EXHIBIT 99.2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Directors of Sonoco Products Company:
We have reviewed the accompanying condensed consolidated balance sheet of Sonoco
Products Company as of March 28, 2004, and the related condensed consolidated
statements of income and cash flows for the three-month periods ended March 28,
2004, and March 30, 2003. These interim financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, 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 the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
December 31, 2003, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the year then ended (not present
herein), and in our report dated January 28, 2004, except for Note 17 as to
which the date is September 30, 2004, 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, 2003, 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
May 4, 2004, except for
Note 11 as to which the date
is September 30, 2004
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands)
MARCH 28,
2004 DECEMBER 31,
(UNAUDITED) 2003*
----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 80,398 $ 84,854
Trade accounts receivable, net of allowances 355,859 320,676
Other receivables 35,482 33,066
Inventories
Finished and in process 113,186 109,080
Materials and supplies 158,352 143,116
Prepaid expenses and other 71,921 64,473
----------- -----------
815,198 755,265
PROPERTY, PLANT AND EQUIPMENT, NET 911,470 923,569
GOODWILL 382,792 383,954
OTHER ASSETS 456,029 457,845
----------- -----------
Total Assets $ 2,565,489 $ 2,520,633
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Payable to suppliers $ 262,061 $ 239,300
Accrued expenses and other 209,738 211,342
Notes payable and current portion of long-term debt 199,396 201,367
Taxes on income 18,588 27,585
----------- -----------
689,783 679,594
LONG-TERM DEBT 469,513 473,220
PENSION AND OTHER POSTRETIREMENT BENEFITS 143,588 137,494
DEFERRED INCOME TAXES AND OTHER 223,828 216,165
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized 300,000 shares
97,783 and 97,217 shares outstanding, of which 97,493 and 96,969
were issued at March 28, 2004 and December 31, 2003, respectively 7,175 7,175
Capital in excess of stated value 348,718 337,136
Accumulated other comprehensive loss (139,440) (136,091)
Retained earnings 822,324 805,940
----------- -----------
Total Shareholders' Equity 1,038,777 1,014,160
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,565,489 $ 2,520,633
=========== ===========
* The year-end condensed consolidated balance sheet data was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principals.
See accompanying Notes to Condensed Consolidated Financial Statements
1
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars and shares in thousands except per share data)
THREE MONTHS ENDED
---------------------
MARCH 28, MARCH 30,
2004 2003
--------- ---------
Net sales $ 695,416 $ 656,480
Cost of sales 573,834 532,565
Selling, general and administrative expenses 70,495 70,385
Restructuring charges (see Note 4) 1,328 1,137
--------- ---------
Income before interest and taxes 49,759 52,393
Interest expense 9,923 12,730
Interest income (1,175) (447)
--------- ---------
Income before income taxes 41,011 40,110
Provision for income taxes 5,425 14,440
--------- ---------
Income before equity in earnings of affiliates/minority interest
in subsidiaries 35,586 25,670
Equity in earnings of affiliates/minority interest in subsidiaries 1,254 1,643
--------- ---------
Income from continuing operations 36,840 27,313
Income from discontinued operations, net of income tax -- 1,685
--------- ---------
Net income $ 36,840 $ 28,998
========= =========
Average common shares outstanding:
Basic 97,608 96,672
Diluted 98,181 96,958
--------- ---------
Per common share
Net income:
Basic $ 0.38 $ 0.30
Diluted $ 0.38 $ 0.30
Cash dividends - common $ 0.21 $ 0.21
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements
2
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
THREE MONTHS ENDED
---------------------
MARCH 28, MARCH 30,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 36,840 $ 28,998
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization 36,970 39,258
Equity in earnings of affiliates/minority interest
in subsidiaries (1,254) (1,643)
Cash dividends from affiliated companies 950 300
Loss (gain) on disposition of assets 51 (113)
Deferred taxes (64) 4,355
Change in assets and liabilities, net of effects from
acquisitions, dispositions and foreign currency
adjustments:
Receivables (37,629) (39,671)
Inventories (19,798) (13,801)
Prepaid expenses (7,724) (3,261)
Payables and taxes 6,563 18,586
Other assets and liabilities 8,172 7,647
--------- ---------
Net cash provided by operating activities 23,077 40,655
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (24,908) (25,425)
Proceeds from the sale of assets 991 448
--------- ---------
Net cash used in investing activities (23,917) (24,977)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 10,577 6,431
Principal repayment of debt (10,274) (3,200)
Net increase in commercial paper borrowings -- 1,500
Net increase in bank overdrafts 5,419 11,077
Cash dividends - common (20,457) (20,256)
Common shares issued 10,963 1,049
--------- ---------
Net cash used in financing activities (3,772) (3,399)
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 156 1
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,456) 12,280
Cash and cash equivalents at beginning of period 84,854 31,405
Cash and cash equivalents at end of period $ 80,398 $ 43,685
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements
3
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(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 herein. Operating results for the
three months ended March 28, 2004, are not necessarily indicative of
the results that may be expected for the year ending December 31,
2004. 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, 2003.
