1 UNITED STATES SECURITIES 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 For the Quarter Ended March 30, 1997 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 29550-0160 Telephone: 803-383-7000 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 May 4, 1997: Common stock, no par value: 90,145,320
2 SONOCO PRODUCTS COMPANY INDEX PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - March 30, 1997 and December 31, 1996 Consolidated Statements of Income - Three Months Ended March 30, 1997 and March 31, 1996 Consolidated Statements of Cash Flows - Three Months Ended March 30, 1997 and March 31, 1996 Notes to Consolidated Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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 CONSOLIDATED BALANCE SHEETS (Dollars and shares in thousands) <TABLE> <CAPTION> (unaudited) March 30, December 31, ASSETS 1997 1996 ------ ----------- ----------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 81,730 $ 71,260 Trade accounts receivable, net of allowances 346,910 329,963 Other receivables 33,248 38,240 Inventories Finished and in process 122,417 123,224 Materials and supplies 132,853 137,236 Prepaid expenses 23,324 26,121 Deferred income taxes 11,436 11,605 ----------- ----------- 751,918 737,649 PROPERTY, PLANT AND EQUIPMENT, NET 996,667 995,415 COST IN EXCESS OF FAIR VALUE OF ASSETS PURCHASED, NET 438,001 455,567 OTHER ASSETS 218,095 198,909 ----------- ----------- Total Assets $ 2,404,681 $ 2,387,540 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Payable to suppliers $ 216,684 $ 205,741 Accrued expenses and other 153,929 111,804 Accrued wages and other compensation 11,916 29,428 Notes payable and current portion of long-term debt 97,183 102,062 Taxes on income 35,672 26,081 ----------- ----------- 515,384 475,116 LONG-TERM DEBT 750,161 791,026 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 107,305 107,265 DEFERRED INCOME TAXES AND OTHER 96,846 93,520 SHAREHOLDERS' EQUITY Serial preferred stock, no par value Authorized 30,000 shares 2,394 and 2,395 shares issued and outstanding as of March 30, 1997 and December 31, 1996, respectively 119,706 119,756 Common shares, no par value Authorized 150,000 shares 90,058 and 89,864 shares issued and outstanding as of March 30, 1997 and December 31, 1996, respectively 7,175 7,175 Capital in excess of stated value 54,035 50,378 Translation of foreign currencies (71,136) (56,572) Retained earnings 825,205 799,876 ----------- ----------- Total shareholders' equity 934,985 920,613 ----------- ----------- Total Liabilities and Shareholders' Equity $ 2,404,681 $ 2,387,540 =========== =========== </TABLE> See accompanying Notes to Consolidated Financial Statements
4 SONOCO PRODUCTS COMPANY CONSOLIDATED STATEMENTS OF INCOME (unaudited) (Dollars and shares in thousands except per share) <TABLE> <CAPTION> Three Months Ended ---------------------------- March 30, March 31, 1997 1996 --------- --------- <S> <C> <C> Net sales $ 687,648 $ 669,231 Cost of sales 535,677 512,876 Selling, general and administrative expenses 71,806 73,793 Interest expense 13,549 11,578 Interest income (1,098) (1,219) --------- --------- Income from operations before income taxes 67,714 72,203 Taxes on income 26,205 28,448 --------- --------- Income from operations before equity in earnings of affiliates/Minority interest in subsidiaries 41,509 43,755 Equity in earnings of affiliates/ Minority interest in subsidiaries (263) (507) --------- --------- Net income 41,246 43,248 Preferred dividends (1,066) (1,941) --------- --------- Net income available to common shareholders $ 40,180 $ 41,307 ========= ========= Average common shares outstanding: Assuming no dilution 89,976 91,137 Assuming full dilution 96,741 100,367 Earnings per common share: Assuming no dilution $ .45 $ .45 ========= ========= Assuming full dilution $ .43 $ .43 ========= ========= Dividends per common share $ .165 $ .15 ========= ========= </TABLE> See accompanying Notes to Consolidated Financial Statements
