1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 27, 1999 Commission File No. 1-11261 SONOCO PRODUCTS COMPANY ---------------- Incorporated under the laws I.R.S. Employer Identification of South Carolina No. 57-0248420 Post Office Box 160 Hartsville, South Carolina 29551-0160 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock at August 1, 1999: Common stock, no par value: 101,935,240 ---------------------------------------
2 SONOCO PRODUCTS COMPANY INDEX PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: Condensed Consolidated Balance Sheets - June 27, 1999 and December 31, 1998 Condensed Consolidated Statements of Income - Three Months and Six Months Ended June 27, 1999 and June 28, 1998 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 27, 1999 and June 28, 1998 Notes to Condensed Consolidated Financial Statements Report of Independent Accountants ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K SIGNATURE
3 SONOCO PRODUCTS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars and shares in thousands) <TABLE> <CAPTION> (unaudited) June 27, December 31, 1999 1998* ----------- ----------- <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $ 44,845 $ 57,249 Trade and other accounts receivable, net of allowances 368,404 352,147 Inventories: Finished and in process 105,541 93,829 Materials and supplies 124,427 123,432 Prepaid expenses and other 30,738 29,465 Net assets held for sale -- 5,294 ----------- ----------- 673,955 661,416 PROPERTY, PLANT AND EQUIPMENT, NET 995,550 1,013,843 COST IN EXCESS OF FAIR VALUE OF ASSETS PURCHASED, NET 172,141 170,361 OTHER ASSETS 259,554 237,363 ----------- ----------- Total Assets $ 2,101,200 $ 2,082,983 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Payable to suppliers $ 156,456 $ 174,218 Accrued expenses and other 148,352 149,467 Notes payable and current portion of long-term debt 76,123 96,806 Taxes on income 2,772 15,578 ----------- ----------- 383,703 436,069 LONG-TERM DEBT 699,184 686,826 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 41,074 43,689 DEFERRED INCOME TAXES AND OTHER 121,889 94,807 SHAREHOLDERS' EQUITY Common stock, no par value Authorized 300,000 shares 101,895 and 101,683 shares issued and outstanding at June 27, 1999 and December 31, 1998, respectively 7,175 7,175 Capital in excess of stated value 435,133 431,465 Accumulated other comprehensive loss (118,674) (95,139) Retained earnings 531,716 478,091 ----------- ----------- Total Shareholders' Equity 855,350 821,592 ----------- ----------- Total Liabilities and Shareholders' Equity $ 2,101,200 $ 2,082,983 =========== =========== </TABLE> * The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. See accompanying Notes to Condensed Consolidated Financial Statements
4 SONOCO PRODUCTS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (Dollars and shares in thousands except per share data) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------------- ----------------------------- June 27, June 28, June 27, June 28, 1999 1998 1999 1998 --------- --------- ----------- ----------- <S> <C> <C> <C> <C> Net sales $ 611,754 $ 637,609 $ 1,172,233 $ 1,310,924 Cost of sales 466,632 489,708 892,534 1,007,766 Selling, general and administrative expenses 64,245 61,854 120,015 129,191 Gain on assets held for sale 3,500 85,360 3,500 85,360 --------- --------- ----------- ----------- Income before interest and taxes 84,377 171,407 163,184 259,327 Interest expense 11,846 12,878 24,316 27,234 Interest income (1,692) (1,963) (2,730) (2,771) --------- --------- ----------- ----------- Income before income taxes 74,223 160,492 141,598 234,864 Provision for income taxes 28,575 88,095 53,166 117,100 --------- --------- ----------- ----------- Income before equity in earnings of affiliates/ Minority interest in subsidiaries 45,648 72,397 88,432 117,764 Equity in earnings of affiliates/Minority interest in subsidiaries 1,716 1,544 2,879 2,672 --------- --------- ----------- ----------- Net income before extraordinary loss 47,364 73,941 91,311 120,436 Extraordinary loss from early extinguishment of debt, net of income tax benefit -- 11,753 -- 11,753 --------- --------- ----------- ----------- Net income $ 47,364 $ 62,188 $ 91,311 $ 108,683 ========= ========= =========== =========== Average common shares outstanding: Basic 101,867 103,104 101,842 103,503 Assuming exercise of options 975 3,183 987 3,111 --------- --------- ----------- ----------- Diluted 102,842 106,287 102,829 106,614 ========= ========= =========== =========== </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements
5 SONOCO PRODUCTS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited), continued (Dollars and shares in thousands except per share data) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------- ------------------- June 27, June 28, June 27, June 28, 1999 1998 1999 1998 ------- ------- ------ ------- <S> <C> <C> <C> <C> Per common share Net income: Basic, before extraordinary loss $ .46 $ .71 $ .90 $ 1.16 Extraordinary loss, net of income tax benefit -- (.11) -- (.11) ------- ------- ------ ------- Basic $ .46 $ .60 $ .90 $ 1.05 ======= ======= ====== ======= Diluted, before extraordinary loss $ .46 $ .70 $ .89 $ 1.13 Extraordinary loss, net of income tax benefit -- (.11) -- (.11) ------- ------- ------ ------- Diluted $ .46 $ .59 $ .89 $ 1.02 ======= ======= ====== ======= Dividends per common share $ .19 $ .18 $ .370 $ .344 ======= ======= ====== ======= </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements
6 SONOCO PRODUCTS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Dollars in thousands) <TABLE> <CAPTION> Six Months Ended --------------------------- June 27, June 28, 1999 1998 --------- --------- <S> <C> <C> NET CASH PROVIDED BY OPERATING ACTIVITIES $ 67,476 $ 87,645 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (64,437) (101,153) Cost of acquisitions, exclusive of cash (25,770) (46,524) Proceeds from non-operating notes receivable 34,000 -- Proceeds from the sale of assets 15,433 295,861 Other, net (933) (1,614) --------- --------- Net cash (used) provided by investing activities (41,707) 146,570 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt 46,040 97,069 Principal repayment of debt (64,796) (111,614) Net increase (decrease) in commercial paper borrowings 17,000 (62,500) Cash dividends (37,686) (35,414) Common shares acquired (217) (138,524) Common shares issued 2,854 26,398 --------- --------- Net cash used by financing activities (36,805) (224,585) --------- --------- EFFECTS OF EXCHANGE RATE CHANGES ON CASH (1,368) (246) --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (12,404) 9,384 Cash and cash equivalents at beginning of period 57,249 53,600 --------- --------- Cash and cash equivalents at end of period $ 44,845 $ 62,984 ========= ========= </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements
7 SONOCO PRODUCTS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1: BASIS OF INTERIM PRESENTATION In the opinion of the management of Sonoco Products Company (the "Company"), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations, and cash flows for the interim periods reported hereon. Operating results for the three and six months ended June 27, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. 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 for the fiscal year ended December 31, 1998. NOTE 2: DIVIDEND DECLARATIONS On April 21, 1999, the Board of Directors declared a regular quarterly dividend of $.19 per share. This dividend was paid June 10, 1999, to all shareholders of record May 21, 1999. On July 21, 1999, the Board of Directors declared a regular quarterly dividend of $.19 per share payable September 10, 1999, to all shareholders of record August 20, 1999. NOTE 3: ACQUISITIONS/DISPOSITIONS During the first quarter of 1999, Sonoco completed the acquisition of Wood Composite Technology, a manufacturer of composite (i.e. wood and plastic) reels serving the wire and cable markets. The acquisition is expected to add approximately $10 million of sales annually. Sonoco also acquired tube and core operations in Brazil and Taiwan from Conitex, a wholly owned subsidiary of Texpack, a joint venture partner. In July 1999, Sonoco received regulatory approval to proceed with the purchase of the composite can assets of Crown Cork & Seal, Inc. The purchase, when completed, will consist of three manufacturing facilities in the United States with annual sales of approximately $32 million. Also in July 1999, the Company signed a definitive agreement to purchase the flexible packaging division of Graphic Packaging Corporation, a wholly owned subsidiary of ACX Technologies, Inc. for approximately $105 million. Completion of the all-cash purchase, which is subject to regulatory approval, is expected in the third quarter of 1999. Also, in the first quarter of 1999, Sonoco completed the sale of its labels and label machinery businesses in the United Kingdom and a label machinery business in the United States. These operations had sales of approximately $34 million in 1998 and $4.4 million in 1999. The completion of the sale of these operations resulted in the recognition of a $3.5 million gain.
