1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC
20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended October 1, 2000 Commission File No. 1-11261
SONOCO PRODUCTS COMPANY
----------------
Incorporated under the laws I.R.S. Employer Identification
of South Carolina No. 57-0248420
Post Office Box 160
Hartsville, South Carolina 29551-0160
Telephone: 843-383-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock at November 5, 2000:
Common stock, no par value: 99,514,510
--------------------------------------
2
SONOCO PRODUCTS COMPANY
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance
Sheets - October 1, 2000 (unaudited)
and December 31, 1999
Condensed Consolidated Statements of
Income - Three and Nine Months Ended
October 1, 2000 (unaudited) and
September 26, 1999 (unaudited)
Condensed Consolidated Statements of
Cash Flows - Nine Months Ended October
1, 2000 (unaudited) and September 26,
1999 (unaudited)
Notes to Condensed Consolidated
Financial Statements
Report of Independent Accountants
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE
3
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands)
(unaudited)
October 1, December 31,
2000 1999*
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 53,960 $ 36,515
Trade accounts receivable, net of allowances 360,263 346,845
Other receivables 27,986 28,847
Inventories:
Finished and in process 112,213 94,133
Materials and supplies 159,344 154,231
Prepaid expenses and other 37,923 62,510
----------- -----------
751,689 723,081
PROPERTY, PLANT AND EQUIPMENT, NET 987,015 1,032,503
COST IN EXCESS OF FAIR VALUE OF ASSETS PURCHASED, NET 238,874 254,580
OTHER ASSETS 301,150 286,856
----------- -----------
Total Assets $ 2,278,728 $ 2,297,020
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Payable to suppliers $ 219,866 $ 192,859
Accrued expenses and other 155,633 139,175
Notes payable and current portion of long-term debt 61,489 84,597
Taxes on income 8,270 --
----------- -----------
445,258 416,631
LONG-TERM DEBT 775,176 819,540
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 28,883 36,278
DEFERRED INCOME TAXES AND OTHER 139,127 123,351
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized 300,000 shares
99,483 and 101,448 shares issued and outstanding
at October 1, 2000 and December 31, 1999, respectively 7,175 7,175
Capital in excess of stated value 380,322 427,591
Accumulated other comprehensive loss (157,748) (123,008)
Retained earnings 660,535 589,462
----------- -----------
Total Shareholders' Equity 890,284 901,220
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,278,728 $ 2,297,020
=========== ===========
* The December 31, 1999 condensed consolidated balance sheet data was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles.
See accompanying Notes to Condensed Consolidated Financial Statements
4
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(Dollars and shares in thousands except per share data)
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
October 1, Sept. 26, October 1, Sept. 26,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net sales $ 677,469 $ 620,027 $ 2,042,454 $ 1,792,260
Cost of sales 529,972 476,069 1,588,414 1,368,603
Selling, general and administrative expenses 69,001 63,427 205,796 183,442
Other items* 5,499 -- 5,499 (3,500)
----------- ----------- ----------- -----------
Income before interest and taxes 72,997 80,531 242,745 243,715
Interest expense 15,026 12,914 45,709 37,230
Interest income (929) (1,310) (2,427) (4,040)
----------- ----------- ----------- -----------
Income before income taxes 58,900 68,927 199,463 210,525
Provision for income taxes 22,382 25,542 75,796 78,708
----------- ----------- ----------- -----------
Income before equity in earnings of affiliates/
Minority interest in subsidiaries 36,518 43,385 123,667 131,817
Equity in earnings of affiliates/Minority
interest in subsidiaries 2,014 1,882 6,282 4,761
----------- ----------- ----------- -----------
Net income $ 38,532 $ 45,267 $ 129,949 $ 136,578
=========== =========== =========== ===========
Average common shares outstanding:
Basic 99,478 101,946 99,953 101,877
Assuming exercise of options 152 953 197 976
----------- ----------- ----------- -----------
Diluted 99,630 102,899 100,150 102,853
=========== =========== =========== ===========
Net income per common share:
Basic $ .39 $ .44 $ 1.30 $ 1.34
=========== =========== =========== ===========
Diluted $ .39 $ .44 $ 1.30 $ 1.33
=========== =========== =========== ===========
Cash dividends per common share $ .20 $ .19 $ .59 $ .56
=========== =========== =========== ===========
* Includes executive severance agreements in 2000 and gain on sales of divested
assets in 1999.
