EXHIBIT 99.1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Directors of Sonoco Products Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in shareholders' equity and cash
flows present fairly, in all material respects, the consolidated financial
position of Sonoco Products Company at December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 8 to these consolidated financial statements, the Company
changed its method of accounting for goodwill in 2002 in accordance with
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
Charlotte, North Carolina
January 28, 2004, except for
Note 17 as to which the
date is September 30, 2004
CONSOLIDATED BALANCE SHEETS
SONOCO PRODUCTS COMPANY AND SUBSIDIARIES
(Dollars and shares in thousands)
At December 31 2003 2002
- -------------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 84,854 $ 31,405
Trade accounts receivable, net of allowances of $8,199 in 2003 and $8,335 in 2002 320,676 314,429
Other receivables 33,066 32,724
Inventories
Finished and in process 109,080 118,512
Materials and supplies 143,116 126,042
Prepaid expenses 33,751 23,726
Deferred income taxes 30,722 16,429
------------ ------------
755,265 663,267
PROPERTY, PLANT AND EQUIPMENT, NET 923,569 975,368
GOODWILL 383,954 359,418
OTHER ASSETS 457,845 438,386
------------ ------------
Total Assets $ 2,520,633 $ 2,436,439
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Payable to suppliers $ 239,300 $ 248,640
Accrued expenses and other 188,092 144,801
Accrued wages and other compensation 23,250 25,016
Notes payable and current portion of long-term debt 201,367 134,500
Taxes on income 27,585 5,639
------------ ------------
679,594 558,596
LONG-TERM DEBT 473,220 699,346
PENSION AND OTHER POSTRETIREMENT BENEFITS 137,494 121,176
DEFERRED INCOME TAXES AND OTHER 216,165 189,896
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Serial preferred stock, no par value
Authorized 30,000 shares
0 shares issued and outstanding as of December 31, 2003 and 2002
Common shares, no par value
Authorized 300,000 shares
97,217 and 96,640 shares outstanding of which 96,969 and 96,380
are issued as of December 31, 2003 and 2002, respectively 7,175 7,175
Capital in excess of stated value 337,136 324,295
Accumulated other comprehensive loss (136,091) (212,164)
Retained earnings 805,940 748,119
------------ ------------
Total Shareholders' Equity 1,014,160 867,425
------------ ------------
Total Liabilities and Shareholders' Equity $ 2,520,633 $ 2,436,439
============ ============
The Notes beginning on page 5 are an integral part of these financial
statements.
1
CONSOLIDATED STATEMENTS OF INCOME
SONOCO PRODUCTS COMPANY AND SUBSIDIARIES
(Dollars and shares in thousands except per share data)
Years ended December 31 2003 2002 2001
- ----------------------- ------------ ------------ ------------
Net sales $ 2,758,326 $ 2,701,419 $ 2,464,445
Cost of sales 2,259,887 2,178,778 1,953,595
Selling, general and administrative expenses 289,839 276,579 251,279
Other expense, net 50,056 10,409 51,175
------------ ------------ ------------
Income before interest and taxes 158,544 235,653 208,396
Interest expense 52,399 54,196 52,217
Interest income (2,188) (1,649) (3,800)
------------ ------------ ------------
Income before income taxes 108,333 183,106 159,979
Provision for income taxes 37,698 65,075 77,269
------------ ------------ ------------
Income before equity in earnings of affiliates/minority interest
in subsidiaries 70,635 118,031 82,710
Equity in earnings (loss) of affiliates/minority interest in
subsidiaries 7,543 7,437 (1,214)
------------ ------------ ------------
Income from continuing operations 78,178 125,468 81,496
Income from discontinued operations, net of income tax 60,771 9,848 10,113
------------ ------------ ------------
Net income $ 138,949 $ 135,316 $ 91,609
============ ============ ============
Average common shares outstanding:
Basic 96,819 96,373 95,370
Assuming exercise of options 310 805 437
Diluted 97,129 97,178 95,807
------------ ------------ ------------
Per common share
Net income
Basic $ 1.44 $ 1.40 $ .96
Diluted $ 1.43 $ 1.39 $ .96
Cash dividends - common $ .84 $ .83 $ .80
============ ============ ============
The Notes beginning on page 5 are an integral part of these financial
statements.
2
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SONOCO PRODUCTS COMPANY AND SUBSIDIARIES
Accumulated
Common Shares Capital in Other
(Dollars and shares Comprehensive --------------------------- Excess of Comprehensive Retained
in thousands) Income (Loss) Outstanding Amount Stated Value Loss Earnings
- ------------- ------------- ----------- -------- ------------ ------------- ----------
JANUARY 1, 2001 95,006 $ 7,175 $ 289,657 $ (172,403) $ 677,042
Net income $ 91,609 91,609
Other comprehensive
income (loss):
Translation loss (8,827)
Minimum pension
liability adjustment,
net of tax (15,914)
Other (825)
-----------
Other comprehensive loss (25,566) (25,566)
-----------
Comprehensive income $ 66,043
===========
Cash dividends (76,080)
Exercise of stock options 800 14,043
Shares repurchased (93) (2,055)
Other 700
- --------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001 95,713 7,175 302,345 (197,969) 692,571
Net income $ 135,316 135,316
Other comprehensive
income (loss):
Translation gain 15,833
Minimum pension
liability adjustment,
net of tax (30,921)
Other 893
-----------
Other comprehensive loss (14,195) (14,195)
-----------
Comprehensive income $ 121,121
===========
Cash dividends (79,768)
Exercise of stock options 927 21,618
Other 332
- --------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002 96,640 7,175 324,295 (212,164) 748,119
Net income $ 138,949 138,949
Other comprehensive
income (loss):
Translation gain 77,903
Minimum pension
liability adjustment,
net of tax (3,403)
Other 1,573
-----------
Other comprehensive income 76,073 76,073
-----------
Comprehensive income $ 215,022
===========
Cash dividends (81,128)
Exercise of stock options 577 8,752
Other 4,089
- --------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 97,217 $ 7,175 $ 337,136 $ (136,091) $ 805,940
==========================================================================================================================
The Notes beginning on page 5 are an integral part of these financial
statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
SONOCO PRODUCTS COMPANY AND SUBSIDIARIES
(Dollars in thousands)
Years ended December 31 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 138,949 $ 135,316 $ 91,609
Adjustments to reconcile net income to net cash provided
by operating activities
Restructuring reserve (noncash) 8,381 360 16,919
Depreciation, depletion and amortization 163,234 159,256 158,574
Equity in (earnings) loss of affiliates/minority interest
in subsidiaries (7,543) (7,437) 1,214
Cash dividends from affiliated companies 11,327 3,626 7,925
Loss on disposition of assets 1,228 100 7,116
Gain on sale of High Density Film business (49,433) -- --
Deferred taxes 11,175 27,956 22,005
Change in assets and liabilities, net of effects from
acquisitions, dispositions, assets held for sale and
foreign currency adjustments
Receivables 5,324 (22,214) 57,255
Inventories (10,117) 19,307 23,438
Prepaid expenses (7,955) 8,281 (2,870)
Payables and taxes 70,727 49,788 (20,301)
Other assets and liabilities (3,459) (102,894) 1,457
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 331,838 271,445 364,341
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (113,574) (123,959) (101,983)
Cost of acquisitions, exclusive of cash (6,232) (8,500) (273,187)
Proceeds from the sale of assets 2,709 8,036 6,902
Proceeds from sale of High Density Film business 81,177 -- --
Investments in affiliates -- -- (3,600)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (35,920) (124,423) (371,868)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt 20,715 11,620 259,224
Principal repayment of debt (120,287) (9,991) (24,476)
Net (decrease) increase in commercial paper borrowings (65,500) (92,500) (174,000)
Net (decrease) increase in bank overdrafts (8,075) (2,924) 11,560
Cash dividends - common (81,128) (79,768) (76,080)
Common shares acquired -- -- (2,055)
Common shares issued 8,752 21,618 14,043
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (245,523) (151,945) 8,216
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 3,054 198 222
- -----------------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 53,449 (4,725) 911
Cash and cash equivalents at beginning of year 31,405 36,130 35,219
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 84,854 $ 31,405 $ 36,130
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 50,079 $ 44,823 $ 50,551
Income taxes paid, net of refunds $ 27,182 $ 44,682 $ 49,035
Value of stock issued for acquisition $ 2,700 $ -- $ --
===================================================================================================================================
The Notes beginning on page 5 are an integral part of these financial
statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
The following notes are an integral part of the Consolidated Financial
Statements. The accounting principles followed by the Company appear in bold
type.
