 
 
 
 
 
 
 
 
 
 
Consumer Packaging
 
$
(40
)
 
$
71

 
$
2,245

 
$
3,750

 
$
4,981

 
$
4,981

Display and Packaging
 
105

 
423

 
192

 
706

 
1,497

 
1,497

Paper and Industrial Converted Products
 
126

 
994

 
833

 
1,742

 
4,341

 
4,341

Protective Solutions
 

 
(215
)
 
72

 
200

 
331

 
331

Asset Impairment / Disposal of Assets
 
 
 
 
 
 
 
 
 
 
 
 
Consumer Packaging
 

 

 
349

 
5,580

 
5,926

 
5,926

Display and Packaging
 

 

 

 

 
165

 
165

Paper and Industrial Converted Products
 

 
(597
)
 
61

 
475

 
(105
)
 
(105
)
Protective Solutions
 

 
185

 

 
414

 
847

 
847

Other Costs
 
 
 
 
 
 
 
 
 
 
 
 
Consumer Packaging
 
5

 
889

 
105

 
657

 
1,910

 
2,110

Display and Packaging
 

 
108

 
7

 
19

 
212

 
212

Paper and Industrial Converted Products
 
128

 
340

 
121

 
217

 
787

 
887

Protective Solutions
 
26

 
117

 
(7
)
 
20

 
244

 
244

Total Charges and Adjustments
 
$
350

 
$
2,315

 
$
3,978

 
$
13,780

 
$
21,136

 
$
21,436

The following table sets forth the activity in the 2013 Actions restructuring accrual included in “Accrued expenses and other” on the Company’s Condensed Consolidated Balance Sheets:
2013 Actions
 
Severance
and
Termination
Benefits
 
Asset
Impairment/
Disposal
of Assets
 
Other
Costs
 
Total
Accrual Activity
2014 Year to Date
 
 
 
 
Liability at December 31, 2013
 
$
3,258

 
$

 
$

 
$
3,258

2014 charges
 
1,910

 
315

 
1,529

 
3,754

Adjustments
 
(637
)
 
(727
)
 
(75
)
 
(1,439
)
Cash receipts/(payments)
 
(3,090
)
 
855

 
(1,454
)
 
(3,689
)
Asset write downs/disposals
 

 
(443
)
 

 
(443
)
Foreign currency translation
 
(48
)
 

 

 
(48
)
Liability at September 28, 2014
 
$
1,393

 
$

 
$

 
$
1,393

Included in "Asset Impairment/Disposal of Assets" above is a gain from the sale of a previously closed facility in New Zealand. “Other costs” consist primarily of costs related to plant closures including equipment removal, utilities, plant security, property taxes and insurance. The Company expects to pay the majority of the remaining 2013 Actions restructuring costs by the end of 2014 using cash generated from operations. 

11

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

2012 and Earlier Actions
2012 and Earlier Actions are comprised of a number of plant closures and workforce reductions initiated prior to 2013. Charges for these actions in both 2014 and 2013 relate primarily to the cost of plant closures including severance, equipment removal, plant security, property taxes and insurance. Partially offsetting these charges were gains from the sales of a former blowmolding facility in Canada and a former rigid paper facility in the United States, closed in 2012 and 2011, respectively.
The Company expects to recognize future pretax charges of approximately $450 associated with 2012 and Earlier Actions.
Below is a summary of expenses/(income) incurred by segment for 2012 and Earlier Actions for the three- and nine-month periods ended September 28, 2014 and September 29, 2013
 
 
2014
 
2013
2012 and Earlier Actions
 
Third Quarter
 
Nine Months
 
Third Quarter
 
Nine Months
Consumer Packaging
 
$
(360
)
 
$
(1,577
)
 
$
1,831

 
$
1,977

Display and Packaging
 

 
(8
)
 
13

 
231

Paper and Industrial Converted Products
 
1,287

 
1,882

 
49

 
1,939

Protective Solutions
 

 

 
(53
)
 
858

Corporate
 
(27
)
 
(27
)
 

 

