SEC Info - Sonoco Products Co. - ‘10-Q’ for 7/3/22

i 1,822,433

i 98,829

i 7,175

i 166,295

( i 344,456)

i 1,982,430

i 10,989

Total Equity

Common Shares

Capital in
Excess of
Stated Value

Accumulated
Other
Comprehensive
Loss

Retained
Earnings

Noncontrolling
Interests

Outstanding

Amount

i 1,849,541

i 97,370

i 7,175

i 119,690

( i 359,425)

i 2,070,005

i 12,096

Net income

i 115,607

i 115,333

i 274

Other comprehensive income/(loss):

Translation income/(loss)

i 706

( i 185)

i 891

Defined benefit plan adjustment, net of tax

i 191

Derivative financial instruments, net of tax

i 2,550

Other comprehensive income

i 3,447

i 2,556

i 891

Dividends

( i 44,124)

Purchase of noncontrolling interest

( i 13,196)

( i 7,080)

( i 6,116)

Issuance of stock awards

i 377

i 182

i 377

Shares repurchased

( i 3,410)

( i 60)

( i 3,410)

Share-based compensation

i 10,689

April 3, 2022

i 1,918,931

i 97,492

i 7,175

i 120,266

( i 356,869)

i 2,141,214

i 7,145

Net income

i 131,767

i 131,672

i 95

Other comprehensive loss

Translation loss

( i 70,314)

( i 69,790)

( i 524)

Defined benefit plan adjustment, net of tax

( i 1,928)

Derivative financial instruments, net of tax

( i 2,090)

Other comprehensive loss

( i 74,332)

( i 73,808)

( i 524)

Dividends

( i 48,041)

Issuance of stock awards

i 263

i 13

i 263

Shares repurchased

( i 574)

( i 10)

( i 574)

Share-based compensation

i 8,377

i 1,936,391

i 97,495

i 7,175

i 128,332

( i 430,677)

i 2,224,845

i 6,716

See accompanying Notes to Condensed Consolidated Financial Statements

SONOCO PRODUCTS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Dollars in thousands)

Six Months Ended

Cash Flows from Operating Activities:

Net income

i 247,374

( i 261,946)

Adjustments to reconcile net income to net cash provided by operating activities:

Asset impairments

i 9,683

i 4,852

Depreciation, depletion and amortization

i 145,952

i 121,792

Loss on early extinguishment of debt

i —

i 20,184

Share-based compensation expense

i 19,065

i 11,199

Equity in earnings of affiliates

( i 5,952)

( i 3,350)

Cash dividends from affiliated companies

i 4,369

i 3,930

Net loss/(gain) on disposition of assets

( i 648)

( i 3,279)

Net loss on divestiture of businesses

i —

i 5,516

Pension and postretirement plan expense

i 4,826

i 576,297

Pension and postretirement plan contributions

( i 30,843)

( i 162,352)

Net increase/(decrease) in deferred taxes

i 12,657

( i 154,242)

Change in assets and liabilities, net of effects from acquisitions and foreign currency adjustments:

Trade accounts receivable

( i 174,064)

( i 104,925)

Inventories

( i 232,734)

( i 61,724)

Payable to suppliers

i 148,319

i 121,054

Prepaid expenses

( i 1,539)

( i 2,581)

Income taxes payable and other income tax items

i 26,447

i 7,965

Accrued expenses and other assets and liabilities

i 11,553

( i 16,437)

Net cash provided by operating activities

i 184,465

i 101,953

Cash Flows from Investing Activities:

Purchases of property, plant and equipment

( i 148,917)

( i 99,959)

Cost of acquisitions, net of cash acquired

( i 1,333,769)

( i 2,353)

Proceeds from the sale of businesses, net

i —

i 86,071

Proceeds from the sale of assets

i 4,798

i 7,433

Other net investing proceeds

( i 2,376)

i 4,304

Net cash used in investing activities

( i 1,480,264)

( i 4,504)

Cash Flows from Financing Activities:

Proceeds from issuance of debt

i 1,570,137

i 18,361

Principal repayment of debt

( i 51,142)

( i 259,225)

Net change in commercial paper

( i 91,000)

i 128,000

Net decrease in outstanding checks

( i 14,599)

( i 15,620)

Proceeds from foreign exchange forward contracts and interest rate swaps

i —

i 4,387

Cash dividends

( i 91,525)

( i 90,401)

Purchase of noncontrolling interest

( i 14,474)

i —

Excess cash costs of early extinguishment of debt

i —

( i 20,111)

Payments for share repurchases

( i 3,984)

( i 159,571)

Net cash provided/(used) by financing activities

i 1,303,413

( i 394,180)

Effects of Exchange Rate Changes on Cash

( i 3,596)

( i 4,588)

Net Increase/(Decrease) in Cash and Cash Equivalents

i 4,018

( i 301,319)

Cash and cash equivalents at beginning of period

i 170,978

i 564,848

Cash and cash equivalents at end of period

i 174,996

i 263,529

See accompanying Notes to Condensed Consolidated Financial Statements

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

Note 1: i 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 six-month periods ended July 3, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021.

With respect to the unaudited condensed consolidated financial information of the Company for the three- and six-month periods ended July 3, 2022 and July 4, 2021 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 August 2, 2022 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: i New Accounting Pronouncements

i In March 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-02, "Financial Instruments — Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." The amendments in this update eliminate the accounting guidance for troubled debt restructurings while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The amendments in this update also require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases. The Company does not expect this pronouncement to materially affect its consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers." Under current accounting standards, contract assets and contract liabilities acquired in a business combination are to be recorded at fair value using the ASC 805 measurement principle. ASU 2021-08 requires the acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606: Revenue from Contracts with Customers as if the acquirer had originated the contracts rather than at fair value. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company elected to early adopt ASU 2021-08 on a prospective basis as of January 1, 2022. The election to use practical expedients allowed under ASU 2021-08 will be applied on an acquisition-by-acquisition basis. There was no impact to the Company’s consolidated financial statements as of the adoption date.

During the six-month period ended July 3, 2022, there have been no other newly issued or newly applicable accounting pronouncements that have had, or are expected to have, a material impact on the Company’s financial statements. Further, at July 3, 2022, there are no other pronouncements pending adoption that are expected to have a material impact on the Company’s consolidated financial statements.

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

Note 3: i Acquisitions and Divestitures

Acquisitions

On January 26, 2022, the Company completed the acquisition of Ball Metalpack Holding, LLC, renamed Sonoco Metal Packaging ("Metal Packaging"), a leading supplier of sustainable metal packaging for food and household products and the largest aerosol can producer in North America, for $ i 1,348,589, net of cash acquired. As previously disclosed, final consideration was subject to customary post-closing adjustments for working capital, cash and indebtedness and was finalized in the second quarter of 2022. The Company received cash from the sellers totaling $ i 14,820, of which $ i 6,924 was included in "Other receivables" in the Company's Condensed Consolidated Balance Sheet at April 3, 2022. Prior to the Company's acquisition of Metal Packaging, Ball Metalpack Holding, LLC was a joint venture formed in 2018 and owned by Platinum Equity ( i 51%) and Ball Corporation ( i 49%). Metal Packaging consists of i eight manufacturing plants in the United States and a headquarters facility in Broomfield, Colorado. This acquisition fits the Company's strategy of investing in its core businesses as it complements the Company's largest Consumer Packaging franchise, global rigid paper containers, and further expands the Company's sustainable packaging portfolio to include metal packaging.

The Company's initial preliminary fair values of the assets acquired and the liabilities assumed in the Metal Packaging acquisition, as well as revised preliminary fair values reflecting measurement period adjustments made during the second quarter of 2022, are as follows:

Initial Allocation

Measurement Period Adjustments

Revised Allocation

Trade accounts receivable

i 123,001

—

i 123,001

Inventories

i 190,070

i 575

i 190,645

Prepaid expenses

i 44,530

—

i 44,530

Property, plant and equipment

i 333,496

( i 418)

i 333,078

Right of use asset - operating leases

i 38,000

—

i 38,000

Other intangible assets

i 498,000

—

i 498,000

Goodwill

i 366,098

( i 10,151)

i 355,947

Other net tangible assets

i 48,069

( i 196)

i 47,873

Payable to suppliers

( i 105,580)

—

( i 105,580)

Accrued expenses and other

( i 25,253)

i 489

( i 24,764)

Notes payable and current portion of long-term debt

( i 46,463)

—

( i 46,463)

Noncurrent operating lease liabilities

( i 30,448)

—

( i 30,448)

Long-term debt

( i 39,543)

—

( i 39,543)

Deferred income taxes

( i 52,312)

i 1,805

( i 50,507)

Total purchase price, net of cash acquired

i 1,341,665

( i 7,896)

i 1,333,769

The allocation of the purchase price of Metal Packaging to the tangible and intangible assets acquired and liabilities assumed, as reflected under the heading "Revised Valuation" in the table above, is based on the Company's preliminary estimates of their fair value, based on information currently available. Management is continuing to finalize its valuation of certain assets and liabilities including, but not limited to: inventory; property, plant and equipment; goodwill; other intangible assets; deferred income taxes; trade accounts receivable; and accrued expenses and other, and expects to complete its valuations within one year of the date of acquisition.