8 SONOCO PRODUCTS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (unaudited) NOTE 4: COMPREHENSIVE INCOME The following table provides a reconciliation from net income to comprehensive income (dollars in thousands): <TABLE> <CAPTION> Three Months Ended Six Months Ended ---------------------- ----------------------- June 27, June 28, June 27, June 28, 1999 1998 1999 1998 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net income $ 47,364 $ 62,188 $ 91,311 $108,683 Other comprehensive income: Foreign currency translation adjustments 957 9,413 (23,535) 3,791 -------- -------- -------- -------- Comprehensive income $ 48,321 $ 71,601 $ 67,776 $112,474 ======== ======== ======== ======== </TABLE> The following table summarizes the components of the current period change in the accumulated other comprehensive income balances (dollars in thousands): <TABLE> <CAPTION> Foreign Minimum Accumulated Currency Pension Other Translation Liability Comprehensive Adjustments Adjustment Income --------- --------- --------- <S> <C> <C> <C> Balance at January 1, 1999 $ (88,228) $ (6,911) $ (95,139) Current period change (23,535) -- (23,535) --------- --------- --------- Balance at June 27, 1999 $(111,763) $ (6,911) $(118,674) ========= ========= ========= </TABLE> NOTE 5: NEW ACCOUNTING PRONOUNCEMENT On June 15, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 and requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to its limited use of derivative instruments, the adoption of FAS 133 will not have a significant effect on the Company's results of operations or its financial position.
9 SONOCO PRODUCTS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (unaudited) NOTE 6: FINANCIAL SEGMENT INFORMATION Sonoco reports its results in two primary segments, Industrial Packaging and Consumer Packaging. The Industrial Packaging segment includes the following businesses: engineered carriers (tubes and cores); molded plugs and related products and services; injection molded and extruded plastics; paper manufacturing; recovered paper operations; designed interior packaging; wood, plywood, and metal reels for wire and cable packaging; adhesives; converting machinery; and forest products. The Consumer Packaging segment includes the following businesses: composite cans; plastic and fibre cartridges; capseals; flexible packaging; high density film products; folding cartons; packaging services; and coasters and glass covers. FINANCIAL SEGMENT INFORMATION (UNAUDITED) (Dollars in thousands) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------------------ ------------------------------ June 27, 1999 June 28, 1998 June 27, 1999 June 28, 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net Sales Industrial Packaging $ 338,381 $ 343,002 $ 646,271 $ 645,577 Consumer Packaging 271,613 259,858 517,289 510,717 Other* 1,760 34,749 8,673 154,630 ----------- ----------- ----------- ----------- Consolidated $ 611,754 $ 637,609 $ 1,172,233 $ 1,310,924 =========== =========== =========== =========== Operating Profit Industrial Packaging $ 47,969 $ 53,993 $ 91,404 $ 103,341 Consumer Packaging 36,460 32,550 68,204 63,194 Other* (52) (496) 76 7,432 Net gain on sales of divested assets -- 85,360 3,500 85,360 Interest, net (10,154) (10,915) (21,586) (24,463) ----------- ----------- ----------- ----------- Consolidated $ 74,223 $ 160,492 $ 141,598 $ 234,864 =========== =========== =========== =========== </TABLE> * Includes net sales and operating profits of divested businesses and entities previously consolidated which have been contributed to joint ventures and are no longer consolidated by Sonoco.