Total Charges and Adjustments
 
$
900

 
$
270

 
$
1,840

 
$
5,005

The accrual for 2012 and Earlier Actions totaled $3,834 and $4,547 at September 28, 2014 and December 31, 2013, respectively, and is included in “Accrued expenses and other” on the Company’s Condensed Consolidated Balance Sheets. The accrual relates primarily to a pension withdrawal liability associated with a former paper mill in the United States and unpaid severance. The Company expects the majority of both the liability and the future costs associated with 2012 and Earlier Actions to be paid by the end of 2015 using cash generated from operations.
Other Asset Impairments
In addition to the restructuring charges discussed above, 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, the Company has impaired the remaining unamortized balance of the customer list.
This asset impairment charge is included in “Restructuring/Asset impairment charges” in the Company’s Condensed Consolidated Statements of Income.













12

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

Note 6: Accumulated Other Comprehensive Loss
The following table summarizes the components of accumulated other comprehensive loss and the changes in the balances of each component of accumulated other comprehensive loss, net of tax as applicable, for the nine months ended September 28, 2014 and September 29, 2013:
 
 
Gains and
Losses on Cash
Flow Hedges
 
Defined
Benefit
Pension Items
 
Foreign
Currency
Items
 
Accumulated
Other
Comprehensive
Loss
Balance at December 31, 2013

$
(262
)

$
(333,106
)

$
(25,152
)

$
(358,520
)
Other comprehensive income/(loss) before reclassifications

1,261


(12,047
)

(46,854
)

(57,640
)
Amounts reclassified from accumulated other comprehensive loss to net income

(1,192
)

12,434




11,242

Amounts reclassified from accumulated other comprehensive loss to fixed assets

11






11

Net current-period other comprehensive
income/(loss)

80


387


(46,854
)

(46,387
)
Balance at September 28, 2014

$
(182
)

$
(332,719
)

$
(72,006
)

$
(404,907
)
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
$
(6,727
)
 
$
(472,333
)
 
$
3,234

 
$
(475,826
)
Other comprehensive income/(loss) before reclassifications
 
2,579

 
(1,122
)
 
(20,348
)
 
(18,891
)
Amounts reclassified from accumulated other comprehensive loss to net income
 
1,695

 
21,629

 

 
23,324

Amounts reclassified from accumulated other comprehensive loss to fixed assets
 
78

 

 

 
78

Net current-period other comprehensive
income/(loss)
 
4,352

 
20,507

 
(20,348
)
 
4,511

Balance at September 29, 2013
 
$
(2,375
)
 
$
(451,826
)
 
$
(17,114
)
 
$
(471,315
)
























13

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

The following table summarizes the effects on net income of significant amounts classified out of each component of accumulated other comprehensive loss for the three and nine months ended September 28, 2014 and September 29, 2013
 
 
Amount Reclassified from Accumulated
Other Comprehensive Loss
 
 
 
 
Three Months Ended
Nine Months Ended
 
 
Details about Accumulated Other Comprehensive
Loss Components
 
September 28,
2014
September 29,
2013
September 28,
2014
September 29,
2013
 
Affected Line Item in 
the Condensed Consolidated 
Statements of Net Income
Gains and losses on cash flow hedges
 
 
 
 
 
 
 
Foreign exchange contracts
 
$
241

$
809

$
(1,669
)
$
3,051

 
Net sales
Foreign exchange contracts
 
232

(871
)
2,343

(1,921
)
 
Cost of sales
Commodity contracts
 
123

(1,528
)
1,248

(3,917
)
 
Cost of sales
 
 
596

(1,590
)
1,922

(2,787
)
 
Total before tax
 
 
(303
)
604

(730
)
1,092

 
Tax (provision)/benefit
 
 
$
293

$
(986
)
$
1,192

$
(1,695
)
 
Net of tax
Defined benefit pension items
 

 
 
 
 
 
Amortization of defined benefit pension items(a)
 
$
(4,868
)
$
(7,787
)
$
(14,482
)
$
(24,737
)
 
Cost of sales
Amortization of defined benefit pension items(a)
 
(1,622
)
(2,596
)
(4,826
)
(8,246
)
 
Selling, general and 
administrative
 
 
(6,490
)
(10,383
)
(19,308
)
(32,983
)
 
Total before tax
 
 
2,195

3,839

6,874

11,354

 
Tax benefit
 
 
$
(4,295
)
$
(6,544
)
$
(12,434
)
$
(21,629
)
 