Factors comprising goodwill include increased access to certain markets as well as the value of the assembled workforce. Approximately i 67% of goodwill is expected to be deductible for income tax purposes. Metal Packaging's financial results are included in the Company's Consumer Packaging segment.

The Company has accounted for this acquisition as a business combination under the acquisition method and has included the results of operations of the acquired business in the Company's Condensed Consolidated Statements of Income from the date of acquisition.

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

The following table presents the unaudited financial results for Metal Packaging for the three-month period ended July 3, 2022 and from the date of acquisition through July 3, 2022:



Supplemental Information (unaudited)	Three Months Ended		January 26 to
Metal Packaging	July 3, 2022		July 3, 2022
Net sales	$	i 291,332	$	i 462,550
Net income	$	i 30,428	$	i 44,447

The following table presents the Company’s estimated unaudited pro forma consolidated results for the three- and six-month periods ended July 3, 2022 and July 4, 2021, assuming the acquisition of Metal Packaging had occurred on January 1, 2021. This unaudited pro forma information is presented for informational purposes only and does not purport to represent the results of operations that would have been achieved if the acquisition had been completed at the beginning of 2021, nor is it necessarily indicative of future consolidated results.

Pro Forma Supplemental Information (unaudited)

Three Months Ended

Six Months Ended

Consolidated

Net sales

i 1,913,332

i 1,573,964

i 3,733,902

i 3,123,580

Net income/(loss) attributable to Sonoco

i 140,360

( i 337,526)

i 305,240

( i 320,031)

The unaudited pro forma information above does not project the Company’s expected results for any future period and gives no effect to any future synergistic benefits that may result from the combination or the costs of integrating the acquired operations with those of the Company. Unaudited pro forma information for the three and six months ended July 3, 2022 and July 4, 2021 includes adjustments to depreciation, amortization, and income taxes based upon the preliminary fair value allocation of the purchase price to Metal Packaging's tangible and intangible assets acquired and liabilities assumed as though the acquisition had occurred on January 1, 2021. Interest expense on the additional debt issued by the Company to fund the acquisition and retention bonuses incurred related to the acquisition are also included in the unaudited pro forma information as if the acquisition had occurred on January 1, 2021. Acquisition-related costs of $ i 4,117 and $ i 26,402 and charges related to fair value adjustments to acquisition-date inventory of $ i 8,155 and $ i 33,155 were recognized during the three- and six-month periods ended July 3, 2022, respectively. These costs are excluded from 2022 unaudited pro forma net income and are instead reflected in 2021 pro forma net income as though they were incurred on January 1, 2021.

Divestitures

As previously disclosed, the Company completed the sale of its U.S. display and packaging business, part of the All Other group of businesses, to Hood Container Corporation on April 4, 2021 for $ i 80,000 in cash. This business provided design, manufacturing and fulfillment of point-of-purchase displays, as well as contract packaging services, for consumer product customers and had approximately i 450 employees. Its operations included i eight manufacturing and fulfillment facilities and i four sales and design centers.

The selling price was adjusted at closing for certain transaction expenses and for anticipated differences between targeted levels of working capital and the projected levels at the time of closing. Net cash proceeds of $ i 79,704 were received on April 5, 2021 and the Company recognized a loss on the divestiture of this business of $ i 5,516, before tax, in the first quarter of 2021. During the quarter ended October 3, 2021, the Company finalized the working capital settlement related to this sale. The settlement resulted in additional cash proceeds of $ i 1,971 and the buyer's assumption of certain liabilities totaling $ i 786. As a result, the Company recognized a reduction in the previously reported loss on the sale of this business of $ i 2,757, before tax, in the third quarter of 2021, bringing the total loss on the sale of business to $ i 2,759, before tax.

The Company continually assesses its operational footprint as well as its overall portfolio of businesses and may consider the divestiture of plants and/or business units it considers to be suboptimal or nonstrategic.

Acquisition and Divestiture-Related Costs

Acquisition- and divestiture-related costs totaled $ i 12,281 and $ i 60,633 during the three- and six-month periods ended July 3, 2022, respectively, primarily related to the Metal Packaging acquisition. These costs include charges related

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

to fair value adjustments to acquisition-date inventory totaling $ i 8,155 and $ i 33,155 during the three- and six-month periods ended July 3, 2022, respectively, which are included in "Cost of sales" in the Company's Condensed Consolidated Statements of Income. Other acquisition-related costs consisting primarily of investment banking fees, representation and warranty insurance premiums, legal and professional fees, and other transaction costs, totaled $ i 4,126 and $ i 27,478 during the three- and six-month periods ended July 3, 2022, respectively, and are included in "Selling, general and administrative expenses” in the Company’s Condensed Consolidated Statements of Income.

Acquisition and divestiture-related costs totaled $ i 1,462 and $ i 11,488 during the three- and six-month periods ended July 4, 2021, respectively. These costs, consisting primarily of legal and professional fees, are included in “Selling, general and administrative expenses” in the Company’s Condensed Consolidated Statements of Income.

Note 4: i Shareholders' Equity

Earnings/(loss) per Share

i The following table sets forth the computation of basic and diluted earnings/(loss) per share:

Three Months Ended

Six Months Ended

Numerator:

Net income/(loss) attributable to Sonoco

i 131,672

( i 334,070)

i 247,005

( i 261,774)

Denominator:

Weighted average common shares outstanding:

Basic

i 97,999

i 100,082

i 97,961

i 100,571

Dilutive effect of stock-based compensation

i 687

i —

i 660

i —

Diluted

i 98,686

i 100,082

i 98,621

i 100,571

Net income/(loss) attributable to Sonoco per common share:

Basic

i 1.34

( i 3.34)

i 2.52

( i 2.60)

Diluted

i 1.33

( i 3.34)

i 2.50

( i 2.60)

Cash dividends

i 0.49

i 0.45

i 0.94

i 0.90

No adjustments were made to "Net income/(loss) attributable to Sonoco" in the computations of net income/(loss) attributable to Sonoco per common share.

Anti-dilutive Securities

Potentially dilutive securities are calculated in accordance with the treasury stock method, which assumes the proceeds from the exercise of all dilutive stock appreciation rights ("SARs") are used to repurchase the Company’s common stock. Certain SARs are not dilutive because either the exercise price is greater than the average market price of the stock during the reporting period or assumed repurchases from proceeds from the exercise of the SARs were anti-dilutive. These SARs may become dilutive in the future if the market price of the Company's common stock appreciates.

The average numbers of SARs that were anti-dilutive and, therefore, not included in the computation of diluted earnings per share during the three- and six-month periods ended July 3, 2022 and July 4, 2021 were as follows (in thousands):

Three Months Ended

Six Months Ended

Anti-dilutive stock appreciation rights

i 374

i —

i 387

i 214

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

Diluted earnings per share is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued unless doing so is anti-dilutive. Such securities have an anti-dilutive impact in those periods in which a loss is reported. Diluted net loss per share of common stock for the three- and six-month periods ended July 4, 2021 is the same as basic net loss per share because otherwise dilutive securities are excluded from the computation of diluted net loss per share. The following table sets forth the potentially dilutive securities excluded from the computation of diluted net loss per share during the three- and six-month periods ended July 4, 2021:

Three Months Ended

Six Months Ended

Dilutive securities excluded due to reported loss

i 486

i 469

Stock Repurchases

On April 20, 2021, the Company's Board of Directors (the "Board") authorized the repurchase of the Company's common stock in an aggregate amount of up to $ i 350,000. Following several repurchase transactions in 2021, a total of $ i 137,972 remained available for share repurchases under this authorization as of December 31, 2021. i No shares were purchased under this authorization during the six months ended July 3, 2022.

