10-Q 1 q3201310-q.htm 10-Q Q3 2013 10-Q


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 29, 2013
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 17, 2013:
Common stock, no par value: 101,952,069



SONOCO PRODUCTS COMPANY
INDEX
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 29, 2013
 
December 31, 2012*
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
287,577

 
$
373,084

Trade accounts receivable, net of allowances
 
688,948

 
619,761

Other receivables
 
35,105

 
36,311

Inventories:
 
 
 
 
Finished and in process
 
153,256

 
159,193

Materials and supplies
 
238,316

 
224,079

Prepaid expenses
 
34,027

 
65,395

Deferred income taxes
 
22,118

 
22,073

 
 
1,459,347

 
1,499,896

Property, Plant and Equipment, Net
 
1,049,597

 
1,034,906

Goodwill
 
1,102,560

 
1,110,505

Other Intangible Assets, Net
 
251,592

 
276,809

Long-term Deferred Income Taxes
 
62,169

 
90,936

Other Assets
 
164,090

 
163,013

Total Assets
 
$
4,089,355

 
$
4,176,065

Liabilities and Equity
 
 
 
 
Current Liabilities
 
 
 
 
Payable to suppliers
 
$
496,809

 
$
426,786

Accrued expenses and other
 
358,099

 
337,536

Notes payable and current portion of long-term debt
 
152,093

 
273,608

Accrued taxes
 
27,250

 
6,305

 
 
1,034,251

 
1,044,235

Long-term Debt, Net of Current Portion
 
947,541

 
1,099,454

Pension and Other Postretirement Benefits
 
446,487

 
461,881

Deferred Income Taxes
 
14,707

 
15,649

Other Liabilities
 
52,382

 
51,632

Commitments and Contingencies
 

 

Sonoco Shareholders’ Equity
 
 
 
 
Common stock, no par value
 
 
 
 
Authorized 300,000 shares
101,503 and 100,847 shares issued and outstanding at
September 29, 2013 and December 31, 2012, respectively
 
7,175

 
7,175

Capital in excess of stated value
 
462,619

 
445,492

Accumulated other comprehensive loss
 
(471,315
)
 
(475,826
)
Retained earnings
 
1,581,978

 
1,512,145

Total Sonoco Shareholders’ Equity
 
1,580,457

 
1,488,986

Noncontrolling Interests
 
13,530

 
14,228

Total Equity
 
1,593,987

 
1,503,214

Total Liabilities and Equity
 
$
4,089,355

 
$
4,176,065

 
*
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 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
Net sales
 
$
1,227,749

 
$
1,195,530

 
$
3,633,218

 
$
3,610,259

Cost of sales
 
1,003,712

 
989,301

 
2,980,901

 
2,970,627

Gross profit
 
224,037

 
206,229

 
652,317

 
639,632

Selling, general and administrative expenses
 
117,935

 
110,330

 
359,794

 
351,690

Restructuring/Asset impairment charges
 
5,818

 
(444
)
 
18,785

 
24,164

Income before interest and income taxes
 
100,284

 
96,343

 
273,738

 
263,778

Interest expense
 
15,119

 
15,908

 
45,400

 
48,379

Interest income
 
833

 
1,056

 
2,439

 
2,858

Income before income taxes
 
85,998

 
81,491

 
230,777

 
218,257

Provision for income taxes
 
27,085

 
25,399

 
74,746

 
73,201

Income before equity in earnings of affiliates
 
58,913

 
56,092

 
156,031

 
145,056

Equity in earnings of affiliates, net of tax
 
2,512

 
2,937

 
8,233

 
8,236

Net income
 
$
61,425

 
$
59,029

 
$
164,264

 
$
153,292

Net (income)/loss attributable to noncontrolling
interests
 
$
(185
)
 
$
(193
)
 
$
103

 
$
(65
)
Net income attributable to Sonoco
 
$
61,240

 
$
58,836

 
$
164,367

 
$
153,227

Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
102,835

 
101,892

 
102,586

 
101,745

Diluted
 
103,510

 
102,544

 
103,164

 
102,548

Per common share:
 
 
 
 
 
 
 
 
Net income attributable to Sonoco:
 
 
 
 
 
 
 
 
Basic
 
$
0.60

 
$
0.58

 
$
1.60

 
$
1.51

Diluted
 
$
0.59

 
$
0.57

 
$
1.59

 
$
1.49

Cash dividends
 
$
0.31

 
$
0.30

 
$
0.92

 
$
0.89

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 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
Net income
 
$
61,425


$
59,029


$
164,264


$
153,292

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

 
38,718

 
(20,348
)
 
20,909

Changes in defined benefit plans, net of tax
 
7,782

 
(1,660
)
 
20,507

 
8,287

Changes in derivative financial instruments, net of tax
 
1,462

 
3,274

 
4,352

 
4,985

Comprehensive income
 
91,020

 
99,361

 
168,775

 
187,473

Net (income)/loss attributable to noncontrolling interests

(185
)

(193
)

103


(65
)
Other comprehensive (income)/loss attributable to
noncontrolling interests
 
(32
)
 
(457
)
 