See accompanying Notes to Condensed Consolidated Financial Statements
5
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
Nine Months Ended
---------------------------
October 1, Sept. 26,
2000 1999
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 271,975 $ 162,089
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (79,837) (94,314)
Cost of acquisitions, exclusive of cash (2,080) (180,684)
Proceeds from non-operating notes receivable -- 34,000
Proceeds from the sale of assets 1,002 15,692
Investments in affiliates (1,153) (14,568)
Other, net -- (688)
--------- ---------
Net cash used by investing activities (82,068) (240,562)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 13,071 124,988
Principal repayment of debt (105,534) (68,004)
Net increase in commercial paper borrowings 31,700 61,800
Net (decrease) increase in bank overdrafts (8,188) 8,966
Cash dividends (58,876) (57,059)
Common shares acquired (46,364) (217)
Common shares issued 2,417 4,277
--------- ---------
Net cash (used) provided by financing activities (171,774) 74,751
--------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (688) (1,403)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,445 (5,125)
Cash and cash equivalents at beginning of period 36,515 57,249
--------- ---------
Cash and cash equivalents at end of period $ 53,960 $ 52,124
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements
6
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1: BASIS OF INTERIM PRESENTATION
In the opinion of the management of Sonoco Products Company (the
"Company"), the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial
position, results of operations, and cash flows for the interim periods
reported hereon. Operating results for the three and nine months ended
October 1, 2000, are not necessarily indicative of the results that may
be expected for the year ending December 31, 2000. These condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in
the Company's annual report for the fiscal year ended December 31,
1999.
Certain amounts have been reclassified to conform with the current year
presentation.
NOTE 2: DIVIDEND DECLARATIONS
On July 19, 2000, the Board of Directors declared a regular quarterly
dividend of $.20 per share payable September 8, 2000, to all
shareholders of record August 18, 2000.
On October 18, 2000, the Board of Directors declared a regular
quarterly dividend of $.20 per share payable December 8, 2000, to all
shareholders of record November 17, 2000.
NOTE 3: NEW ACCOUNTING PRONOUNCEMENT
On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133) which was
later amended by FAS 138. FAS 133, as amended, is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000 and
requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The Company
is currently evaluating the effect of adopting FAS 133.
7
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(unaudited)
NOTE 4: COMPREHENSIVE INCOME
The following table reconciles net income to comprehensive income
(dollars in thousands):
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
October 1, Sept. 26, October 1, Sept. 26,
2000 1999 2000 1999
--------- --------- --------- ---------
Net income $ 38,532 $ 45,267 $ 129,949 $ 136,578
Other comprehensive loss:
Foreign currency translation
adjustments (9,627) (2,200) (34,740) (25,735)
--------- --------- --------- ---------
Comprehensive income $ 28,905 $ 43,067 $ 95,209 $ 110,843
========= ========= ========= =========
The following table summarizes the components of the current period
change in the accumulated other comprehensive loss balances (dollars in
thousands):
Foreign Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustments Adjustment Loss
----------- ---------- -------------
Balance at January 1, 2000 $(118,882) $ (4,126) $(123,008)
Current period change (34,740) -- (34,740)
--------- --------- ---------
Balance at October 1, 2000 $(153,622) $ (4,126) $(157,748)
========= ========= =========
8
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(unaudited)
NOTE 5: FINANCIAL SEGMENT INFORMATION
Sonoco reports its results in two primary segments, Industrial
Packaging and Consumer Packaging. The Industrial Packaging segment
includes engineered carriers (paper and plastic tubes and cores, paper
manufacturing, and recovered paper operations); and protective
packaging (designed interior packaging and protective reels). The
Consumer Packaging segment includes composite cans; flexible packaging
(printed flexibles, high density bag and film products, and container
seals); and packaging services and specialty products (e-marketplace,
graphics management, folding cartons, and paper glass covers and
coasters).