On May 10, 2021, the Company entered into an accelerated share repurchase agreement ("ASR Agreement") with a financial institution to repurchase outstanding shares of the Company's common stock. In exchange for an upfront payment of $ i 150,000, which was funded with available cash on hand, the financial institution delivered i 1,751 initial shares to the Company, representing i 80% of the expected number of shares to be repurchased during the repurchase period based upon an estimated average repurchase price of $ i 68.50 per share. The initial shares received were retired by the Company. The final number of shares to be repurchased and retired were based on the Company's volume-weighted average share price during the repurchase period, less a discount and subject to certain adjustments. The financial institution could have elected to settle all or any part of the transaction at any time between July 9, 2021 and September 11, 2021. As of July 4, 2021, the unsettled portion of the ASR Agreement represented a forward contract indexed to the Company's own stock which was recognized within shareholders’ equity as "Capital in excess of stated value."

On May 6, 2021, the Company repurchased i 54 shares for $ i 3,615 from a private stockholder based upon the average closing stock price on that day. The cost of these share repurchases, as well as those related to the accelerated share agreement mentioned above, was allocated to "Capital in excess of stated value" on the Company's Condensed Consolidated Balance Sheet for the period ended July 4, 2021.

The Company regularly 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 i 70 shares during the six months ended July 3, 2022, at a cost of $ i 3,984, and i 98 shares during the six months ended July 4, 2021, at a cost of $ i 5,956.

Dividend Declarations

On April 20, 2022, the Board of Directors declared a regular quarterly dividend of $ i i 0.49 / per share. This dividend was paid on June 10, 2022 to all shareholders of record as of May 10, 2022.

On July 20, 2022, the Board of Directors declared a regular quarterly dividend of $ i i 0.49 / per share. This dividend is payable on September 9, 2022 to all shareholders of record as of August 10, 2022.

Noncontrolling interests

In April 2015, the Company acquired a i 67% controlling interest in Graffo Paranaense de Embalagens S/A (“Graffo”). Prior to March 31, 2022, the Company consolidated 100% of Graffo, with the partner's i 33% share included in “Noncontrolling Interests” within the equity section of the balance sheet. On March 31, 2022, the Company paid $ i 14,474 in cash to acquire the remaining i 33% ownership interest from the i three noncontrolling partners, which resulted in a $ i 6,116 reduction in noncontrolling interest, a $ i 7,080 charge to capital in excess of stated value, and a $ i 1,278 reduction to accrued expenses and other on the Company's Condensed Consolidated Balance Sheet as of July 3, 2022.

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

Note 5: i Restructuring and Asset Impairments

Due to its geographic footprint and the cost-competitive nature of its businesses, the Company is continually seeking the most cost-effective means and structure to serve its customers and to respond to fundamental changes in its markets. As such, restructuring costs have been, and are expected to be, a recurring component of the Company's operating costs. The amount of these costs can vary significantly from quarter to quarter and from year to year depending upon the scope and location of the restructuring activities.

Following are the total restructuring and asset impairment charges/(income), net of adjustments, recognized during the periods presented:

Three Months Ended

Six Months Ended

Restructuring and restructuring-related asset impairment charges/(income)

i 6,857

( i 1,853)

i 12,610

i 844

Other asset impairments

i 3,706

i 408

i 10,095

i 4,557

Restructuring/Asset Impairment Charges/(Income)

i 10,563

( i 1,445)

i 22,705

i 5,401

The table below sets forth restructuring and restructuring-related asset impairment charges/(income) by type incurred:

Three Months Ended

Six Months Ended

Severance and Termination Benefits

i 2,214

i 2,438

i 4,313

i 3,866

Asset Impairments/(Gains from Disposal of Assets)

i 787

( i 5,621)

i 1,232

( i 6,485)

Other Costs

i 3,856

i 1,330

i 7,065

i 3,463

Restructuring and restructuring-related asset impairment charges/(income)

i 6,857

( i 1,853)

i 12,610

i 844

The table below sets forth restructuring and restructuring-related asset impairment charges/(income) by reportable segment:

Three Months Ended

Six Months Ended

Consumer Packaging

i 2,544

i 173

i 4,179

i 1,258

Industrial Paper Packaging

i 1,007

( i 4,372)

i 2,355

( i 2,939)

All Other

( i 495)

i 2,355

( i 417)

i 2,520

Corporate

i 3,801

( i 9)

i 6,493

i 5

Restructuring and restructuring-related asset impairment charges/(income)

i 6,857

( i 1,853)

i 12,610

i 844

Restructuring and restructuring-related asset impairment charges/(income) are included in “Restructuring/Asset impairment charges/(income)” in the Company's Condensed Consolidated Statements of Income.

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

i The following table sets forth the activity in the restructuring accrual included in “Accrued expenses and other” on the Company’s Condensed Consolidated Balance Sheets:

Severance
and
Termination
Benefits

Asset
Impairments/
Disposal
of Assets

Other
Costs

Total

Accrual Activity

Liability at December 31, 2021

i 10,917

i —

i 1,873

i 12,790

2022 charges

i 4,313

i 1,232

i 7,065

i 12,610

Cash (payments)/receipts

( i 7,024)

i 4,076

( i 7,163)

( i 10,111)

Asset write downs/disposals

i —

( i 5,308)

i —

( i 5,308)

Foreign currency translation

( i 83)

i —

( i 38)

( i 121)

Liability at July 3, 2022

i 8,123

i —

i 1,737

i 9,860

"Severance and Termination Benefits" during the first six months of 2022 includes the cost of severance for approximately i 150 employees whose positions were eliminated in conjunction with the Company's ongoing organizational effectiveness efforts.

"Asset Impairments/Disposal of Assets" during the first six months of 2022 consists primarily of asset impairment charges related to plant closures in the Consumer Packaging and Industrial Paper Packaging segments, partially offset by a gain from the sale of a previously closed facility in our "All Other" group of businesses. Cash proceeds in the first six months of 2022 relate to the sale of this facility as well as the partial sale of a previously closed operation in Canada, part of the Industrial Paper Packaging segment.

“Other Costs” during the first six months of 2022 consists primarily of consulting services and 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 restructuring reserves by the end of 2022 using cash generated from operations. The Company also expects to recognize future additional charges totaling approximately $ i 2,300 in connection with previously announced restructuring actions and believes that the majority of these charges will be incurred and paid by the end of 2022. The Company continually evaluates its cost structure, including its manufacturing capacity, and additional restructuring actions are likely to be undertaken.

Other Asset Impairments

The Company recognized other asset impairment charges totaling $ i 3,706 and $ i 10,095 in the three and six months ended July 3, 2022, respectively.

The charges in the three and six months ended July 3, 2022 include net asset impairment charges totaling $ i 3,452 and $ i 9,165, respectively, resulting from the Company's decision in the first quarter of 2022 to exit its operations in Russia, consisting of two small tube and core plants in our Industrial Paper Packaging segment, as a result of the ongoing Russia-Ukraine conflict. These charges include $ i 3,747 of cumulative translation adjustment losses that were reclassified from accumulated other comprehensive income upon completion of the Company's exit from Russia on July 1, 2022. The charges also include $ i 254 and $ i 930 of fixed asset impairments in the Company's plastics foods operations, part of the Consumer Packaging segment, in the three and six months ended July 3, 2022, respectively. These assets were determined to be impaired as the value of their projected undiscounted cash flows was no longer sufficient to recover their carrying value.

The Company recognized other asset impairment charges totaling $ i 408 and $ i 4,557 in the three and six months ended July 4, 2021, respectively. The year-to-date charges consist of fixed asset impairments totaling $ i 2,158 in the Company's plastics foods operations, part of the Consumer Packaging segment, and $ i 2,399 in the temperature-assured packaging business, part of the All Other group of businesses. The assets were impaired as the value of their projected undiscounted cash flows was determined to no longer be sufficient to recover their carrying value.

These impairment charges are included in “Restructuring/Asset impairment charges/(income)” in the Company’s Condensed Consolidated Statements of Income.