1. BASIS OF PRESENTATION
THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDE THE ACCOUNTS OF SONOCO AND ITS
MAJORITY-OWNED SUBSIDIARIES (THE COMPANY OR SONOCO) AFTER ELIMINATION OF
INTERCOMPANY ACCOUNTS AND TRANSACTIONS. INVESTMENTS IN AFFILIATED COMPANIES IN
WHICH THE COMPANY OWNS 20% TO 50% AND IS ABLE TO EXERCISE SIGNIFICANT INFLUENCE,
BUT NOT CONTROL, ARE ACCOUNTED FOR BY THE EQUITY METHOD OF ACCOUNTING (EQUITY
INVESTMENTS). INCOME APPLICABLE TO EQUITY INVESTMENTS IS REFLECTED AS "EQUITY IN
EARNINGS (LOSS) OF AFFILIATES/MINORITY INTEREST IN SUBSIDIARIES" IN THE
CONSOLIDATED STATEMENTS OF INCOME. Investments related to equity in affiliates
are included in "Other Assets" in the Company's Consolidated Balance Sheets and
totaled $100,427 and $90,866 for the years ended December 31, 2003 and 2002,
respectively.
THE PREPARATION OF FINANCIAL STATEMENTS IN CONFORMITY WITH ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA REQUIRES MANAGEMENT TO MAKE
ESTIMATES AND ASSUMPTIONS THAT AFFECT THE REPORTED AMOUNT OF ASSETS AND
LIABILITIES AT THE DATE OF THE FINANCIAL STATEMENTS AND THE REPORTED AMOUNTS OF
REVENUES AND EXPENSES DURING THE REPORTING PERIOD. ACTUAL RESULTS COULD DIFFER
FROM THOSE ESTIMATES.
THE COMPANY RECORDS REVENUE WHEN TITLE AND RISK OF OWNERSHIP PASS TO THE
CUSTOMER AND WHEN PERSUASIVE EVIDENCE OF AN ARRANGEMENT EXISTS, DELIVERY HAS
OCCURRED OR SERVICES HAVE BEEN RENDERED, THE SELLER'S PRICE TO THE BUYER IS
FIXED OR DETERMINABLE, AND WHEN COLLECTIBILITY IS REASONABLY ASSURED.
Certain prior year amounts in the Consolidated Balance Sheets at December 31,
2002 have been reclassified to conform to the current year presentation.
Additionally, during 2003, the Company reclassified shipping and handling costs
related to third party shipments from "Net sales" to "Cost of sales" on the
Consolidated Statements of Income for all years. These reclassifications
increased net sales and cost of sales by the same amount, and therefore, did not
affect reported net income.
During the fourth quarter of 2003, the Company completed the sale of its High
Density Film business to Hilex Poly Co., LLC, Los Angeles, Calif. Operating
results of this business have been presented for all years as "Income from
discontinued operations, net of income taxes" in the Company's Consolidated
Statements of Income. Items related to the Consolidated Statements of Income
have been restated to reflect the reclassification of the High Density Film
business as discontinued operations.
2. ACQUISITIONS/DISPOSITIONS/JOINT VENTURES
The Company completed four acquisitions during 2003, with an aggregate cost of
approximately $11,077 in cash, assumption of debt, relief of notes receivable
and issuance of common stock. In connection with these acquisitions, the Company
recorded fair value of identified intangibles of $3,150, goodwill of $2,897 and
other net tangible assets of $5,030. Acquisitions in the Company's Engineered
Carriers and Paper segment included an engineered carriers manufacturer in
Australia and a recovered paper operation in Savannah, Ga. The Company also
acquired certain assets of a wooden reel manufacturer in Canada and the United
States, which are classified as components of All Other Sonoco. In addition, the
Company increased its ownership interest in a manufacturer of rotogravure
cylinders in Charlotte, N.C., in the Company's Consumer Packaging segment.
Pro forma information is not provided for 2003 acquisitions, as the impact of
these acquisitions is immaterial to the results of the Company.
During 2003, the Company decided to divest itself of the High Density Film
business in order to redirect the value of those assets to primary growth
vehicles that will enhance the opportunity to increase total returns to
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
shareholders and significantly reduce the Company's exposure to highly cyclical
resin markets. In December 2003, the Company completed this divestiture by
selling the business to Hilex Poly Co., LLC, of Los Angeles, Calif., for a price
of approximately $119,100, including approximately $81,100 in cash, subject to
final determination of net working capital; $28,000 in subordinated notes
bearing a 4.95% interest rate maturing in 10 years; and, a $10,000 nonvoting
cumulative preferred instrument yielding 10%. This transaction resulted in a
gain of $63,112 ($49,433 after tax). Operating results of this business have
been presented for all periods as "Income from discontinued operations, net of
income tax" in the Company's Consolidated Statements of Income.
The Company completed three acquisitions during 2002, with an aggregate cost of
approximately $8,500 in cash. In connection with these acquisitions, the Company
recorded fair value of identified intangibles of $6,025, goodwill of $1,725 and
other net tangible assets of $750. Acquisitions in the Company's Engineered
Carriers and Paper segment included certain assets from Republic Paperboard
Company, LLC, and the related Republic Resource Control, LLC. The Company also
acquired Texas Reel Company's plywood reel operations in Sherman, Texas and
Coonrod Reel Company's nailed wooden reel operation in Bonham, Texas, both of
which are classified as components of All Other Sonoco.
The Company completed 10 acquisitions during 2001, with an aggregate cost of
approximately $273,000 in cash. In connection with these acquisitions, the
Company recorded approximate fair value of identified intangibles of $27,000,
goodwill of $138,000, and other net tangible assets of $108,000. Acquisitions in
the Company's Engineered Carriers and Paper segment included a lightweight
paperboard company with operations in DePere, Wis., and Menasha, Wis.; a
paper-based textile tube converting facility in Kaiping, China; a paper-based
core and tube operation in the United Kingdom; a paper-based core and tube
facility in Sint-Denijs, Belgium; an engineered carriers operation in
Cartersville, Ga.; and a paper mill in Hutchinson, Kan. Acquisitions in the
Company's Consumer Packaging segment included a steel easy-open closure
operation headquartered in North Canton, Ohio. The Company also acquired a
manufacturer of paper-based tubes, cores and composite cans headquartered in
Neenah, Wis. Approximately 80% of this operation is included in the Engineered
Carriers and Paper segment and 20% in the Consumer Packaging segment.
Acquisitions in the Company's Packaging Services segment included assets of a
packaging services operation in Hemel Hempstead, England, U.K. The Company also
acquired a plywood reel operation in Helenwood, Tenn., which is classified as a
component of All Other Sonoco.
The Company has accounted for all of its acquisitions as purchases and,
accordingly, has included their results of operations in consolidated net income
from the date of acquisition.
3. RESTRUCTURING PROGRAMS
Effective January 1, 2003, the Company adopted 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. The adoption of FAS 146 did not have a material effect on the Company's
financial statements except for the timing of the recognition of costs
associated with exit or disposal activities.
Due to the sale of the High Density Film business in December 2003,
restructuring charges have been restated to exclude any costs incurred by the
High Density Film business, as such charges have been included in "Income from
discontinued operations, net of income taxes" on the Consolidated Statements of
Income.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
During 2003, the Company recognized restructuring charges, net of adjustments,
of $50,056 ($35,329 after tax). Of these charges, $31,413 was attributed to the
Engineered Carriers and Paper segment, $9,469 was related to the Consumer
Packaging segment, $335 was attributed to the Packaging Services segment, $1,806
was related to All Other Sonoco and $7,033 was associated with Corporate. None
of these charges has been allocated to the segments' operating results. These
restructuring charges, net of adjustments, consisted of severance and
termination benefits of $37,733, asset impairment charges of $8,381 and other
exit costs of $3,942, primarily associated with lease termination and other
miscellaneous plant closing costs. The Company expects to recognize an
additional cost of approximately $16,000 pretax in the future associated with
these 2003 actions. The Company also expects to announce, in 2004, the closing
of an additional five to ten plants. The costs associated with the future plant
closings have not yet been determined. Remaining charges associated with the
2003 activities will be recorded in future periods in accordance with the
guidelines of FAS 146.
During 2003, the Company also recorded restructuring charges of $1,455 after tax
related to affiliates/minority interest in subsidiaries. The restructuring
charges are included in "Equity in earnings (loss) of affiliates/minority
interest in subsidiaries" in the Company's Consolidated Statements of Income.
During 2002, the Company recognized restructuring charges, net of adjustments,
of $10,409 ($6,663 after tax). Additionally, the Company's High Density Film
business, which was divested in 2003, incurred restructuring charges of $2,238
pretax ($1,432 after tax). The 2002 restructuring charges, including the High
Density Film business charges, were primarily related to three U.S. plant
closings in the Consumer Packaging segment, one U.S. plant closing in the
Engineered Carriers and Paper segment, one plant closing in All Other Sonoco and
severance costs associated with plant consolidations in Europe. These
restructuring charges, net of adjustments, consisted of severance and
termination benefits of $10,532, asset impairment charges of $360, and other
exit costs of $1,755, consisting of building lease termination charges and other
miscellaneous costs.
