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 o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock at August 4, 2002:
Common stock, no par value: 96,491,533
INDEX
Part I. Financial Information Item 1. Financial Statements
SONOCO PRODUCTS COMPANYCONDENSED CONSOLIDATED BALANCE SHEETS(Dollars and shares in thousands)
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)
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 30, 2002, and the related condensed consolidated statements of income for each of the three-month and six-month periods ended June 30, 2002 and July 1, 2001, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2002 and July 1, 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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; 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.
Second Quarter 2002 Compared with Second Quarter 2001
Results of Operations
Consolidated net sales for the second quarter of 2002 were $712.4 million, versus $647.7 million in the second quarter of 2001. The higher sales, compared with the same period in 2001, were due primarily to increased volume of approximately $82.0 million, driven principally by the effect of 2001 acquisitions, increased volumes in the engineered carriers/paper operations and new flexible packaging business. This revenue was partially offset by lower average selling prices of approximately $16.0 million, primarily in the engineered carriers and high density film businesses, and lower volume in composite cans. Company-wide volumes, including the impact of acquisitions completed in 2001, were up approximately 13 percent, compared with last year’s second quarter.
Net income for the second quarter of 2002 was $37.7 million, versus $16.9 million in the second quarter of 2001. Excluding restructuring charges in both years, and, in 2001, excluding Corporate-owned life insurance (COLI) adjustments and the effect of not amortizing goodwill, net income for the second quarter 2002 was $38.8 million, versus $38.7 million in the second quarter of 2001. Second quarter 2002 results were affected by a further decline in the Company’s price/cost relationship of approximately $10.0 million, principally reflecting the partial impact of approximately $30 per ton in average price increases during the quarter for old corrugated containers (OCC), Sonoco’s principal raw
Management’s Discussion and Analysis of Financial Condition and Results of Operationscontinued
Second Quarter 2002 Compared with Second Quarter 2001, continued
Results of Operations, continued
material for its paperboard which is used primarily for conversion into engineered carriers in the industrial sector.
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 $4.0 million pretax this quarter, and the full year impact is expected to be approximately $20.0 million when compared with 2001. Strong performance from acquisitions and increased volume in engineered carriers/paper operations helped mitigate lower volume in the composite can operations. Additionally, the favorable impact from productivity initiatives of approximately $12.0 million helped offset some of the impact of pricing and higher benefit costs.
The Company reported earnings per diluted share of $0.39 and $0.18 in the second quarter of 2002 and 2001, respectively. Excluding restructuring charges in both years, and, in 2001, excluding COLI adjustments and the effect of not amortizing goodwill, earnings per diluted share were $0.40 in the second quarters of 2002 and 2001.
The following table is a reconciliation of comparative net income to net income as reported:
Consumer Packaging Segment
The Consumer Packaging segment includes the following products and services: round and shaped composite cans, printed flexible packaging, metal and plastic ends and closures, high density film products, specialty packaging and packaging services.
Second quarter 2002 sales were $349.6 million, compared with $322.2 million in the same quarter of 2001. Excluding restructuring charges in both years, and, in 2001, excluding COLI adjustments and the effect of not amortizing goodwill, operating profit in the second quarter of 2002 for this segment was $28.7 million, versus $30.3 million in the second quarter of 2001.
The increase in second quarter 2002 sales was due primarily to additional easy-open steel closures revenue at Phoenix Packaging, which was acquired in 2001, and new flexible packaging business. Partially offsetting the higher sales from these businesses were lower selling prices in the Company’s high density film business and lower composite can volume in certain snack food products, frozen concentrate and refrigerated dough. Overall, volumes in the Consumer Packaging segment were up approximately 11 percent, compared with last year’s second quarter, including the impact of acquisitions completed in 2001.
Lower profits in this segment were primarily due to lower volume in composite cans, higher pension and post-retirement expense, and increased research and development spending. Profitability on the increased flexibles business was dampened by start-up costs and inefficiencies related to two new presses. These costs were partially offset by earnings from acquisitions completed in 2001 in the segment.
Consumer Packaging Segment, continued
In addition, productivity improvements added approximately $4.5 million to Consumer Packaging segment profits.
Restructuring charges of $2.0 million, recorded in the second quarter of 2002, included severance and asset impairment costs associated with the closing of a plant location in the United States. Included in the charge was a write-off of impaired equipment of $0.6 million.
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.