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

Note 6: i Accumulated Other Comprehensive Loss

i The following table summarizes the components of accumulated other comprehensive loss and the changes in the balances of each component of accumulated other comprehensive loss, net of tax as applicable, for the six months ended July 3, 2022 and July 4, 2021:

Foreign
Currency
Items

Defined
Benefit
Pension Items

Cash
Flow Hedges

Accumulated
Other
Comprehensive
Loss

Balance at December 31, 2021

( i 269,076)

( i 91,397)

i 1,048

( i 359,425)

Other comprehensive (loss)/income before reclassifications

( i 73,722)

( i 3,893)

i 3,047

( i 74,568)

Amounts reclassified from accumulated other comprehensive loss to net income

i 3,747

i 2,156

( i 2,199)

i 3,704

Amounts reclassified from accumulated other comprehensive loss to fixed assets

i —

( i 388)

Other comprehensive (loss)/income

( i 69,975)

( i 1,737)

i 460

( i 71,252)

Balance at July 3, 2022

( i 339,051)

( i 93,134)

i 1,508

( i 430,677)

Balance at December 31, 2020

( i 194,024)

( i 562,747)

( i 71)

( i 756,842)

Other comprehensive (loss)/income before reclassifications

( i 20,184)

i 10,888

i 5,219

( i 4,077)

Amounts reclassified from accumulated other comprehensive loss to net loss

i —

i 417,242

( i 733)

i 416,509

Amounts reclassified from accumulated other comprehensive loss to fixed assets

i —

( i 46)

Other comprehensive (loss)/income

( i 20,184)

i 428,130

i 4,440

i 412,386

Balance at July 4, 2021

( i 214,208)

( i 134,617)

i 4,369

( i 344,456)

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

The following table summarizes the effects on net income of significant amounts reclassified from each component of accumulated other comprehensive loss for the three- and six-month periods ended July 3, 2022 and July 4, 2021:

Amount Reclassified from Accumulated
Other Comprehensive Loss

Three Months Ended

Six Months Ended

Details about Accumulated Other
Comprehensive
Loss Components

Affected Line Item in
the Condensed Consolidated
Statements of Income

Foreign currency items

Loss on Russia restructuring(a)

( i 3,747)

i —

( i 3,747)

i —

Restructuring/Asset impairment charges

Gains/(losses) on cash flow hedges

Foreign exchange contracts

i 843

i 1,489

i 1,866

i 1,829

Net sales

Foreign exchange contracts

( i 1,011)

( i 1,190)

( i 1,706)

( i 1,418)

Cost of sales

Commodity contracts

i 1,979

i 646

i 2,937

i 575

Cost of sales

i 1,811

i 945

i 3,097

i 986

Income/(Loss) before income taxes

Income tax impact

( i 529)

( i 241)

( i 898)

( i 253)

Provision for/(Benefit from) income taxes

i 1,282

i 704

i 2,199

i 733

Net income/(loss)

Defined benefit pension items

Effect of settlement loss(b)

( i 74)

( i 547,631)

( i 430)

( i 547,631)

Non-operating pension costs

Amortization of defined

benefit pension items(b)

( i 1,255)

( i 6,432)

( i 2,426)

( i 13,333)

Non-operating pension costs

( i 1,329)

( i 554,063)

( i 2,856)

( i 560,964)

Income/(Loss) before income taxes

Income tax impact

i 335

i 142,090

i 700

i 143,722

Provision for/(Benefit from) income taxes

( i 994)

( i 411,973)

( i 2,156)

( i 417,242)

Net income/(loss)

Total reclassifications for the period

( i 3,459)

( i 411,269)

( i 3,704)

( i 416,509)

Net income/(loss)

(a) See Note 5 for additional details.

(b) See Note 11 for additional details.

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

The following table summarizes the before and after tax amounts for the various components of other comprehensive income/(loss) for the three-month periods ended July 3, 2022 and July 4, 2021:

Three months ended

Three months ended

Before Tax
Amount

Tax
(Expense)
Benefit

After Tax
Amount

Before Tax
Amount

Tax
(Expense)
Benefit

After Tax
Amount

Foreign currency items:

Other comprehensive (loss)/income before
reclassifications

( i 73,537)

i —

( i 73,537)

i 11,837

i —

i 11,837

Amounts reclassified from accumulated other

comprehensive loss to net income/(loss)(a)

i 3,747

i —

i 3,747

i —

Net other comprehensive (loss)/income from
foreign currency items

( i 69,790)

i —

( i 69,790)

—

i 11,837

i —

i 11,837

Defined benefit pension items:

Other comprehensive (loss)/income before
reclassifications

( i 3,907)

i 985

( i 2,922)

i 14,213

( i 3,441)

i 10,772

Amounts reclassified from accumulated other

comprehensive loss to net income/(loss)(b)

i 1,329

( i 335)

i 994

i 554,063

( i 142,090)

i 411,973

Net other comprehensive (loss)/income from
defined benefit pension items

( i 2,578)

i 650

( i 1,928)

i 568,276

( i 145,531)

i 422,745

Gains and losses on cash flow hedges:

Other comprehensive income/(loss) before
reclassifications

( i 474)

i 139

( i 335)

i 5,674

( i 1,452)

i 4,222

Amounts reclassified from accumulated other
comprehensive loss to net income/(loss)

( i 1,811)

i 529

( i 1,282)

( i 945)

i 241

( i 704)

Amounts reclassified from accumulated other
comprehensive loss to fixed assets

( i 668)

i 195

( i 473)

( i 49)

i 13

( i 36)

Net other comprehensive income/(loss) from
cash flow hedges

( i 2,953)

i 863

( i 2,090)

i 4,680

( i 1,198)

i 3,482

Other comprehensive income/(loss)

( i 75,321)

i 1,513

( i 73,808)

i 584,793

( i 146,729)

i 438,064

(a) See Note 5 for additional details.

(b) See Note 11 for additional details.

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

The following table summarizes the before and after tax amounts for the various components of other comprehensive income/(loss) for the six-month periods ended July 3, 2022 and July 4, 2021:

Six months ended July 3, 2022

Six months ended July 4, 2021

Before Tax
Amount

Tax
(Expense)
Benefit

After Tax
Amount

Before Tax
Amount

Tax
(Expense)
Benefit

After Tax
Amount

Foreign currency items:

Other comprehensive loss before
reclassifications

( i 73,722)

i —

( i 73,722)

( i 20,184)

i —

( i 20,184)

Amounts reclassified from accumulated other

comprehensive loss to net income/(loss)(a)

i 3,747

i —

i 3,747

i —

Net other comprehensive loss from
foreign currency items

( i 69,975)

i —

( i 69,975)

( i 20,184)

i —

( i 20,184)

Defined benefit pension items:

Other comprehensive (loss)/income before
reclassifications

( i 5,183)

i 1,290

( i 3,893)

i 14,364

( i 3,476)

i 10,888

Amounts reclassified from accumulated other

comprehensive loss to net income/(loss)(b)

i 2,856

( i 700)

i 2,156

i 560,964

( i 143,722)

i 417,242

Net other comprehensive (loss)/income from
defined benefit pension items

( i 2,327)

i 590

( i 1,737)

i 575,328

( i 147,198)

i 428,130

Gains and losses on cash flow hedges:

Other comprehensive income/(loss) before
reclassifications

i 4,271

( i 1,224)

i 3,047

i 7,012

( i 1,793)

i 5,219

Amounts reclassified from accumulated other
comprehensive loss to net income/(loss)

( i 3,097)

i 898

( i 2,199)

( i 986)

i 253

( i 733)

Amounts reclassified from accumulated other
comprehensive loss to fixed assets

( i 552)

i 164

( i 388)

( i 62)

i 16

( i 46)

Net other comprehensive income/(loss) from
cash flow hedges

i 622

( i 162)

i 460

i 5,964

( i 1,524)

i 4,440

Other comprehensive income/(loss)

( i 71,680)

i 428

( i 71,252)

i 561,108

( i 148,722)

i 412,386

(a) See Note 5 for additional details.

(b) See Note 11 for additional details.

Note 7: i Goodwill and Other Intangible Assets

Goodwill

A summary of the changes in goodwill for the six months ended July 3, 2022 is as follows:

Consumer
Packaging

Industrial Paper Packaging

All Other

Total

Goodwill at December 31, 2021

i 572,416

i 367,780

i 384,305

i 1,324,501

2022 Acquisitions

i 366,098

i —

i 366,098

Foreign currency translation

( i 10,377)

( i 8,918)

( i 2,795)

( i 22,090)

Measurement period adjustments

( i 10,151)

i —

( i 10,151)

Goodwill at July 3, 2022

i 917,986

i 358,862

i 381,510

i 1,658,358

Goodwill activity reflected under the captions "2022 Acquisitions" and "Measurement period adjustments" relate to the January 26, 2022 acquisition of Metal Packaging. See Note 3 for additional information.