595

 
(416
)
Comprehensive income attributable to Sonoco
 
$
90,803

 
$
98,711

 
$
169,473

 
$
186,992

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 29,
2013
 
September 30,
2012
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
164,264


$
153,292

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Asset impairment
 
7,352

 
5,876

Depreciation, depletion and amortization
 
145,574

 
149,159

Share-based compensation expense
 
7,658

 
6,472

Equity in earnings of affiliates
 
(8,233
)

(8,236
)
Cash dividends from affiliated companies
 
8,636

 
5,870

Gain on disposition of assets
 
(1,286
)
 
(4,390
)
Pension and postretirement plan expense
 
46,678

 
39,806

Pension and postretirement plan contributions
 
(30,514
)
 
(64,080
)
Tax effect of share-based compensation exercises
 
6,867

 
4,103

Excess tax benefit of share-based compensation
 
(3,324
)
 
(1,867
)
Net increase (decrease) in deferred taxes
 
22,504

 
(1,487
)
Change in assets and liabilities, net of effects from acquisitions, dispositions, and foreign currency adjustments:
 
 
 
 
Trade accounts receivable
 
(78,003
)
 
(56,641
)
Inventories
 
(13,069
)
 
3,246

Payable to suppliers
 
75,207

 
25,565

Prepaid expenses
 
(1,958
)
 
(3,558
)
Accrued expenses
 
25,078

 
10,062

Income taxes payable and other income tax items
 
43,796

 
22,366

Fox River environmental reserves
 
(1,592
)
 
(1,320
)
Other assets and liabilities
 
5,649

 
8,289

Net cash provided by operating activities
 
421,284

 
292,527

Cash Flows from Investing Activities:
 
 
 
 
Purchase of property, plant and equipment
 
(143,926
)
 
(158,213
)
Cost of acquisitions, exclusive of cash
 
(3,728
)
 
(503
)
Proceeds from the sale of assets
 
8,950

 
20,092

Investment in affiliates and other, net
 
(3,542
)
 
—

Net cash used in investing activities
 
(142,246
)
 
(138,624
)
Cash Flows from Financing Activities:
 
 
 
 
Proceeds from issuance of debt
 
51,799

 
5,678

Principal repayment of debt
 
(172,056
)
 
(38,771
)
Net decrease in commercial paper
 
(152,000
)
 
(17,000
)
Net (decrease) increase in outstanding checks
 
(1,196
)
 
469

Excess tax benefit of share-based compensation
 
3,324

 
1,867

Cash dividends
 
(93,216
)
 
(89,537
)
Shares acquired
 
(8,835
)
 
(3,437
)
Shares issued
 
13,443

 
7,153

Net cash used in financing activities
 
(358,737
)
 
(133,578
)
Effects of Exchange Rate Changes on Cash
 
(5,808
)
 
5,295

Net (Decrease) Increase in Cash and Cash Equivalents
 
(85,507
)
 
25,620

Cash and cash equivalents at beginning of period
 
373,084

 
175,523

Cash and cash equivalents at end of period
 
$
287,577

 
$
201,143

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 29, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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, 2012.
During the completion of its 2012 financial statements, the Company noted a misclassification of cash flows associated with $3,996 of insurance proceeds received in the first quarter of 2012 associated with assets destroyed in a fire in 2011. The proceeds were originally treated as a positive cash flow from operations but instead represented an investing cash flow. Accordingly, the Company has revised its Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 to reduce the reported cash flow generated from operations and decrease the reported net cash used in investing activities by the amount of these proceeds. The effect of this adjustment was not considered material to previously issued financial statements; however, to enhance comparability, the Company revised its third quarter 2012 financial statements as described above.
With respect to the unaudited condensed consolidated financial information of the Company for the three- and nine-month periods ended September 29, 2013 and September 30, 2012 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 31, 2013 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 July 2013, the Financial Accounting Standards Board (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 clarifies guidance and eliminates 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 is effective for annual reporting periods beginning on or after December 15, 2013, and subsequent interim periods. The Company is currently assessing the impact, if any, that this pronouncement will have on its condensed consolidated financial statements.
In February 2013, the FASB issued ASU no. 2013-02, "Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income." This update requires an entity to present on the face of the financial statements where net income is presented, or in the notes, significant amounts reclassified out of accumulated other comprehensive income/(loss) by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. The requirements of this update were effective prospectively for reporting periods beginning after December 15, 2012. The disclosures required by this ASU are provided in Note 6 to these condensed consolidated financial statements.
During the three- and nine-month periods ended September 29, 2013, there have been no other newly issued nor newly applicable accounting pronouncements that have, or are expected to have, a material impact on the Company’s financial statements. Further, at September 29, 2013, there were no other pronouncements pending adoption that are expected to have a material impact on the Company’s financial statements.
 

Note 3: Acquisitions
The Company completed two acquisitions during the third quarter of 2013 at an aggregate cost of $3,728 in cash. These acquisitions included Imagelinx, a global brand artwork management business in the United Kingdom, and a small tube and core business in Australia. The acquisitions of these businesses are expected to generate annual sales totaling approximately $12,500 ($10,000 for the Consumer Packaging segment and $2,500 for the Paper and Industrial Converted Products segment). In connection with these acquisitions, the Company has preliminarily recorded net tangible assets of $3,655 and net intangible assets of $73. The allocation of the purchase price of these acquisitions to the tangible and intangible assets acquired and

7
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

liabilities assumed was based on the Company's preliminary estimates of their respective fair values. The valuations will be finalized before the end of 2013.