During 2001, the Company recognized restructuring charges, net of adjustments,
of $51,402 ($35,241 after tax). Additionally, the Company's High Density Film
business, which was divested in 2003, incurred restructuring charges of $2,149
pretax ($1,375 aftertax). The 2001 restructuring charges, including the High
Density Film business charges, consisted of severance and termination benefits
of $27,265, asset impairment charges of $16,919 and other exit costs of $9,367
(consisting of building lease termination charges of $7,715 and other
miscellaneous charges of $1,652).
Affiliates of the Company accounted for under the equity method of accounting
recorded restructuring charges of $9,986 ($6,591 after tax) during 2001. These
charges included the closing of two plant locations and other miscellaneous
restructuring activities and are included in "Equity in earnings (loss) of
affiliates/minority interest in subsidiaries" in the Consolidated Statements of
Income.
The 2003, 2002 and 2001 restructuring plans included a global reduction of
approximately 880 salaried positions (approximately 510 in the United States)
and approximately 1,330 hourly positions (approximately 990 in the United
States), and the closure of 29 plant locations. As of December 31, 2003, 23
plant locations have been closed, and approximately 1,960 employees have been
terminated (approximately 820 salaried and 1,140 hourly).
The following table sets forth the activity in the restructuring accrual
included in "Accrued expenses and other" on the Consolidated Balance Sheets.
Restructuring charges are included in "Other expense, net" in the Consolidated
Statements of Income. In accordance with the agreement of sale for the High
Density Film business, the liability associated with the restructuring has been
retained by the Company and is, therefore, included in the table below:
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
Severance and Other
Termination Asset Exit
Benefits Impairment Costs Total
------------- ---------- --------- ----------
Liability, December 31, 2000 $ 1,100 $ -- $ -- $ 1,100
------------- ---------- --------- ----------
2001 Charges 30,614 17,889 13,682 62,185
Cash payments (14,431) -- (3,143) (17,574)
Asset impairment (noncash) -- (16,919) -- (16,919)
Reclassifications to pension liability (5,180) -- -- (5,180)
Adjustments (3,349) (970) (4,315) (8,634)
------------- ---------- --------- ----------
Liability, December 31, 2001 8,754 -- 6,224 14,978
------------- ---------- --------- ----------
2002 Charges 11,032 383 1,885 13,300
Cash payments (6,848) -- (2,765) (9,613)
Asset impairment (noncash) -- (360) -- (360)
Reclassifications to pension liability (3,276) -- -- (3,276)
Adjustments (500) (23) (130) (653)
------------- ---------- --------- ----------
Liability, December 31, 2002 9,162 -- 5,214 14,376
------------- ---------- --------- ----------
2003 Charges 40,526 8,709 3,142 52,377
Cash payments (21,953) -- (2,970) (24,923)
Asset impairment (noncash) -- (8,381) -- (8,381)
Reclassifications to pension liability (10,234) -- -- (10,234)
Adjustments (2,793) (328) 1,000 (2,121)
------------- ---------- --------- ----------
Liability, December 31, 2003 $ 14,708 -- $ 6,386 $ 21,094
============= ========== ========= ==========
The Company expects to pay the remaining restructuring costs, with the exception
of ongoing pension subsidies and certain building lease termination expenses, by
the end of 2004, using cash generated from operations.
During 2003, the Engineered Carriers and Paper segment recognized writeoffs of
impaired equipment and facilities held for disposal of $5,212 and $1,409,
respectively, attributed to the closing of four plant locations. Additionally,
the Consumer Packaging segment recognized writeoffs of impaired equipment of
$1,760 related to the closing of one plant location. Impaired assets were
written down to the lower of carrying amount or fair value, less estimated costs
to sell, if applicable.
During 2002, the Company recognized writeoffs of impaired equipment in the
Engineered Carriers and Paper segment of $299 attributed to the closing of a
plant location. Additionally, the Company recognized net writeoffs of impaired
equipment in the Consumer Packaging segment and All Other Sonoco of $(692) and
$753, respectively, related to adjustments to previously recorded impaired
equipment charges.
Asset impairment charges included in the 2001 restructuring charges resulted
from the writeoff/down of assets associated with 13 plant location closings and
nine other plant locations impacted by the restructuring. Impaired assets were
written down to the lower of carrying amount or fair value, less estimated costs
to sell, if applicable. The Engineered Carriers and Paper segment recognized
writeoffs/downs of impaired facilities and equipment of $4,294 and
writeoff/downs of facilities and equipment held for sale of $997. The Consumer
Packaging segment recognized writeoffs/downs of impaired facilities and
equipment of $9,091. All Other Sonoco recognized writeoffs/downs of impaired
facilities and equipment of $2,320 and writeoff/downs of facilities and
equipment held for sale of $217.
The effect of suspending depreciation on assets held for disposition was not
material to the Consolidated Statements of Income for the years ended December
31, 2003, 2002 and 2001.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
4. DISCONTINUED OPERATIONS
The financial statements for prior years have been restated to report the
revenues and expenses of the components of the Company that were disposed of
separately as discontinued operations. Income from discontinued operations for
2003, 2002 and 2001 represents the results of operations of the Company's High
Density Film business, which was sold in December 2003. See Note 2 for a
discussion of this disposition.
The following table sets forth the operating results for the business unit,
which was previously reported in the Company's Consumer Packaging segment:
2003 2002 2001
------------- ------------- ------------
Net Sales $ 198,759 $ 191,950 $ 217,742
Operating income before
income taxes 17,758 15,504 15,802
Gain on sale 63,112
Income tax expense (20,099) (5,656) (5,689)
------------- ------------- ------------
Income from discontinued
operations $ 60,771 $ 9,848 $ 10,113
Income from discontinued
operations - per diluted share $ .63 $ .10 $ .11
============= ============= ============
No interest expense or income was allocated to this business unit.
The Company has no material continuing involvement in the management or
operations of the divested business.
5. CASH AND CASH EQUIVALENTS
Cash equivalents are composed of highly liquid investments with an original
maturity of three months or less and are recorded at market. At December 31,
2003 and 2002, outstanding checks in excess of bank deposits totaling $20,433
and $30,033, respectively, were included in "Payable to suppliers" on the
Consolidated Balance Sheets. In addition, outstanding payroll checks of $2,415
and $890 in 2003 and 2002, respectively, were included in "Accrued wages and
other compensation" on the Consolidated Balance Sheets.
6. INVENTORIES
Inventories are stated at the lower of cost or market. The last-in, first-out
(LIFO) method was used to determine costs of approximately 26% of total
inventories at December 31, 2003 and 2002. The remaining inventories are
determined on the first-in, first-out (FIFO) method.
If the FIFO method of accounting had been used for all inventories, total
inventory would have been higher by $10,462 in 2003 and $10,284 in 2002.
7. PROPERTY, PLANT AND EQUIPMENT
Plant assets represent the original cost of land, buildings and equipment, less
depreciation, computed under the straight-line method, over the estimated useful
life of the asset, and are reviewed for impairment whenever events indicate the
carrying value may not be recoverable.
Equipment lives range from three to 11 years, buildings from 15 to 40 years.
Timber resources are stated at cost. Depletion is charged to operations based on
the number of units of timber cut during the year.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
Depreciation and depletion expense amounted to $148,843 in 2003, $143,215 in
2002 and $132,814 in 2001. Depreciation expense amounted to $9,696 for 2003,
$13,333 for 2002, and $13,865 for 2001 for the High Density Film business which
have been reclassified as discontinued operations. Details at December 31 are as
follows:
2003 2002
------------- ------------
Land $ 46,432 $ 44,285
Timber resources 36,392 35,672
Buildings 345,296 335,450
Machinery and equipment 1,806,181 1,833,141
Construction in progress 57,248 62,722
------------- ------------
2,291,549 2,311,270
------------- ------------
Accumulated depreciation and depletion (1,367,980) (1,335,902)
------------- ------------
Property, plant and equipment, net $ 923,569 $ 975,368
============= ============
Estimated costs for completion of authorized capital additions under
construction totaled approximately $58,349 at December 31, 2003.
Certain properties and equipment are leased under noncancelable operating
leases. Future minimum rentals under noncancelable operating leases with terms
of more than one year are as follows: 2004 - $24,100, 2005 - $19,500, 2006 -
$15,000, 2007 - $12,700, 2008 - $9,700, and 2009 and thereafter - $22,300. Total
rental expense under operating leases was approximately $34,000 in 2003, $31,700
in 2002 and $36,510 in 2001.
Research and development costs charged to expense were $14,225 in 2003, $13,018
in 2002 and $11,851 in 2001.
8. GOODWILL AND INTANGIBLE ASSETS
GOODWILL
During the first quarter of 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 'Goodwill and Other Intangible Assets' (FAS 142).