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

The Company assesses goodwill for impairment annually during the third quarter, or from time to time when warranted by the facts and circumstances surrounding individual reporting units or the Company as a whole. The Company completed its most recent annual goodwill impairment testing during the third quarter of 2021, and analyzed certain qualitative and quantitative factors in determining whether a goodwill impairment existed. The Company's assessments reflected a number of significant management assumptions and estimates including the Company's forecast of sales growth, gross profit margins, and discount rates. Changes in these assumptions could materially impact the Company's conclusions. Based on its assessments, the Company concluded that there was i no impairment of goodwill for any of its reporting units.

Although no reporting units failed the annual impairment test, in management’s opinion the goodwill of the Plastics - Healthcare reporting unit is at risk of impairment in the near term if the reporting unit's operations do not perform in line with management's expectations, or if there is a negative change in the long-term outlook for the business or in other factors such as the discount rate.

Although beginning to benefit from economic recovery, the results of the Plastics - Healthcare reporting unit have been negatively impacted by end-market weakness due to the COVID-19 pandemic. In addition, the unit is facing near-term headwinds from higher raw material and other cost increases. Assuming COVID-19 infection rates continue to decline, management expects market demand will improve throughout 2022 and that selling price increases and/or cost reductions, including restructuring actions and investments in production efficiency projects, will mitigate the impacts of recent raw material and other cost inflation. However, should it become apparent that the ongoing post-COVID-19 recovery is likely to be significantly weaker, delayed, or prolonged compared to management’s current expectations, significant negative price/cost relationships will persist over the long-term, profit margins do not improve as expected, or other assumptions change, such as the discount rate, goodwill impairment charges may be possible in the future.

In the annual goodwill impairment analysis completed during the third quarter of 2021, projected future cash flows for the Plastics - Healthcare reporting unit were discounted at i 8.3% and its estimated fair value was determined to exceed its carrying value by approximately i 13.3%. Based on the discounted cash flow model and holding other valuation assumptions constant, projected operating profits across all future periods would have to be reduced approximately i 13.0%, or the discount rate increased to i 9.3%, in order for the estimated fair value of the reporting unit to fall below carrying value. Total goodwill associated with this reporting unit was $ i 62,404 at July 3, 2022.

During the time subsequent to the annual evaluation, and at July 3, 2022, the Company considered whether any events and/or changes in circumstances had resulted in the likelihood that the goodwill of any of its reporting units may have been impaired. It is management's opinion that no such events and/or changes in circumstances have occurred.

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

Other Intangible Assets

i A summary of other intangible assets as of July 3, 2022 and December 31, 2021 is as follows:

July 3,
2022

December 31,
2021

Other Intangible Assets, gross:

Patents

i 29,307

i 29,315

Customer lists

i 1,048,443

i 592,195

Trade names

i 31,837

i 32,043

Proprietary technology

i 57,728

i 22,846

Other

i 2,777

i 2,807

Total Other Intangible Assets, gross

i 1,170,092

i 679,206

Accumulated Amortization:

Patents

( i 17,099)

( i 16,275)

Customer lists

( i 379,576)

( i 347,274)

Trade names

( i 15,042)

( i 14,106)

Proprietary technology

( i 23,117)

( i 21,394)

Other

( i 2,044)

( i 2,014)

Total Accumulated Amortization

( i 436,878)

-436878000

( i 401,063)

Other Intangible Assets, net

i 733,214

i 278,143

The acquisition of Metal Packaging on January 26, 2022 resulted in the addition of $ i 498,000 of intangible assets, primarily customer lists and proprietary technology, which are expected to be amortized over their average useful lives of approximately i 13.6 years. See Note 3 for additional information about the Metal Packaging acquisition.

Other Intangible Assets are amortized on a straight-line basis over their respective useful lives, which generally range from three to i forty years. The Company has i no intangible assets with indefinite lives.

Aggregate amortization expense was $ i 20,871 and $ i 12,111 for the three months ended July 3, 2022 and July 4, 2021, respectively, and $ i 39,671 and $ i 24,860 for the six months ended July 3, 2022 and July 4, 2021, respectively. Amortization expense on other intangible assets is expected to total approximately $ i 81,200 in 2022, $ i 79,500 in 2023, $ i 71,400 in 2024, $ i 60,900 in 2025 and $ i 57,900 in 2026.

Note 8: i Debt

i Details of the Company's debt at July 3, 2022 and December 31, 2021 are as follows:


	July 3, 2022		December 31, 2021
Commercial paper	$	i 258,000	$	i 349,000
Syndicated term loan due February 2025	i 299,559		i —
i 1.800% notes due February 2025	i 397,978		i —
i 2.250% notes due February 2027	i 297,654		i —
i 2.850% notes due February 2032	i 495,004		i —
i 3.125% notes due May 2030	i 595,629		i 595,342
i 5.750% notes due November 2040	i 536,198		i 536,182
Other foreign denominated debt	i 42,745		i 55,432
Finance lease obligations	i 107,521		i 60,282

Other debt	i 96,653		i 14,425
Total debt	$	i 3,126,941	$	i 1,610,663
Less current portion and short-term notes	i 399,025		i 411,557
Long-term debt	$	i 2,727,916	$	i 1,199,106

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

On January 21, 2022, the Company completed a registered public offering of green bonds with an aggregate principal amount of $ i 1,200,000. These unsecured notes (the "Notes") consisted of the following:

Principal Amount

Issuance Costs and Discounts

Net Proceeds

Interest Rate

Maturity

2025 Notes

i 400,000

( i 2,356)

i 397,644

i 1.800%

February 1, 2025

2027 Notes

i 300,000

( i 2,565)

i 297,435

i 2.250%

February 1, 2027

2032 Notes

i 500,000

( i 5,220)

i 494,780

i 2.850%

February 1, 2032

Total

i 1,200,000

( i 10,141)

i 1,189,859

The Notes are senior unsecured obligations and rank equal in right of payment to the Company’s other senior unsecured debt from time to time outstanding. The indenture governing the Notes contains certain covenants with respect to the Company that, among other things, restrict the entry into additional secured indebtedness, sale and leaseback transactions and certain mergers, consolidations and transfers of all or substantially all of the Company’s assets. The Company used an amount equal to the net proceeds from the Notes to partially fund the January 26, 2022 acquisition of Metal Packaging.

Also on January 21, 2022, the Company entered into a $ i 300,000 i three-year term loan facility (the "Term Loan Facility") with a syndicate of i eight banks. The full $ i 300,000 was drawn from this facility on January 26, 2022, and the proceeds used to partially fund the acquisition of Metal Packaging. Interest is assessed at the Secured Overnight Financing Rate ("SOFR") plus a margin based on a pricing grid that uses the Company’s credit ratings. The current SOFR margin is i 122.5 basis points. There is no required amortization and repayment can be accelerated at any time without penalty at the Company's discretion. Borrowings under the Term Loan Facility mature on January 27, 2025.

On April 28, 2021, the Company commenced a cash tender offer to purchase up to $ i 300,000 of the $ i 600,000 then-outstanding principal amount of its i 5.750% notes due November 2040. i Upon expiration of the tender offer on May 25, 2021, the Company repurchased i 10.53% of its outstanding i 5.750% notes for a total cash cost of $ i 81,961, as shown below: /

Principal Amount Tendered

Premium and Other Amounts Paid

Total
Cash
Paid

i 5.750% notes due November 2040

i 63,206

i 18,755

i 81,961

On April 28, 2021, the Company entered into a reverse treasury lock agreement intended to fix the cash cost to fund approximately $ i 100,000 of the maximum $ i 300,000 principal amount subject to being tendered. The settlement of the reverse treasury lock on May 13, 2021 resulted in a loss of $ i 1,356. In addition, the Company wrote off a proportional share of unamortized bond issuance costs and unamortized original issue discounts associated with the i 5.750% notes. These non-cash write-offs net to $ i 73, which combined with the hedge loss and premium and other amounts paid, resulted in a pretax loss from the early extinguishment of debt totaling $ i 20,184 during each of the three- and six-month periods ended July 4, 2021.