Second quarter 2002 sales for the Industrial Packaging segment were $362.8 million, versus $325.5 million in the same period last year. Excluding restructuring charges in both years, and, in 2001, excluding COLI adjustments and the effect of not amortizing goodwill, operating profit in the second quarter of 2002 for the segment was $41.8 million, versus $42.1 million in the second quarter of 2001.
Second quarter sales in the industrial sector increased from last year’s second quarter due primarily to higher volumes in the Company’s engineered carriers and paper operations, reflecting modest but improving demand across most customer sectors; higher selling prices of recovered paper sold externally; and the partial impact of price increases implemented late during the second quarter of 2002. This increase was partially offset by lower volume in the Company’s cable and wire reels business. Overall, volumes in the Industrial Packaging segment were up approximately 15 percent, over last year’s second quarter, including the impact of acquisitions completed in 2001.
Industrial Packaging Segment, continued
Operating profits were slightly lower than last year’s second quarter, primarily resulting from lower selling prices and the impact of higher raw material costs, principally in recovered paper. Throughout the second quarter and continuing through July 2002, costs for recovered paper trended upward. To recover rising recovered paper costs, the Company has aggressively instituted price increases in paperboard and converted products in the United States, Canada, and Europe. However, due to the inherent time lag in recovering higher costs, the full benefit of the selling price increases will not occur until the third and fourth quarters of 2002. Additionally, higher pension and post-retirement costs of approximately $2.0 million were offset by productivity improvements of $7.5 million.
During the second quarter of 2002, the segment recorded an income adjustment of $.3 million related to a previously recorded restructuring charge.
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.
During the second quarter of 2002, Cascades Sonoco Inc., a joint venture owned 50 percent by Cascades Inc. and 50 percent by the Company, announced a $9.0 million investment in Kingsey Falls, Quebec. This investment will include the extension of the Cascades Sonoco Plant, installation of a new ultramodern and high-production coextrusion coating machine, workforce training and other pre-operating expenses.
June 2002 Year-to-Date Compared with June 2001 Year-to-Date
For the first six months of 2002, consolidated net sales were $1.37 billion, versus $1.28 billion in the same period last year. The higher sales, compared with the same period in 2001, were due primarily to increased volume, principally as a result of the seven key acquisitions made during 2001, increased volumes in the engineered carriers/paper operations, higher packaging services revenue and new flexible packaging business. Partially offsetting the higher volume was lower average selling prices, primarily in
Management’s Discussion and Analysis of Financial Condition and Results of OperationsContinued
engineered carriers and the high density film businesses, and lower composite can volume. Company-wide volumes, including the impact of acquisitions completed in 2001, were up eight percent compared to last year’s first six months.
Net income for the first half of 2002 was $71.3 million, versus $21.6 million in the second quarter of 2001. Excluding restructuring charges in both years, and, in 2001, excluding COLI adjustments and the effect of not amortizing goodwill, net income for the first half of 2002 was $73.2 million, versus $76.1 million in the same period last year. Results for the first six months of 2002 were affected by lower prices in the engineered carrier operations of approximately $20.0 million, lower composite can volume of approximately $13.0 million, and higher pension and post-retirement expense of approximately $9.0 million. These costs were partially offset by strong performance from acquisitions totaling $20.0 million and the favorable impact from productivity initiatives of approximately $21.0 million.
Earnings per diluted share for the first six months of 2002 were $0.73, compared with $0.23 in the same period in 2001. Excluding restructuring charges in both years, and, in 2001, excluding COLI adjustments and the effect of not amortizing goodwill, earnings per diluted share were $0.75 and $0.80 for the first six months of 2002 and 2001, respectively.
First half sales in the Consumer Packaging Segment were $678.1 million, versus $623.1 million in the same period of 2001. The increase in sales was due primarily to easy-open steel closures revenue at Phoenix Packaging, which was acquired in 2001, higher packaging services revenue and new flexible packaging business. Partially offsetting the higher revenue from these businesses were lower selling prices in the Company’s high density film business and decreased volume in composite cans.
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 $56.3 million, versus $56.8 million in the same period last year. Profits decreased primarily due to lower composite can volume and higher pension and post-retirement expense in this segment. Profitability on the increased flexibles business was
dampened by start-up costs and inefficiencies related to two new presses. These costs were partially offset by earnings from acquisitions in the segment. In addition, productivity improvements added $7.0 million to Consumer Packaging segment profits.
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 $2.0 million.
Sales for the first half of 2002 in this segment were $688.5 million, versus $657.3 million in the same period last year. The higher sales, compared with the same period in 2001, were due primarily to increased volume, 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 $20.0 million.