Net of tax
Total reclassifications for the period
 
$
(4,002
)
$
(7,530
)
$
(11,242
)
$
(23,324
)
 
Net of tax
 
(a)
See Note 10 for additional details.
At September 28, 2014, the Company had commodity contracts outstanding to fix the costs of certain anticipated purchases of natural gas and aluminum, and foreign currency contracts to hedge certain anticipated foreign currency denominated sales and purchases. These contracts, which have maturities ranging from October 2014 to December 2015, qualify as cash flow hedges under U.S. GAAP. The amounts included in accumulated other comprehensive loss related to these cash flow hedges were net losses of $399 ($182 after tax) at September 28, 2014, and losses of $427 ($262 after tax) at December 31, 2013.
The cumulative tax (provision)/benefit on Cash Flow Hedges included in Accumulated Other Comprehensive Loss was $217 at September 28, 2014, and $165 at December 31, 2013. During the three- and nine-month periods ended September 28, 2014, the tax benefit on Cash Flow Hedges changed by $675 and $52, respectively.
The cumulative tax benefit on Defined Benefit Pension Items was $173,042 at September 28, 2014, and $189,668 at December 31, 2013. During the three- and nine-month periods ended September 28, 2014, the tax benefit on Defined Benefit Pension Items decreased by $(2,195) and $(16,626), respectively.
During the three- and nine-month periods ended September 28, 2014, changes in noncontrolling interests included foreign currency translation adjustments of $(250) and $(115), respectively.






14

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

Note 7: Goodwill and Other Intangible Assets
Goodwill
A summary of the changes in goodwill by segment for the nine months ended September 28, 2014 is as follows: 
 
 
Consumer
Packaging
 
Display
and
Packaging
 
Paper and
Industrial
Converted
Products
Protective
Solutions
 
Total
Goodwill at December 31, 2013
 
$
418,765

 
$
204,629

 
$
254,648

$
221,165

 
$
1,099,207

Acquisitions
 

 

 
3,250


 
3,250

Foreign currency translation
 
(4,740
)
 

 
(7,786
)

 
(12,526
)
Other
 
(231
)
 

 


 
(231
)
Goodwill at September 28, 2014
 
$
413,794

 
$
204,629

 
$
250,112

$
221,165

 
$
1,089,700

The Company recorded $3,250 of goodwill in connection with the May 2014 acquisition of Dalton Paper Products, a tube and core business located in Dalton, Georgia.
The Company assesses goodwill for impairment annually and from time to time when warranted by the facts and circumstances surrounding individual reporting units or the Company as a whole. As part of this testing, the Company analyzes certain qualitative and quantitative factors in determining goodwill impairment. In its most recent assessment, completed in the third quarter of 2014, the Company estimated the fair values of all of its reporting units utilizing both an income approach and a market approach. The estimated fair values reflect 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 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 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 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.
Based on the results of its third quarter 2014 assessments, the Company concluded that there was no impairment of goodwill for any of its reporting units. 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.
Although no reporting units failed the assessments noted above, in management’s opinion, the reporting units having the greatest risk of future impairment if actual results fall significantly short of expectations are Plastics – Blowmolding, Display and Packaging, and Tubes and Cores/Paper - Brazil. Total goodwill associated with these reporting units was approximately $124,700, $196,700, and $3,900, respectively, at September 28, 2014. A large portion of sales in the Display and Packaging reporting unit is concentrated in one customer. Management expects to retain this business; however, if a significant amount is lost and not replaced, it is possible that a goodwill impairment charge may be incurred.
There were no triggering events between the most recent annual impairment test and September 28, 2014.