Under FAS 142, purchased goodwill and intangible assets with indefinite lives
are not amortized, but instead tested for impairment at least annually. The
Company completed its transitional goodwill impairment testing required by FAS
142 during the second quarter of 2002 and its annual goodwill impairment testing
required by FAS 142 during the third quarter of 2002 and 2003. Based on this
impairment testing, no adjustment to the recorded goodwill balance was
necessary.
The following table sets forth the reconciliation of net income and earnings per
share information for the years ended December 31, 2003, 2002 and 2001, adjusted
for the non-amortization provisions of FAS 142:
2003 2002 2001
---------- --------- ----------
Reported net income $ 138,949 $ 135,316 $ 91,609
---------- --------- ----------
Add: Goodwill amortization, after tax 9,094
Adjusted net income $ 138,949 $ 135,316 $ 100,703
========== ========= ==========
2003 2002 2001
------ ------ ------
Reported basic earnings per share $ 1.44 $ 1.40 $ .96
Adjusted basic earnings per share 1.44 1.40 1.06
Reported diluted earnings per share 1.43 1.39 .96
Adjusted diluted earnings per share 1.43 1.39 1.05
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
The changes in the carrying amount of goodwill for the year ended December 31,
2003, are as follows:
Engineered
Carriers Consumer Packaging
and Paper Packaging Services All Other
Segment Segment Segment Sonoco Total
---------- ---------- --------- --------- ---------
Balance as of January 1, 2003 $ 141,343 $ 151,353 $ 1,139 $ 65,583 $ 359,418
Goodwill purchase
price adjustments (37) (168) -- -- (205)
Goodwill on 2003 acquisitions 1,284 1,602 -- 11 2,897
Foreign currency translation 8,879 12,589 124 252 21,844
---------- ---------- --------- --------- ---------
Balance as of December 31, 2003 $ 151,469 $ 165,376 $ 1,263 $ 65,846 $ 383,954
========== ========== ========= ========= =========
INTANGIBLE ASSETS
2003 2002
--------- ---------
Amortizable intangibles - Gross cost
Patents $ 3,268 $ 3,268
Customer lists 38,223 37,025
Land use rights 5,873 5,873
Supply agreements 5,261 4,261
Other 6,404 3,185
--------- ---------
Total gross cost 59,029 53,612
Accumulated amortization
Patents (2,564) $ (2,285)
Customer lists (4,630) $ (2,354)
Land use rights (1,963) $ (1,782)
Supply agreements (3,715) $ (2,609)
Other (2,756) $ (1,744)
--------- ---------
Total accumulated amortization (15,628) $ (10,774)
Net amortizable intangibles $ 43,401 $ 42,838
========= =========
The approximate amortization expense for the next five years is $3,800 in 2004,
$3,800 in 2005, $3,500 in 2006, $3,200 in 2007, and $3,000 in 2008.
As discussed in Note 2, the Company recorded $3,150 of identifiable intangibles
mainly related to non-compete agreements in connection with 2003 acquisitions.
These agreements will be amortized over a five-year period and will have no
residual value at the end of the amortization period. The Company recorded
$6,025 of identifiable intangible assets related to the fair value of customer
lists in connection with a 2002 acquisition. These customer lists will be
amortized over a period of 15 years and will have no residual value at the end
of the amortization period.
The Company has no identified intangibles with indefinite lives. Intangible
assets are included in "Other Assets" on the Company's Consolidated Balance
Sheets.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
9. DEBT
Debt at December 31 was as follows:
2003 2002
---------- ----------
Commercial paper, average rate of 1.76% in 2002 $ -- $ 65,500
6.5% debentures due November 2013 248,861 248,745
7.0% debentures due November 2004 149,681 149,977
6.75% debentures due November 2010 99,880 99,863
5.875% debentures due November 2003 -- 99,945
9.2% debentures due August 2021 41,305 41,305
6.125% IRBs due June 2025 34,627 34,603
6.0% IRBs due April 2026 34,297 34,265
Foreign denominated debt, average rate of 6.0% in 2003 and 8.9% in 2002 49,875 40,363
Other notes 16,061 19,280
---------- ----------
Total debt 674,587 833,846
Less current portion and short-term notes 201,367 134,500
---------- ----------
Long-term debt $ 473,220 $ 699,346
========== ==========
The Company has authorized a commercial paper program totaling $450,000 and has
fully committed bank lines of credit supporting the program by a like amount.
These bank lines expire in 2004, but may be extended by the Company into 2005
under a term-out option. Accordingly, commercial paper borrowings are classified
as long-term debt. It is management's intent to indefinitely maintain line of
credit agreements supporting the commercial paper program. Additionally, the
Company has $150,000 of 7.0% bonds maturing in 2004. The bonds are expected to
be refinanced with floating rate debt.
Certain of the Company's debt agreements impose restrictions with respect to the
maintenance of financial ratios and the disposition of assets. The most
restrictive covenant currently requires that net worth at the end of each fiscal
quarter be greater than $758,900, increased by 25% of net income after March 30,
2003, and decreased by stock purchases after July 9, 2003. Based on this
calculation, the Company was $229,000 above the minimum level of $786,000,
required under this covenant as of December 31, 2003. On November 1, 2002, the
Company amended its U.S. commercial paper backup credit agreement to exclude
from the above net worth covenant any charge to shareholders' equity arising
from minimum pension liability adjustments for its U.S. defined benefit pension
plan. At December 31, 2003, no such charge existed for U.S. plans.
In addition to the committed availability under the commercial paper program,
unused short-term lines of credit for general Company purposes at December 31,
2003, were approximately $101,990, with interest at mutually agreed-upon rates.
The approximate principal requirements of debt maturing in the next five years
are: 2004 - $201,367, 2005 - $2,653, 2006 - $1,550, 2007 - $1,421, and 2008 -
$865.
10. FINANCIAL INSTRUMENTS
The following table sets forth the carrying amounts and fair values of the
Company's significant financial instruments where the carrying amount differs
from the fair value.
December 31, 2003 December 31, 2002
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount of Value of Amount of Value of
Liability Liability Liability Liability
--------- --------- --------- ---------
Long-term debt $ 473,220 $ 526,693 $ 699,346 $ 772,071
========== ========== ========== ==========
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
The fair value of cash and cash equivalents, short-term debt and long-term
variable-rate debt approximates fair value. The fair value of long-term debt is
based on quoted market prices or by discounting future cash flows using interest
rates available to the Company for issues with similar terms and average
maturities.
The Company records derivatives based on Financial Accounting Standards No. 133,
'Accounting for Derivative Instruments and Hedging Activities' (FAS 133), and
related amendments. This Statement requires that all derivatives be recognized
as assets or liabilities in the balance sheet and measured at fair value.
Changes in the fair value of derivatives are recognized in either net income or
in other comprehensive income, depending on the designated purpose of the
derivative.
The Company uses derivatives from time to time to manage the cost of certain raw
materials, to mitigate exposure to foreign currency fluctuation and to manage
its exposure to fixed and variable interest rates within acceptable limits. The
Company purchases commodities such as recovered paper, metal and energy
generally at market or fixed prices that are established with the vendor as part
of the purchase process for quantities expected to be consumed in the ordinary
course of business. The Company may enter into commodity futures or swaps to
reduce the effect of price fluctuation. In addition, the Company may use foreign
currency forward contracts and other risk management instruments to manage
exposure to changes in foreign currency cash flows and the translation of
monetary assets and liabilities on the Company's financial statements. The
Company uses published market prices or estimated values based on current price
quotes and a discounted cash flow model to estimate the fair market value of the
derivatives.
In 2003, the Company entered into certain cash flow hedges to mitigate exposure
to commodity and foreign exchange risks in 2003, out through mid-2006. The fair
market value of these derivatives as of December 31, 2003 was $1,641 on a tax
adjusted basis and will be reclassified to earnings in the same periods the
forecast purchases or payments affect earnings. Based on the current amount of
the derivative loss in other comprehensive income, $857 after tax will be
reclassified to income in 2004. As a result of the high correlation between the
hedged instruments and the underlying transactions, ineffectiveness did not have
a material impact on the Company or on its Consolidated Statements of Income for
the years ended December 31, 2003 and 2002.
11. INVESTMENT IN LIFE INSURANCE
Prior to 2002, corporate-owned life insurance (COLI) policies were used by the
Company to aid in the financing of employee benefits and were recorded net of
policy loans in "Other Assets" on the Consolidated Balance Sheets. The net
pretax cost of COLI, including interest expense and excluding 2001 policy
surrender charges of $7,026, was $1,397 in 2001 and is included in "Selling,
general and administrative expenses" in the Company's Consolidated Statements of
Income. The related COLI interest expense was $3,043 in 2001. Legislation was
enacted in 1996 that began phasing out the tax deductibility of this interest.
