EXHIBIT 99.3
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 June 27, 2004, and the related condensed consolidated
statements of income for the three-month and six-month periods ended June 27,
2004, and June 29, 2003 and the condensed consolidated statements of cash flows
for the six-month periods ended June 27, 2004 and June 29, 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
July 28, 2004, except for
Note 13 as to which the date
is September 30, 2004
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands)
JUNE 27,
2004 DECEMBER 31,
(UNAUDITED) 2003*
----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 65,249 $ 84,854
Trade accounts receivable, net of allowances 387,407 320,676
Other receivables 39,974 33,066
Inventories
Finished and in process 112,253 109,080
Materials and supplies 172,487 143,116
Prepaid expenses and other 79,421 64,473
----------- ------------
856,791 755,265
PROPERTY, PLANT AND EQUIPMENT, NET 942,536 923,569
GOODWILL 538,055 383,954
OTHER ASSETS 492,963 457,845
----------- ------------
Total Assets $ 2,830,345 $ 2,520,633
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Payable to suppliers $ 257,148 $ 239,300
Accrued expenses and other 219,915 211,342
Notes payable and current portion of long-term debt 206,358 201,367
Taxes on income 8,255 27,585
----------- ------------
691,676 679,594
LONG-TERM DEBT 733,892 473,220
PENSION AND OTHER POSTRETIREMENT BENEFITS 147,830 137,494
DEFERRED INCOME TAXES AND OTHER 212,556 216,165
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized 300,000 shares
97,986 and 97,217 shares outstanding, of which 97,695 and 96,969
were issued at June 27, 2004 and December 31, 2003, respectively 7,175 7,175
Capital in excess of stated value 353,726 337,136
Accumulated other comprehensive loss (152,319) (136,091)
Retained earnings 835,809 805,940
----------- ------------
Total Shareholders' Equity 1,044,391 1,014,160
----------- ------------
Total Liabilities and Shareholders' Equity $ 2,830,345 $ 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 SIX MONTHS ENDED
---------------------- -------------------------
JUNE 27, JUNE 29, JUNE 27, JUNE 29,
2004 2003 2004 2003
--------- ---------- ----------- -----------
Net sales $ 763,902 $ 684,567 $ 1,459,318 $ 1,341,047
Cost of sales 620,753 560,805 1,194,587 1,093,370
Selling, general and administrative expenses 76,969 68,299 147,464 138,684
Restructuring charges (see Note 5) 5,768 7,828 7,096 8,965
--------- ---------- ----------- -----------
Income before interest and taxes 60,412 47,635 110,171 100,028
Interest expense 11,518 13,979 21,441 26,709
Interest income (1,196) (509) (2,371) (956)
--------- ---------- ----------- -----------
Income before income taxes 50,090 34,165 91,101 74,275
Provision for income taxes 17,795 14,476 23,220 28,916
--------- ---------- ----------- -----------
Income before equity in earnings of affiliates/minority
interest in subsidiaries 32,295 19,689 67,881 45,359
Equity in earnings (loss) of affiliates/minority
interest in subsidiaries 2,660 1,681 3,914 3,324
--------- ---------- ----------- -----------
Income from continuing operations 34,955 21,370 71,795 48,683
Income from discontinued operations, net of income tax -- 1,463 -- 3,148
--------- ---------- ----------- -----------
Net income $ 34,955 $ 22,833 $ 71,795 $ 51,831
========= ========== =========== ===========
Average common shares outstanding:
Basic 97,890 96,696 97,754 96,684
Diluted 98,691 96,956 98,441 96,957
--------- ---------- ----------- -----------
Per common share
Basic:
From continuing operations $ 0.36 $ 0.22 $ 0.73 $ 0.51
From discontinued operations $ - $ 0.02 $ - $ 0.03
--------- ---------- ----------- -----------
Net income $ 0.36 $ 0.24 $ 0.73 $ 0.54
Diluted:
From continuing operations $ 0.35 $ 0.22 $ 0.73 $ 0.50
From discontinued operations $ - $ 0.02 $ - $ 0.03
--------- ---------- ----------- -----------
Net income $ 0.35 $ 0.24 $ 0.73 $ 0.53
Cash dividends - common $ 0.22 $ 0.21 $ 0.43 $ 0.42
========= ========== =========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements
2
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
SIX MONTHS ENDED
----------------------
JUNE 27, JUNE 29,
2004 2003
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 71,795 $ 51,831
Adjustments to reconcile net income to net cash provided
by operating activities:
Restructuring reserve (noncash) 1,698 729
Depreciation, depletion and amortization 73,280 79,149
Equity in earnings of affiliates/minority interest
in subsidiaries (3,914) (3,324)
Cash dividends from affiliated companies 1,650 1,325
Loss (gain) on disposition of assets 2,179 (502)