The Company has accounted for these acquisitions as purchases and, accordingly, has included their results of operations in consolidated net income from the respective dates of acquisition. Pro forma results have not been provided, as the acquisitions were not material to the Company’s financial statements individually, or in the aggregate.

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 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to Sonoco
 
$
61,240

 
$
58,836

 
$
164,367

 
$
153,227

Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
102,835,000

 
101,892,000

 
102,586,000

 
101,745,000

Dilutive effect of stock-based compensation
 
675,000

 
652,000

 
578,000

 
803,000

Diluted
 
103,510,000

 
102,544,000

 
103,164,000

 
102,548,000

Reported net income attributable to Sonoco per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.60

 
$
0.58

 
$
1.60

 
$
1.51

Diluted
 
$
0.59

 
$
0.57

 
$
1.59

 
$
1.49

Stock options and stock appreciation rights covering 469,050 and 1,465,811 shares were not dilutive during the three- and nine-month periods ended September 29, 2013, respectively, and are therefore excluded from the computations of income attributable to Sonoco per diluted common share. The comparable figures for the three- and nine-month periods ended September 30, 2012 were 2,453,745 and 2,462,878 shares, respectively. No adjustments were made to reported net income attributable to Sonoco in the computations of earnings per share.
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. During the third quarter, 132,500 shares were purchased at a cost of $5,052; accordingly, at September 29, 2013, a total of 4,867,500 shares remain available for repurchase.
The Company frequently repurchases shares of its common stock to satisfy employee tax withholding obligations in association with certain share-based compensation awards. These repurchases, which are not part of a publicly announced plan or program, totaled 111,612 shares in the first nine months of 2013 at a cost of $3,783, and 103,209 shares in the first nine months of 2012 at a cost of $3,437.
Dividend Declarations
On July 17, 2013, the Board of Directors declared a regular quarterly dividend of $0.31 per share. This dividend was paid on September 10, 2013 to all shareholders of record as of August 16, 2013.
On October 14, 2013, the Board of Directors declared a regular quarterly dividend of $0.31 per share. This dividend is payable December 10, 2013 to all shareholders of record as of November 15, 2013.
 





8
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

Note 5: Restructuring and Asset Impairment
The Company has engaged in a number of restructuring actions over the past several years. Actions initiated in 2013 and 2012 are reported as “2013 Actions” and “2012 Actions,” respectively. Actions initiated prior to 2012, all of which were substantially complete at September 29, 2013, are reported as “2011 and Earlier Actions.”
Following are the total restructuring and asset impairment charges/(credits), net of adjustments, recognized by the Company during the periods presented: 
 
 
2013
 
2012
 
 
Third
Quarter
 
Nine
Months
 
Third
Quarter
 
Nine
Months
Restructuring/Asset impairment:
 
 
 
 
 
 
 
 
2013 Actions
 
$
3,978

 
$
13,780

 
$
—

 
$
—

2012 Actions
 
378

 
1,830

 
2,014

 
19,116

2011 and Earlier Actions
 
1,462

 
3,175

 
(2,458
)
 
5,048

Restructuring/Asset impairment charges
 
$
5,818

 
$
18,785

 
$
(444
)
 
$
24,164

Income tax benefit
 
(1,957
)
 
(6,153
)
 
(126
)
 
(5,912
)
Equity method investments, net of tax
 
—

 
—

 
—

 
22

Benefit attributable to noncontrolling interests,
     net of tax
 
68

 
14

 
31

 
104

Total impact of restructuring/asset impairment
     charges, net of tax
 
$
3,929

 
$
12,646

 
$
(539
)
 
$
18,378

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 $5,000 in connection with announced restructuring actions, when accruable in accordance with GAAP, and believes that the majority of these charges will be incurred and paid by the end of 2013. 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)

2013 Actions
During 2013, the Company announced the planned closures of a thermoforming operation 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 75 positions.
Below is a summary of 2013 Actions and related expenses by segment and by type incurred and estimated to be incurred through completion. 
2013 Actions
 
Third
Quarter
 
Total
Incurred
to Date
 
Estimated
Total Cost
Severance and Termination Benefits
 
 
 
 
 
 
Paper and Industrial Converted Products
 
$
833

 
$
1,742

 
$
1,742

Consumer Packaging
 
2,245

 
3,750

 
4,650

Display and Packaging
 
147

 
226

 
626

Protective Solutions
 
117

 
680

 
680

Asset Impairment / Disposal of Assets
 
 
 
 
 
 
Paper and Industrial Converted Products
 
61

 
475

 
475

Consumer Packaging
 
349

 
5,580

 
5,580

Protective Solutions
 
—

 
414

 
414

Other Costs
 
 
 
 
 
 
Paper and Industrial Converted Products
 
121

 
217

 
367

Consumer Packaging
 
105

 
657

 
2,307

Protective Solutions
 
—

 
39

 
39

Total Charges and Adjustments
 
$
3,978

 
$
13,780

 
$
16,880

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
2013 Year to Date
 
 
 