The Company's i 150,000 euro-denominated loan, which bore i 1% annual interest, matured on May 25, 2021, and a U.S. dollar equivalent cash payment of $ i 177,780 was made to settle the debt. On April 7, 2021, the Company entered into two forward contracts to buy a total of i 150,000 euros in order to manage foreign currency risk related to the Company's funding of the debt repayment upon maturity. The Company recognized a gain of $ i 4,387 upon the May 21, 2021 maturity of these forward contracts. The gain is included in "Selling, general and administrative expenses" in the Company's Condensed Consolidated Statements of Income for the three and six months ended July 4, 2021 and the proceeds from the settlement of the contracts and the debt maturity payment are reflected in "Net cash provided/(used) by financing activities" in the Company's Condensed Consolidated Statement of Cash Flows for the six months ended July 4, 2021.

Certain of the Company’s debt agreements impose restrictions with respect to the maintenance of financial ratios and the disposition of assets. The most restrictive covenants currently require the Company to maintain a minimum level of interest coverage and a minimum level of net worth, as defined in the agreements. As of July 3, 2022, the Company’s interest coverage and net worth were substantially above the minimum levels required under these covenants.

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

Note 9: i 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.

Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value

Long-term debt, net of current portion

i 2,727,916

i 2,569,487

i 1,199,106

i 1,434,711

The carrying value of cash and cash equivalents and short-term 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 which is considered a Level 2 fair value measurement.

Cash Flow Hedges

At July 3, 2022 and December 31, 2021, the Company had derivative financial instruments outstanding to hedge anticipated transactions and certain asset and liability related cash flows. These contracts, which have maturities ranging to December 2024, qualify as cash flow hedges under U.S. GAAP. For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item.

Commodity Cash Flow Hedges

Certain derivative contracts entered into to manage the cost of anticipated purchases of natural gas and aluminum have been designated by the Company as cash flow hedges. At July 3, 2022, these contracts included natural gas swaps covering approximately i 1.1 million MMBTUs. These contracts represented approximately i 25% of anticipated usage in North America for the remainder of 2022, and i i 1 / % of anticipated usage in both 2023 and 2024. The Company also has certain natural gas hedges that it does not treat as cash flow hedges. See "Non-Designated Derivatives" below for a discussion of these hedges. At July 3, 2022, the Company had designated swap contracts covering i 84 metric tons of aluminum as cash flow hedges. These contracts represented approximately i 3% of anticipated aluminum usage for the remainder of 2022. The fair value of the Company’s commodity cash flow hedges netted to a gain position of $ i 2,700 and $ i 1,491 at July 3, 2022 and December 31, 2021, respectively. The amount of the gain included in Accumulated Other Comprehensive Income at July 3, 2022 expected to be reclassified to the income statement during the next twelve months is $ i 2,696.

Foreign Currency Cash Flow Hedges

The Company has entered into forward contracts to hedge certain anticipated foreign currency denominated sales, purchases, and capital spending expected to occur in 2022 and 2023. i The net positions of these contracts at July 3, 2022 were as follows (in thousands):


Currency	Action	Quantity
Colombian peso	purchase	i 13,591,224
Mexican peso	purchase	i 244,790
Polish zloty	purchase	i 44,467
Czech koruna	purchase	i 33,398
Euro	purchase	i 10,449
Turkish lira	purchase	i 9,356
Canadian dollar	purchase	i 7,809
British pound	purchase	i 1,005
Brazilian real	sell	( i 6,286)

The fair value of foreign currency cash flow hedges related to forecasted sales and purchases netted to a gain position of $ i 379 and $ i 336 at July 3, 2022 and December 31, 2021, respectively. Gains of $ i 379 are expected to be

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

reclassified from accumulated other comprehensive loss to the income statement during the next twelve months. In addition, the Company has entered into forward contracts to hedge certain foreign currency cash flow transactions related to construction in progress. As of July 3, 2022 and December 31, 2021, the net position of these contracts was $( i 938) and $( i 457), respectively. During the six months ended July 3, 2022, losses from these hedges totaling $ i 657 were reclassified from accumulated other comprehensive loss and included in the carrying value of the capitalized expenditures. Losses of $ i 875 are expected to be reclassified from accumulated other comprehensive loss and included in the carrying value of the related fixed assets acquired during the next twelve months.

Non-Designated Derivatives

The Company routinely enters into other derivative contracts which are not designated for hedge accounting treatment under ASC 815. As such, changes in fair value of these non-designated derivatives are recorded directly to income and expense in the periods that they occur.

Foreign Currency Hedges

The Company routinely enters into forward contracts or swaps to economically hedge the currency exposure of intercompany debt and foreign currency denominated receivables and payables. i The net currency positions of these non-designated contracts at July 3, 2022, were as follows (in thousands):


Currency	Action	Quantity
Colombian peso	purchase	i 31,847,040
Indonesian rupiah	purchase	i 30,335,671
Mexican peso	purchase	i 388,269
Turkish lira	purchase	i 36,904
Thai baht	purchase	i 9,251
Canadian dollar	purchase	i 4,026
Euro	purchase	i 20

Commodity Hedges

The Company has entered into non-designated derivative contracts to manage the cost of anticipated purchases of natural gas. At July 3, 2022, these contracts consisted of natural gas swaps covering approximately i 5.3 million MMBTUs and represented approximately i 46% of anticipated usage in North America for the remainder of 2022, and i 27% and i 17% of anticipated usage in 2023 and 2024, respectively.

Interest Rate Hedges

Pursuant to the registered public offering of unsecured i 2.850% notes with a principal amount of $ i 500,000 maturing on February 1, 2032, the Company entered into treasury lock derivative instruments with i two banks, with a notional principal amount of $ i 150,000 each on December 29, 2021. These instruments had the risk management objective of reducing exposure to the Company of increases in the underlying Treasury index up to the date of pricing of the notes. The fair value of the contracts was a net loss position of $( i 550) at December 31, 2021. The derivatives were settled when the bonds priced on January 11, 2022, with the Company recognizing a gain on the settlement of $ i 5,201. The gain is included in "Selling, general and administrative expenses" on the Company's Condensed Consolidated Statements of Income for the six months ended July 3, 2022.

The fair value of the Company’s non-designated derivatives position was a gain of $ i 3,679 and $ i 92 at July 3, 2022 and December 31, 2021, respectively.

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

i The following table sets forth the location and fair values of the Company’s derivative instruments at July 3, 2022 and December 31, 2021:

Description

Balance Sheet Location

Derivatives designated as hedging instruments:

Commodity Contracts

Prepaid expenses

i 2,822

i 1,599

Commodity Contracts

Other assets

i 5

i —

Commodity Contracts

Accrued expenses and other

( i 127)

( i 108)

Foreign Exchange Contracts

Prepaid expenses

i 936

i 848

Foreign Exchange Contracts

Accrued expenses and other

( i 1,432)

( i 969)

Foreign Exchange Contracts

Other liabilities

( i 63)

i —

Derivatives not designated as hedging instruments:

Commodity Contracts

Prepaid expenses

i 4,688

i 1,815

Commodity Contracts

Other assets

i 197

i —

Commodity Contracts

Accrued expenses and other

i —

( i 1,132)

Commodity Contracts

Other liabilities

( i 957)

i —

Foreign Exchange Contracts

Prepaid expenses

i 26

i 135

Foreign Exchange Contracts

Accrued expenses and other

( i 275)

( i 176)

Interest Rate Lock Contract

Accrued expenses and other

i —

( i 550)

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 July 3, 2022 and July 4, 2021, excluding the amount of foreign currency cash flow hedges that were reclassified from accumulated other comprehensive loss to the carrying value of the capitalized expenditures:

Description

Amount of Gain or
(Loss) Recognized
in OCI on
Derivatives

Location of Gain
or (Loss)
Reclassified from
Accumulated OCI
Into Income

Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI Into Income

Derivatives in Cash Flow Hedging Relationships:

Three months ended July 3, 2022

Foreign Exchange Contracts

( i 1,324)

Net sales

i 843

Cost of sales

( i 1,011)

Commodity Contracts

i 850

Cost of sales

i 1,979

Three months ended July 4, 2021

Foreign Exchange Contracts

i 751

Net sales

i 1,489

Cost of sales

( i 1,190)

Commodity Contracts

i 4,847

Cost of sales

i 646

Description

Gain or (Loss)
Recognized

Location of Gain or (Loss) Recognized in
Income Statement

Derivatives not Designated as Hedging Instruments:

Three months ended July 3, 2022

Commodity Contracts

i 506

Cost of sales

Foreign Exchange Contracts

( i 1,142)