15

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

Other Intangible Assets
A summary of other intangible assets as of September 28, 2014 and December 31, 2013 is as follows:         
 
 
September 28,
2014
 
December 31,
2013
Other Intangible Assets, gross
 
 
 
 
Patents
 
$
2,219

 
$
2,221

Customer lists
 
333,360

 
339,911

Trade names
 
21,112

 
21,232

Proprietary technology
 
17,810

 
17,866

Land use rights
 
325

 
323

Other
 
4,751

 
4,731

Other Intangible Assets, gross
 
$
379,577

 
$
386,284

Accumulated Amortization
 
$
(157,041
)
 
$
(142,364
)
Other Intangible Assets, net
 
$
222,536

 
$
243,920

Other intangible assets are amortized on a straight-line basis over their respective useful lives, which generally range from three to forty years. The Company has no intangibles with indefinite lives.
The Company recorded $3,380 of identifiable intangibles in connection with the acquisition of a small tubes and cores business in May 2014. These intangibles, primarily related to customer lists, will be amortized over a period of ten years. In addition, during the third quarter of 2014, the Company recorded a $2,730 impairment related to a customer list obtained in connection with a 2008 acquisition of a small packaging fulfillment business. See "Other Asset Impairments" in Note 5 for additional information.
Aggregate amortization expense was $7,040 and $7,036 for the three months ended September 28, 2014 and September 29, 2013, respectively, and $20,863 and $21,352 for the nine months ended September 28, 2014 and September 29, 2013, respectively. Amortization expense on other intangible assets is expected to approximate $27,800 in 2014, $26,300 in 2015, $26,100 in 2016, $25,700 in 2017 and $25,300 in 2018.

Note 8: Financial Instruments and Derivatives
The following table sets forth the carrying amounts and fair values of the Company’s significant financial instruments for which the carrying amount differs from the fair value. 
 
 
September 28, 2014
 
December 31, 2013
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Long-term debt, net of current portion
 
$
945,900

 
$
1,050,855

 
$
946,257

 
$
999,247

The carrying value of cash and cash equivalents, short-term debt and long-term variable-rate debt approximates fair value. The fair value of long-term debt is determined based on recent trade information in the financial markets of the Company’s public debt or is determined by discounting future cash flows using interest rates available to the Company for issues with similar terms and maturities. It is considered a Level 2 fair value measurement.
Cash Flow Hedges
At September 28, 2014 and December 31, 2013, 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 recorded in other comprehensive income and reclassified to income or expense in the period in which the hedged item impacts earnings. The Company has determined all hedges to be highly effective and as a result no material ineffectiveness has been recorded.



16

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

Commodity Cash Flow Hedges
The Company has entered into certain derivative contracts to manage the cost of anticipated purchases of natural gas and aluminum. At September 28, 2014, natural gas swaps covering approximately 6.0 million MMBTUs were outstanding. These contracts represent approximately 90% and 78% of anticipated U.S. and Canadian usage for the remainder of 2014 and 2015, respectively. Additionally, the Company had swap contracts covering 4,712 metric tons of aluminum representing approximately 34% of anticipated usage for the remainder of 2014. The fair values of the Company’s commodity cash flow hedges netted to loss positions of $(65) and $(330) at September 28, 2014 and December 31, 2013, respectively. The amount of the gain included in Accumulated Other Comprehensive Loss at September 28, 2014, that is expected to be reclassified to the income statement during the next twelve months is $13.
Foreign Currency Cash Flow Hedges
The Company has entered into forward contracts to hedge certain anticipated foreign currency denominated sales and purchases forecast to occur in 2014. The net positions of these contracts at September 28, 2014 were as follows (in thousands): 
Currency
Action
Quantity
Colombian peso
purchase
3,755,047

Mexican peso
purchase
60,316

Canadian dollar
purchase
12,775

Turkish lira
purchase
2,331

British pound
purchase
1,117

Polish zloty
purchase
668

New Zealand dollar
sell
(821
)
Euro
sell
(902
)
Australian dollar
sell
(1,517
)
Russian ruble
sell
(10,770
)
The fair value of these foreign currency cash flow hedges netted to loss positions of $(422) and $(97) at September 28, 2014 and December 31, 2013, respectively. During the nine months ended September 28, 2014, certain foreign currency cash flow hedges related to construction in progress were settled as the related capital expenditures were made. Losses from these hedges totaling $11 were reclassified from accumulated other comprehensive loss and included in the carrying value of the assets acquired. During the next twelve months, a loss of $(349) is expected to be reclassified from Accumulated Other Comprehensive Loss to the income statement.
Other Derivatives
The Company routinely enters into forward contracts or swaps to economically hedge the currency exposure of intercompany debt and existing foreign currency denominated receivables and payables. The Company does not apply hedge accounting treatment under ASC 815 for these instruments. As such, changes in fair value are recorded directly to income and expense in the periods that they occur.
The net positions of these contracts at September 28, 2014, were as follows (in thousands): 
Currency
Action
Quantity
Colombian peso
purchase
12,536,560

Mexican peso
purchase
178,389

Canadian dollar
purchase
10,062

Euro
purchase
50

Thai baht
sell
(193,299
)
The fair value of the Company’s other derivatives was $15 and $415 at September 28, 2014 and December 31, 2013, respectively.
 