10 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Directors of Sonoco Products Company We have reviewed the accompanying condensed consolidated balance sheet of Sonoco Products Company as of June 27, 1999, and the related condensed consolidated statements of income for each of the three-month and six-month periods ended June 27, 1999 and June 28, 1998, and the condensed consolidated statements of cash flows for the six-month periods ended June 27, 1999 and June 28, 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with generally accepted accounting principles. We previously audited in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1998, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the year then ended (not presented herein), and in our report dated January 27, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1998, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/PricewaterhouseCoopers LLP ------------------------------ PricewaterhouseCoopers LLP Charlotte, North Carolina August 9, 1999
11 SONOCO PRODUCTS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) Statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations that are not historical in nature, are intended to be, and are hereby identified as "forward looking statements" for purposes of the safe harbor provided by section 21E of the Securities Exchange Act of 1934, as amended. The Company cautions readers that forward looking statements, including without limitation those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, income, and successful implementation of the Year 2000 Plan, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements. SECOND QUARTER 1999 COMPARED WITH SECOND QUARTER 1998 RESULTS OF OPERATIONS Consolidated net sales for the second quarter of 1999 were $611.8 million, compared with $637.6 million in the second quarter of 1998. Last year's second quarter included sales from divested operations including the Company's former labels and label machinery businesses in North America and the United Kingdom, and the Industrial Containers business. It also included sales from the Company's paper cone and roll wrap operations, both of which were subsequently contributed to joint ventures in which Sonoco is a minority or equal owner. The second quarter of 1998 also included sales of corrugating medium to Georgia-Pacific. Beginning in July 1998, corrugating medium was sold to Georgia-Pacific under a new cost-plus fixed management fee arrangement under which Sonoco no longer reports sales. On a comparable basis, excluding divested businesses and entities previously consolidated which have been contributed to joint ventures and are no longer consolidated by Sonoco, sales for the second quarter of 1999 from ongoing operations were $610.0 million, versus $602.9 million in the second quarter of 1998. Reported net income for the quarter was $47.4 million versus $62.2 million in the second quarter of 1998, which included certain one-time transactions. Excluding the one-time transactions, net income for the second quarter of 1998 was $47.4 million. These one-time transactions in 1998 included an after-tax gain of $40 million resulting from the sale of Sonoco's fibre drum and plastic drum operations and a $13.5 million after-tax charge in the second quarter relating to the disposition of former Engraph operations. Net income in 1998 also included the effect of an extraordinary, after-tax loss of $11.8 million resulting from the repurchase of $58.7 million of 9.2% notes. Sonoco reported second quarter earnings of $.46 per diluted share versus $.59 in 1998 including the impact of these one-time transactions. Excluding these one-time transactions, earnings per diluted share were $.45 for the second quarter of 1998. In addition, reported earnings per diluted share for the second quarter of 1999 reflect reduced interest expense from lower debt levels and the reduction in the number of outstanding shares of common stock resulting from $169.1 million of stock repurchases during 1998.
12 SONOCO PRODUCTS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED), CONTINUED SECOND QUARTER 1999 COMPARED WITH SECOND QUARTER 1998, CONTINUED CONSUMER PACKAGING SEGMENT The consumer packaging segment in the second quarter of 1999 included composite cans; plastic and fibre cartridges; capseals; flexible packaging; high density film products; folding cartons; packaging services; and coasters and glass covers. Second quarter sales were $273.4 million, compared with $271.5 million in the same quarter of 1998. Last year's sales included the North American labels operations, which were sold at the beginning of the second quarter of 1998, and sales from the labels operations in the United Kingdom and label machinery operations in the United Kingdom and the United States, which were sold in the second quarter of 1999. On a comparable basis, second quarter 1999 sales were $271.6 million, versus $259.9 million in the same quarter last year. Reported operating profits in this segment were $36.4 million, compared with $30.7 million in the second quarter of 1998. On a comparable basis, operating profits were $36.5 million in the second quarter of 1999, versus $32.6 million in the same quarter last year. The increase in second quarter sales in this segment resulted primarily from increased volume in flexible packaging operations and the European composite can operations. The Company's co-extruded, laminated flexible packaging operations saw increases in internal sales to the Company's consumer products businesses, as well as from new confectionery product introductions by a major customer. New introductions in the snack food market in Europe helped boost composite can volume. The increase in operating profit reflects improved productivity in the domestic composite can, high density film and flexible packaging operations, plus a gain of $1.4 million from the sale of real estate. In the domestic composite can operations, sales in the nuts and powdered beverage product lines were strong, while sales volume in the snack, refrigerated dough and frozen concentrate lines declined during the quarter. The rate of sales decline in frozen concentrates lessened, reflecting the conversion of a previous self-manufacturer. The Company opened a new composite can plant in Mexico during the second quarter, primarily to serve the powdered infant formula market.