5 SONOCO PRODUCTS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Dollars in thousands) <TABLE> <CAPTION> Three Months Ended -------------------------- March 30, March 31, 1997 1996 -------- -------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 41,246 $ 43,248 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization 37,910 34,125 Equity in earnings of affiliates/ Minority interest in subsidiaries 263 507 Deferred taxes 1,872 2,049 Loss on disposition of assets 403 37 Changes in assets and liabilities, net of effects from acquisitions, dispositions and foreign currency adjustments: Accounts receivable (26,341) (20,482) Inventories (7,453) (5,752) Prepaid expenses 2,704 7,490 Payables and taxes 22,176 (10,741) Other assets and liabilities (14,640) 8,785 -------- -------- Net cash provided by operating activities 58,140 59,266 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (50,365) (46,354) Cost of acquisitions, exclusive of cash (1,870) (33,073) Other, net 570 0 Proceeds from the sale of assets 62,634 134 -------- -------- Net cash provided (used) by investing activities 10,969 (79,293) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net (decrease) increase in commercial paper borrowings (44,091) 57,700 Proceeds from issuance of debt 17,138 6,790 Principal repayment of debt (17,891) (13,197) Cash dividends - common and preferred (15,917) (15,616) Shares acquired - common and preferred (50) (11,805) Common shares issued 3,121 5,755 -------- -------- Net cash (used) provided by financing activities (57,690) 29,627 -------- -------- EFFECTS OF EXCHANGE RATE CHANGES ON CASH (949) (107) -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 10,470 9,493 Cash and cash equivalents at beginning of period 71,260 61,624 -------- -------- Cash and cash equivalents at end of period $ 81,730 $ 71,117 ======== ======== </TABLE> See accompanying Notes to Consolidated Financial Statements
6 SONOCO PRODUCTS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued (Dollars in thousands) SUPPLEMENTAL CASH FLOW DISCLOSURES: <TABLE> <CAPTION> Three Months Ended --------------------------------- March 30, March 31, 1997 1996 ------- ------- <S> <C> <C> Interest paid $10,066 $10,085 Income taxes paid $ 6,652 $ 9,052 </TABLE> See accompanying Notes to Consolidated Financial Statements
7 SONOCO PRODUCTS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1: BASIS OF INTERIM PRESENTATION In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and results of operations for the interim periods reported hereon. Operating results for the three months ended March 30, 1997, are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. These 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, 1996. NOTE 2: DIVIDEND DECLARATIONS On April 16, 1997, the Board of Directors declared and increased the regular quarterly dividend from $.165 per share to $.18 per share, payable June 10, to shareholders of record May 16. On February 5, 1997, the Board declared a quarterly dividend of $.5625 per share on the $2.25 Series A Cumulative Convertible Preferred Stock, payable May 1, to shareholders of record April 11. NOTE 3: ACQUISITIONS/DISPOSITIONS In March of 1997, the Company completed the sale of its screen print operations acquired in the October 1993 acquisition of Engraph, Inc. This division was sold because the business did not fit with the Company's overall focus on the packaging industry. In addition, the Company signed a letter of intent to form a joint venture with the Rock-Tenn Company, combining their fibre partitions businesses into a joint venture company called RTS Packaging, owned 35% by Sonoco and 65% by Rock-Tenn, with combined annual sales of approximately $150 million. This transaction is awaiting regulatory approval.