17

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

The following table sets forth the location and fair values of the Company’s derivative instruments at September 28, 2014 and December 31, 2013
Description
 
Balance Sheet Location
 
September 28,
2014
 
December 31,
2013
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Commodity Contracts
 
Prepaid expenses
 
$
607

 
$
535

Commodity Contracts
 
Other assets
 
$
70

 
$
363

Commodity Contracts
 
Accrued expenses and other
 
$
(606
)
 
$
(1,228
)
Commodity Contracts
 
Other liabilities
 
$
(136
)
 
$

Foreign Exchange Contracts
 
Prepaid expenses
 
$
380

 
$
896

Foreign Exchange Contracts
 
Accrued expenses and other
 
$
(802
)
 
$
(993
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign Exchange Contracts
 
Prepaid expenses
 
$
116

 
$
468

Foreign Exchange Contracts
 
Accrued expenses and other
 
$
(101
)
 
$
(53
)
While certain of the Company’s derivative contract arrangements with its counterparties provide for the ability to settle contracts on a net basis, the Company reports its derivative positions on a gross basis. There are no collateral arrangements or requirements in these agreements.
The following tables set forth the effect of the Company’s derivative instruments on financial performance for the three months ended September 28, 2014 and September 29, 2013:
Description
 
Amount of Gain or
(Loss) Recognized
in OCI on
Derivatives
(Effective Portion)
 
Location of Gain
or (Loss)
Reclassified from
Accumulated OCI
Into Income
(Effective Portion)
 
Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI Into Income
(Effective Portion)
 
Location of Gain 
or (Loss)  Recognized in
Income on
Derivatives
(Ineffective Portion)
 
Amount of Gain 
or (Loss)
Recognized
in Income on
Derivatives (Ineffective 
Portion)
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
 
Three months ended September 28, 2014
 
 
 
 
 
 
 
 
Foreign Exchange Contracts
$
(55
)
 
Net sales
 
$
241

 
Net sales
 
$

 
 
 
 
Cost of sales
 
$
232

 
 
 
 
Commodity Contracts
$
(1,250
)
 
Cost of sales
 
$
123

 
Cost of sales
 
$
44

Three months ended September 29, 2013
 
 
 
 
 
 
 
 
Foreign Exchange Contracts
$
959

 
Net sales
 
$
809

 
Net sales
 
$

 
 
 
 
Cost of sales
 
$
(871
)
 
 
 
 
Commodity Contracts
$
(309
)
 
Cost of sales
 
$
(1,528
)
 
Cost of sales
 
$
10

 
Description
Location of Gain or (Loss) Recognized in
Income Statement
Gain or (Loss)
Recognized
Derivatives not Designated as Hedging Instruments:
 
Three months ended September 28, 2014
 
 
Foreign Exchange Contracts
Cost of sales
$
77

 
Selling, general and administrative
$
(194
)
Three months ended September 29, 2013
 
 
Foreign Exchange Contracts
Cost of sales
$
(770
)
 
Selling, general and administrative
$
(67
)


18

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

The following tables set forth the effect of the Company’s derivative instruments on financial performance for the nine months ended September 28, 2014 and September 29, 2013
Description
 
Amount of Gain or
(Loss) Recognized
in OCI on
Derivatives
(Effective Portion)
 
Location of Gain
or (Loss)
Reclassified from
Accumulated OCI
Into Income
(Effective Portion)
 
Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI Into Income
(Effective Portion)
 
Location of Gain 
or (Loss) 
Recognized in
Income on
Derivatives
(Ineffective Portion)
 
Amount of Gain
or (Loss) Recognized
in Income on
Derivatives
(Ineffective 
Portion)
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
 