Liability at December 31, 2012
 
$
—

 
$
—

 
$
—

 
$
—

2013 charges
 
6,398

 
6,469

 
913

 
13,780

Cash receipts/(payments)
 
(2,349
)
 
6,641

 
(913
)
 
3,379

Asset write downs/disposals
 
—

 
(13,110
)
 
—

 
(13,110
)
Foreign currency translation
 
56

 
—

 
—

 
56

Liability at September 29, 2013
 
$
4,105

 
$
—

 
$
—

 
$
4,105

Included in “Asset Impairment/Disposal of Assets” above are impairments of $5,308 related to the Company’s planned closure of a thermoformed plastics operation in Ireland. This charge consists of a $3,561 impairment of net fixed assets, a $349 impairment of spare parts inventory, and a $1,398 impairment of other intangible assets (customer lists). Included in 2013 charges above is a loss of $286 from the sale of a small corrugated box business in Kennesaw, Georgia, acquired as part of the November 2011 acquisition of Tegrant Holding Company (Tegrant). The Company received proceeds of $6,200 from the sale of this business which had annual sales of approximately $13,000. Assets written off in connection with the sale included: net fixed assets of $773, net working capital of $1,275, goodwill of $2,430, and other intangible assets (primarily customer lists) of $2,008.
“Other costs” consist primarily of equipment removal costs.
 
The Company expects to pay the majority of the remaining 2013 Actions restructuring costs by the end of 2013 using cash generated from operations.


10
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

2012 Actions
During 2012, the Company announced the closures of a paper mill in Germany (part of the Paper and Industrial Converted Products segment) and a protective packaging operation in the United States (part of the Protective Solutions segment). In addition, the Company continued its rationalization efforts in its blow-molding businesses (part of the Consumer Packaging segment), including the closure of a facility in Canada, and realigned its cost structure, resulting in the elimination of approximately 165 positions.
Below is a summary of 2012 Actions and related expenses by segment and by type incurred and estimated to be incurred through completion.
 
 
 
2013
 
2012
 
Total
Incurred
to Date
 
 Estimated
Total Cost
2012 Actions
 
Third
Quarter
 
Nine
Months
 
Third
Quarter
 
Nine
Months
 
 
Severance and Termination Benefits
 
 
 
 
 
 
 
 
 
 
Paper and Industrial Converted Products
 
$
53

 
$
388

 
$
541

 
$
8,146

 
$
10,717

 
$
10,717

Consumer Packaging
 
210

 
263

 
407

 
1,509

 
2,834

 
2,834

Display and Packaging
 
—

 
(4
)
 
—

 
285

 
1,297

 
1,297

Protective Solutions
 
—

 
67

 
101

 
1,464

 
1,662

 
1,662

Corporate
 
—

 
—

 
—

 
—

 
297

 
297

Asset Impairment / Disposal of Assets
 
 
 
 
 
 
 
 
 
 
 
 
Paper and Industrial Converted Products
 
22

 
117

 
(18
)
 
2,233

 
2,521

 
2,521

Consumer Packaging
 
66

 
112

 
175

 
3,470

 
3,033

 
3,033

Protective Solutions
 
(28
)
 
(28
)
 
—

 
161

 
133

 
133

Other Costs
 
 
 
 
 
 
 
 
 
 
 
 
Paper and Industrial Converted Products
 
43

 
533

 
319

 
836

 
1,827

 
2,027

Consumer Packaging
 
9

 
157

 
263

 
588

 
1,018

 
1,218

Display and Packaging
 
3

 
20

 
11

 
11

 
31

 
31

Protective Solutions
 
—

 
205

 
215

 
413

 
1,141

 
1,141

Total Charges and Adjustments
 
$
378

 
$
1,830

 
$
2,014

 
$
19,116

 
$
26,511

 
$
26,911

The following table sets forth the activity in the 2012 Actions restructuring accrual included in “Accrued expenses and other” on the Company’s Condensed Consolidated Balance Sheets:
 
2012 Actions
 
Severance
and
Termination
Benefits
 
Asset
Impairment/
Disposal
of Assets
 
Other
Costs
 
Total
Accrual Activity
2013 Year to Date
 
 
 
 
Liability at December 31, 2012
 
$
6,313

 
$
—

 
$
80

 
$
6,393

2013 charges
 
837

 
270

 
915

 
2,022

Adjustments
 
(123
)
 
(69
)
 
—

 
(192
)
Cash receipts/(payments)
 
(4,893
)
 
42

 
(915
)
 
(5,766
)
Asset write downs/disposals
 
—

 
(243
)
 
—

 
(243
)
Foreign currency translation
 
10

 
—

 
—

 
10

Liability at September 29, 2013
 
$
2,144

 
$
—

 
$
80

 
$
2,224

“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 2012 Actions restructuring costs by the end of 2013 using cash generated from operations.