13 SONOCO PRODUCTS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED), CONTINUED SECOND QUARTER 1999 COMPARED WITH SECOND QUARTER 1998, CONTINUED INDUSTRIAL PACKAGING SEGMENT The industrial packaging segment for the second quarter of 1999 included engineered carriers (tubes and cores); molded plugs and related products and services; injection molded and extrusion molded plastics; paper manufacturing; recovered paper operations; designed interior packaging; wood, plywood, and metal reels for wire and cable packaging; adhesives; converting machinery; and forest products. Second quarter sales for the industrial packaging segment were $338.4 million, compared with $366.1 million in the second quarter of 1998. The Company's paper cone and roll wrap businesses, both of which were included in last year's second quarter sales, were contributed to joint ventures in 1998, affecting second quarter sales comparisons. Last year's second quarter also included sales of corrugating medium which, beginning in July 1998, is sold under a cost-plus fixed management fee arrangement under which Sonoco no longer reports sales. On a comparable basis, excluding these items and sales from divested operations, sales in 1998 would have been $343.0 million. Operating profits for this segment were $48.0 million, compared with $55.3 million in the same period of 1998. Included in 1999 results is a $2.4 million charge related to the shutdown of a paper mill in the United Kingdom and associated redundancies. Excluding this charge in 1999, and excluding operating profits from divested businesses and previously consolidated entities which have been contributed to joint ventures and are no longer consolidated by Sonoco, comparable operating profits were $50.4 million and $54.0 million, in 1999 and 1998, respectively. Volumes improved in virtually all of the industrial businesses globally, including the paper operations that are currently operating near capacity. The profit impact from volume gains was more than offset, however, by an unfavorable price/cost ratio reflecting increasing raw material costs during the quarter, including recovered paper (OCC) costs. In response, the company announced a 7-1/2% - 9% increase in U.S. prices for its paper-based engineered carriers in July, as well as price increases for Asia, Europe, Latin America, Canada and Mexico. The Company had not announced a general price increase for its engineered carriers since August 1997. Historically, full implementation of price increases for engineered carriers lags increased paper prices. Therefore, a positive impact from the price increase in the third quarter is not expected. There has been a steady, month-over-month increase in demand for engineered carriers since February of this year. In addition, paperboard volume, both internally and from paper supplied under contract to our joint venture partners, improved throughout the quarter as did capacity utilization in our paper mills. These improvements are expected to continue throughout the balance of 1999.