Deferred taxes 1,256 5,587
Change in assets and liabilities, net of effects from
acquisitions, dispositions and foreign currency
adjustments:
Receivables (48,662) (43,846)
Inventories (29,218) (29,002)
Prepaid expenses (14,425) (12,476)
Payables and taxes 864 8,783
Other assets and liabilities (1,977) 26,196
---------- ---------
Net cash provided by operating activities 54,526 84,450
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (53,540) (52,787)
Cost of acquisitions, exclusive of cash acquired (259,981) (1,275)
Proceeds from the sale of assets 3,315 1,372
---------- ---------
Net cash used in investing activities (310,206) (52,690)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 169,141 20,938
Principal repayment of debt (12,935) (10,199)
Net increase in commercial paper borrowings 108,000 (1,500)
Net increase in bank overdrafts 157 10,469
Cash dividends - common (41,926) (40,514)
Common shares issued 14,855 1,070
---------- ---------
Net cash provided by (used in) financing activities 237,292 (19,736)
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (1,217) 552
---------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (19,605) 12,576
Cash and cash equivalents at beginning of period 84,854 31,405
Cash and cash equivalents at end of period $ 65,249 $ 43,981
========== =========
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 and six months ended June 27, 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 and six month periods ended
June 27, 2004 and June 29, 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 July 28, 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.
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 three and six months ended June 29, 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 three and six months
ended June 29, 2003 have been restated to reflect the
reclassification of the Company's High Density Film business as
discontinued operations.
NOTE 2: ACQUISITIONS/JOINT VENTURES
Acquisition of CorrFlex Graphics, LLC
On May 28, 2004, the Company completed its purchase of CorrFlex
Graphics, LLC ("CorrFlex") for an all-cash purchase price of
approximately $250,000. CorrFlex, a privately held company, is one of
the nation's largest point-of-purchase display companies. The
acquired business, which is known as Sonoco CorrFlex, LLC, is
reflected in the Packaging Services segment beginning in June of
2004.
The unaudited proforma combined historical results, as if CorrFlex
had been acquired at the beginning of fiscal 2003 and 2004 are
estimated to be:
Three Months Ended Six Months Ended
--------------------- ----------------------
JUNE 27, JUNE 29, JUNE 27, JUNE 29,
2004 2003 2004 2003
--------- ---------- ---------- ----------
Net sales $ 792,651 $ 721,250 $1,531,190 $1,423,598
Net income $ 36,614 $ 22,963 $ 75,942 $ 54,446
========= ========== ========== ==========
Diluted earnings per
common share $ 0.37 $ 0.24 $ 0.77 $ 0.56
========= ========== ========== ==========
4
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The proforma results include amortization of intangibles and interest
expense on debt assumed to finance the purchase. The proforma results
are not necessarily indicative of what actually would have occurred
if the acquisition had been completed as of the beginning of each
period presented, nor are they necessarily indicative of future
consolidated results.
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. The Company is
currently awaiting regulatory approval by the European Union and
expects to finalize this joint venture by the end of 2004.
NOTE 3: 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 three and six months ended June 29, 2003
represents the results of operations of the Company's High Density
Film business unit, which was sold in December 2003.
The following table sets forth the operating results for the High
Density Film business unit, which was previously reported in the
Company's Consumer Packaging segment:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 29, 2003 JUNE 29, 2003
------------------ ----------------
Net sales $ 47,859 $ 92,566
============== ==============
Income before income taxes $ 2,286 $ 4,918
Provision for income taxes 823 1,770
-------------- --------------
Income from discontinued operations, net of
income taxes $ 1,463 $ 3,148
============== ==============
Income from discontinued operations, net of
income taxes - per diluted share $ 0.02 $ 0.03
============== ==============
No interest expense or income was allocated to this business unit.
The Company has no continuing involvement in the management or
operations of the divested business.