Accordingly, no deduction was taken in 2001 for interest on policy loans. In
April 2001, the Company surrendered its COLI policies as a result of a
settlement with the IRS over deductibility of COLI loan interest. The surrender
of these policies resulted in additional income taxes of $11,295 and other costs
of $7,026 in 2001. Other costs are included in "Other expense, net" in the
Company's 2001 Consolidated Statements of Income.
12. STOCK PLANS
The Company has stock option plans under which common shares are reserved for
sale to certain employees and nonemployee directors. Options granted under the
plans were at the market value of the shares at the date of grant. Options are
generally exercisable one year after the date of grant and expire 10 years after
the date of grant. There were 4,413,407 shares reserved for future grants at
December 31, 2003.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
On December 31, 1998, the Company granted special one-time Centennial stock
options of 100 shares to substantially all of its employees. These options are
exercisable at the closing price of the shares on December 31, 1998, and expire
after six years. A total of 890,900 options granted under the Centennial Share
Program were outstanding at December 31, 2003.
A summary of the status of the Company's stock option plans is presented below:
Option Weighted-
Shares Average Price
------ -------------
2001
Outstanding at beginning of year 9,955,843 $ 24.31
Granted 1,748,603 $ 23.83
Exercised (832,498) $ 17.16
Canceled (381,976) $ 28.81
Outstanding at end of year 10,489,972 $ 24.63
Options exercisable at end of year 8,712,119 $ 24.87
---------- ---------
2002
Granted 1,511,474 $ 25.25
Exercised (945,321) $ 19.14
Canceled (180,499) $ 29.21
Outstanding at end of year 10,875,626 $ 25.12
Options exercisable at end of year 9,415,202 $ 25.10
---------- ---------
2003
Granted 1,419,694 $ 21.19
Exercised (438,470) $ 20.96
Canceled (518,209) $ 24.59
Outstanding at end of year 11,338,641 $ 24.81
Options exercisable at end of year 9,943,286 $ 25.32
========== =========
The weighted-average fair value of options granted was $4.85, $6.62 and $6.43 in
2003, 2002 and 2001, respectively.
The following tables summarize information about stock options outstanding and
stock options exercisable at December 31, 2003:
Options Outstanding
------------------------------------------------
Weighted- Weighted-
Average Average
Range of Number Remaining Exercise
Exercise Prices Outstanding Contractual Life Price
- --------------- ----------- ---------------- ---------
$17.25 - $22.88 3,521,091 5.8 years $ 20.25
$23.06 - $24.95 3,238,017 4.7 years $ 24.08
$25.00 - $37.10 4,579,533 5.0 years $ 28.84
----------
$17.25 - $37.10 11,338,641 5.2 years $ 24.81
=============== ========== ========= =========
Options Exercisable
-------------------
Range of Number Weighted-Average
Exercise Prices Outstanding Exercise Price
- --------------- ----------- ----------------
$17.25 - $22.88 2,131,693 $ 19.66
$23.06 - $24.95 3,232,060 $ 24.08
$25.00 - $37.10 4,579,533 $ 28.84
---------
$17.25 - $37.10 9,943,286 $ 25.32
=============== ========= =======
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
As of December 31, 2002 and 2001, the Company granted awards in the form of
contingent share units to certain of its executives.
The 2002 awards vest over five years with accelerated vesting of three years if
performance targets are met. The performance vesting of the awards, which can
range from 56,434 to 169,300 shares, is tied to growth in earnings and improved
capital effectiveness over a three-year period. The 2001 awards vest over three
years and can range from 75,336 to 301,344 shares dependent on growth in
earnings and improved capital effectiveness. Under the 2001 plan, none of the
stock units will vest if the minimum objectives are not achieved, and as of
December 31, 2003, no stock units under this plan were expected to vest. No such
awards were granted for 2003.
Since 1994, the Company has granted one-time awards of contingent shares to
certain of the Company's executives. These awards vest over a five-year period
with one-third vesting on the third, fourth and fifth anniversaries of the
grant. An executive must be actively employed by the Company on the vesting date
for shares to be issued. Once vested, these awards do not expire. As of December
31, 2003, a total of 359,116 contingent shares granted under this plan remain
outstanding, 247,456 of which are vested.
As permitted by Statement of Financial Accounting Standards No. 123, 'Accounting
for Stock-based Compensation' (FAS 123), the Company has chosen to continue to
account for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board (APB) Opinion No. 25, 'Accounting for Stock
Issued to Employees,' and its related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. Compensation cost for performance stock
options is recorded based on the quoted market price of the Company's stock at
the end of the period.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FAS 123 to
stock-based employee compensation.
2003 2002 2001
---------- --------- ---------
Net income, as reported $ 138,949 $ 135,316 $ 91,609
Add: Stock-based employee compensation cost,
net of related tax effects included in net
income, as reported 869 199 468
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (5,889) (6,622) (7,410)
---------- --------- ---------
Pro forma net income $ 133,929 $ 128,893 $ 84,667
Earnings per share:
Basic - as reported $ 1.44 $ 1.40 $ .96
Basic - pro forma $ 1.38 $ 1.34 $ .89
Diluted - as reported $ 1.43 $ 1.39 $ .96
Diluted - pro forma $ 1.38 $ 1.33 $ .88
========== ========= =========
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
The fair value of each option grant is estimated on the date of the grant using
the binomial option pricing model with the following assumptions:
2003 2002 2001
--------- --------- ---------
Expected dividend yield 3.6% 3.4% 3.2%
Expected stock price volatility 31.8% 34.9% 35.4%
Risk-free interest rate 3.0% 4.3% 4.9%
Expected life of options 4.5 years 4.2 years 4.0 years
========= ========= =========
13. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS AND RETIREE HEALTH AND LIFE INSURANCE PLANS
The Company provides non-contributory defined benefit pension plans for
substantially all of its United States and certain of its Mexico employees, as
well as postretirement healthcare and life insurance benefits to the majority of
its retirees and their eligible dependents in the United States and Canada.
Effective January 1, 2004, the Company switched to a defined contribution plan
for all new U.S. employees. The Company also sponsors contributory pension plans
covering the majority of its employees in the United Kingdom and Canada.
The Company uses a December 31 measurement date for its plans.
The components of net periodic benefit cost include the following:
2003 2002 2001
---------- ---------- ----------
RETIREMENT PLANS
Service cost $ 20,209 $ 18,296 $ 15,054
Interest cost 51,767 48,210 44,523
Expected return on plan assets (55,290) (59,443) (62,748)
Amortization of net translation (asset) obligation 576 552 (302)
Amortization of prior service cost 1,665 1,674 1,576
Amortization of net actuarial (gain) loss 22,223 8,674 504
Special termination benefit cost 10,234 3,276 5,180
Acquisitions -- -- 48
Other 70 -- --
Effect of curtailment 611 -- --
---------- ---------- ----------
Net periodic benefit cost $ 52,065 $ 21,239 $ 3,835
========== ========== ==========
RETIREE HEALTH AND LIFE INSURANCE PLANS
Service cost $ 4,360 $ 4,177 $ 3,746
Interest cost 11,558 11,559 9,438
Expected return on plan assets (3,650) (5,552) (6,248)
Amortization of prior service cost (6,581) (6,990) (5,949)
Amortization of net actuarial loss 9,026 7,693 4,139
Special termination benefit cost (1,096) -- --
---------- ---------- ----------
Net periodic benefit cost $ 13,617 $ 10,887 $ 5,126
========== ========== ==========
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
The following tables set forth the plans' obligations and assets at December 31:
Retiree Health and
Retirement Plans Life Insurance Plans
2003 2002 2003 2002
------------ ------------ ------------ ------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1 $ 782,287 $ 678,822 $ 175,005 $ 161,251
Service cost 20,209 18,296 4,360 4,177
Interest cost 51,767 48,210 11,558 11,559
Plan participant contributions 1,074 1,049 2,294 1,469
Plan amendments 398 1,798 -- (8,544)
Actuarial loss 63,690 62,032 12,111 21,906
Benefits paid (47,721) (44,342) (17,157) (16,822)
Impact of foreign exchange rates 24,860 13,146 149 9
Special termination benefit cost 10,234 3,276 -- --
Effect of curtailment (3,702) -- (1,957) --
Other 7,987 -- -- --
------------ ------------ ------------ ------------
Benefit obligation at December 31 $ 911,083 $ 782,287 $ 186,363 $ 175,005
------------ ------------ ------------ ------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 $ 648,672 $ 629,188 $ 50,576 $ 62,214
Actual return on plan assets 144,679 (59,682) 11,733 (5,775)
Company contributions 29,907 115,082 2,836 9,728
Plan participant contributions 1,074 1,049 2,294 1,469
Benefits paid (47,721) (44,342) (17,157) (16,822)
Impact of foreign exchange rates 17,967 9,236 -- --
Expenses paid (4,108) -- (201) --
Other -- (1,859) -- (238)
------------ ------------ ------------ ------------
Fair value of plan assets at
December 31 $ 790,470 $ 648,672 $ 50,081 $ 50,576
------------ ------------ ------------ ------------
RECONCILIATION OF FUNDED STATUS,
DECEMBER 31
Funded status of plan $ (120,613) $ (133,615) $ (136,282) $ (124,429)
Unrecognized net actuarial loss 303,880 342,887 106,833 113,586
Unrecognized prior service cost 7,927 9,820 (14,937) (22,557)
Unrecognized net transition obligation 6,740 6,421 -- --
------------ ------------ ------------ ------------
Net amount recognized $ 197,934 $ 225,513 $ (44,386) $ (33,400)
============ ============ ============ ============
Retirement Plans
2003 2002
---------- ---------
TOTAL RECOGNIZED AMOUNTS IN THE
CONSOLIDATED BALANCE SHEETS
Prepaid benefit cost included in Other Assets $ 229,784 $ 244,240
Accrued benefit liability (118,136) (98,432)
Intangible asset 7,148 6,734
Accumulated other comprehensive loss 79,138 72,971
---------- ---------
Net amount recognized $ 197,934 $ 225,513
========== =========
The accumulated benefit obligation for all defined benefit plans was $853,443
and $736,268 at December 31, 2003 and 2002, respectively.