14 SONOCO PRODUCTS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED), CONTINUED JUNE 1999 YEAR-TO-DATE COMPARED WITH JUNE 1998 YEAR-TO-DATE Consolidated net sales for the first six months of 1999 were $1.17 billion, compared with $1.31 billion in the first six months of 1998. Last year's sales included approximately $131.7 million from the following divested operations: the North American labels operation and the fibre and plastic drum portions of the industrial containers business, both divested at the beginning of the second quarter of 1998; and the roll wrap and paper cone operations which were contributed to separate joint ventures during 1998. In addition, 1998 results included sales of corrugating medium which, beginning in July 1998, is sold under a cost-plus fixed management fee arrangement under which Sonoco no longer reports sales. Comparable net sales were $1.16 billion in 1999, even with $1.16 billion in 1998. Net income for the first half of 1999, including a gain of $3.5 million from the sale of the Company's labels business in the United Kingdom and its label machinery businesses in the United Kingdom and the United States, was $91.3 million compared to $108.7 million in 1998,which included numerous special one-time transactions discussed earlier. Excluding these transactions, comparable net income was $87.1 million, a 7.2% decrease from the $93.9 reported during the first half of 1998. CONSUMER PACKAGING SEGMENT Trade sales for the consumer packaging segment in the first six months of 1999 were $526.0 million, compared with $567.4 million in the first half of 1998. On a comparable basis, trade sales for the first six months of 1998 were $510.7 million, as last year's sales included approximately $56.7 million from the North American labels operations, divested at the beginning of the second quarter of 1998. Operating profits in this segment were $68.3 million for the first half of 1999, compared with $64.1 million during the same period last year. On a comparable basis, excluding divested operations, operating profits increased 7.9% to $68.2 million from 1998's $63.2 million. The company's global composite can operations remain strong. Volume increases in the powdered beverage and nuts markets were offset by weakness in the frozen concentrate, snacks, and dough market. Volume increased in Sonoco's high density film products operations led by increases in both the grocery and retail markets. Sales prices, however, declined over last year, but were more than offset by lower resin costs. Volume increased in the company's flexible packaging operations in both the confectionery and liners markets. Productivity improvements and favorable raw material price changes also contributed to this group's improved performance over the first half of 1998.
15 SONOCO PRODUCTS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED), CONTINUED JUNE 1999 YEAR-TO-DATE COMPARED WITH JUNE 1998 YEAR-TO-DATE INDUSTRIAL PACKAGING SEGMENT Trade sales for the industrial packaging segment for the first six months of 1999 were $646.3 million, compared with $743.5 million in the first half of 1998. The Company's paper cone and roll wrap businesses, both of which were included in last year's sales, were contributed to joint ventures in 1998, affecting second quarter sales comparisons. Last year's first half also included sales of corrugating medium which, beginning in July 1998, is sold under a cost-plus fixed management fee arrangement under which Sonoco no longer reports sales. On a comparable basis, excluding these items and sales from divested operations, sales in 1998 would have been $645.6 million. Operating profits for this segment in the first half of 1999 were $91.4 million, compared with the $109.9 million reported in the same period of 1998. On a comparable basis, excluding divested operations and entities previously consolidated which have been contributed to joint ventures and are no longer consolidated by Sonoco, 1998 profit was $103.3 million. Volume in the global tube and core operations remained strong compared with a year ago. Selling prices declined across all segments, more than offsetting small declines in raw material prices. CORPORATE General corporate expenses have been allocated as operating costs to each of the segments. Year to date interest expense was lower in the first six months of 1999 compared with the same period last year due to higher debt levels in the first quarter of 1998 associated with the share repurchase program completed that year. In July 1999, Sonoco received regulatory approval to proceed with the purchase of the composite can assets of Crown Cork & Seal, Inc. The purchase, when completed, will consist of three manufacturing facilities in the United States with annual sales of approximately $32 million. Also in July 1999, the Company signed a definitive agreement to purchase the flexible packaging division of Graphic Packaging Corporation, a wholly owned subsidiary of ACX Technologies, Inc. for approximately $105 million. Completion of the all-cash purchase, which is subject to regulatory approval, is expected in the third quarter of 1999. Both purchases will become part of the Consumer Packaging segment. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company's financial position remained strong through the first half of 1998. The debt-to-capital ratio, after adjusting debt levels for excess cash related to the issuance of restricted purpose bonds, decreased slightly to 46.3% at June 27, 1999, from 46.7% at December 31, 1998.