FINANCIAL SEGMENT INFORMATION (UNAUDITED)
(Dollars in thousands)
Three Months Ended Nine Months Ended
-------------------------------- ---------------------------------
Oct. 1, 2000 Sept. 26, 1999 Oct. 1, 2000 Sept. 26, 1999
------------ -------------- ------------ --------------
Net Sales
Industrial Packaging $ 362,452 $ 340,456 $ 1,103,103 $ 986,727
Consumer Packaging 315,017 279,571 939,351 796,860
Other* -- -- -- 8,673
----------- ----------- ----------- -----------
Consolidated $ 677,469 $ 620,027 $ 2,042,454 $ 1,792,260
=========== =========== =========== ===========
Operating Profit
Industrial Packaging $ 52,677 $ 46,047 $ 162,113 $ 137,451
Consumer Packaging 25,819 34,677 86,131 102,881
Other* -- (193) -- (117)
One-time non-operational items** (5,499) -- (5,499) 3,500
Interest, net (14,097) (11,604) (43,282) (33,190)
----------- ----------- ----------- -----------
Consolidated $ 58,900 $ 68,927 $ 199,463 $ 210,525
=========== =========== =========== ===========
* Includes net sales and operating profits of divested businesses.
** Includes executive severance agreements in 2000 and gain on sales of divested
assets in 1999.
9
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited)
Note 6: Income Tax
As previously disclosed in footnote 14 to the Company's annual report
for the fiscal year ended December 31, 1999, the Company received a
Revenue Agent Report from the Internal Revenue Service (IRS) related
to the years 1993 through 1995. The most significant issue pertains to
the disallowance of Corporate Owned Life Insurance (COLI) loan
interest. In January 2000, the Company filed a protest with the
Appeals Division of the IRS disputing the agent's position. In October
2000, management learned that in another case, a US District Court
upheld the IRS's position that interest related to loans on COLI
policies was not deductible for income tax purposes. This issue has
wide spread implications to numerous corporations, including the
Company, and its ultimate resolution is unknown. The Company continues
to monitor the issue and to work towards resolving it. Based on the
Company's evaluation of the facts in its case, the Company believes
that the impact could exceed existing accruals by a range from $0 to
$26 million. The Company plans to reevaluate the adequacy of its
accruals as the situation develops.
10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of Sonoco Products Company
We have reviewed the accompanying condensed consolidated balance sheet of Sonoco
Products Company as of October 1, 2000, and the related condensed consolidated
statements of income for each of the three-month and nine-month periods ended
October 1, 2000 and September 26, 1999, and the condensed consolidated
statements of cash flows for the nine-month periods ended October 1, 2000 and
September 26, 1999. 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, 1999, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the year then ended (not presented
herein), and in our report dated January 26, 2000, 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, 1999, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Charlotte, North Carolina
November 15, 2000
11
SONOCO PRODUCTS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations that are not historical in nature, are
intended to be, and are hereby identified as "forward looking statements" for
purposes of the safe harbor provided by section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements include statements regarding
offsetting high raw material costs, adequacy of income tax provision,
refinancing of debt, adequacy of cash flows, 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; the accuracy of customer forecasts;
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; currency stability and the rate
of growth in foreign markets; and actions of government agencies.
THIRD QUARTER 2000 COMPARED WITH THIRD QUARTER 1999
RESULTS OF OPERATIONS
Consolidated net sales for the third quarter of 2000 were $677.5 million, an
increase of $57.5 million over last year's third quarter sales of $620.0
million. The combination of selling price increases implemented in the first
three quarters of 2000 to pass through higher raw material costs and
acquisitions made late in the third quarter of 1999 resulted in an increase in
sales of $64 million over the same period last year. Quarter-over-quarter sales
were lowered by approximately $8 million from the translation of European sales
into U.S. dollars.
Reported net income and earnings per diluted share for the quarter were $38.5
million and $.39, respectively. These reported results include the impact of a
one-time, after-tax charge of $3.4 million, or $.03 per diluted share, related
to senior management changes that were announced in July 2000. Excluding the
impact of this executive severance charge, net income and earnings per diluted
share for the quarter were $41.9 million and $.42, respectively, compared with
$45.3 million and $.44, respectively, in the third quarter of 1999. Earnings
were adversely impacted by slower volumes and unfavorable product mix compared
with last year's third quarter.
12
SONOCO PRODUCTS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED), CONTINUED
THIRD QUARTER 2000 COMPARED WITH THIRD QUARTER 1999, CONTINUED
CONSUMER PACKAGING SEGMENT
The consumer packaging segment includes composite cans; flexible packaging
(printed flexibles, high density bag and film products, and container seals);
and packaging services and specialty products (e-marketplace, graphics
management, folding cartons, and paper glass covers and coasters).