The projected benefit obligation (PBO), accumulated benefit obligation (ABO) and
fair value of plan assets for pension plans with accumulated benefit obligations
in excess of plan assets were, $290,077, $277,999 and $158,953, respectively, as
of December 31, 2003, and $237,330, $227,417 and $127,982, respectively, as of
December 31, 2002.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
Assumptions
The following tables set forth the major actuarial assumptions used in
determining the PBO, ABO and net periodic cost.
Weighted-average assumptions used
to determine benefit obligations
at December 31 U.S. Foreign Plans
- --------------------------------- ---- -------------
RETIREMENT PLANS AND RETIREE HEALTH
AND LIFE INSURANCE PLANS:
Discount Rate
2003 6.25% 5.00-6.50%
2002 6.75% 5.50-7.00%
Rate of Compensation Increase
2003 4.60% 1.50-4.00%
2002 4.10% 1.50-5.00%
Weighted-average assumptions used
to determine net periodic benefit cost for
years ended December 31 U.S. Foreign Plans
- ------------------------------------------ ---- -------------
RETIREMENT PLANS AND RETIREE HEALTH
AND LIFE INSURANCE PLANS:
Discount Rate
2003 6.75% 5.00-7.00%
2002 7.25% 5.50-7.00%
2001 7.50% 6.45-7.00%
Expected Long-term Rate of Return
2003 8.75% 5.50-8.50%
2002 9.50% 5.50-8.50%
2001 9.50% 8.00-8.50%
Rate of Compensation Increase
2003 4.60% 1.50-5.00%
2002 4.10% 1.50-5.00%
2001 4.10% 3.50-5.00%
The expected long-term rate of return assumption is based on the Company's
historical plan return performance over the past 12 years.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
RETIREE HEALTH AND LIFE INSURANCE PLANS
The U.S. Retiree Health and Life Insurance Plan makes up 99% of the Retiree
Health liability. Therefore, the following information relates to the U.S. plan
only.
Healthcare Cost Trend Rate
2003 11.0%
2002 12.0%
Ultimate Trend Rate
2003 6.0%
2002 6.0%
Year at which the Rate Reaches
the Ultimate Trend Rate
2003 2008
2002 2008
Increasing the assumed trend rate for healthcare costs by one percentage point
would increase the accumulated postretirement benefit obligation (APBO) and
total service and interest cost component approximately $2,751 and $174,
respectively. Decreasing the assumed trend rate for healthcare costs by one
percentage point would decrease the APBO and total service and interest cost
component approximately $2,431 and $154, respectively. Based on amendments to
the U.S. plan approved in 2002, cost increases borne by the Company are limited
to the Urban CPI.
Retirement Plan Assets
The following table sets forth the weighted-average asset allocations of the
Company's retirement plans at December 31, 2003 and 2002, by asset category.
Asset Category U.S. UK Canada
- -------------- ---- -- ------
Equity securities
2003 68.2% 71.5% 58.0%
2002 63.3% 69.9% 58.0%
Debt securities
2003 31.8% 23.1% 42.0%
2002 35.9% 24.4% 42.0%
Real estate
2003 0.0% 4.0% 0.0%
2002 0.0% 4.3% 0.0%
Other
2003 0.0% 1.4% 0.0%
2002 0.8% 1.4% 0.0%
---- --- --- ---
Total
2003 100.0% 100.0% 100.0%
2002 100.0% 100.0% 100.0%
The Company employs a total return investment approach whereby a mix of equities
and fixed income investments are used to maximize the long-term return of plan
assets for a prudent level of risk. Other assets such as real estate, private
equity and hedge funds may be used judiciously to enhance long-term returns
while improving portfolio diversification. Risk tolerance is established through
careful consideration of plan liabilities, plan funded status and corporate
financial condition. Investment risk is measured and monitored on an ongoing
basis through quarterly investment portfolio reviews, annual liability
measurements and periodic asset/liability studies.
U.S. Defined Benefit Plan
The equity investments are diversified across U.S. and non-U.S. stocks, as well
as growth, value, and small and large capitalizations. In January 2004, a core
real estate investment of 5% was established by liquidating a portion of the
equity and debt securities. The current target allocation for the investment
portfolio is Equity Securities - 65%, Debt Securities - 30%, Real Estate - 5%
and Other - 0%.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
UK Plan
The equity investments are diversified across domestic and international stocks
of small and large capitalizations. The current target allocation (midpoint) for
the investment portfolio is Equity Securities - 72%, Debt Securities - 22%, Real
Estate - 5% and Other - 1%.
Canadian Plan
The equity investments are diversified across domestic and international stocks
of primarily large capitalizations. The current target allocation (midpoint) for
the investment portfolio is Equity Securities - 50%, Debt Securities - 50%, Real
Estate - 0% and Other - 0%.
Retiree Health and Life Insurance Plan Assets
The following table sets forth the weighted-average asset allocations of the
Company's retiree health and life insurance plans at December 31, 2003 and 2002,
by asset category. As mentioned previously, the U.S. Retiree Health and Life
Insurance Plan makes up 99% of the Retiree Health liability. Therefore, the
following information relates to the U.S. Plan only.
Asset Category
- -----------------
Equity securities
2003 64.6%
2002 60.0%
Debt securities
2003 33.2%
2002 36.8%
Real estate
2003 0.0%
2002 0.0%
Other
2003 2.2%
2002 3.2%
------- -----
Total
2003 100.0%
2002 100.0%
=====
As of December 31, 2003 and 2002, approximately 74% of the assets associated
with the U.S. Retiree Health and Life Insurance Plan were managed utilizing the
same methodology as the U.S. Defined Benefit Plan discussed previously,
including the same portfolio risk profile, investment mix and target allocation.
The remaining 26% of the assets were invested as follows:
December 31, December 31,
2003 2002
------------ ------------
Equity securities (domestic) 54.4% 50.8%
Debt securities (domestic) 37.1% 39.3%
Real estate 0.0% 0.0%
Other 8.5% 9.9%
----- -----
Contributions
The Company estimates that it will make voluntary contributions of approximately
$30 million to its retirement and retiree health and life insurance plans in
2004.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
New Legislation
On December 8, 2003, President Bush signed into law the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 ("the Act"). The Act expands
Medicare, primarily by adding a prescription drug benefit for Medicare-eligibles
starting in 2006. The Act provides employers currently sponsoring prescription
drug programs for Medicare-eligibles with a range of options for coordinating
with the new government-sponsored program to potentially reduce program cost.
These options include supplementing the government program on a secondary payor
basis or accepting a direct subsidy from the government to support a portion of
the cost of the employer's program.
Paragraph 40 of Statement of Financial Standards No. 106, 'Employers' Accounting
for Postretirement Benefits Other Than Pensions' (FAS 106), requires that
presently enacted changes in law impacting employer-sponsored retiree healthcare
programs which take effect in future periods be considered in current-period
measurements for benefits expected to be provided in those future periods.
Therefore, under FAS 106 guidance, measures of plan liabilities and annual
expense on or after the date of enactment should reflect the effects of the Act.
Pursuant to guidance under FASB Staff Position 106-1, the Company has chosen to
defer recognition of the potential effects of the Act in these 2003 disclosures.
Therefore, the retiree health obligations and costs reported in this financial
statement do not yet reflect any potential impact of the Act. Specific,
authoritative guidance on the accounting for the government subsidy is pending,
and that guidance, when issued, could require the Company to change previously
reported information.
SONOCO SAVINGS PLAN
The Company also sponsors the Sonoco Savings Plan for its U.S. employees, a
defined contribution retirement plan (formerly the Sonoco Employee Savings and
Stock Ownership Plan). Beginning in 2002, the Company adopted the IRS "Safe
Harbor" matching contributions and vesting provisions which provide 100% Company
matching on the first 3% of pretax contributions, 50% Company matching on the
next 2% of pretax contributions and 100% immediate vesting. The plan also
provides for contributions of 1% to 30% of gross pay beginning in 2004. For 2003
and 2002, the plan provided that all eligible employees could contribute 1% to
20% of their gross pay. For 2001, the plan provided that all eligible employees
could contribute 1% to 16% of their gross pay, subject to regulations of the
IRS, with 50% vesting after one year and 100% vesting after two years. In 2001,
the Company made matching contributions of 50% on the first 6% of pretax and/or
after-tax contributions as approved by the Company's Board of Directors. The
Company's contributions to the plan for 2003, 2002 and 2001 were approximately
$12,000, $11,000, and $8,500, respectively.
14. INCOME TAXES
The Company provides for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting requirements and tax laws. Assets and liabilities
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
The provision for taxes on income for the years ended December 31 consists of
the following:
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
2003 2002 2001
------------- ----------- ----------
Pretax income
Domestic $ 157,889 $ 163,680 $ 127,544
Foreign 31,317 34,813 48,237
------------- ----------- ----------
Total pretax income $ 189,206 $ 198,493 $ 175,781
============= =========== ==========
Current
Federal $ 26,831 $ 23,757 $ 40,664
State 2,682 2,617 4,177
Foreign 17,109 16,284 16,112
------------- ----------- ----------
Total current $ 46,622 $ 42,658 $ 60,953
============= =========== ==========
Deferred
Federal $ 9,644 $ 20,851 $ 19,064
State 1,813 4,594 2,056
Foreign (282) 2,511 885
------------- ----------- ----------
Total deferred $ 11,175 $ 27,956 $ 22,005
------------- ----------- ----------
Total taxes $ 57,797 $ 70,614 $ 82,958
============= =========== ==========
Cumulative deferred tax liabilities (assets) are comprised of the following at
December 31:
2003 2002
----------- ----------
Depreciation $ 113,600 $ 97,298
Employee benefits 107,381 102,466
Other 14,140 11,322
----------- ----------
Gross deferred tax liabilities 235,121 211,086
----------- ----------
Retiree health benefits (22,381) (17,314)
Foreign loss carryforwards (22,576) (8,959)
Capital loss carryforwards (580) (23,295)
Employee benefits (40,257) (39,576)
Accrued liabilities and other (41,217) (34,655)
----------- ----------
Gross deferred tax assets (127,011) (123,799)
----------- ----------
Valuation allowance on deferred tax assets 26,941 35,731
----------- ----------
Total deferred taxes, net $ 135,051 $ 123,018
=========== ==========
The decrease in the valuation allowance for deferred tax assets of $8,790 is due
to a decrease of $22,407 relating to the Company's capital loss carryforwards
and an increase of $13,617 relating to net operating losses of foreign
subsidiaries for which their use is limited to future taxable earnings.
Approximately $63,000 of foreign subsidiary net operating loss carryforwards
remain at December 31, 2003. Their use is limited to future taxable earnings of
the respective foreign subsidiaries. Of these loss carryforwards, approximately
$20,000 have no expiration date. The remaining loss carryforwards expire at
various dates in the future.
A reconciliation of the United States federal statutory tax rate to the actual
consolidated tax expense is as follows:
2003 2002 2001
---------------------- ---------------------- ----------------------
Statutory tax rate $ 66,222 35.0% $ 69,472 35.0% $ 61,523 35.0%
State income taxes, net of
federal tax benefit 3,085 1.6 4,989 2.5 4,096 2.3
COLI -- -- -- -- 14,613 8.3
Valuation allowance (8,790) (4.6) -- -- -- --
Other, net (2,720) (1.5) (3,847) (1.9) 2,726 1.6
----------- ---- ----------- ---- ----------- ----
Total taxes $ 57,797 30.5% $ 70,614 35.6% $ 82,958 47.2%
=========== ==== =========== ==== =========== ====
Undistributed earnings of international subsidiaries totaled $167,000 at
December 31, 2003. Deferred taxes have not been provided on the undistributed
earnings, as the Company considers these amounts to be indefinitely reinvested
to finance international growth and expansion. If such amounts were remitted,
loaned to the Company or the stock in the foreign subsidiaries sold, these
earnings could become subject to tax.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
The Company has resolved all issues with the IRS for all years through 1998. The
Company is currently under examination for the tax years 1999 through 2001. The
Company believes that it has made adequate provision for income taxes with
respect to open years and any settlements may result in favorable adjustment to
the amount accrued.
15. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal proceedings incidental to its business
and is subject to a variety of environmental and pollution control laws and
regulations in all jurisdictions in which it operates. As is the case with other
companies in similar industries, the Company faces exposure from actual or
potential claims and legal proceedings.
The Company has been named as a potentially responsible party at several
environmentally contaminated sites not owned by the Company. These regulatory
actions and a small number of private party lawsuits represent the Company's
largest potential environmental liabilities. The Company accrued $3,967 and
$4,391 as of December 31, 2003 and 2002, respectively, related to environmental
contingencies. Due to the complexity of determining clean-up costs associated
with the sites, a reliable estimate of the ultimate cost to the Company cannot
be determined. Furthermore, all of the sites are also the responsibility of
other parties. The Company's liability, if any, is shared with such other
parties, but the Company's share has not been finally determined in most cases.
In some cases, the Company has cost-sharing agreements with other potentially
responsible parties with respect to a particular site. Such agreements relate to
the sharing of legal defense costs or clean-up costs, or both. The Company has
assumed, for purposes of estimating amounts to be accrued, that the other
parties to such cost-sharing agreements will perform as agreed. It appears that
final resolution of some of the sites is years away. Accordingly, a reliable
estimate of the ultimate cost to the Company with respect to such sites cannot
be determined. COSTS, HOWEVER, ARE ACCRUED AS NECESSARY, ONCE REASONABLE
ESTIMATES ARE DETERMINED. ACCRUED AMOUNTS ARE NOT DISCOUNTED. Although the level
of future expenditures for legal and environmental matters is impossible to
determine with any degree of probability, it is management's opinion that such
costs, when finally determined, will not have an adverse material effect on the
consolidated financial position of the Company.
16. SHAREHOLDERS' EQUITY
STOCK REPURCHASES
On February 7, 2001, the Board of Directors approved a new stock repurchase
program authorizing the repurchase of up to 5,000,000 shares of the Company's
common stock. No shares were repurchased under this program in 2003, 2002 and
2001. Under previous authorizations, the Company repurchased 92,960 shares of
its common stock in 2001 at a total cost of $2,055, with an average price of
$22.11 per share. At December 31, 2003, the Company had authorizations to
repurchase approximately 5,300,000 shares of common stock.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
2003 2002 2001
------------- ------------- -------------
Numerator:
Net income $ 138,949 $ 135,316 $ 91,609
Denominator:
Average common shares outstanding 96,819,000 96,373,000 95,370,000
Dilutive effect of employee stock options 310,000 805,000 437,000
------------- ------------- -------------
Diluted outstanding shares 97,129,000 97,178,000 95,807,000
Net income per common share
Basic $ 1.44 $ 1.40 $ .96
Diluted $ 1.43 $ 1.39 $ .96
============= ============= =============
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
Stock options to purchase approximately 7,876,000, 6,716,000, and 3,605,000
shares for 2003, 2002 and 2001, respectively, were not dilutive and therefore
were not included in the computations of diluted income per common share
amounts. These options may become dilutive in future periods if the market price
of the Company's common stock appreciates. No adjustments were made to reported
net income in the computation of earnings per share.
17. FINANCIAL REPORTING FOR BUSINESS SEGMENTS
The Company has determined that it will change its reportable segments on a
prospective basis beginning with the third quarter of 2004. Accordingly, the
Company has changed its disclosure of segment information for 2003, 2002 and
2001 to conform to the new segment reporting. The changes to the financial
statements for the three years ended December 31, 2003 relate solely to the
presentation of segment specific disclosures and had no impact on the
consolidated balance sheets, statements of income, statements of changes in
shareholders' equity or statements of cash flows. Other financial statement
footnotes affected by this change in segment reporting include Note 2 -
Acquisitions/Dispositions/Joint Ventures, Note 3 - Restructuring Programs and
Note 8 - Goodwill and Intangible Assets.
Previously, the Company reported its results in two segments, Industrial
Packaging and Consumer Packaging. As presented below, the Company will now
report results in three segments, Engineered Carriers and Paper, Consumer
Packaging and Packaging Services. Sonoco will report certain smaller operations
as All Other Sonoco.
The Engineered Carriers and Paper segment includes the following products:
high-performance paper and composite engineered carriers; paperboard; and,
fiber-based construction tubes and forms.
The Consumer Packaging segment includes the following products: round and shaped
rigid packaging, both composite and plastic; printed flexible packaging; and,
metal and plastic ends and closures.
