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
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.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock at May 5, 2002:
Common stock, no par value: 96,388,419
SONOCO PRODUCTS COMPANY
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)
Note 1: Basis of Interim Presentation
Note 2: Dividend Declarations
Note 3: Acquisitions/Dispositions
Note 4: Subsequent Event
SONOCO PRODUCTS COMPANYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued(Dollars in thousands except per share data)(unaudited)
Note 5: Comprehensive Income
Note 6: Financial Segment Information
FINANCIAL SEGMENT INFORMATION (Unaudited)
Note 7: Restructuring and Asset Impairment Charges
Note 8: Earnings Per Share
Note 9: Goodwill and Intangible Assets
Note 9: Goodwill and Intangible Assets, continued
Note 10: New Accounting Pronouncements
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 March 31, 2002, and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 2002, and April 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.
Charlotte, North CarolinaApril 17, 2002
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, and elsewhere in this report, 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.
First Quarter 2002 Compared with First Quarter 2001
Results of Operations
Consolidated net sales for the first quarter of 2002 were $654.2 million, versus $632.8 million in the first quarter of 2001. The higher sales, compared with the same period in 2001, were due primarily to increased volume of $22.8 million, driven mainly by the effect of 2001 acquisitions, and higher packaging services revenue, offset partially by lower average selling prices. Overall, volumes were up approximately four percent; however, excluding the impact of 2001 acquisitions, volumes were five percent below last year’s first quarter.
Net income for the first quarter of 2002 was $33.5 million, versus $4.7 million in the first quarter of 2001. Excluding restructuring charges and the effect of not amortizing goodwill, net income for the first quarter 2002 was $34.4 million, versus $37.3 million in the first quarter of 2001. First quarter 2002 results declined primarily due to general economic weakness particularly in the Industrial Packaging segment. Strong performance from acquisitions and in some consumer businesses helped mitigate lower volume in other operations. The gross margin as a percentage of sales declined from 21.7 percent in the first quarter of 2001 to 20.7 percent in the first quarter of 2002. The decline is primarily attributable to the Industrial Packaging segment and is largely the result of pricing pressures
Management’s Discussion and Analysis of Financial Condition and Results of Operationscontinued
First Quarter 2002 Compared with First Quarter 2001, continued
Results of Operations, continued
in engineered carriers operations, both in the United States and Europe. Margins were also impacted by higher pension and post-retirement cost resulting from lower investment earnings on plan assets. Higher pension and post-retirement expense lowered earnings approximately $5.0 million pretax this quarter, and the full year impact is expected to be approximately $20.0 million when compared to 2001. The favorable impact from productivity initiatives of $9.5 million, lower material prices of $8.1 million, and lower fixed costs of $7.6 million, helped offset some of the impact of lower volume, pricing and higher benefit costs.
The Company reported earnings per diluted share of $0.35 and $0.05 in the first quarter of 2002 and 2001, respectively. Excluding restructuring charges and the effect of not amortizing goodwill, earnings per diluted share were $0.36 and $0.39 in the first quarters of 2002 and 2001, respectively.
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.
First quarter 2002 sales were $328.5 million, compared with $300.9 million in the same quarter of 2001. Operating profit in the first quarter of 2002 for this segment, excluding restructuring charges and the effect of not amortizing goodwill, was $27.6 million, versus $26.5 million in the first quarter of 2001.
The increase in first quarter 2002 sales was due primarily to higher packaging services revenue, additional revenue related to the easy-open steel closures business acquired from Phoenix Packaging in 2001 and new flexible packaging business. Partially offsetting the higher sales from these businesses were lower selling prices and volume in the Company’s high density film business. Overall, volumes in the Consumer Packaging segment were up approximately three percent; however, excluding the impact of acquisitions, volumes were approximately five percent below last year’s first quarter. Without acquisitions, total sales dollars in the Consumer Packaging segment would have been up modestly from last year.