8 SONOCO PRODUCTS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (unaudited) NOTE 4: FINANCIAL SEGMENT INFORMATION As of the 1996 second quarter, the Company has been reporting its operations in two segments, Industrial Packaging and Consumer Packaging. The Financial Segment Information provided below should be read in conjunction with the Management's Discussion and Analysis immediately following the Notes to Consolidated Financial Statements. FINANCIAL SEGMENT INFORMATION (UNAUDITED) (Dollars in thousands) <TABLE> <CAPTION> Three Months Ended ------------------------------- March 30, March 31, 1997 1996 --------- --------- <S> <C> <C> Total Revenue Industrial Packaging $ 390,946 $ 384,515 Consumer Packaging 306,372 295,511 --------- --------- Consolidated $ 697,318 $ 680,026 ========= ========= Net Sales Industrial Packaging $ 381,300 $ 374,170 Consumer Packaging 306,348 295,061 --------- --------- Consolidated $ 687,648 $ 669,231 ========= ========= Operating Profit Industrial Packaging $ 50,194 $ 51,775 Consumer Packaging 29,971 30,787 Interest, net (12,451) (10,359) --------- --------- Consolidated $ 67,714 $ 72,203 ========= ========= </TABLE>
9 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, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements. FIRST QUARTER 1997 COMPARED WITH FIRST QUARTER 1996 RESULTS OF OPERATIONS Consolidated net sales for the first quarter of 1997 were $687.6 million, compared with $669.2 million recorded for the first quarter of 1996. Net income available to common shareholders for the first quarter was $40.2 million, compared with $41.3 million in the first quarter of 1996. Fully diluted earnings per share for the first quarter of 1997 were $.43, equal to the all-time high first quarter results of 1996. First quarter earnings per share were favorably impacted by the repurchase of 3.44 million common share equivalents during 1996. First quarter performance was in line with Management's expectations that earnings for the first two quarters of 1997 would be flat to slightly down, compared with 1996, and then improve in the second half of the year. INDUSTRIAL PACKAGING SEGMENT The Industrial Packaging segment includes tubes; cores; cones; roll wrap; molded plugs and related products and services; fibre drums; plastic drums; intermediate bulk containers; injection molded and extruded plastics; paper manufacturing and recovered paper collections; fibre partitions; molded pulp; corner posts; reels for wire and cable packaging; adhesives; converting machinery; and forest products. Trade sales for the Industrial Packaging segment were $381.3 million, a 1.9% increase over the $374.2 million recorded in the first quarter of 1996. Operating profits were $50.2 million for the first quarter of 1997 compared with $51.8 million in the first quarter of 1996. Volume continued improving in the first quarter in nearly every product line in the global tube and core business, led by strong increases in sales to textile carriers, particularly in the United States and Europe. Profits in industrial products were negatively impacted by further declines in selling prices, although such prices appear to be stabilizing. Although improving, start-up and consolidation costs in Brazil and China continued to negatively impact segment results. The industrial segment began seeing some of the benefits of the plant consolidations that took place during 1996 in conjunction with the Company's Process Excellence initiative. Continued improvement is expected from this and other initiatives undertaken over the past couple of years. In the paper operations, lower selling prices for corrugating medium and linerboard, which is sold by the Company to external markets, reduced sales and profits by approximately $4 million for the quarter. Approximately 85% of the paperboard produced by the Company is for internal consumption.
10 SONOCO PRODUCTS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED), CONTINUED FIRST QUARTER 1997 COMPARED WITH FIRST QUARTER 1996, CONTINUED RESULTS OF OPERATIONS, CONTINUED Volume was excellent in the injection molded and extruded plastics business, led by sales of a new heating tray used in the fast food industry. Volume also increased in both the textile and filtration markets. In addition, the automotive business continues to be strong. Volume in the industrial container group was nearly even with the first quarter 1996, but sales dollars were down because of declining prices and product mix. Performance in this group is also being impacted by start-up costs for the new plastic drum plant that began operations in Pennsylvania during 1996. However, volume was up significantly in the first quarter in the group's intermediate bulk container business. CONSUMER PACKAGING SEGMENT The Consumer Packaging segment includes composite cans; fibre and plastic caulk cartridges; capseals; flexible packaging; pressure-sensitive labels; label application machinery; paperboard cartons, sleeves, blister packs, coasters and glass covers; and high density film products. Trade sales for the consumer packaging segment were $306.3 million for the first quarter of 1997, a 3.8% increase over 1996's first quarter sales of $295.1 million. Operating profits were $30.0 million for the first quarter of 1997, compared with $30.8 million in the first quarter of 1996. The Company's composite can operations continued their strong performance during the first quarter of 1997, led by sales increases in the snack food, powdered beverages and adhesives and sealants markets. Volume was also up in the Capseals business, which is located in England. This segment is still being negatively impacted by reorganization in the label and flexible packaging businesses. Costs associated with the reorganization and consolidation of its label business, which previously operated as multiple independent companies, should improve throughout 1997 as the Company continues to build a label business under a unified brand. Sales and profits in the flexible packaging operations improved over the fourth quarter of 1996 and should continue improving throughout 1997. Volume was off in the high density film products business as several customers had built inventories during the previous quarter. This business was also impacted by increased resin costs, which have not been fully recovered through selling price increases.