Nine months ended September 28, 2014
 
 
 
 
 
 
 
 
Foreign Exchange Contracts
 
$
420

 
Net sales
 
$
(1,669
)
 
Net sales
 
$

 
 
 
 
Cost of sales
 
$
2,343

 
 
 
 
Commodity Contracts
 
$
1,519

 
Cost of sales
 
$
1,248

 
Cost of sales
 
$

Nine months ended September 29, 2013
 
 
 
 
 
 
 
 
Foreign Exchange Contracts
 
$
5,482

 
Net sales
 
$
3,051

 
Net sales
 
$

 
 
 
 
Cost of sales
 
$
(1,921
)
 
 
 
 
Commodity Contracts
 
$
(1,237
)
 
Cost of sales
 
$
(3,917
)
 
Cost of sales
 
$
(51
)
 
Description
Location of Gain or (Loss) Recognized in
Income Statement
Gain or (Loss)
Recognized
Derivatives not Designated as Hedging Instruments:
 
Nine months ended September 28, 2014
 
 
Foreign Exchange Contracts
Cost of sales
$
(359
)
 
Selling, general and administrative
$
(41
)
Nine months ended September 29, 2013
 
 
Foreign Exchange Contracts
Cost of sales
$
(1,941
)
 
Selling, general and administrative
$
(207
)
























19

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

 
Note 9: Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
 
Level 1 –
Observable inputs such as quoted market prices in active markets;
Level 2 –
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3 –
Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
The following table sets forth information regarding the Company’s financial assets and financial liabilities, excluding retirement and postretirement plan assets, measured at fair value on a recurring basis:
 
Description
 
September 28,
2014
 
Level 1
 
Level 2
 
Level 3
Hedge derivatives, net:
 
 
 
 
 
 
 
 
Commodity contracts
 
$
(65
)
 
$

 
$
(65
)
 
$

Foreign exchange contracts
 
(422
)
 

 
(422
)
 

Non-hedge derivatives, net:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
15

 

 
15

 

Deferred compensation plan assets
 
914

 
914

 

 

 
 
 
 
 
 
 
 
 
Description
 
December 31,
2013
 
Level 1
 
Level 2
 
Level 3
Hedge derivatives, net:
 
 
 
 
 
 
 
 
Commodity contracts
 
$
(330
)
 
$

 
$
(330
)
 
$

Foreign exchange contracts
 
(97
)
 

 
(97
)
 

Non-hedge derivatives, net:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
415

 

 
415

 

Deferred compensation plan assets
 
859

 
859

 

 

As discussed in Note 8, the Company uses derivatives to mitigate the effect of raw material and energy cost fluctuations, foreign currency fluctuations and, from time to time, interest rate movements. Fair value measurements for the Company’s derivatives are classified under Level 2 because such measurements are estimated based on observable inputs such as interest rates, yield curves, spot and future commodity prices and spot and future exchange rates.
Certain deferred compensation plan liabilities are funded by assets invested in various exchange traded mutual funds. These assets are measured using quoted prices in accessible active markets for identical assets.
The Company does not currently have any nonfinancial assets or liabilities that are recognized or disclosed at fair value on a recurring basis. None of the Company’s financial assets or liabilities is measured at fair value using significant unobservable inputs. There were no transfers in or out of Level 1 or Level 2 fair value measurements during the three- and nine-month periods ended September 28, 2014.







20

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

 
Note 10: Employee Benefit Plans
Retirement Plans and Retiree Health and Life Insurance Plans
The Company provides non-contributory defined benefit pension plans for a majority of its employees in the United States and certain of its employees in Mexico and Belgium. Effective December 31, 2003, the Company froze participation for newly hired salaried and non-union hourly U.S. employees in its qualified defined benefit pension plan. At that time, the Company adopted a defined contribution plan, the Sonoco Investment and Retirement Plan (SIRP), which covers its non-union U.S. employees hired on or after January 1, 2004. The Company also sponsors contributory defined benefit pension plans covering the majority of its employees in the United Kingdom, Canada, and the Netherlands.
On February 4, 2009, the U.S. qualified defined benefit pension plan was amended to freeze plan benefits for all active participants effective December 31, 2018. Remaining active participants in the U.S. qualified plan will become participants of the SIRP effective January 1, 2019.
The Company also provides postretirement healthcare and life insurance benefits to a limited number of its retirees and their dependents in the United States and Canada, based on certain age and/or service eligibility requirements.
The components of net periodic benefit cost include the following: 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
Retirement Plans
 