The Packaging Services segment provides the following services: packaging
fulfillment; product handling; brand management; and, supply chain management.
This segment also includes the production of folding cartons.
All Other Sonoco represents the activities and businesses of the Company's
consolidated subsidiaries that do not meet the aggregation criteria outlined in
Statement of Financial Accounting Standards No. 131, 'Disclosures about Segments
of an Enterprise and Related Information' (FAS 131) and therefore cannot be
combined with other operating segments into a reportable segment. All Other
Sonoco includes the following products: wooden, metal and composite reels for
wire and cable packaging; molded plastics; custom designed protective packaging;
adhesives; machinery manufacturing; and specialty packaging.
Included in Corporate operating profit are restructuring charges and one-time
items detailed below, interest expense and interest income.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
Engineered
Years ended Carriers Consumer Packaging All Other
December 31 and Paper Packaging Services Sonoco Corporate Consolidated
- ----------- --------- --------- -------- ------ --------- ------------
TOTAL REVENUE(1)
2003 $ 1,334,223 $ 1,046,525 $ 185,006 $ 295,029 $ -- $ 2,860,783
2002 1,277,406 1,043,958 184,979 294,556 -- 2,800,899
2001 1,134,024 963,084 130,021 315,342 -- 2,542,471
INTERSEGMENT SALES(1,2)
2003 $ 74,391 $ 2,143 $ 386 $ 25,537 $ -- $ 102,457
2002 71,052 3,302 431 24,695 -- 99,480
2001 52,274 1,810 278 23,664 -- 78,026
SALES TO UNAFFILIATED CUSTOMERS(1)
2003 $ 1,259,832 $ 1,044,382 $ 184,620 $ 269,492 $ -- $ 2,758,326
2002 1,206,354 1,040,656 184,548 269,861 -- 2,701,419
2001 1,081,750 961,274 129,743 291,678 -- 2,464,445
OPERATING PROFIT(1,3)
2003 $ 102,938 $ 78,733 $ 7,935 $ 18,995 $ (100,268) $ 108,333
2002 127,845 86,781 6,223 25,216 (62,959) 183,106
2001 136,487 96,881 6,429 31,835 (111,653) 159,979
IDENTIFIABLE ASSETS(4)
2003 $ 1,075,707 $ 683,284 $ 49,191 $ 195,799 $ 516,652 $ 2,520,633
2002 954,765 630,632 42,807 271,483 536,752 2,436,439
2001 1,005,941 638,121 31,255 278,980 397,900 2,352,197
DEPRECIATION, DEPLETION AND AMORTIZATION(1)
2003 $ 83,647 $ 52,549 $ 3,453 $ 13,040 $ -- $ 152,689
2002 79,807 49,976 2,856 13,284 -- 145,923
2001 78,705 47,358 2,766 15,880 -- 144,709
CAPITAL EXPENDITURES(1)
2003 $ 48,612 $ 50,951 $ 5,069 $ 3,785 $ -- $ 108,417
2002 54,856 48,913 1,765 5,881 -- 111,415
2001 51,423 35,674 1,474 6,388 -- 94,959
(1) Prior year information has been restated to exclude impact of High Density
film business, which has been reclassified as discontinued operations.
(2) Intersegment sales are recorded at a market-related transfer price.
(3) Corporate 2003, 2002 and 2001 includes restructuring costs of $(31,413),
$(6,420) and $(20,686), respectively, associated with the Engineered
Carriers and Paper segment; $(9,469), $(3,793) and $(24,119), respectively,
associated with the Consumer Packaging segment; $(335), $0 and $(131),
respectively, associated with the Packaging Services segment; $(1,806), $0
and $(2,917), respectively, associated with All Other Sonoco; and,
$(7,033), $(196) and $(3,549), respectively, for unallocated Corporate.
2001 also includes goodwill amortization expenses of $(12,061), $7,252 for
a gain on net legal settlements and a $(7,026) COLI adjustment. Interest
expense and interest income are also shown under Corporate.
(4) Identifiable assets are those assets used by each segment in its
operations. Corporate assets consist primarily of cash and cash
equivalents, investments in affiliates, headquarters facilities and prepaid
expenses.
GEOGRAPHIC REGIONS
Sales to unaffiliated customers and long-lived assets by geographic region are
as follows:
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
2003 2002 2001
------------- ------------- -------------
Sales to Unaffiliated Customers
United States $ 1,859,609 $ 1,879,631 $ 1,709,421
Europe 392,198 348,606 313,783
Canada 262,826 241,315 214,526
All other 243,693 231,867 226,715
------------- ------------- -------------
Total $ 2,758,326 $ 2,701,419 $ 2,464,445
============= ============= =============
Net PPE, Goodwill and Intangibles
United States $ 884,863 $ 960,273 $ 987,510
Europe 187,588 178,086 170,764
Canada 157,587 134,190 128,846
All other 120,886 105,075 111,179
------------- ------------- -------------
Total $ 1,350,924 $ 1,377,624 $ 1,398,299
============= ============= =============
Prior year sales information from the United States has been restated to exclude
the impact of the High Density Film business, which has been reclassified as
discontinued operations.
Sales are attributed to countries/regions based upon the plant location from
which products are shipped. Long-lived assets are comprised of property, plant
and equipment, goodwill, and intangible assets (see Notes 7 and 8 to the
Consolidated Financial Statements).
18. COMPREHENSIVE INCOME (LOSS)
The following table summarizes the components of accumulated other comprehensive
income (loss) and the changes in accumulated comprehensive income (loss), net of
tax as applicable, for the years ended December 31, 2003 and 2002:
Foreign Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustments Adjustments Other Loss
----------- ----------- --------- -------------
Balance at January 1, 2002 $ (177,642) $ (19,502) $ (825) $ (197,969)
Change during 2002 15,833 (30,921) 893 (14,195)
----------- ----------- --------- ------------
Balance at December 31, 2002 $ (161,809) $ (50,423) $ 68 $ (212,164)
Change during 2003 77,903 (3,403) 1,573 76,073
----------- ----------- --------- ------------
Balance at December 31, 2003 $ (83,906) $ (53,826) $ 1,641 $ (136,091)
=========== =========== ========= ============
The cumulative tax benefit of the Minimum Pension Liability Adjustments was
$25,312 and $22,548 in 2003 and 2002, respectively. Additionally, the tax
liability of Other items was $940 and $148 in 2003 and 2002, respectively.
19. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company adopted 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. The adoption of FAS 143 did not have a material effect on the
Company's Consolidated Financial Statements.
As of January 1, 2003, the Company adopted 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 adoption of FAS 146
did not have a material effect on the Company's Consolidated Financial
Statements except for the timing of the recognition of costs associated with
exit or disposal activities.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
Sonoco Products Company and Subsidiaries
In April 2003, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No.149, 'Amendment of Statement 133 on
Derivative Instruments and Hedging Activities' (FAS 149). FAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement of Financial Accounting Standards 133,
'Accounting for Derivative Instruments and Hedging Activities' (FAS 133). FAS
149 also amends certain other existing pronouncements. FAS 149 is effective for
contracts entered into or modified after June 30, 2003, (except that provisions
of FAS 149 that relate to FAS 133 implementation issues that have been effective
for fiscal quarters that began prior to June 15, 2003, should continue to be
applied in accordance with their respective effective dates) with certain
exceptions and for hedging relationships designated after June 30, 2003. The
adoption of FAS 149 did not have a material effect on the Company's Consolidated
Financial Statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.150,
'Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity' (FAS 150). FAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within the scope of FAS 150 as a
liability, which previously may have been classified as equity, consistent with
the current definition of liabilities in FASB Concepts Statement No. 6,
'Elements of Financial Statements.' FAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of FAS 150 did not have a material effect on the Company's
Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), 'Consolidation
of Variable Interest Entities - an interpretation of ARB 51.' FIN 46 addresses
when a company should include in its financial statements the assets,
liabilities and activities of a variable interest entity. It defines variable
interest entities as those entities with a business purpose that either do not
have any equity investors with voting rights, or have equity investors that do
not provide sufficient financial resources for the entity to support its
activities. FIN 46 also requires disclosures about variable interest entities
that a company is not required to consolidate, but in which it has a significant
variable interest. FIN 46 consolidation requirements apply immediately to
variable interest entities created or obtained after January 31, 2003, but this
had no impact on the Company's 2003 financial statements. A modification to FIN
46 (FIN 46R) was released on December 17, 2003. FIN 46R delayed the effective
date for variable interest entities created before February 1, 2003, with the
exception of special-purpose entities, until the first fiscal year or interim
period ending after March 15, 2004. FIN 46R delayed the effective date for
special-purpose entities until the first fiscal year or interim period after
December 15, 2003. The adoption of FIN 46R is not expected to have a material
effect on the Company's Consolidated Financial Statements.
27