11 SONOCO PRODUCTS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED), CONTINUED FIRST QUARTER 1997 COMPARED WITH FIRST QUARTER 1996, CONTINUED RESULTS OF OPERATIONS, CONTINUED CORPORATE General corporate expenses have been allocated as operating costs to each of the segments. Interest expense increased in the first quarter of 1997 over 1996 due to higher debt resulting from the 1996 share repurchase program, capital spending and acquisitions. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company's financial position remained strong through the first quarter. The debt to capital percentage, after adjusting debt levels for excess cash related to the issuance of restricted purpose bonds, decreased to 45.1% at March 30, 1997, from 47.2% at December 31, 1996. Debt decreased primarily as a result of proceeds from the sale of the screen print operations. Working capital decreased $26 million to $236.5 million during the first three months of 1997 primarily due to the sale of the screen print operations and seasonal increases in payables to suppliers. 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. In February 1997, the Financial Accounting Standards Board issued Financial Accounting Standard No. 128 "Earnings Per Share" (FAS 128). This standard is effective for financial statements issued for periods ending after December 15, 1997 and will be implemented in the Company's 10K for the year ended December 31, 1997. The Company does not expect that FAS No. 128 will have a material impact on the earnings per share computation.
12 SONOCO PRODUCTS COMPANY PART II. OTHER INFORMATION Item 1. Legal Proceedings Reference is made to Item 3 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996. Item 4. Submission of Matters to a Vote of Security Holders The Company's annual meeting of shareholders was held on April 16, 1997. The following matters, as described in more detail in the Company's Proxy Statement, were approved by the shareholders at this meeting: (1) The following directors were elected: <TABLE> <CAPTION> VOTES --------------------- Term For Withheld ---- --------- -------- <S> <C> <C> <C> C. W. Coker 3-year 72,786,353 361,628 A. T. Dickson 3-year 72,777,991 369,990 R. E. Elberson 3-year 72,792,535 355,446 J. C. Fort 3-year 72,686,552 461,429 Dona Davis Young 3-year 72,751,895 396,086 </TABLE> (2) Coopers & Lybrand L.L.P., Certified Public Accountants, was re-elected as the independent auditors of the corporation for the fiscal year ending December 31, 1997. The shareholders voted 73,060,008 for and 27,438 against this appointment, with 60,535 votes abstaining. There were 16,873,508 non-votes for each matter voted upon. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit (3) - By-laws Exhibit (11) - Computation of Earnings Per Share Exhibit (27) - Financial Data Schedule (for SEC use only) (b) There were no reports on Form 8-K filed by the Company during the quarter ended March 30, 1997.
13 SONOCO PRODUCTS COMPANY 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: May 13, 1997 By: /s/ F. Trent Hill, Jr. ---------------- ---------------------------- F. Trent Hill, Jr. Vice President and Chief Financial Officer
14 SONOCO PRODUCTS COMPANY EXHIBIT INDEX Exhibit Number Description ------ ----------- 3 By-laws 11 Computation of Earnings per Share 27 Financial Data Schedule (for SEC use only)