16 SONOCO PRODUCTS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED), CONTINUED FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES, CONTINUED Working capital increased $64.9 million to $290.3 million during the first half of 1999, driven mainly by lower payables and decreases in short-term debt. The Company expects internally generated cash flows, along with borrowings available under its commercial paper and other existing credit facilities, to be sufficient to meet operating and normal capital expenditure requirements. YEAR 2000 READINESS DISCLOSURE AND EURO COMPLIANCE The "Year 2000 issue" relates to the inability of certain computerized information and production systems to properly recognize and process date sensitive information. This is because most of the world's computer hardware and software have historically used only two digits to identify the year, resulting in the computers' inability to distinguish between dates in the 1900's and dates in the 2000's. In May 1997, the Company adopted a Year 2000 Plan ("Plan") to identify and address the Company's various Year 2000 issues throughout its domestic and international operations, including financial and administrative systems, process control and operating systems and information systems infrastructure. The Plan provides for six phases: (i) an inventory of all systems that might be affected by the Year 2000; (ii) assessment of Year 2000 readiness of each application identified in the inventory; (iii) planning for corrective action, which includes reviewing and prioritizing the various corrective actions based on their relative impact on the Company's operations and profitability; (iv) initiation of corrective actions to replace or repair systems that are not Year 2000 compliant; (v) testing the new, upgraded or repaired systems; and (vi) implementation of tested systems and post-implementation support, including contingency plans for those systems most critical to the Company's ongoing operations and/or most at risk to fail. The Plan is being implemented on a Company-wide basis under the direction of the Information Services Department in cooperation with senior management and with the review of the Board of Directors' Audit Committee. The Company has completed the inventory, assessment, planning and correction phases for all of its material systems that may involve a Year 2000 issue. In approximately 90% of its operations, final testing and implementation have also been completed. Testing of material systems in the remaining operations is scheduled to be completed in the third quarter of 1999. Based on the information developed from the work performed to date, of the total system-related expenditures, the Company estimates that the total cost of achieving Year 2000 compliance in substantially all of its information technology and production systems will be approximately $30 million, of which approximately $28.5 million has been spent through June 27, 1999, a portion of which was capitalized and will be amortized to earnings in future periods. The funds were spent primarily on the correction
17 SONOCO PRODUCTS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED), CONTINUED YEAR 2000 READINESS DISCLOSURE AND EURO COMPLIANCE, CONTINUED and implementation phases. Management anticipates that the remainder will be spent in the third quarter of 1999, and believes that the total cost of achieving Year 2000 compliance will not have a material impact on the Company's financial condition, results of operations, or cash flows. However, the Company currently is in the process of completing corrective actions and testing the new, upgraded or repaired systems. The Company may need to take additional corrective action arising out of the results of the testing, the costs of which it cannot yet predict. The Company is deploying its internal and external resources to install and test new or upgraded equipment necessary to address the Year 2000 issues in its operations. Management believes its existing personnel and outside resources are sufficient to implement the Plan on a timely basis, assuming that no unanticipated delays are encountered. The Company's facilities utilize various control systems to monitor and regulate production operations. Although the production impact of a Year 2000 related failure varies significantly among the facilities, any such failure could cause manufacturing delays or similar inefficiencies. Due to the decentralized nature of its operations, however, management believes the potential impact of such a failure would be isolated to the affected facility. In most cases, production could be shifted to other Company facilities that have similar production capabilities and capacity until the Year 2000 issue is remedied. It is not possible to predict the reasonable likelihood of such an event occurring or the related financial impact. Based on information developed to date, the Company does not believe it has a significant amount of software imbedded in its production equipment that is date dependent. The Company intends to have contingency plans for its administration functions, production facilities, and equipment finalized by the third quarter of 1999. The Company's contingency plans will assume a worst-case scenario that includes short-term power outages, short-term transportation and supply shortages, and short-term voice and data communication failures. Mitigation plans vary somewhat between business units, but share a common focus on safety, asset and revenue protection, and supply chain management. Specific contingency options include manual procedures, alternate site production capability, and increased raw material inventories. The Company also maintains a wide variety of administrative and financial applications that require corrective actions to handle Year 2000 dates. The Company has installed and tested new, more centralized software systems throughout its North American operations that are designed to address Year 2000 issues. Such