Selling, general and administrative

Three months ended July 4, 2021

Commodity Contracts

i 56

Cost of sales

Foreign Exchange Contracts

i 220

Selling, general and administrative

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

Three months ended July 3, 2022

Three months ended July 4, 2021

Description

Revenue

Cost of
sales

Revenue

Cost of
sales

Total amount of income and expense line items presented in the Condensed Consolidated Statements of Income

i 843

i 968

i 1,489

( i 544)

Gain or (loss) on cash flow hedging relationships:

Foreign exchange contracts:

Amount of gain or (loss) reclassified from accumulated other comprehensive loss into net income

i 843

( i 1,011)

i 1,489

( i 1,190)

Commodity contracts:

Amount of gain reclassified from accumulated other comprehensive loss into net income

i —

i 1,979

i —

i 646

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares 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 six months ended July 3, 2022 and July 4, 2021, excluding the amount of foreign currency cash flow hedges that were reclassified from accumulated other comprehensive loss to the carrying value of the capitalized expenditures:

Description

Amount of Gain or
(Loss) Recognized
in OCI on
Derivatives

Location of Gain
or (Loss)
Reclassified from
Accumulated OCI
Into Income

Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI Into Income

Derivatives in Cash Flow Hedging Relationships:

Six months ended July 3, 2022

Foreign Exchange Contracts

i 88

Net sales

i 1,866

Cost of sales

( i 1,706)

Commodity Contracts

i 4,183

Cost of sales

i 2,937

Six months ended July 4, 2021

Foreign Exchange Contracts

i 563

Net sales

i 1,829

Cost of sales

( i 1,418)

Commodity Contracts

i 6,601

Cost of sales

i 575

Description

Gain or (Loss)
Recognized

Location of Gain or (Loss) Recognized in
Income Statement

Derivatives not Designated as Hedging Instruments:

Six months ended July 3, 2022

Commodity Contracts

i 7,498

Cost of sales

Foreign Exchange Contracts

i 201

Selling, general and administrative

Six months ended July 4, 2021

Commodity Contracts

i 434

Cost of sales

Foreign Exchange Contracts

( i 405)

Selling, general and administrative

Six months ended July 3, 2022

Six months ended July 4, 2021

Description

Revenue

Cost of
sales

Revenue

Cost of
sales

Total amount of income and expense line items presented in the Condensed Consolidated Statements of Income

i 1,866

i 1,231

i 1,829

( i 843)

Gain or (loss) on cash flow hedging relationships:

Foreign exchange contracts:

Amount of gain or (loss) reclassified from accumulated other comprehensive income into net income

i 1,866

( i 1,706)

i 1,829

( i 1418)

Commodity contracts:

Amount of gain or (loss) reclassified from accumulated other comprehensive income into net income

i —

i 2,937

i —

i 575

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

Note 10: i Fair Value Measurements

i 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

Assets that are calculated at Net Asset Value per share (NAV) are not required to be categorized within the fair value hierarchy.

i 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

Assets measured
at NAV

Level 1

Level 2

Level 3

Hedge derivatives, net:

Commodity contracts

i 2,700

i —

i 2,700

i —

Foreign exchange contracts

( i 559)

i —

( i 559)

i —

Non-hedge derivatives, net:

Commodity contracts

i 3,928

i —

i 3,928

i —

Foreign exchange contracts

( i 249)

i —

( i 249)

i —

Description

Assets measured
at NAV

Level 1

Level 2

Level 3

Hedge derivatives, net:

Commodity contracts

i 1,491

i —

i 1,491

i —

Foreign exchange contracts

( i 121)

i —

( i 121)

i —

Non-hedge derivatives, net:

Commodity contracts

i 683

i —

i 683

i —

Foreign exchange contracts

( i 41)

i —

( i 41)

i —

Interest rate lock contract

( i 550)

i —

( i 550)

i —

As discussed in Note 9, the Company uses derivatives to mitigate the effect of commodity 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.

The Company does not currently have any non-financial assets or liabilities that are recognized or disclosed at fair value on a recurring basis. i None of the Company’s financial assets or liabilities are measured at fair value using significant unobservable inputs. There were no transfers in or out of Level 1 or Level 2 fair value measurements during the three- and six-month periods ended July 3, 2022.

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

Note 11: i Employee Benefit Plans

Retirement Plans and Retiree Health and Life Insurance Plans

The Company provides non-contributory defined benefit pension plans for certain of its employees in the United States, Mexico, Belgium, Germany, Greece, France, and Turkey. The Company also sponsors contributory defined benefit pension plans covering certain of its employees in the United Kingdom, Canada and the Netherlands, and provides postretirement healthcare and life insurance benefits to a limited number of its retirees and their dependents in the United States and Canada, based on certain age and/or service eligibility requirements.

i The components of net periodic benefit cost include the following:

Three Months Ended

Six Months Ended

Retirement Plans

Service cost

i 837

i 1,020

i 1,663

i 1,981

Interest cost

i 2,671

i 9,657

i 5,381

i 19,764

Expected return on plan assets

( i 2,278)

( i 8,650)

( i 5,143)

( i 18,311)

Amortization of prior service cost

i 232

i 235

i 453

i 461

Amortization of net actuarial loss

i 1,181

i 6,378

i 2,316

i 13,249

Effect of settlement loss

i 74

i 547,631

i 430

i 547,631

Net periodic benefit cost

i 2,717

i 556,271

i 5,100

i 564,775

Retiree Health and Life Insurance Plans

Service cost

i 79

i 95

i 161

i 189

Interest cost

i 66

i 50

i 130

i 100

Expected return on plan assets

( i 110)

( i 111)

( i 222)

( i 224)

Amortization of net actuarial gain

( i 158)

( i 181)

( i 343)

( i 377)

Net periodic benefit income

( i 123)

( i 147)

( i 274)

( i 312)

Settlement Charges

The Company recognized settlement charges of $ i 430 and $ i 340 during the six months ended July 3, 2022 and July 4, 2021, respectively. These charges resulted from payments made to certain participants in the Company's non-union Canadian pension plan who elected a lump sum distribution option upon retirement. Additional settlement charges related to the Canadian pension plans may be recognized over the remainder of 2022 as a result of ongoing lump-sum distributions.

The Company terminated the Sonoco Pension Plan for Inactive Participants (the "Inactive Plan"), a tax-qualified defined benefit plan, effective September 30, 2019, and settled the liabilities of the Inactive Plan in the second quarter of 2021 through a combination of lump-sum payments and the purchase of group annuity contracts. Non-cash, pre-tax settlement charges totaling $ i 547,291 were recognized in the second quarter of 2021 as the lump sum payouts and annuity purchases were made.

Contributions

The Company made aggregate contributions of $ i 8,895 and $ i 139,687 to its defined benefit retirement and retiree health and life insurance plans during the six months ended July 3, 2022 and July 4, 2021, respectively. The 2021 contributions include $ i 133,000 contributed to the Inactive Plan during the second quarter of 2021 in order for it to be fully funded upon final settlement. The Company expects to make additional aggregate contributions of approximately $ i 6,800 to its defined benefit retirement and retiree health and life insurance plans over the remainder of 2022.

Sonoco Retirement and Savings Plan

The Sonoco Retirement and Savings Plan is a defined contribution retirement plan provided for certain of the Company’s U.S. employees. The plan is comprised of both an elective and non-elective component.

The elective component of the plan, which is designed to meet the requirements of Section 401(k) of the Internal Revenue Code, allows participants to set aside a portion of their wages and salaries for retirement and encourages saving

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

by matching a portion of their contributions with contributions from the Company. The plan provides for participant contributions of i 1% to i 100% of gross pay. Effective January 1, 2022, the Company's match on elective contributions to the plan increased from i 50% of the first i 4% of compensation contributed by participants to i 100% of the first i 6% as a result of changes to the plan, described below.

The non-elective component of the plan, the Sonoco Retirement Contribution ("SRC"), was eliminated effective January 1, 2022. The SRC provided for an annual Company contribution equal to i 4% of the participant's eligible pay plus i 4% of eligible pay in excess of the social security wage base to eligible participant accounts. SRC contributions were funded annually in the first quarter, following the year in which the benefit was earned. SRC contributions totaled $ i 21,948 and $ i 22,665 during the six months ended July 3, 2022 and July 4, 2021, respectively. i No additional SRC contributions will occur. The Company recognized expense related to the SRC of $ i 5,499 and $ i 11,834 for the three- and six-month periods ended July 4, 2021.