With respect to the unaudited condensed consolidated financial
information of the Company for the three month periods ended March
28, 2004 and March 30, 2003 included in this Form 10-Q,
PricewaterhouseCoopers LLP reported that they have applied limited
procedures in accordance with professional standards for a review of
such information. However, their separate report dated May 4, 2004
appearing herein, states that they did not audit and they do not
express an opinion on that unaudited financial information.
Accordingly, the degree of reliance on their report on such
information should be restricted in light of the limited nature of
the review procedures applied. PricewaterhouseCoopers LLP is not
subject to the liability provisions of Section 11 of the Securities
Act of 1933 for their report on the unaudited financial information
because that report is not a "report" or a "part" of the registration
statement prepared or certified by PricewaterhouseCoopers LLP within
the meaning of Sections 7 and 11 of the Act.
Beginning in the second quarter of 2003, the Company reclassified
shipping and handling costs related to third-party shipments from net
sales to cost of sales on the Condensed Consolidated Statements of
Income in all periods presented. The Company's Condensed Consolidated
Statement of Income for the first quarter of 2003 has been restated
to reflect this reclassification. Because this reclassification
increased net sales and cost of sales by the same amount, it did not
affect previously 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,
California. Operating results of this business have been presented
for the first quarter of 2003 as "Income from discontinued
operations, net of income taxes" in the Company's Condensed
Consolidated Statements of Income. Items included in the Notes to
Condensed Consolidated Financial Statements that relate to the
Consolidated Statement of Income for the first quarter of 2003 have
been restated to reflect the reclassification of the Company's High
Density Film business as discontinued operations.
NOTE 2: DISCONTINUED OPERATIONS
The financial statements and accompanying notes for prior periods
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, net of
income taxes for the first quarter of 2003 represents the results of
operations of the Company's High Density Film business, which was
sold in December 2003.
4
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The following table sets forth the operating results for the business
unit, which was previously reported in the Company's Consumer
Packaging segment:
Three Months Ended
March 30, 2003
------------------
Net sales $ 44,707
===========
Income before income taxes $ 2,632
Provision for income taxes 947
-----------
Income from discontinued operations, net
of income taxes $ 1,685
===========
Income from discontinued operations, net
of income taxes - per diluted share $ 0.02
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.
NOTE 3: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
------------------------------
MARCH 28, 2004 MARCH 30, 2003
-------------- --------------
Numerator:
Income from continuing operations $ 36,840 $ 27,313
Income from discontinued operations,
net of income taxes -- 1,685
-------------- --------------
Net income $ 36,840 $ 28,998
============== ==============
Denominator:
Average common shares outstanding 97,608 96,672
Dilutive effect of:
Employee stock options 365 125
Contingent employee share awards 208 161
-------------- --------------
Dilutive shares outstanding 98,181 96,958
============== ==============
Basic earnings per common share:
Income from continuing operations $ 0.38 $ 0.28
Income from discontinued operations,
net of income taxes -- 0.02
-------------- --------------
Net income $ 0.38 $ 0.30
============== ==============
Diluted earnings per common share:
Income from continuing operations $ 0.38 $ 0.28
Income from discontinued operations,
net of income taxes -- 0.02
-------------- --------------
Net income $ 0.38 $ 0.30
============== ==============
5
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Stock options to purchase approximately 5,378 and 8,657 shares at
March 28, 2004 and March 30, 2003, respectively, were not dilutive
and, therefore, are not included in the computations of diluted
income per common share amounts. No adjustments were made to reported
net income in the computations of earnings per share.
NOTE 4: RESTRUCTURING PROGRAMS
In August 2003, the Company announced general plans to reduce its
overall cost structure by $54,000 pretax by realigning and
centralizing a number of staff functions and eliminating excess plant
capacity. Pursuant to these plans, the Company has initiated or
completed 13 plant closings and has terminated approximately 740
employees. As of March 28, 2004, the Company had incurred cumulative
charges, net of adjustments, of approximately $54,426 pretax
associated with these activities. Of this amount, $34,636 was related
to the Engineered Carriers and Paper segment, $10,239 was related to
the Consumer Packaging segment, $333 was attributed to the Packaging
Services segment, $2,146 was related to All Other Sonoco, and $7,072
was associated with Corporate. These restructuring charges, net of
adjustments, consisted of severance and termination benefits of
$41,446, asset impairment charges of $8,604 and other exit costs of
$4,376. The Company expects to recognize an additional cost of
approximately $9,500 pretax in the future associated with these
activities. The Company also expects to announce throughout the
remainder of 2004 the closing of an additional five to ten plants in
furtherance of these plans. The costs associated with these future
plant closings have not yet been determined.
During the first quarter of 2004, the Company recognized
restructuring charges, net of adjustments, of $1,328 ($861 after
tax), which are reflected as "Restructuring charges" on the Company's
Condensed Consolidated Statements of Income. Of these charges, $877
was attributed to the Engineered Carriers and Paper segment, $101 was
related to the Consumer Packaging segment and $350 was associated
with All Other Sonoco. These restructuring charges, net of
adjustments, consisted of severance and termination benefits of $575,
asset impairment charges of $223 and other exit costs of $530.
During the first quarter of 2003, the Company recognized
restructuring charges, net of adjustments, of $1,137 ($728 after tax)
related to previously announced restructuring plans that were
completed prior to December 31, 2003. These charges were primarily
associated with severance costs in Europe in the Engineered Carriers
and Paper segment as well as lease termination and restoration costs
associated with prior plant closings in the Consumer Packaging
segment. Additionally, the Company's High Density Film business,
which was divested in December 2003, incurred restructuring charges
of approximately $200 ($128 after tax) in the first quarter of 2003.
The following table sets forth the activity in the restructuring
accrual included in "Accrued expenses and other" on the Company's
Condensed Consolidated Balance Sheets. Restructuring charges are
included in "Restructuring charges" on the Company's Condensed
Consolidated Statements of Income. In accordance with the agreement
of sale for the High Density Film business, the liability of that
business associated with the restructuring has been retained by the
Company and is, therefore, included in the table below:
6
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
SEVERANCE
AND OTHER
TERMINATION ASSET EXIT
BENEFITS IMPAIRMENT COSTS TOTAL
----------- ---------- -------- -------
Beginning liability
December 31, 2003 $ 14,708 $ -- $ 6,386 $21,094
New charges 759 246 634 1,639
Cash payments (6,966) -- (1,730) (8,696)
Asset impairment -- (223) -- (223)
Adjustments (184) (23) (104) (311)
----------- ---------- -------- -------
Ending liability
March 28, 2004 $ 8,317 $ -- $ 5,186 $13,503
=========== ========== ======== =======
During the first quarter of 2004, the Company recognized writeoffs of
impaired equipment in the Engineered Carriers and Paper segment in
the amount of $223. Other exit costs are primarily associated with
lease termination and other miscellaneous plant closing costs.
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 the first quarter of 2005, using
cash generated from operations.