Third quarter sales in the consumer segment were $315.0 million, compared with
$279.6 million in the same quarter of 1999. Operating profits in this segment
were $25.8 million in the third quarter of 2000, compared with $34.7 million in
the same period last year.
The consumer segment's increase in sales of $35.4 million, or 12.7%, for the
third quarter of 2000 over the same quarter last year resulted primarily from
higher selling prices and acquisitions completed late in the third quarter of
1999. These acquisitions consisted of the flexible packaging businesses of
Graphic Packaging Corporation and the composite can businesses of Crown, Cork &
Seal.
The decrease in operating profits of $8.9 million, or 25.5%, is the result of
lower volume and unfavorable mix of products sold, coupled with unrecovered
resin price increases primarily in the high density bag and film business.
Average resin prices for the third quarter of 2000 were approximately 13% higher
than in the same period last year. Two price increases of 7.5% each were
announced during the second quarter of 2000, but they have fallen approximately
$3 million short in the third quarter of covering the higher cost of raw
materials. Various sourcing and alliance agreements are being considered for
this business to help minimize the volatility experienced with resin prices.
Sales increased in the printed flexibles business due to the September 1999
Graphic Packaging acquisition and growth in the base business. Operating
profits, however, were lower in the third quarter of 2000 compared to the third
quarter of 1999. The lower profits resulted primarily from lower volume in
supplying liner internally to our composite can operations, and an unfavorable
price/cost relationship during the third quarter of 2000 compared to the same
period last year.
Volume in the Company's composite can businesses was particularly strong in
Europe and Latin America in the third quarter of 2000. Although North American
composite can volume was up in nuts and miscellaneous foods, declines were
experienced in the snack, frozen concentrate, and powdered beverage markets.
13
SONOCO PRODUCTS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED), CONTINUED
THIRD QUARTER 2000 COMPARED WITH THIRD QUARTER 1999, CONTINUED
INDUSTRIAL PACKAGING SEGMENT
The industrial packaging segment includes engineered carriers (paper and plastic
tubes and cores, paper manufacturing, and recovered paper operations) and
protective packaging (designed interior packaging and protective reels).
Third quarter sales for the industrial packaging segment were $362.5 million in
2000, a 6.5% increase over the $340.5 million reported in last year's third
quarter. Operating profits for this segment were $52.7 million, an increase of
14.4% over the $46.0 million reported in the third quarter of 1999.
The increase in third quarter sales and profits in the industrial segment
resulted primarily from selling price increases for engineered carriers
implemented in the second and third quarters of 2000 in response to higher
general operating expenses and raw material costs. The benefits of these
increases, along with productivity gains in engineered carriers, were partially
offset by a slight decrease in unit volume growth in the third quarter, compared
with the same period last year, and by natural gas costs which have risen more
than 100% over last year.
Unit volume in the engineered carrier operations in the United States was
approximately 3% lower than last year's third quarter; however, unit volume was
up approximately 7% in the European operations with increases noted in Central
and Eastern Europe. Operating profits in engineered carriers have benefited from
the higher selling prices and the slight lowering quarter over quarter,
approximately $4 per ton, in total furnish costs (primarily old corrugated
containers or OCC). Total furnish costs averaged $88 per ton during the third
quarter of 2000 compared with $92 per ton in last year's third quarter and $122
per ton during the second quarter of 2000.
This year's third quarter results included a pre-tax charge of approximately $3
million for the write-down of recovered paper inventories to the lower of cost
or market. The lower OCC costs reflect the slower economic growth in many of the
markets served by Sonoco.
Volume in the Company's designed interior packaging operations remained ahead of
last year's third quarter. In addition, productivity improvements contributed to
the higher operating profits of these operations.
14
SONOCO PRODUCTS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED), CONTINUED
SEPTEMBER 2000 YEAR-TO-DATE COMPARED WITH SEPTEMBER 1999 YEAR-TO-DATE
RESULTS OF OPERATIONS
Consolidated net sales for the first nine months of 2000 were $2.04 billion,
compared with $1.79 billion in the first nine months of 1999, an increase of
14%. Strong volume in the first quarter of 2000, coupled with selling price
increases implemented throughout the first six months of 2000, increased
year-over-year sales by $159 million. In addition, acquisitions (net of
dispositions) increased sales by $96 million. Also, this year's first nine
months included six more calendar days (4 to 6 more billing days, depending on
the specific business) than in the previous year. Year-over-year sales were
lowered by approximately $20 million from the translation of European sales into
U.S. dollars.