 

11
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

2011 and Earlier Actions
2011 and Earlier Actions are comprised of a number of plant closures and workforce reductions initiated prior to 2012. Costs for these actions in both 2013 and 2012 relate primarily to the cost of plant closures including severance, equipment removal, plant security, property taxes and insurance. Offsetting these costs in the prior year was the gain from the sale of the land and building associated with a former flexible packaging facility in Canada. The Company expects to recognize future pretax charges of approximately $1,500 associated with 2011 and Earlier Actions.
Below is a summary of expenses/(income) incurred by segment for 2011 and Earlier Actions for the three- and nine- month periods ended September 29, 2013 and September 30, 2012.
 
 
 
2013
 
2012
2011 and Earlier Actions
 
Third
Quarter
 
Nine
Months
 
Third
Quarter
 
Nine
Months
Paper and Industrial Converted Products
 
$
(69
)
 
$
901

 
$
57

 
$
1,181

Consumer Packaging
 
1,546

 
1,445

 
(3,105
)
 
3,168

Display and Packaging
 
—

 
—

 
228

 
40

Protective Solutions
 
(15
)
 
829

 
362

 
659

Total Charges and Adjustments
 
$
1,462

 
$
3,175

 
$
(2,458
)
 
$
5,048

The accrual for 2011 and Earlier Actions totaled $4,252 and $5,229 at September 29, 2013 and December 31, 2012, 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 2011 and Earlier Actions to be paid in 2014 using cash generated from operations.
 

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 29, 2013: 
 
 
Gains and
Losses on Cash
Flow Hedges
 
Defined
Benefit
Pension Items
 
Foreign
Currency
Items
 
Accumulated
Other
Comprehensive
Loss
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
)












12
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 29, 2013: 
 
 
Amount Reclassified from Accumulated Other Comprehensive Loss
 
 
Details about Accumulated Other Comprehensive
Loss Components
 
Three Months Ended September 29, 2013
Nine Months Ended September 29, 2013
 
Affected Line Item in the 
Condensed Consolidated 
Statements of Net  Income
Gains and losses on cash flow hedges
 
 
 
 
 
Foreign exchange contracts
 
$
809

$
3,051

 
Net sales
Foreign exchange contracts
 
(871
)
(1,921
)
 
Cost of sales
Commodity contracts
 
(1,528
)
(3,917
)
 
Cost of sales
 
 
(1,590
)
(2,787
)
 
Total before tax
 
 
604

1,092

 
Tax benefit
 
 
$
(986
)
$
(1,695
)
 
Net of tax
Defined benefit pension items
 

 
 
 
Amortization of defined benefit pension items(a)
 
$
(7,787
)
$
(24,737
)
 
Cost of sales
Amortization of defined benefit pension items(a)
 
(2,596
)
(8,246
)
 
Selling, general and 
administrative
 
 
(10,383
)
(32,983
)
 
Total before tax
 
 
3,807

11,354

 
Tax benefit
 
 
$
(6,576
)
$
(21,629
)
 
Net of tax
Total reclassifications for the period
 
$
(7,562
)
$
(23,324
)
 
Net of tax
 
(a)
See Note 10 for additional details.
At September 29, 2013, the Company had commodity and foreign currency contracts outstanding to fix the costs of certain anticipated raw materials and energy purchases. These contracts, which have maturities ranging from October 2013 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 in an unfavorable position of $3,662 ($2,375 after tax) at September 29, 2013, and an unfavorable position of $10,772 ($6,727 after tax) at December 31, 2012.
The cumulative tax benefit on Cash Flow Hedges was $1,287 at September 29, 2013, and $4,045 at December 31, 2012. During the three- and nine- month periods ended September 29, 2013, the tax benefit on Cash Flow Hedges changed by $(767) and $(2,758), respectively.
The cumulative tax benefit on Defined Benefit Pension Items was $268,094 at September 29, 2013, and $278,235 at December 31, 2012. During the three- and nine- month periods ended September 29, 2013, the tax benefit on Defined Benefit Pension Items decreased by $(4,506) and $(10,141), respectively.
During the three- and nine- month periods ended September 29, 2013, changes in noncontrolling interests include foreign currency translation adjustments of $31 and $(595), respectively.















13
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 29, 2013 is as follows:
 
 
 
Consumer
Packaging
 
Paper and
Industrial
Converted
Products
 
Display
and
Packaging
 
Protective
Solutions
 
Total
Goodwill at December 31, 2012
 
$
427,575

 
$
254,706

 
$
158,023

 
$
270,201

 
$
1,110,505

Foreign currency translation
 
(5,127
)
 
(388
)
 
—

 
—

 
(5,515
)
Other
 
—

 
—

 
—

 
(2,430
)
 