Note 12: i Income Taxes

The Company’s effective tax rates for the three- and six-month periods ended July 3, 2022 were i 25.8% and i 24.9%, respectively, and its rates for the three- and six-month periods ended July 4, 2021 were i 26.0% and i 26.2%, respectively. The Company's effective tax rates varied from the U.S. statutory rate due primarily to rate differences between U.S. and non-U.S. jurisdictions and the relative amounts earned in those jurisdictions, state income taxes, and discrete tax adjustments that were not consistent year over year. The lower 2022 rate was primarily driven by the absence of the 2021 pension settlement charge and the 2022 release of valuation allowances on the Company's state net operating loss carryforwards resulting from the increase in projected earnings associated with the Metal Packaging acquisition.

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 income tax examinations by tax authorities for years prior to 2015.

The Company’s reserve for uncertain tax benefits has increased by $ i 1,000 since December 31, 2021 due primarily to an increase in reserves related to existing tax positions. The Company believes that it is reasonably possible that the amount reserved for unrecognized tax benefits at July 3, 2022 could increase by approximately $ i 200 over the next twelve months. Although the Company’s estimate for the potential outcome for any uncertain tax issue is highly judgmental, management believes that any reasonably foreseeable outcomes related to these matters have been adequately provided for. However, future results may include favorable or unfavorable adjustments to estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which earnings or deductions are realized may differ from current estimates. As a result, the Company’s effective tax rate may fluctuate significantly on a quarterly basis. The Company has operations and pays taxes in many countries outside of the U.S. and taxes on those earnings are subject to varying rates. The Company is not dependent upon the favorable benefit of any one jurisdiction to an extent that the loss of such benefit would have a material effect on the Company’s overall effective tax rate.

Note 13: i i Leases /

The Company routinely enters into leasing arrangements for real estate (including manufacturing facilities, office space, and warehouses), transportation equipment (automobiles, forklifts, and trailers), and office equipment (copiers and postage machines). The assessment of the certainty associated with the exercise of various lease renewal, termination, and purchase options included in the Company's lease contracts is performed after contemplating all the relevant facts and circumstances in accordance with guidance under ASC 842. Most real estate leases, in particular, include i one or more options to renew, with renewal terms that typically extend the lease term in increments from one to i five years. The Company's leases do not have any significant residual value guarantees or restrictive covenants.

As the implicit rate in the Company's leases is normally not readily determinable, the Company generally calculates its lease liabilities using discount rates based upon the Company’s incremental secured borrowing rate, which contemplates and reflects a particular geographical region’s interest rate for the leases active within that region of the Company’s global operations. The Company further utilizes a portfolio approach by assigning a “short” rate to contracts with lease terms of i 10 years or less and a “long” rate for contracts greater than i 10 years.

The Company completed the acquisition of Metal Packaging on January 26, 2022. The acquisition included both operating and finance lease assets and liabilities. The acquired operating lease liabilities of $ i 33,910 had a weighted

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

average remaining lease maturity term and discount rate of i 11.0 years and i 2.8%, respectively, and the acquired finance lease liabilities of $ i 46,687 had a weighted average remaining lease maturity term and discount rate of i 3.8 years and i 7.5%, respectively, as of the date of the acquisition.

i The following table sets forth the balance sheet location and aggregate values of the Company’s lease assets and lease liabilities at July 3, 2022 and December 31, 2021:

Classification

Balance Sheet Location

Lease Assets

Operating lease assets

Right of Use Asset - Operating Leases

i 296,643

i 268,390

Finance lease assets

Other Assets

i 108,606

i 55,826

Total lease assets

i 405,249

i 324,216

Lease Liabilities

Current operating lease liabilities

Accrued expenses and other

i 48,968

i 45,305

Current finance lease liabilities

Notes payable and current portion of debt

i 15,583

i 6,952

Total current lease liabilities

i 64,551

i 52,257

Noncurrent operating lease liabilities

Noncurrent Operating Lease Liabilities

i 254,520

i 234,167

Noncurrent finance lease liabilities

Long-term Debt, Net of Current Portion

i 91,938

i 53,330

Total noncurrent lease liabilities

i 346,458

i 287,497

Total lease liabilities

i 411,009

i 339,754

Certain of the Company’s leases include variable costs. Variable costs include lease payments that were volume or usage-driven in accordance with the use of the underlying asset, and also non-lease components that were incurred based upon actual terms rather than contractually fixed amounts. In addition, variable costs are incurred for lease payments that are indexed to a change in rate or index. Because the right of use assets recorded on the balance sheet were determined based upon factors considered at the commencement date of the leases, subsequent changes in the rate or index that were not contemplated in the right of use asset balances recorded on the balance sheet result in variable expenses being incurred when paid during the lease term.

The following table sets forth the components of the Company's total lease cost for the three- and six-month periods ended July 3, 2022 and July 4, 2021:

Three Months Ended

Six Months Ended

Lease Cost

Operating lease cost

(a)

i 13,251

i 11,902

i 26,048

i 25,097

Finance lease cost:

Amortization of lease asset

(a)

i 3,278

i 1,332

i 5,989

i 2,657

Interest on lease liabilities

(b)

i 1,281

i 337

i 2,247

i 630

Variable lease cost

(a) (c)

i 7,167

i 6,689

i 14,522

i 12,773

Total lease cost

i 24,977

i 20,260

i 48,806

i 41,157

(a) Production-related and administrative amounts are included in cost of sales and selling, general and administrative expenses, respectively.

(b) Included in interest expense.

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

i The following table sets forth certain lease-related information for the six-month periods ended July 3, 2022 and July 4, 2021:


	Six Months Ended
	July 3, 2022		July 4, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used by operating leases	$	i 26,295	$	i 26,620
Operating cash flows used by finance leases	$	i 2,247	$	i 630
Financing cash flows used by finance leases	$	i 6,019	$	i 2,156
Noncash investing and financing activities:
Leased assets obtained in exchange for new operating lease liabilities	$	i 22,046	$	i 6,705
Leased assets obtained in exchange for new finance lease liabilities	$	i 7,511	$	i 5,879
Modification to leased assets for (decrease) increase in operating lease liabilities	$	( i 4,139)	$	i 6,845
Modification to leased assets for increase in finance lease liabilities	$	i 14	$	i 9,586
Termination reclasses to decrease operating lease assets	$	( i 3,230)	$	( i 4,319)
Termination reclasses to decrease operating lease liabilities	$	( i 3,109)	$	( i 4,336)
Termination reclasses to decrease finance lease assets	$	( i 386)	$	( i 21)
Termination reclasses to decrease finance lease liabilities	$	( i 9)	$	( i 23)

SONOCO PRODUCTS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars and shares in thousands except per share data)

(unaudited)

Note 14: i Revenue Recognition

The Company records revenue when control is transferred to the customer, which is either upon shipment or over time in cases where the Company is entitled to payment with margin for products produced that are customer specific without alternative use. The Company recognizes over time revenue under the input method as goods are produced. Revenue that is recognized at a point in time is recognized when the customer obtains control of the goods. Customers obtain control either when goods are delivered to the customer facility, if the Company is responsible for arranging transportation, or when picked up by the customer's designated carrier. The Company commonly enters into Master Supply Arrangements with customers to provide goods and/or services over specific time periods. Customers submit purchase orders with quantities and prices to create a contract for accounting purposes. Shipping and handling expenses are included in "Cost of Sales," and freight charged to customers is included in "Net Sales" in the Company's Condensed Consolidated Statements of Income.

The Company has rebate agreements with certain customers. These rebates are recorded as reductions of revenue and are accrued using sales data and rebate percentages specific to each customer agreement. Accrued customer rebates are included in "Accrued expenses and other" in the Company's Condensed Consolidated Balance Sheets.

Payment terms under the Company's sales arrangements are short term, generally no longer than i 120 days. The Company does provide prompt payment discounts to certain customers if invoices are paid within a predetermined period. Prompt payment discounts are treated as a reduction of revenue and are determinable within a short time period following the sale.

The following tables set forth the effects of contract assets and liabilities from contracts with customers. Contract assets and liabilities are reported in "Other receivables" and "Accrued expenses and other," respectively, on the Company's Condensed Consolidated Balance Sheets.

Contract Assets

i 65,377

i 51,106

Contract Liabilities

( i 25,631)

( i 18,993)

Significant changes in the contract assets and liabilities balances during the six months ended July 3, 2022 and the year ended December 31, 2021 were as follows: