UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
SONOCO PRODUCTS COMPANY
One North Second Street
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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock at November 3, 2002:
Common stock, no par value: 96,599,866
INDEX
Part I. Financial Information Item 1. Financial Statements
SONOCO PRODUCTS COMPANYCONDENSED CONSOLIDATED BALANCE SHEETS(Dollars and shares in thousands)
* 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
SONOCO PRODUCTS COMPANYCONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)(Dollars and shares in thousands except per share data)
SONOCO PRODUCTS COMPANYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)(Dollars in thousands)
SONOCO PRODUCTS COMPANYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands except per share data)(unaudited)
SONOCO PRODUCTS COMPANYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued(Dollars in thousands except per share data)(unaudited)
FINANCIAL SEGMENT INFORMATION (Unaudited)
* For comparative purposes, 2001 operating profit for the Industrial and Consumer Packaging segments has been restated to exclude goodwill amortization. Additionally, items classified as “other expense (income)” on the Condensed Consolidated Statements of Income have been separately presented (restructuring charges and net gains from legal settlements and corporate-owned life insurance).
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 September 29, 2002, and the related condensed consolidated statements of income for each of the three-month and nine-month periods ended September 29, 2002 and September 30, 2001, and the condensed consolidated statements of cash flows for the nine-month periods ended September 29, 2002 and September 30, 2001. 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 accounting principles generally accepted in the United States of America.
We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2001, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated January 31, 2002, 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, 2001, is fairly stated in all material respects, in relation to the consolidated balance sheet from which it has been derived.
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 words “estimate”, “project”, “intend”, “expect”, “believe”, “anticipate”, and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding offsetting high raw material costs, adequacy of income tax provisions, refinancing of debt, adequacy of cash flows, effects of acquisitions and dispositions, and financial strategies and the results expected from them. Such forward-looking statements are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management. Such information includes, without limitation, discussions as to estimates, expectations, beliefs, plans, strategies and objectives concerning our future financial and operating performance. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed or forecasted in such forward-looking statements. Such risks and uncertainties include, without limitation: availability and pricing of raw materials; success of new product development and introduction; ability to maintain or increase productivity levels; international, national and local economic and market conditions; ability to maintain market share; pricing pressures and demand for products; continued strength of our paperboard-based engineered carrier and composite can operations; anticipated results of restructuring activities; resolution of income tax contingencies; ability to successfully integrate newly acquired businesses into the Company’s operations; currency stability and the rate of growth in foreign markets; actions of government agencies; and loss of consumer confidence and economic disruptions resulting from terrorist activities.
Third Quarter 2002 Compared with Third Quarter 2001
Results of Operations
Consolidated net sales for the third quarter of 2002 were $717.4 million, versus $649.3 million in the third quarter of 2001. The higher sales, compared with the same period in 2001, were due primarily to increased volume of approximately $70.0 million, driven principally by the effect of acquisitions completed in 2001, increased volumes in the engineered carriers/paper operations and new flexible packaging business, partially offset by lower volume in the Company’s molded plastics operations, cable and wire reels business, and composite can operations. Higher selling prices of recovered paper sold externally were also largely offset by lower average selling prices, primarily in the engineered carriers and high density film businesses. Company-wide volumes, including the impact of acquisitions completed in 2001, were up approximately 11 percent, compared with last year’s third quarter.
Net income for the third quarter of 2002 was $29.2 million, versus $42.8 million in the third quarter of 2001. Excluding restructuring charges in both years and, in 2001, excluding net gains from legal settlements, Corporate-owned life insurance (COLI) adjustments and the effect of not amortizing goodwill, net income for the third quarter 2002 was $33.3 million, versus $41.6 million in the third quarter of 2001. Third quarter 2002 results were impacted by a decline in the Company’s price/cost relationship of approximately $16.0 million, primarily associated with higher costs for old corrugated containers (OCC), the Company’s primary raw
Management’s Discussion and Analysis of Financial Condition and Results of Operationscontinued
Third Quarter 2002 Compared with Third Quarter 2001, continued
Results of Operations, continued
material, and the delay in recovering those costs. In addition, third quarter 2002 profits were impacted by higher volume, driven principally by the effect of acquisitions completed in 2001, higher volume in engineered carriers/paper operations and increased flexible packaging business which helped mitigate lower volume in the Company’s molded plastics operations, cable and wire reels business, and composite can operations, and lower average selling prices in engineered carriers and high density film businesses. Additionally, on-going productivity initiatives resulted in a favorable impact on the quarter of approximately $12.0 million. Third quarter 2002 profits were also impacted by higher pension and post-retirement costs resulting from lower investment earnings on plan assets. Higher pension and post-retirement expense lowered earnings approximately $5.0 million pretax in the third quarter 2002, and the full year impact is expected to be approximately $20.0 million when compared with 2001.
The Company reported earnings per diluted share of $0.30 and $0.45 in the third quarter of 2002 and 2001, respectively. Excluding restructuring charges in both years and, in 2001, excluding net gains from legal settlements, COLI adjustments and the effect of not amortizing goodwill, earnings per diluted share were $0.34 and $0.43 in the third quarters of 2002 and 2001, respectively.
The following table is a reconciliation of comparative net income to net income as reported:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
continued
Consumer Packaging Segment
The Consumer Packaging segment includes the following products and services: round and shaped rigid packaging, both composite and plastic; printed flexible packaging; metal and plastic ends and closures; high density film products; specialty packaging; and packaging services.
Third quarter 2002 sales were $358.4 million, compared with $329.2 million in the same quarter of 2001. Excluding restructuring charges in 2002 and, in 2001, excluding COLI adjustments and the effect of not amortizing goodwill, operating profit in the third quarter of 2002 for this segment was $26.8 million, versus $30.8 million in the third quarter of 2001.
The higher sales, compared with the same period in 2001, were due primarily to increased volume of approximately $36.0 million, driven principally by additional easy-open steel closures revenue at Sonoco Phoenix, which was acquired in 2001, new flexible packaging business and increased volume in high density film businesses, partially offset by lower composite can volume in certain snack food products and frozen concentrate. Also partially offsetting the higher sales from these businesses were lower selling prices of approximately $6.0 million, mainly attributed to the Company’s high density film business. Overall, volumes in the Consumer Packaging segment were up approximately 11 percent, compared with last year’s third quarter, including the impact of acquisitions completed in 2001.
Lower profits in this segment were primarily due to lower selling prices in high density film businesses, partially offset by lower resin costs, lower volume in composite cans, higher pension and post-retirement expense, and increased research and development spending. Earnings were also adversely affected by new
Consumer Packaging Segment, continued
equipment start-up costs in the flexible packaging and metal ends businesses. These costs were partially offset by earnings from acquisitions completed in 2001 in the segment and productivity initiatives.
Restructuring charges of $0.6 million, recorded in the third quarter of 2002, included severance of $1.3 million reduced by net adjustments to previously recorded impaired equipment costs and other charges of $0.6 million and $.1 million, respectively.
Under the guidelines of FAS 142, purchased goodwill and intangibles with indefinite lives are no longer amortized in 2002. For comparative purposes, 2001 operating profit for the Consumer Packaging segment has been restated to exclude goodwill amortization of $1.0 million.
Industrial Packaging Segment
The Industrial Packaging segment includes the following products: high performance paper, plastic and composite engineered carriers; paperboard; wood, metal and composite reels for wire and cable packaging; fiber-based construction tubes and forms; custom designed protective packaging; and supply chain management capabilities.
Third quarter 2002 sales for the Industrial Packaging segment were $359.0 million, versus $320.0 million in the same period last year. Excluding restructuring charges in both years and, in 2001, excluding net gains from legal settlements, COLI adjustments and the effect of not amortizing goodwill, operating profit in the third quarter of 2002 for the segment was $36.6 million, versus $43.9 million in the third quarter of 2001.
The higher sales, compared to last year’s third quarter, were due primarily to higher volumes of approximately $34.0 million, driven principally by 2001 acquisitions and increased volume in the Company’s engineered carriers and paper operations, partially offset by lower volume in the Company’s molded plastics operations and cable and wire reels business, and lower average selling prices in engineered carriers, partially offset by higher selling prices of recovered paper sold externally. Overall, volumes in the Industrial Packaging segment were up approximately 11 percent over last year’s third quarter, including the impact of acquisitions completed in 2001.
Industrial Packaging Segment, continued
Operating profits were lower than last year’s third quarter, primarily due to lower selling prices, the impact of higher raw material (OCC) prices and continued weakness in the Company’s molded plastics operations and cable and wire reels business. OCC costs per ton in the United States increased significantly beginning in April 2002 from $35 to a high in July 2002 of $130. OCC prices then dropped to $100 in August 2002 and $75 in September 2002. Similar OCC cost movement was experienced globally. To recover higher OCC costs, the Company implemented price increases in paperboard and converted products (tubes and cores) in the United States, Canada and Europe. However, due to the competitive market environment, the inherent lag time in recovering higher costs and the subsequent downward OCC movement, selling price increases did not offset the increase in OCC costs. During the fourth quarter, the Company expects implemented price increases to cover the net fourth quarter 2002 year over year change in OCC costs; however, this could be impacted by future OCC cost fluctuations. Earnings were also adversely affected by higher pension and post-retirement costs. The results of on-going productivity initiatives of approximately $7.0 million partially offset higher costs in the quarter.
Restructuring charges of $5.8 million, recorded in the third quarter of 2002, were primarily related to severance costs associated with plant consolidations in Europe.
Under the guidelines of FAS 142, purchased goodwill and intangibles with indefinite lives are no longer amortized in 2002. For comparative purposes, 2001 operating profit for the Industrial Packaging segment has been restated to exclude goodwill amortization of $2.0 million.
September 2002 Year-to-Date Compared with September 2001 Year-to-Date
For the first nine months of 2002, consolidated net sales were $2.08 billion, versus $1.93 billion in the same period last year. The higher sales, compared with the same period in 2001, were due primarily to increased volume of approximately $174.0 million, principally as a result of the seven key acquisitions made during 2001; new flexible packaging business; and increased volumes in the engineered carriers/paper operations, partially offset by lower volume in the Company’s molded plastics operations, cable and wire reels business, and composite can operations. Higher packaging services revenue also contributed to the increase in sales.
In addition, higher volume and higher selling prices of recovered paper sold externally were partially offset by lower average selling prices of approximately $36.0 million, primarily in engineered carriers and the high density film businesses. Company-wide volumes, including the impact of acquisitions completed in 2001, were up nine percent, compared with last year’s first nine months.
Net income for the first nine months of 2002 was $100.5 million, versus $64.4 million in the same period of 2001. Excluding restructuring charges in both years and, in 2001, excluding net gains from legal settlements, COLI adjustments and the effect of not amortizing goodwill, net income for the first nine months of 2002 was $106.6 million, versus $117.6 million in the same period last year. Operating results were impacted by lower selling prices of approximately $36.0 million, primarily in engineered carriers and high density film businesses, partially offset by external sales of recovered paper. Higher raw material costs for OCC were partially offset by lower resin costs in the high density film business. Higher volume, driven principally by the effect of acquisitions completed in 2001; higher volume in engineered carriers/paper operations; and increased flexible packaging business helped mitigate lower volume in the Company’s molded plastics operations, cable and wire reels business, and composite can operations. Earnings also included the favorable impact of on-going productivity initiatives which resulted in reduced costs of approximately $33.0 million, partially offset by higher pension and post-retirement costs.
Earnings per diluted share for the first nine months of 2002 were $1.03, compared with $0.67 in the same period in 2001. Excluding restructuring charges in both years and, in 2001, excluding net gains from legal settlements, COLI adjustments and the effect of not amortizing goodwill, earnings per diluted share were $1.10 and $1.23 for the first nine months of 2002 and 2001, respectively.
Sales for the first nine months of 2002 in the Consumer Packaging Segment were $1.04 billion, versus $952.3 million in the same period of 2001. The increase in sales was due primarily to increased volume of approximately $80.0 million, driven by additional easy-open steel closures revenue at Sonoco Phoenix , which was acquired in 2001; new flexible packaging business; and higher packaging services revenue, partially offset by decreased volume in composite cans. Higher revenue from these businesses was partially offset by lower selling prices of approximately $21.0 million, primarily in the Company’s high density film business.
Excluding restructuring charges in both years and, in 2001, excluding COLI adjustments and the effect of not amortizing goodwill, operating profit in this segment was $83.1 million, versus $87.9 million in the same period last year. Profits decreased primarily due to lower composite can volume; lower selling prices in high density film businesses, partially offset by lower resin costs; and higher pension and post-retirement expense in this segment. Earnings were also negatively impacted by new equipment start-up costs in the flexible packaging and metal ends businesses. These costs were partially offset by earnings from acquisitions completed in 2001 and productivity initiatives.
Restructuring charges of $2.6 million, recorded during the first nine months of 2002, primarily included severance and asset impairment costs, a portion of which is associated with the closing of a plant location in the United States.
Under the guidelines of FAS 142, purchased goodwill and intangibles with indefinite lives are no longer amortized in 2002. For comparative purposes, 2001 operating profit for the Consumer Packaging segment has been restated to exclude goodwill amortization of $3.0 million.
Sales for the first nine months of 2002 in this segment were $1.05 billion, versus $977.4 million in the same period last year. The higher sales, compared with the same period in 2001, were due primarily to increased volume of $94.0 million, driven principally by the effect of 2001 acquisitions and increased volume in the engineered carriers/paper operations, partially offset by lower volume in the Company’s cable and wire reels business, and molded plastics operations. Net volume increases were partially offset by lower average selling prices of approximately $15.0 million.
Excluding restructuring charges in both years and, in 2001, excluding net gains from legal settlements, COLI adjustments and the effect of not amortizing goodwill, operating profit for this segment for the first nine months of 2002 was $115.3 million, versus $130.8 million in the same period last year. Earnings in the segment were impacted by a decline in the Company’s price/cost relationship of approximately $31.0 million, primarily associated with lower average selling prices, partially offset by external sales of recovered paper and higher raw
material costs for OCC. To recover higher OCC costs, the Company implemented price increases in the second and third quarters of 2002 in paperboard and converted products (tubes and cores) in the United States, Canada and Europe. During the fourth quarter, the Company expects implemented price increases to cover the net fourth quarter 2002 year over year change in OCC costs; however, this could be impacted by future OCC cost fluctuations. Earnings were also impacted by on-going productivity initiatives which resulted in reduced costs of approximately $21.0 million, and higher volume, principally as a result of acquisitions completed in 2001, which were offset by lower volume in the Company’s cable and wire reels business and molded plastics operations, and higher pension and post-retirement costs.
During the first nine months of 2002, the segment recorded restructuring charges of $6.9 million, mainly attributed to the closing of a plant location in the United States and severance costs associated with plant consolidations in Europe.
Under the guidelines of FAS 142, purchased goodwill and intangibles with indefinite lives are no longer amortized beginning in 2002. For comparative purposes, 2001 operating profit for the Industrial Packaging segment has been restated to exclude goodwill amortization of $5.9 million.
During the fourth quarter of 2002, the Company announced the purchase of Texas Reel Company’s plywood reel operations in Sherman, Texas, and Coonrod Reel Company’s nailed wood reel operation in Boham, Texas. The purchase includes equipment, inventory, and intangible assets. Annual sales from these acquisitions in 2002 are expected to be approximately $10.0 million. The Texas Reel purchase was effective September 30, 2002, and the Coonrod Reel purchase was effective November 4, 2002.
Corporate
General corporate expenses have been allocated as operating costs to each of the segments and are included in the segment information presented above. Net interest expense increased $3.3 million and $3.9 million for the three-month and nine-month periods ended September 29, 2002, respectively, compared to the same periods last year. The increase was primarily driven by higher average debt levels in 2002 and higher interest rates associated with fixed rate debt securities issued in the fourth quarter of 2001. Although total debt outstanding at September 29, 2002 decreased by $41.3 million from September 30, 2001, average debt outstanding during the
Corporate continued,
third quarter of 2002 was up approximately $65.0 million compared with the same period in 2001. Debt associated with acquisitions made in 2001 was only outstanding for a portion of the third quarter in 2001. In addition, average interest rates increased over third quarter 2001 as the Company termed out $250.0 million of commercial paper by issuing 6.5 percent debentures in the fourth quarter of 2001.
Restructuring charges of $0.1 million, recorded in the third quarter of 2002, were comprised of severance and termination charges.
Based on the current market value of pension plan assets, the Company may be required to record an additional minimum pension liability adjustment at December 31, 2002 under the guidelines of Statement of Financial Accounting Standards No. 87, ‘Employers’ Accounting for Pensions’ (FAS 87). Pursuant to FAS 87, a minimum pension liability must be recognized when the accumulated benefit obligation exceeds the fair value of plan assets. Company contributions to the pension plans in the fourth quarter, if any, coupled with market returns on plan assets through December 31, 2002, will affect the amount of the additional minimum pension liability recorded, if any. The adjustment, if required, will be recorded as a charge to “Accumulated Other Comprehensive Loss” in the Company’s Condensed Consolidated Balance Sheet. This non-cash charge would not impact operating results and would not affect any of the Company’s existing credit agreements.
In addition, changes in interest rates and the expected market rate of return assumptions, and the resulting decline in the funded status of the Company’s defined benefit pension plans, will result in higher pension cost in 2003. From a funding perspective, the company has pre-funded its pension obligations, and does not expect to be required to make any additional contributions until 2004. However, it is the Company’s intent to continue funding the plans in an amount at least equal to the annual benefits paid from the plans.
The effective tax rate for the three-month and nine-month periods ended September 29, 2002, was 36 percent, compared with 38.1 percent and 50.9 percent, respectively, for the same periods last year. In 2001, excluding the impact of COLI charges and certain non-deductible foreign restructuring charges, the effective tax rate would have been 37.5 percent for both periods. The drop in the effective tax rate, from 37.5 percent in the three-month and nine-month periods ended September 30, 2001 to 36 percent for the same periods in 2002, is partially due to non-deductible goodwill amortization no longer being reported as an expense in 2002 under FAS 142. In addition, the Company’s 401(k) plan participants are now given the right to elect to receive cash dividends on Company stock in the plan which results in the tax deductibility of the related dividends paid by the Company.
As previously disclosed, the Company’s federal tax returns for the years 1996 through 1998 have been under examination by the Internal Revenue Service. The examination was concluded and there was no material impact to the Company.
Equity in earnings of affiliates/Minority interest in subsidiaries increased $0.5 million and $3.3 million for the three-month and nine-month periods ended September 29, 2002, respectively, over the same periods in 2001 primarily due to restructuring charges in 2001 and earnings improvement at affiliate operations in Canada and the United States, partially offset by earnings deterioration in France.
Goodwill and Intangible Assets
During the first quarter of 2002, the Company adopted Financial Accounting Standards No. 142 ‘Goodwill and Other Intangible Assets’ (FAS 142). Under FAS 142, purchased goodwill and intangible assets with indefinite lives are no longer amortized but instead tested for impairment at least annually. In connection with the adoption of FAS 142, the Company reclassified cost in excess of fair value of assets purchased (goodwill) to intangible assets of $10.9 million as of December 31, 2001. In addition, the Company expects that it will no longer record approximately $11.0 million annually of amortization expense relating to its existing goodwill. The Company completed its transitional goodwill impairment testing required by FAS 142 during the second quarter of 2002 and its annual goodwill impairment testing required by FAS 142 during the third quarter of 2002. Based on this impairment testing, no adjustment to the recorded goodwill balance was necessary.
The Consolidated Statements of Income for the three and nine month periods ended September 30, 2001 include in “Cost of Sales” $3.0 million and $8.9 million ($2.2 million and $6.7 million after tax), respectively, of goodwill amortization. No goodwill amortization is included for the corresponding periods of 2002.
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143, ‘Accounting for Asset Retirement Obligations’ (FAS 143), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. FAS 143 is required to be adopted for fiscal years beginning after June 15, 2002. The Company does not expect the adoption of FAS 143 to have a material effect on its financial statements.
New Accounting Pronouncements continued,
As of January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, ‘Accounting for the Impairment or Disposal of Long-Lived Assets’ (FAS 144), which supersedes FASB Statement No. 121, ‘Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.’ This new statement also supercedes certain aspects of APB 30, ‘Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,’ with regard to reporting the effects of a disposal of a segment of a business. FAS 144 requires expected future operating losses from discontinued operations to be reported in discontinued operations in the period incurred (rather than as of the measurement date as previously required by APB 30). In addition, more dispositions may qualify for discontinued operations treatment. The adoption of FAS 144 did not have a material effect on the Company’s financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, ‘Accounting for Costs Associated with Exit or Disposal Activities’ (FAS 146), which nullifies Emerging Issues Task Force Issue No. 94-3 (Issue 94-3), ‘Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).’ FAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. The provisions of FAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company has not yet applied the provisions of FAS 146, but does not expect the adoption of FAS 146 to have a material effect on its financial statements except for the timing of the recognition of costs associated with future exit or disposal activities.
Restructuring and Asset Impairment
During the first nine months of 2002, the Company recognized restructuring charges of $9.6 million ($6.1 million after tax), primarily related to the closing of a plant location in each of the Industrial and Consumer Packaging segments and severance costs associated with plant consolidations in Europe. These restructuring charges, net of adjustments, consisted of severance and termination benefits of $8.6 million, asset impairment charges of $0.4 million, and other exit costs of $0.6 million. During 2001, the Company recognized restructuring charges of $53.6 million ($36.6 million after tax) as a result of restructuring actions announced during the year. The objective of the restructurings was to realign and centralize a number of staff functions and to remove approximately $53.0 million of annualized costs from the Company’s cost structure. With the
Restructuring and Asset Impairment continued,
exception of on-going pension subsidies and certain building lease termination expenses, costs associated with the restructuring actions are expected to be paid by the end of the fourth quarter 2003 using cash generated by operations. The Company anticipates recording additional restructuring charges during the fourth quarter of 2002.
Financial Position, Liquidity and Capital Resources
The Company’s financial position remained strong through the first nine months of 2002. The debt-to-capital ratio decreased to 44.6 percent at September 29, 2002 from 49.3 percent at December 31, 2001. The decrease is due to a $94.7 million net reduction in the Company’s overall debt since the end of 2001.
In February 2002, the Company entered into a swap to match the terms of a $150.0 million bond maturing in 2004. The swap qualified as a fair value hedge under Financial Accounting Standard No. 133, ‘Accounting for Derivative Instruments and Hedging Activities’ (FAS 133), and swapped fixed interest for floating. On August 1, 2002, the Company terminated this agreement and received $3.4 million in cash from the termination of this derivative instrument. In accordance with FAS 133, the 7 percent bonds were marked to fair market value through the date of this swap termination, and interest expense will be lowered by future amortization of the $3.4 million over the remaining 27 months until the bonds mature on November 15, 2004.
Net working capital decreased $15.5 million to $189.4 million during the first nine months of 2002, driven primarily by an increase in current liabilities. The increase in current liabilities is primarily attributed to an increase in trade accounts payable associated with a Company initiative to reduce working capital days during 2002.
Cash generated from operations of $214.3. million (after funding benefit plans of $41.0 million) was used to partially fund capital expenditures of $84.1 million, to pay dividends of $59.6 million and reduce debt by $94.7 million. The Company expects internally generated cash flows to be sufficient to meet operating and normal capital expenditure requirements on a short-term and long-term basis.
SONOCO PRODUCTS COMPANYPART I. FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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.
CERTIFICATIONS
I, Harris E. DeLoach, Jr., certify that:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
I, Charles J. Hupfer, certify that:
SONOCO PRODUCTS COMPANYEXHIBIT INDEX