5
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
NOTE 4: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
------------------ ------------------
JUNE 27, JUNE 29, JUNE 27, JUNE 29,
2004 2003 2004 2003
-------- -------- -------- --------
Numerator:
Income from continuing operations $ 34,955 $ 21,370 $ 71,795 $ 48,683
Income from discontinued
operations, net of income taxes -- 1,463 -- 3,148
-------- -------- -------- --------
Net income $ 34,955 $ 22,833 $ 71,795 $ 51,831
======== ======== ======== ========
Denominator:
Average common shares outstanding 97,890 96,696 97,754 96,684
Dilutive effect of:
Employee stock options 515 201 440 163
Contingent employee share awards 286 59 247 110
-------- -------- -------- --------
Dilutive shares outstanding 98,691 96,956 98,441 96,957
======== ======== ======== ========
Basic earnings per common share:
Income from continuing operations $ 0.36 $ 0.22 $ 0.73 $ 0.51
Income from discontinued
operations, net of income taxes -- 0.02 -- 0.03
-------- -------- -------- --------
Net income $ 0.36 $ 0.24 $ 0.73 $ 0.54
======== ======== ======== ========
Diluted earnings per common share:
Income from continuing operations $ 0.35 $ 0.22 $ 0.73 $ 0.50
Income from discontinued
operations, net of income taxes -- 0.02 -- 0.03
-------- -------- -------- --------
Net income $ 0.35 $ 0.24 $ 0.73 $ 0.53
======== ======== ======== ========
Stock options to purchase approximately 4,487 and 8,120 shares at
June 27, 2004 and June 29, 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 5: 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 12 plant closings and has terminated approximately 850
employees. As of June 27, 2004, the Company had incurred cumulative
charges, net of adjustments, of approximately $60,978 pretax
associated with these activities. Of this amount, $40,149 was related
to the Engineered Carriers and Paper segment, $10,688 was related to
the Consumer Packaging segment, $333 was attributed to the Packaging
Services segment, $2,736 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
$45,431, asset impairment charges of $9,994 and other exit costs of
$5,553. The Company expects to recognize an additional cost of
approximately $4,000 pretax in the future associated with these
activities, which is comprised of approximately $2,100 in severance
and termination benefits, $300 in asset impairment charges and $1,600
in other exit costs. Of this amount, approximately $3,100 is related
to the Engineered Carriers and Paper segment and
6
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
approximately $900 is related to the Consumer Packaging segment. The
Company also expects to announce throughout the remainder of 2004 the
closing of approximately five additional plants in furtherance of
these plans. The costs associated with these future plant closings
have not yet been determined. In conjunction with the Company's
review of its restructuring accrual in the second quarter of 2004, it
was determined that one of the plants that had originally been
identified to be closed pursuant to these plans would not be closed
due to changes in certain factors. In response to this determination,
the Company reduced its restructuring accrual for the Consumer
Packaging segment, which resulted in negative charges, net of
adjustments, in both the three and six months ended June 27, 2004.
During the three months ended June 27, 2004, the Company recognized
restructuring charges, net of adjustments, of $5,768 ($3,720 after
tax), which are reflected as "Restructuring charges" on the Company's
Condensed Consolidated Statements of Income. Of these charges, $5,624
was attributed to the Engineered Carriers and Paper segment, ($446)
was related to the Consumer Packaging segment and $590 was associated
with All Other Sonoco. These restructuring charges, net of
adjustments, consisted of severance and termination benefits of
$3,649, asset impairment charges of $1,475 and other exit costs of
$644.
During the three months ended June 29, 2003, the Company recognized
restructuring charges, net of adjustments, of $7,828 ($7,894 after
tax) related to previously announced restructuring plans, $7,522 of
which was attributed to the Engineered Carriers and Paper segment and
$306 of which was associated with All Other Sonoco. These
restructuring charges, net of adjustments, consisted of severance and
termination benefits of $7,041, asset impairment charges of $729 and
other exit costs of $58.
During the six months ended June 27, 2004, the Company recognized
restructuring charges, net of adjustments, of $7,096 ($4,577 after
tax). Of these charges, $6,501 was attributed to the Engineered
Carriers and Paper segment, ($345) was related to the Consumer
Packaging segment and $940 was associated with All Other Sonoco.
These restructuring charges, net of adjustments, consisted of
severance and termination benefits of $4,224, asset impairment
charges of $1,698 and other exit costs of $1,174.
During the six months ended June 29, 2003, the Company recognized
restructuring charges, net of adjustments, of $8,965 ($8,622 after
tax) related to previously announced restructuring plans. Of these
charges, $8,159 was attributed to the Engineered Carriers and Paper
segment, $500 was related to the Consumer Packaging segment and $306
was associated with All Other Sonoco. These restructuring charges,
net of adjustments, consisted of severance and termination benefits
of $7,678, asset impairment charges of $729 and other exit costs of
$558. 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 six months ended June 29,
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:
7
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 4,783 1,732 1,869 8,384
Cash payments (11,500) -- (3,325) (14,825)
Asset impairment -- (1,698) -- (1,698)
Adjustments (559) (34) (695) (1,288)
----------- ---------- ------- ---------
Ending liability
June 27, 2004 $ 7,432 $ -- $ 4,235 $ 11,667
=========== ========== ======= =========
During the six months ended June 27, 2004, the Company recognized
writeoffs of impaired equipment and facilities in the Engineered
Carriers and Paper segment in the amount of $945 and $240,
respectively. Also during the six months ended June 27, 2004, the
Company recognized writeoffs of impaired equipment and facilities in
All Other Sonoco in the amount of $113 and $400, respectively. 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 second quarter of 2005, using
cash generated from operations.