$
(2,430
)
Goodwill at September 29, 2013
 
$
422,448

 
$
254,318

 
$
158,023

 
$
267,771

 
$
1,102,560

“Other” reflects the disposal of $2,430 of goodwill associated with the sale of a small corrugated box operation in the United States that had been acquired as part of the Company’s November 2011 acquisition of Tegrant.
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. For most of its reporting units, only a qualitative analysis is required for management to reach a conclusion that it is not more likely than not that goodwill has been impaired.
For any reporting unit where management is not able to reach this conclusion based on its qualitative assessment, a more detailed analysis (i.e., step 1 analysis) is performed. In this analysis, the fair values of the reporting units are estimated utilizing both an income approach and a market approach. A number of significant management assumptions and estimates were reflected in the Company's forecast of future results and cash flows, such as: sales volumes and prices, profit margins, income taxes, capital expenditures and changes in working capital requirements. Changes in these assumptions, along with the discount rate 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.
The Company completed its most recent annual goodwill impairment testing during the third quarter of 2013. Based on the results of its qualitative and quantitative assessments, the Company concluded that there was no impairment of goodwill for any of its reporting units. Because the Company’s assessments, whether qualitative or quantitative, incorporate management’s expectations for the future, including forecasted growth rates 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 qualitative or quantitative assessments noted above, in management’s opinion, the reporting units with significant goodwill having the greatest risk of future impairment if actual results in the future are not as expected are Plastics – Blowmolding and Plastics – Thermoforming. Total goodwill associated with these reporting units was approximately $128,500 and $53,200, respectively, at September 29, 2013. Although management believes that goodwill of the Display and Packaging reporting unit is not currently at risk for impairment, a large portion of sales in this unit is concentrated in one customer and will be up for negotiation over the next few years. 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. Total goodwill associated with this reporting unit was approximately $158,000 at September 29, 2013.

14
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

There were no triggering events between this year's annual impairment test and September 29, 2013. However, the plastics businesses referenced above have experienced some short-term performance issues. The goodwill for these units could become impaired should these units not exhibit the sustained business improvements expected or management’s outlook changes.

Other Intangible Assets
A summary of other intangible assets as of September 29, 2013 and December 31, 2012 is as follows:
 
        
 
 
September 29,
2013
 
December 31,
2012
Other Intangible Assets, gross
 
 
 
 
Patents
 
$
2,222

 
$
2,224

Customer lists
 
340,572

 
345,133

Trade names
 
21,224

 
21,214

Proprietary technology
 
17,856

 
17,844

Land use rights
 
330

 
350

Other
 
4,747

 
4,944

Other Intangible Assets, gross
 
$
386,951

 
$
391,709

Accumulated Amortization
 
$
(135,359
)
 
$
(114,900
)
Other Intangible Assets, net
 
$
251,592

 
$
276,809

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.
Aggregate amortization expense was $7,036 and $6,945 for the three months ended September 29, 2013 and September 30, 2012, respectively, and $21,352 and $21,122 for the nine months ended September 29, 2013 and September 30, 2012, respectively. Amortization expense on other intangible assets is expected to approximate $28,600 in 2013, $28,100 in 2014, $26,700 in 2015, $26,400 in 2016 and $24,600 in 2017.


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 29, 2013
 
December 31, 2012
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Long-term debt, net of current portion
 
$
947,541

 
$
991,306

 
$
1,099,454

 
$
1,214,292

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 29, 2013 and December 31, 2012, 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.


15
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, aluminum and old corrugated containers. At September 29, 2013, natural gas swaps covering approximately 6.7 million MMBTUs were outstanding. These contracts represent approximately 79% , 74%, and 19% of anticipated U.S. and Canadian usage for the remainder of 2013, 2014, and 2015, respectively. Additionally, the Company had swap contracts covering 6,650 metric tons of aluminum representing approximately 59% of anticipated usage for the remainder of 2013 and 44% for 2014, and 525 short tons of old corrugated containers representing approximately 2% of anticipated usage for the remainder of 2013. The fair values of the Company’s commodity cash flow hedges were in loss positions of $(3,598) and $(6,286) at September 29, 2013 and December 31, 2012, respectively. The amount of the loss included in accumulated other comprehensive loss at September 29, 2013, that is expected to be reclassified to the income statement during the next twelve months is $(3,134).
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 2013. The net positions of these contracts at September 29, 2013 were as follows (in thousands): 
 
 
 
Currency
Action
Quantity
Colombian peso
purchase
5,112,342

Mexican peso
purchase
188,919

Canadian dollar
purchase
11,478

British pound
purchase
2,800

Turkish lira
purchase
1,085

Polish zloty
purchase
390

New Zealand dollar
sell
(294
)
Australian dollar
sell
(908
)
Euro
sell
(2,953
)

The fair value of these foreign currency cash flow hedges was $(69) at September 29, 2013 and $(4,483) at December 31, 2012. During the first nine months of 2013, 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 $78 were reclassified from accumulated other comprehensive loss and included in the carrying value of the assets acquired. The amount of the loss included in accumulated other comprehensive loss at September 29, 2013 expected to be reclassified to the income statement during the next twelve months is $(83).
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 29, 2013, were as follows (in thousands): 
 
 
 
Currency
Action
Quantity
Colombian peso
purchase
17,077,750

British pound
purchase
12,123

Canadian dollar
purchase
11,891

Euro
sell
(4,195
)
The fair value of the Company’s other derivatives was $(129) and $708 at September 29, 2013 and December 31, 2012, respectively.
 

16
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 29, 2013 and December 31, 2012: 
Description
 
Balance Sheet Location
 
September 29,
2013
 
December 31,
2012
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Commodity Contracts
 
Prepaid expenses
 
$
101

 
$
201

Commodity Contracts
 
Other assets
 
$
90

 
$
—

Commodity Contracts
 
Accrued expenses and other
 
$
(3,244
)
 
$
(4,760
)
Commodity Contracts
 
Other liabilities
 
$
(545
)
 
$
(1,727
)
Foreign Exchange Contracts
 
Prepaid expenses
 
$
575

 
$
725

Foreign Exchange Contracts
 
Accrued expenses and other
 
$
(644
)
 
$
(5,208
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign Exchange Contracts
 
Prepaid expenses
 
$
80

 
$
679

Foreign Exchange Contracts
 
Other assets
 
$
34

 
$
36

Foreign Exchange Contracts
 
Accrued expenses and other
 
$
(243
)
 
$
(7
)
Foreign Exchange Contracts
 
Other liabilities
 
$
—

 
$
—

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 29, 2013 and September 30, 2012: 
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)
Three months ended September 29, 2013
 
 
 
 
 
 
 
 
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
 
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

Three months ended September 30, 2012
 
 
 
 
 
 
 
 
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
 
Foreign Exchange Contracts
 
$
(1,125
)
 
Net sales
 
$
(511
)
 
Net sales
 
$
—

 
 
 
 
Cost of sales
 
$
(726
)
 
 
 
 
Commodity Contracts
 
$
7,985

 
Cost of sales
 
$
2,927

 
Cost of sales
 
$
(81
)
 

17
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

Derivatives not designated as hedging
instruments:
Location of Gain or (Loss) Recognized in
Income Statement
Gain or (Loss)
Recognized
Three months ended September 29, 2013
 
 
Foreign Exchange Contracts
Cost of sales
$
(770
)
 
Selling, general and administrative
$
(67
)
Three months ended September 30, 2012
 
 
Foreign Exchange Contracts
Cost of sales
$
279

 
Selling, general and administrative
$
30

 
The following tables set forth the effect of the Company’s derivative instruments on financial performance for the nine months ended September 29, 2013 and September 30, 2012: 
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)
Nine months ended September 29, 2013
 
 
 
 
 
 
 
 
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
 
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
)
Nine months ended September 30, 2012
 
 
 
 
 
 
 
 
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
 
Foreign Exchange Contracts
 
$
306

 
Net sales
 
$
(718
)
 
Net sales
 
$
—

 
 
 
 
Cost of sales
 
$
578

 
 
 
 
Commodity Contracts
 
$
3,640

 
Cost of sales
 
$
(3,744
)
 
Cost of sales
 
$
(94
)
 
 
 
 
Derivatives not designated as hedging
instruments:
Location of Gain or (Loss) Recognized in
Income Statement
Gain or (Loss)
Recognized
 
 
 
Nine months ended September 29, 2013
 
 
Foreign Exchange Contracts
Cost of sales
$
(1,941
)
 
Selling, general and administrative
$
(207
)
 
 
 
Nine months ended September 30, 2012
 
 
Foreign Exchange Contracts
Cost of sales
$
1,023

 
Selling, general and administrative
$
69

 









18
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 29,
2013
 
Level 1
 
Level 2
 
Level 3
Hedge derivatives, net:
 
 
 
 
 
 
 
 
Commodity contracts
 
$
(3,598
)
 
$
—

 
$
(3,598
)
 
$
—

Foreign exchange contracts
 
(69
)
 
—

 
(69
)
 
—

Non-hedge derivatives, net:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
(129
)
 
—

 
(129
)
 
—

Deferred compensation plan assets
 
2,971

 
2,971

 
—

 
—

 
 
 
 
 
 
 
 
 
Description
 
December 31,
2012
 
Level 1
 
Level 2
 
Level 3
Hedge derivatives, net:
 
 
 
 
 
 
 
 
Commodity contracts
 
$
(6,286
)
 
$
—

 
$
(6,286
)
 
$
—

Foreign exchange contracts
 
(4,483
)
 
—

 
(4,483
)
 
—

Non-hedge derivatives, net:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
708

 
—

 
708

 
—

Deferred compensation plan assets
 
2,585

 
2,585

 
—

 
—

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 29, 2013.
 


19
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 traditional 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 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
Retirement Plans
 
 
 
 
 
 
Service cost
 
$
6,267

 
$
6,391

 
$
18,756

 
$
17,804

Interest cost
 
16,794

 
17,906

 
50,226

 
52,430

Expected return on plan assets
 
(21,582
)
 
(20,890
)
 
(64,544
)
 
(62,889
)
Amortization of net transition obligation
 
108

 
115

 
328

 
344

Amortization of prior service cost
 
141

 
139

 
424

 
308

Amortization of net actuarial loss
 
10,891

 
10,525

 
32,571

 
28,722

Effect of settlement loss
 
—

 
—

 
1,893

 
—

Net periodic benefit cost
 
$
12,619

 
$
14,186

 
$
39,654

 
$
36,719

Retiree Health and Life Insurance Plans
 
 
 
 
 
 
Service cost
 
$
218

 
$
131

 
$
664

 
$
615

Interest cost
 
219

 
154

 
710

 
841

Expected return on plan assets
 
(378
)
 
(391
)
 
(1,126
)
 
(1,131
)
Amortization of prior service credit
 
(756
)
 
(1,619
)
 
(2,230
)
 
(4,872
)
Amortization of net actuarial loss
 
(1
)
 
(403
)
 
(3
)
 
(2
)
Net periodic benefit income
 
$
(698
)
 
$
(2,128
)
 
$
(1,985
)
 
$
(4,549
)
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 contributions of $21,224 and $55,160 to its defined benefit retirement and retiree health and life insurance plans during the nine months ended September 29, 2013 and September 30, 2012, respectively. The Company

20
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

anticipates that it will make additional contributions of approximately $11,000 to its defined benefit retirement and retiree health and life insurance plans in 2013.