Excluding restructuring charges in both years, and, in 2001, excluding COLI adjustments and the effect of not amortizing goodwill, operating profit for this segment in the first half of 2002 was $78.8 million, versus $87.2 million in the same period last year. Operating profits were negatively impacted by higher raw material prices and the inherent lag time in recovering those costs through price increases. Higher pension and post-retirement costs of approximately $5.0 million were offset by productivity improvements of approximately $14.0 million.
During the first half of 2002, the segment recorded restructuring charges of $1.1 million, mainly attributed to the closing of a plant location in the United States. Asset impairment charges of $0.4 million, included in the restructuring charge, resulted from equipment write-offs associated with the plant closure.
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 $4.0 million.
Corporate
General corporate expenses have been allocated as operating costs to each of the segments and are included in the segment information presented above. Year-to-date net interest expense increased $0.6 million primarily due to an increase in debt. Total debt increased year-over-year by $98.5 million primarily as a result of the acquisitions made in 2001.
In July 2002, the Company renewed its $450 million backstop credit line for commercial paper, short-term borrowing under uncommitted facilities and future liquidity needs. The credit agreement matures in July 2003 unless the Company exercises a one-year term-out option.
Operating results in the second quarter 2002 included net gains from building sales, offset by costs associated with a plant shutdown.
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 Consolidated Statements of Income for the three and six month periods ended June 30, 2001 include in “Cost of Sales” $3.0 million and $6.0 million ($1.9 million and $3.8 million after tax), respectively, of goodwill amortization. No goodwill amortization is included for the corresponding periods of 2002.
Goodwill and Intangible Assets, continued
FAS 142 requires a two-step impairment test for goodwill. The first step is to identify a potential impairment and, in transition, this step must be measured as of the beginning of the fiscal year. However, a Company has six months from the date of adoption to complete the first step. The second step of the goodwill impairment test measures the amount of the impairment loss (also measured as of the beginning of the fiscal year in year of transition), if any, and must be completed by the end of the Company’s fiscal year. The Company completed its transitional goodwill impairment testing required by FAS 142 during the second quarter of 2002 and no further adjustments to its goodwill balance were necessary.
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.
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 provisions of this statement are required to be applied for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The adoption of FAS 144 did not have a material effect on the financial statements.
New Accounting Pronouncements, continued
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 does not expect the adoption of FAS 146 to have a material effect on its financial statements.
Restructuring and Asset Impairment
During the first six months of 2002, the Company recognized restructuring charges of $3.1 million ($2.0 million after tax) related to the closing of two plant locations in the Industrial and Consumer Packaging segments. These restructuring charges, net of adjustments, consisted of severance and termination benefits of $2.0 million, asset impairment charges of $1.0 million and other exit costs of $0.1 million. Additionally, 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 restructuring was to realign and centralize a number of staff functions and to remove approximately $48.0 million of annualized costs from the Company’s cost structure. With the 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 2002 using cash generated by operations. The Company anticipates recording additional restructuring charges during the third quarter of 2002.
Financial Position, Liquidity and Capital Resources
The Company’s financial position remained strong through the first six months of 2002. The debt-to- capital ratio decreased to 46.8 percent at June 30, 2002, from 49.3 percent at December 31, 2001. The decrease is due to a $31.9 million net reduction in the Company’s overall debt since the end of 2001.
Financial Position, Liquidity and Capital Resources, continued
In February 2002, the Company entered into a swap to match the terms of a $150 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% 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 increased $25.6 million to $230.5 million during the first six months of 2002. The increase is driven mainly by higher trade accounts receivable reflecting higher sales volume experienced in the second quarter of 2002.
The effective tax rate for the three-month and six-month periods ended June 30, 2002, was 36.0 percent, compared with 64.7 percent and 65.2 percent for the same periods last year. Excluding the impact of COLI charges and certain non-deductible foreign restructuring charges in 2001, 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 first six months of 2001 to 36.0 percent for the same period in 2002, is partially due to non-deductible goodwill amortization no longer being reported as an expense 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 deductibility of the related dividends paid by the Company.
Cash generated from operations of $115.3. million (after funding benefit plans of $31.0 million) was used to partially fund capital expenditures of $51.9 million, to pay dividends of $39.3 million, and reduce debt by $31.9 million. The Company expects internally generated cash flows to be sufficient to meet operating and normal capital expenditure requirements both on a short-term and long-term basis.
SONOCO PRODUCTS COMPANYPART I. FINANCIAL INFORMATION
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 5. 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.
EXHIBIT INDEX