NOTE 5: COMPREHENSIVE INCOME
The following table reconciles net income to comprehensive income:
Three Months Ended
------------------------------
MARCH 28, 2004 MARCH 30, 2003
-------------- --------------
Net income $ 36,840 $ 28,998
Other comprehensive income:
Foreign currency translation
adjustments (4,224) 14,097
Other adjustments, net of income tax 875 1,194
-------------- --------------
Comprehensive income $ 33,491 $ 44,289
============== ==============
The following table summarizes the components of accumulated other
comprehensive income and the changes in accumulated other
comprehensive income, net of tax as applicable, for the quarter ended
March 28, 2004:
FOREIGN MINIMUM ACCUMULATED
CURRENCY PENSION OTHER
TRANSLATION LIABILITY COMPREHENSIVE
ADJUSTMENT ADJUSTMENT OTHER LOSS
----------- ---------- ------- -------------
Balance at
December 31, 2003 $ (83,906) $ (53,826) $ 1,641 $ (136,091)
Year-to-date change (4,224) -- 875 (3,349)
----------- ---------- ------- -------------
Balance at
March 28, 2004 $ (88,130) $ (53,826) $ 2,516 $ (139,440)
=========== ========== ======= =============
The cumulative tax benefit of the Minimum Pension Liability
Adjustments was $25,312 at March 28, 2004 and December 31, 2003.
Additionally, the deferred tax liability of Other items was $1,254
and $940 at March 28, 2004 and December 31, 2003, respectively.
7
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
A summary of the changes in goodwill for the quarter ended March 28,
2004 is as follows:
ENGINEERED
CARRIERS CONSUMER PACKAGING
AND PAPER PACKAGING SERVICES ALL OTHER
SEGMENT SEGMENT SEGMENT SONOCO TOTAL
----------- ---------- --------- --------- ----------
Balance as of January 1, 2004 $ 151,469 $ 165,376 $ 1,263 $ 65,846 $ 383,954
Foreign currency translation (102) (1,115) 64 (9) (1,162)
----------- ---------- --------- --------- ----------
Balance as of March 28, 2004 $ 151,367 $ 164,261 $ 1,327 $ 65,837 $ 382,792
=========== ========== ========= ========= ==========
Other Intangible Assets
A summary of other intangible assets as of March 28, 2004 and
December 31, 2003 is as follows:
March 28, 2004 December 31, 2003
----------------------- ----------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
--------- ------------ -------- ------------
Patents $ 3,268 $ (2,626) $ 3,268 $ (2,564)
Customer lists 38,223 (5,127) 38,223 (4,630)
Land use rights 5,873 (1,999) 5,873 (1,963)
Supply agreements 5,261 (4,030) 5,261 (3,715)
Other 6,404 (2,978) 6,404 (2,756)
--------- ------------ -------- ------------
Total $ 59,029 $ (16,760) $ 59,029 $ (15,628)
========= ============ ======== ============
Aggregate amortization expense on intangible assets was $1,132 and
$971 for the three months ended March 28, 2004 and March 30, 2003,
respectively. Amortization expense on the other intangible assets
identified in the table above is expected to approximate $3,800 in
2004, $3,800 in 2005, $3,500 in 2006, $3,200 in 2007 and $3,000 in
2008. Other intangible assets are included in "Other Assets" on the
Company's Condensed Consolidated Balance Sheets.
NOTE 7: DIVIDEND DECLARATIONS
On February 4, 2004, the Board of Directors declared a regular
quarterly dividend of $0.21 per share. This dividend was paid March
10, 2004 to all shareholders of record as of February 20, 2004.
On April 21, 2004, the Board of Directors declared a regular
quarterly dividend of $0.22 per share, payable June 10, 2004 to all
shareholders of record as of May 21, 2004.
NOTE 8: STOCK PLANS
As permitted by Statement of Financial Accounting Standards No. 123,
'Accounting for Stock-Based Compensation' (FAS 123), the Company has
elected to account for its 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.
8
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
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.
Three Months Ended
-------------------------------
MARCH 28, 2004 MARCH 30, 2003
-------------- --------------
Net income, as reported $ 36,840 $ 28,998
Add: Stock-based employee compensation cost,
net of related tax effects, included in
net income, as reported 399 224
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (1,243) (1,425)
-------------- --------------
Proforma net income $ 35,996 $ 27,797
============== ==============
Earnings per share:
Basic - as reported $ 0.38 $ 0.30
Basic - proforma $ 0.37 $ 0.29
Diluted - as reported $ 0.38 $ 0.30
Diluted - proforma $ 0.37 $ 0.29
NOTE 9: EMPLOYEE BENEFIT 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 established a defined contribution plan for all new
U.S. employees. The defined benefit plans discussed above remain in
place for all U.S. employees whose employment with the Company began
prior to January 1, 2004. The Company also sponsors contributory
pension plans covering the majority of its employees in the United
Kingdom and Canada.
The components of net periodic benefit cost include the following:
Three Months Ended
-------------------------------
MARCH 28, 2004 MARCH 30, 2003
-------------- --------------
RETIREMENT PLANS
Service cost $ 5,925 $ 5,052
Interest cost 14,267 12,942
Expected return on plan assets (16,490) (13,823)
Amortization of net transition
(asset) obligation 150 144
Amortization of prior service cost 363 416
Amortization of net actuarial
(gain) loss 5,242 5,556
-------------- --------------
Net periodic benefit cost $ 9,457 $ 10,287
============== ==============
9
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
RETIREE HEALTH AND LIFE INSURANCE
PLANS
Service cost $ 1,281 $ 1,090
Interest cost 2,932 2,877
Expected return on plan assets (880) (913)
Amortization of prior service cost (1,529) (1,645)
Amortization of net actuarial loss 2,448 2,257
-------------- --------------
Net periodic benefit cost $ 4,252 $ 3,666
============== ==============
During the three months ended March 28, 2004, the Company made
voluntary contributions of $7,900 to its retirement and retiree
health and life insurance plans. The Company anticipates that it will
make additional voluntary contributions of approximately $15,000 to
these plans in 2004.
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 Accounting Standards No. 106,
'Employers' Accounting for Postretirement Benefits Other Than
Pensions' (FAS 106), requires that presently enacted changes in law
impacting employer-sponsored retiree health care 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, however, the
Company has chosen to defer recognition of the potential effects of
the Act in these disclosures. Therefore, the retiree health
obligations and costs reported in these financial statements or
accompanying notes 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.
NOTE 10: NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 46, 'Consolidation of Variable Interest
Entities - an interpretation of ARB 51' (FIN 46). 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 equity investors with voting rights in
proportion to such investors' equity, or have investors that do not
provide financial resources in proportion to such investors' equity
for the entity to support its activities and have equity investors
that lack a controlling financial interest. 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
10
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
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 after December 15, 2003. As of
January 1, 2004, the Company adopted FIN 46R. In conjunction with
this adoption, the Company performed an evaluation of variable
interest entities in which it has an ownership, contractual or other
monetary interest and adopted FIN 46R. The adoption of FIN 46R did
not have a material effect on the Company's Condensed Consolidated
Financial Statements.
NOTE 11: FINANCIAL SEGMENT INFORMATION
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 the three months ended March 28, 2004 and March 30,
2003 to conform to the new segment reporting. The changes to the
financial statements for the three months ended March 28, 2004 and
March 30, 2003 relate solely to the presentation of segment specific
disclosures and had no impact on the condensed consolidated balance
sheets, statements of income or statements of cash flows. Other
financial statement footnotes affected by this change in segment
reporting include Note 4 - Restructuring Programs and Note 6 -
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. The Packaging Services 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.
The following table sets forth net sales and operating profit for the
Company's financial segments. Operating profit at the segmental level
is defined as "Income before interest and income taxes" on the
Company's Condensed Consolidated Statements of Income adjusted for
restructuring charges, which are not allocated to the financial
segments.