Net income for the first nine months of 2000, excluding a $3.4 million
non-recurring executive severance charge in the third quarter of 2000, was
$133.4 million versus $133.1 million for the same period in 1999, excluding a
$3.5 million non-recurring gain in the first quarter of 1999. Earnings per
diluted share, excluding the non-recurring items, were $1.33 versus $1.29 in the
same period of 1999. The higher earnings per diluted share reflect the benefit
of the Company's repurchase of a total of approximately 3.1 million shares of
its common stock throughout December 1999 and the first quarter of 2000.
Net income benefited from volume growth in the first two quarters of 2000.
Volume began to decline in the third quarter of 2000; however, it remained ahead
of last year on a year-to-date basis. Year-over-year raw material costs have
increased in virtually every operation and geographic region in which the
Company operates. Selling prices have been raised in response to the rising raw
material and general operating costs. By the end of the third quarter of 2000,
the Company's year-to-date selling prices relative to material costs were
positive; however, unfavorable product mix and higher fixed costs offset this
favorable price/cost relationship for the first nine months of the year.
CONSUMER PACKAGING SEGMENT
Net sales from ongoing operations for the consumer packaging segment were $939.4
million in the first nine months of 2000, $142.5 million higher than the $796.9
million reported in the same period last year. Approximately $104.7 million of
the increase in the year-over-year sales in this segment was due to the
previously described acquisitions completed late in the third quarter of 1999.
Operating profits from ongoing operations in this segment were $86.1 million for
the first nine months of 2000, compared with $102.9 million during the same
period last year. Last year's results included a gain in the second quarter of
approximately $2 million on the sale of land and buildings.
15
SONOCO PRODUCTS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED), CONTINUED
SEPTEMBER 2000 YEAR-TO-DATE COMPARED WITH SEPTEMBER 1999 YEAR-TO-DATE
CONSUMER PACKAGING SEGMENT, CONTINUED
Volume in the Company's global composite can operations in the first nine months
of 2000 remains ahead of levels in the same period last year largely due to the
acquisition of Crown Cork & Seal's composite can businesses late in the third
quarter of 1999. Year-over-year operating profits in this business were down as
the additional volume was offset by unfavorable product mix and higher fixed
costs partially attributable to the acquisition.
Sonoco's high density bag and film products operations experienced lower volume
for the first nine months of 2000, compared with the same period last year. The
lower volume occurred primarily in the second and third quarters in both the
grocery and retail markets. Operating profits have also been negatively impacted
by higher resin prices. Two 7.5% price increases were implemented during the
second quarter of 2000, but have fallen approximately $11 million short of
covering these material price increases on a year-to-date basis.
Volume increased in the Company's printed flexible operations in the first nine
months of 2000, compared with the first nine months of 1999, partially due to
the acquisition of Graphic Packaging in September 1999. This acquisition, which
was expected to be earnings neutral in its first year, is favorably impacting
operating earnings in this segment. In addition to the acquisition,
year-over-year operating profits were higher as a result of productivity
improvements. These benefits were partially offset by unfavorable product mix
and higher selling and administrative costs, partially attributable to the
acquisition.
INDUSTRIAL PACKAGING SEGMENT
Trade sales for the industrial packaging segment for the first nine months of
2000 were $1,103 million, compared with $986.7 million in the first nine months
of 1999. Year-to-date operating profits for this segment were $162.1 million,
compared with the $137.5 million reported last year.
The increase in sales and profits in this segment resulted primarily from
increased volume in paper and plastic tubes and cores, compared with the first
nine months of 1999. In addition, more calendar days in the first quarter of
2000, productivity improvements throughout the year, and the impact of price
increases realized, contributed to improved results for the first nine months of
2000 compared to the same period last year.
In the global integrated paper and engineered carriers business, year-over-year
unit volume increased slightly on a comparable billing day basis. The average
price of recovered paper for the first nine months of 2000 was more
16
SONOCO PRODUCTS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED), CONTINUED
INDUSTRIAL PACKAGING SEGMENT, CONTINUED
than fifty percent higher than in the same period last year. Selling prices for
engineered carriers were increased to pass through the higher recovered paper
cost. Recovered paper prices began to drop late in the second quarter of 2000
and continued to drop throughout the third quarter. Through the first nine
months, raw material increases for most businesses in this segment had been
fully recovered.