18 SONOCO PRODUCTS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED), CONTINUED YEAR 2000 READINESS DISCLOSURE AND EURO COMPLIANCE, CONTINUED applications generally are decentralized in the Company's international operations. Consequently, any Year 2000 failure would be isolated to a single facility or operation. In most instances, the Company has the ability to run these applications off-line with the assistance of additional Company personnel, if necessary. The Company relies on third party suppliers for certain raw materials, utilities, transportation and other key services. Under the Plan, the Company has initiated efforts to evaluate the Year 2000 readiness of its key suppliers so that it can make contingency plans to reduce risks of disruption in its production and delivery processes. Paper, the Company's primary raw material, is produced internally; therefore, the Company believes it will not be subject to many of the risks attendant to companies that are substantially dependent on third party suppliers for raw materials. To date, approximately 80% of those suppliers that the Company has contacted have responded to the surveys. All have indicated that they are, or believe they will be, Year 2000 compliant with respect to operations that impact the Company. Although possible Year 2000 interruptions in customers' operations could result in reduced sales, increased inventory or receivable levels and reduction in cash flow, the Company believes that its customer base is broad enough to minimize the effects of such occurrences. Nevertheless, the Company is actively communicating with each of its more significant customers in order to devise adequate contingency plans where necessary. There is a risk that the Company's plans for achieving Year 2000 compliance may not be completed on time, particularly in certain of the Company's European operations that are more dependent on third parties. However, the Company anticipates that if one or more of the milestones are not met with respect to any system, the Plan timetable will provide adequate advance notice to permit the Company to take those steps necessary to implement contingency plans, which could include taking the systems off-line temporarily, stockpiling inventories of raw materials or finished goods, or devoting additional Company personnel to resolve or substantially mitigate the issues.
19 SONOCO PRODUCTS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED), CONTINUED YEAR 2000 READINESS DISCLOSURE AND EURO COMPLIANCE, CONTINUED On January 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their existing currencies and the Euro and adopted the Euro as their common legal currency (the "Euro Conversion"). The impact of the Euro Conversion has not been material to the Company in the first six months of 1999. The Company is currently unsure of the future impact that the Euro Conversion will have, particularly as it relates to its European operations. However, the Company does not anticipate that the Euro Conversion will have a material adverse effect on its future business, financial condition, results of operations, or cash flows. The corrective actions that the Company is taking to address Year 2000 issues with respect to its European operations already include changes in its administrative and financial applications necessary to deal with the Euro Conversion at an immaterial incremental cost. The estimates and conclusions herein contain forward-looking statements and are based on management's best estimates of future events. Risks to completing the Plan include the availability of resources, the Company's ability to discover and correct the potential Year 2000-sensitive problems that could have a serious impact on specific systems or facilities, and the ability of suppliers to bring their systems into Year 2000 compliance. All statements made herein regarding our Year 2000 efforts are "Year 2000 Readiness Disclosures" made pursuant to the Year 2000 Information and Readiness Disclosures Act, and to the extent applicable, are entitled to the protections of such act.
20 SONOCO PRODUCTS COMPANY PART I. FINANCIAL INFORMATION Item 3. Quantitative and Qualitative Disclosures About Market Risk Information about the Company's exposure to market risk was disclosed in its 1998 Annual Report on Form 10-K which was filed with the Securities and Exchange Commission on March 26, 1999. There have been no material changes in market risk exposures since the date of that filing. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Incorporated by reference to the information set forth under Item 4 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 28, 1999. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 3-1 - Articles of Incorporation (as amended) Exhibit 3-2 - Bylaws (as amended) Exhibit 27 - Financial Data Schedule (for SEC use only) (b) No Current Reports on Form 8-K were filed by the Company during the second quarter of 1999.
21 S O N O C O P R O D U C T S C O M P A N Y SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SONOCO PRODUCTS COMPANY ----------------------- (Registrant) Date: August 9, 1999 By:/s/ F. Trent Hill, Jr. ------------------------- -------------------------- F. T. Hill, Jr. Vice President and Chief Financial Officer
22 SONOCO PRODUCTS COMPANY EXHIBIT INDEX Exhibit Number Description ------ ----------- 3.1 Articles of Incorporation (as amended) 3.2 Bylaws (as amended) 27 Financial Data Schedule for the second quarter of 1999 (for SEC use only)