11
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
FINANCIAL SEGMENT INFORMATION (Unaudited)
Three Months Ended
-------------------------------
MARCH 28, 2004 MARCH 30, 2003
-------------- --------------
Net Sales:
Engineered Carriers and Paper $ 313,488 $ 293,849
Consumer Packaging 256,405 252,368
Packaging Services 53,073 45,331
All Other Sonoco 72,450 64,932
-------------- --------------
Consolidated $ 695,416 $ 656,480
============== ==============
Income before income taxes:
Engineered Carriers and Paper -
Operating Profit $ 20,747 $ 25,126
Consumer Packaging - Operating Profit 17,853 21,346
Packaging Services - Operating Profit 5,486 2,201
All Other Sonoco - Operating Profit 7,001 4,857
Restructuring charges (1,328) (1,137)
Interest, net (8,748) (12,283)
-------------- --------------
Consolidated $ 41,011 $ 40,110
============== ==============
Prior year information has been restated to exclude the impact of the
Company's High Density Film business, which has been reclassified as
discontinued operations on the Condensed Consolidated Statements of
Income.
NOTE 12: 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 cannot currently determine the final outcome
of the proceedings described below or the ultimate amount of
potential losses. Pursuant to Statement of Financial Accounting
Standards No. 5, 'Accounting for Contingencies' (FAS 5), management
records accruals for estimated losses at the time that information
becomes available indicating that losses are probable and that the
amounts are reasonably estimable. 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.
Sonoco-U.S. Paper Lawsuit
On April 30, 2004, the Company announced that the U.S. District Court
for the Southern District of Ohio had entered a judgment against its
subsidiary, Sonoco-U.S. Paper, and the Company in the amount of
$3,750 in a case involving alleged trade secrets of the plaintiff.
Although not covered by the judgment, the plaintiff may also make
claim for certain litigation expenses. While the Company is currently
considering what legal steps to take with respect to this judgment,
during the first quarter of 2004, it accrued approximately $5,500
related to this legal proceeding.
Environmental Matters
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.
As of March 28, 2004 and December 31, 2003, the Company had accrued
$3,909 and $3,967, 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
12
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
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.
NOTE 13: SUBSEQUENT EVENTS
European Joint Venture
On April 19, 2004, the Company announced that it had signed a
definitive agreement with Ahlstrom Corporation, Helsinki, Finland
("Ahlstrom") to combine each of the companies' respective European
paper-based tube/core and coreboard operations into a joint venture
that will operate under the name Sonoco-Alcore S.a.r.l. The Company,
which will contribute to the joint venture ownership positions in 25
tube and core plants and six paper mills, will hold a 64.5% interest
in the joint venture. Ahlstrom, a leader in high-performance
fiber-based materials serving niche markets worldwide, will
contribute 15 tube and core plants and one paper mill to the joint
venture and will hold a 35.5% interest in it. Total sales in 2003 for
the properties being contributed by the Company and Ahlstrom to this
joint venture were approximately $235,000 and $102,000, respectively.
This joint venture is expected to be finalized by the end of the
third quarter of 2004.
Following an initial two and one-half year standstill period and
subject to certain conditions, Ahlstrom will have the right to
require (through a put option arrangement) the Company to buy the
shares not owned by the Company at any time over the next three and
one-half years. During the seventh year, the Company will have the
right to purchase the shares (through a call option arrangement). The
price of the share purchase will be determined using a formula
related to an earnings multiple at the time such shares might be put
or called.
In a separate but related transaction, the Company has signed an
agreement to purchase 100% of Ahlstrom's Chinese paper tube/core
operation in Shouguang to serve the rapidly growing Chinese market
for paper mill cores. This operation will not be part of the joint
venture.
Acquisition of CorrFlex Graphics
On April 29, 2004, the Company announced that it had signed a
definitive agreement to acquire CorrFlex Graphics, LLC ("CorrFlex")
for an all-cash purchase price of approximately $250,000. CorrFlex,
which is privately held, is one of the nation's largest
point-of-purchase display companies. The acquisition is expected to
be moderately accretive in the first year and is expected to generate
sales on an annualized basis of approximately $200,000 for 2004. The
acquisition will be known as Sonoco CorrFlex and is expected to close
by the end of the second quarter of 2004.
13