 
 
 
 
 
Service cost
 
$
5,491

 
$
6,267

 
$
16,283

 
$
18,756

Interest cost
 
18,376

 
16,794

 
54,684

 
50,226

Expected return on plan assets
 
(23,290
)
 
(21,582
)
 
(69,342
)
 
(64,544
)
Amortization of net transition obligation
 
102

 
108

 
303

 
328

Amortization of prior service cost
 
168

 
141

 
497

 
424

Amortization of net actuarial loss
 
6,630

 
10,891

 
19,726

 
32,571

Effect of settlement loss
 

 

 

 
1,893

Net periodic benefit cost
 
$
7,477

 
$
12,619

 
$
22,151

 
$
39,654

Retiree Health and Life Insurance Plans
 
 
 
 
 
 
Service cost
 
$
181

 
$
218

 
$
539

 
$
664

Interest cost
 
258

 
219

 
768

 
710

Expected return on plan assets
 
(398
)
 
(378
)
 
(1,187
)
 
(1,126
)
Amortization of prior service credit
 
(345
)
 
(756
)
 
(1,026
)
 
(2,230
)
Amortization of net actuarial loss
 
(65
)
 
(1
)
 
(192
)
 
(3
)
Net periodic benefit income
 
$
(369
)
 
$
(698
)
 
$
(1,098
)
 
$
(1,985
)

During the second quarter of 2013 the Company recognized a $1,893 settlement loss associated with settling the retirement liabilities of approximately 100 participants in one of its Canadian pension plans. Approximately 75% of the loss is included in “Cost of sales” in the Condensed Consolidated Statements of Income with the remainder in “Selling, general and administrative expenses.”
The Company made aggregate contributions of $46,372 and $21,224 to its defined benefit retirement and retiree health and life insurance plans during the nine months ended September 28, 2014 and September 29, 2013, respectively. The Company anticipates that it will make additional aggregate contributions of approximately $7,000 to its defined benefit retirement and retiree health and life insurance plans in 2014.

Sonoco Investment and Retirement Plan (SIRP)
The Company recognized SIRP expense totaling $3,242 and $3,391 for the quarters ended September 28, 2014 and September 29, 2013, respectively, and $8,728 and $9,009 for the nine months ended September 28, 2014 and September 29, 2013, respectively. Contributions to the SIRP, funded annually in the first quarter, totaled $12,049 during the nine months ended September 28, 2014, and $9,290 during the nine months ended September 29, 2013. No additional SIRP contributions are expected during the remainder of 2014. 


21

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

Note 11: Income Taxes
The Company’s effective tax rate for the three- and nine-month periods ending September 28, 2014, was 29.4% and 31.5%, respectively, and its effective tax rate for the three- and nine-month periods ending September 29, 2013, was 31.5% and 32.4%, respectively. The rates for both years were favorable to the U.S. statutory rate primarily due to the favorable effect of international operations that are subject to tax rates generally lower than the U.S. rate, the release of tax reserves for uncertain tax positions that are no longer necessary, and the favorable effect of the manufacturer’s deduction. 
The Company and/or its subsidiaries file federal, state and local income tax returns in the United States and various foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, or non-U.S., income tax examinations by tax authorities for years before 2011. With respect to state and local income taxes, the Company is no longer subject to examination prior to 2010, with few exceptions.
The Company’s total liability for uncertain tax benefits has not changed significantly since December 31, 2013. The Company has $6,700 of reserves for uncertain tax benefits for which it believes it is reasonably possible that a resolution may be reached within the next twelve months. The Company’s estimate for the potential outcome for any uncertain tax issue is highly judgmental. Management believes that any reasonably foreseeable outcomes related to these matters have been adequately provided for. However, future results may include favorable or unfavorable adjustments to estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which earnings or deductions are realized may differ from current estimates. As a result, the Company’s effective tax rate may fluctuate significantly on a quarterly basis.