Profits increased primarily due to good performance from acquisitions and increased earnings from new packaging services and flexible packaging contracts. In addition, productivity improvements added approximately $3.4 million to Consumer Packaging segment profits. Lower fixed costs resulting from restructuring actions offset higher pension and post-retirement expense in this segment.
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.
Industrial Packaging Segment, continued
First quarter 2002 sales for the Industrial Packaging segment were $325.7 million, versus $331.8 million in the same period last year. Operating profit in the first quarter of 2002 for the segment, excluding restructuring charges and the effect of not amortizing goodwill, was $37.0 million, versus $45.0 million in the first quarter of 2001.
First quarter sales and operating profits declined from last year’s first quarter due primarily to lower volumes and weaker selling prices in the engineered carriers and paper operations, reflecting the continued weak general economy. Additionally, lower volumes in the Company’s cable and wire reels business contributed to the decline in sales and profits. Overall, volumes in the Industrial Packaging segment were up approximately four percent; however, excluding the impact of 2001 acquisitions, volumes were approximately five percent lower than last year’s first quarter.
Operating profits in the Industrial Packaging segment were impacted by lower volume and pricing, principally in the engineered carrier business. Lower raw material costs helped mitigate some of the lower pricing; however, the overall relationship of selling prices to material cost was unfavorable, as compared to last year’s first quarter. Higher pension and post-retirement costs were more than offset by higher productivity improvements of $6.1 million and lower fixed costs resulting from restructuring actions.
During the first quarter of 2002, the segment recorded restructuring charges of $1.4 million attributed to the closing of one 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.
Corporate
General corporate expenses have been allocated as operating costs to each of the segments. Net interest expense declined $0.7 million quarter-over-quarter due to a decline in average interest rates. Total debt increased year-over-year by $99.2 million as a result of the acquisitions made in 2001.
Goodwill and Intangible Assets
During the first quarter of 2002, the Company adopted Financial Accounting Standard 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 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 relating to its existing goodwill. 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. Based on the analysis performed to date, the Company does not expect further adjustments related to the adoption of this standard. The Company expects to complete the analysis during the second quarter of 2002.
New Accounting Pronouncements
In August 2001, the 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.
Also in August 2001, the FASB issued 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 will require expected future operating
New Accounting Pronouncements, continued,
losses from discontinued operations to be reported in discontinued operations in the period incurred (rather than as of the measurement date as presently 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.
Restructuring and Asset Impairment
During the first quarter of 2002, the Company recognized restructuring charges of $1.4 million ($0.9 million after tax) related to the closing of a plant location in the Industrial Packaging segment. These restructuring charges consisted of severance and termination benefits of $0.9 million, asset impairment charges of $0.4 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 is to realign and centralize a number of staff functions and to permanently 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 second quarter of 2002.
Financial Position, Liquidity and Capital Resources
The Company’s financial position remained strong during the first quarter of 2002. The debt-to-capital ratio decreased slightly to 48.9 percent at March 31, 2002, from 49.3 percent at December 31, 2001. Net working capital increased $13.0 million to $217.9 million during the first quarter of 2002 driven mainly by an increase in trade accounts receivable. The increase in accounts receivable is partially attributed to higher sales related to the 2001 acquisitions.
Financial Position, Liquidity and Capital Resources, continued
The effective tax rate for the first quarter of 2002 was 36.0 percent, compared with 67.5 percent for the same period in 2001. Excluding the impact of certain non-deductible foreign restructuring charges in 2001, the effective tax rate would have been 37.5 percent. The drop in the effective tax rate, from 37.5 percent in the first quarter of 2001 to 36.0 percent in the first quarter of 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 $39.0 million (after funding benefit plans of $27.0 million) was used to partially fund capital expenditures of $23.0 million and to pay dividends of $19.1 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.
PART 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 6. Exhibits and Reports on Form 8-K
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