Strong volume in the Company's protective packaging operations contributed to
higher sales and earnings in the first nine months of 2000 compared with the
same period last year. Part of the increase in volume is due to a new designed
interior packaging facility in Mexico that began production in the second half
of 1999. In addition, productivity improvements contributed to the improved
performance of these operations.
CORPORATE
General corporate expenses have been allocated as operating costs to each of the
segments. Year to date net interest expense was $10.1 million higher in the
first nine months of 2000 compared with the same period last year due to higher
average interest rates and higher average debt levels associated with funding
acquisitions and stock repurchases.
The Company has not yet adopted SFAS 133 (as amended by SFAS 138) "Accounting
for Derivative Instruments and Hedging Transactions". The Company is in the
process of evaluating the anticipated impact of the standard, which must be
adopted at the beginning of the first fiscal period of 2001. This standard
requires the recognition of all derivatives as either assets or liabilities in
the statement of financial position and the measurement of those instruments at
fair value.
As previously disclosed, the Company received a Revenue Agent Report from the
Internal Revenue Service (IRS) related to the years 1993 through 1995. The most
significant issue pertains to the disallowance of Corporate Owned Life Insurance
(COLI) loan interest. In January 2000, the Company filed a protest with the
Appeals Division of the IRS disputing the agent's position. In October 2000,
management learned that in another case, a US District Court upheld the IRS's
position that interest related to loans on COLI policies was not deductible for
income tax purposes. This issue has wide spread implications to numerous
corporations, including the Company, and its ultimate resolution is unknown. The
Company continues to monitor the issue and to work towards resolving it. Based
on the Company's evaluation of the facts in its case, the Company believes that
the impact could exceed existing accruals by a range from $0 to $26 million. The
Company plans to reevaluate the adequacy of its accruals as the situation
develops.
17
SONOCO PRODUCTS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED), CONTINUED
CORPORATE, CONTINUED
In October 2000, the Company's board of directors authorized the purchase of up
to 5 million shares of its common stock. Approximately 2.5 million shares of the
5 million remain from a previous authorization in February 2000. The Company has
repurchased approximately 2.5 million shares of its common stock to date during
2000, with the last purchase being made in March 2000.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remained strong through the first nine months
of 2000. The debt-to-capital ratio, after adjusting debt levels for excess cash
related to the issuance of restricted purpose bonds, decreased to 45.4% at
October 1, 2000, from 47.5% at December 31, 1999. The decrease is due to a net
reduction in the Company's overall debt of $67.5 million since the end of 1999.
Working capital of $306.4 million has remained flat relative to the working
capital at December 31, 1999. Current assets and current liabilities have each
increased $28.6 during the first nine months of 2000. The increases were driven
mainly by increases in accounts receivable, inventories, and trade accounts
payable. The increase in accounts receivable is primarily attributable to higher
sales, while part of the increase in inventory and accounts payable is due to
increased raw material prices.
Depreciation and amortization expense for the third quarter and first nine
months of 2000 was $39.2 million and $115 million, respectively.
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.
18
SONOCO PRODUCTS COMPANY
PART I. FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information about the Company's exposure to market risk was
disclosed in its 1999 Annual Report on Form 10-K which was filed
with the Securities and Exchange Commission on March 24, 2000.
There have been no material quantitative or qualitative changes
in market risk exposures since the date of that filing.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10 - Agreement and Mutual Release
(b) Exhibit 27 - Financial Data Schedule (for SEC use only)
(c) Form 8-K filed July 21, 2000, relating to Item 5 of
that form with respect to other events.
19
S O N O C O P R O D U C T S C O M P A N Y
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SONOCO PRODUCTS COMPANY
-----------------------
(Registrant)
Date: November 15, 2000 By: /s/ F. T. Hill, Jr.
-------------------------- ------------------------
F. T. Hill, Jr.
Vice President and
Chief Financial Officer
20
SONOCO PRODUCTS COMPANY
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10 Agreement and Mutual Release
27 Financial Data Schedule for the third quarter
of 2000 (for SEC use only)