Sonoco Investment and Retirement Plan (SIRP)
The Company recognized SIRP expense totaling $3,391 and $2,692 for the quarters ended September 29, 2013 and September 30, 2012, respectively, and $9,009 and $7,637 for the nine months ended September 29, 2013 and September 30, 2012, respectively. Contributions to the SIRP, funded annually in the first quarter, totaled $9,290 during the nine months ended September 29, 2013, and $8,920 during the nine months ended September 30, 2012. No additional SIRP contributions are expected during the remainder of 2013. 


Note 11: Income Taxes
The Company’s effective tax rate for the three- and nine- month periods ending September 29, 2013, was 31.5% and 32.4%, respectively, and its effective tax rate for the three- and nine- month periods ending September 30, 2012, was 31.2% and 33.5%, respectively. The quarterly and year-to-date rates for both years varied from 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 favorable effect of the manufacturer’s deduction, and contingencies recorded for uncertain tax positions. 
The Company and/or its subsidiaries file federal, state and local income tax returns in the United States and various foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examination by tax authorities for years before 2009. With few exceptions, the Company is no longer subject to examination prior to 2007 with respect to U.S. state and local and non-U.S. income taxes.
There have been no significant changes in the Company’s liability for uncertain tax positions since December 31, 2012. 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.
 

Note 12: Segment Reporting
The Company reports its financial results in four reportable segments: Consumer Packaging, Paper and Industrial Converted Products, Display and Packaging, and Protective Solutions. Beginning in the fourth quarter of 2012, the Company changed the name of what had been called Packaging Services to Display and Packaging and what had been called Protective Packaging to Protective Solutions to better describe the segments’ business activities. There was no change to the composition of these segments.
The Consumer Packaging segment includes the following products and services: round and shaped rigid containers and trays (both composite and thermoformed plastic); blow-molded plastic bottles and jars; extruded and injection-molded plastic products; printed flexible packaging; metal and peelable membrane ends and closures; and global brand artwork management.
The Paper and Industrial Converted Products segment includes the following products: high-performance paper and composite paperboard tubes and cores; fiber-based construction tubes and forms; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, linerboard, corrugating medium, recovered paper and other recycled materials.
The Display and Packaging segment includes the following products and services: designing, manufacturing, assembling, packing and distributing temporary, semipermanent and permanent point-of-purchase displays; supply chain management services, including contract packing, fulfillment and scalable service centers; and paper amenities, such as coasters and glass covers. 
The Protective Solutions segment includes the following products: custom-engineered paperboard-based and expanded foam protective packaging and components; temperature-assurance packaging; and retail security packaging.
The following table sets forth net sales, intersegment sales and operating profit for the Company’s reportable segments. “Segment operating profit” is defined as the segment’s portion of “Income before interest and income taxes” excluding restructuring charges, asset impairment charges, acquisition-related costs, and certain other items, if any, the exclusion of which

21
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)

the Company believes improves comparability and analysis of the financial performance of the business. General corporate expenses have been allocated as operating costs to each of the Company’s reportable segments.







SEGMENT FINANCIAL INFORMATION 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
Net sales:
 
 
 
 
 
 
 
 
Consumer Packaging
 
$
473,332

 
$
475,946

 
$
1,411,645

 
$
1,448,750

Paper and Industrial Converted Products
 
467,847

 
453,605

 
1,395,271

 
1,392,675

Display and Packaging
 
143,173

 
124,561

 
391,838

 
347,267

Protective Solutions
 
143,397

 
141,418

 
434,464

 
421,567

Consolidated
 
$
1,227,749

 
$
1,195,530

 
$
3,633,218

 
$
3,610,259

Intersegment sales:
 
 
 
 
 
 
 
 
Consumer Packaging
 
$
978

 
$
2,096

 
$
3,784

 
$
6,209

Paper and Industrial Converted Products
 
26,320

 
23,126

 
74,792

 
73,779

Display and Packaging
 
445

 
516

 
1,619

 
1,694

Protective Solutions
 
621

 
457

 
2,021

 
1,465

Consolidated
 
$
28,364

 
$
26,195

 
$
82,216

 
$
83,147

Income before interest and income taxes:
 
 
 
 
 
 
 
 
Segment operating profit:
 
 
 
 
 
 
 
 
Consumer Packaging
 
$
49,025

 
$
43,829

 
$
138,731

 
$
136,661

Paper and Industrial Converted Products
 
37,722

 
33,150

 
104,717

 
105,106

Display and Packaging
 
8,858

 
5,098

 
18,946

 
13,969

Protective Solutions
 
9,934

 
10,645

 
30,520

 
29,303

Restructuring/Asset impairment charges
 
(5,818
)
 
444

 
(18,785
)
 
(24,164
)
Other, net
 
563

 
3,177

 
(391
)
 
2,903