NOTE 6: COMPREHENSIVE INCOME
The following table reconciles net income to comprehensive income:
Three Months Ended Six Months Ended
------------------- -------------------
JUNE 27, JUNE 29, JUNE 27, JUNE 29,
2004 2003 2004 2003
-------- -------- -------- --------
Net income $ 34,955 $ 22,833 $ 71,795 $ 51,831
Other comprehensive income:
Foreign currency translation
adjustments (13,948) 37,487 (18,172) 51,584
Other adjustments, net of
income tax 1,069 (228) 1,944 966
-------- -------- -------- --------
Comprehensive income $ 22,076 $ 60,092 $ 55,567 $104,381
======== ======== ======== ========
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 six months
ended June 27, 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 (18,172) -- 1,944 (16,228)
----------- ---------- -------- -------------
Balance at
June 27, 2004 $ (102,078) $ (53,826) $ 3,585 $ (152,319)
=========== ========== ======== =============
8
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
The cumulative tax benefit of the Minimum Pension Liability
Adjustments was $25,312 at June 27, 2004 and December 31, 2003.
Additionally, the deferred tax liability associated with Other items
was $2,067 and $940 at June 27, 2004 and December 31, 2003,
respectively.
NOTE 7: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
A summary of the changes in goodwill for the six months ended June
27, 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
2004 Acquisitions 813 2,284 155,417 -- 158,514
Foreign currency translation (1,558) (2,855) 42 (42) (4,413)
---------- --------- --------- --------- ---------
Balance as of June 27, 2004 $ 150,724 $ 164,805 $ 156,722 $ 65,804 $ 538,055
========== ========= ========= ========= =========
Other Intangible Assets
A summary of other intangible assets as of June 27, 2004 and December
31, 2003 is as follows:
June 27, 2004 December 31, 2003
---------------------- ----------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ------------ -------- ------------
Patents $ 3,268 $ (2,691) $ 3,268 $ (2,564)
Customer lists 68,223 (5,969) 38,223 (4,630)
Land use rights 5,873 (2,035) 5,873 (1,963)
Supply agreements 5,261 (4,356) 5,261 (3,715)
Other 6,404 (3,208) 6,404 (2,756)
-------- ------------ -------- ------------
Total $ 89,029 $ (18,259) $ 59,029 $ (15,628)
======== ============ ======== ============
Aggregate amortization expense on intangible assets was $1,499 and
$1,058 for the three months ended June 27, 2004 and June 29, 2003,
respectively and $2,631 and $2,029 for the six months ended June 27,
2004 and June 29, 2003, respectively. Amortization expense on the
other intangible assets identified in the table above is expected to
approximate $5,400 in 2004, $5,700 in 2005, $5,500 in 2006, $5,100 in
2007 and $5,000 in 2008. Other intangible assets are included in
"Other Assets" on the Company's Condensed Consolidated Balance
Sheets.
Intangible assets acquired in conjunction with the Company's purchase
of CorrFlex (see Note 2) consisted of customer lists. The Company has
allocated $30,000 of the purchase price to these intangible assets,
which have a weighted average amortization period of 15 years. The
estimated fair values of these assets are based on the Company's
current purchase price allocation, which has been prepared on a
preliminary basis, and are subject to change upon its finalization.
9
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
NOTE 8: DEBT
In June 2004, the Company made a private placement of $150 million
5.625% notes due in 2016. Under the terms of the sale of the notes,
the Company is required to take appropriate steps to offer to
exchange other notes with the same terms that have been registered
with the SEC for the private placement notes or, in some
circumstances, register the private placement notes with the SEC. If
the Company does not take the necessary actions in connection with
the exchange offer, or registration of the private placement notes if
required, by specified deadlines, it will become obligated to pay
additional interest to the holders of the private placement notes up
to a maximum of 1% per annum.
During the second quarter of 2004, the Company entered into a $150
million swap against the newly issued $150 million notes. During the
first quarter of 2004, the Company entered into a $100 million swap
against a portion of the $250 million 6.5% notes maturing in 2013.
Consistent with the treatment of all of the Company's interest rate
swaps, these contracts qualified as fair value hedges under Statement
of Financial Accounting Standards No. 133, 'Accounting for Derivative
Instruments and Hedging Activities' (FAS 133) and swapped fixed
interest for floating.
In July 2004, the Company terminated its $450 million backstop credit
line and entered into a new $350 million backstop credit line for
commercial paper issuance. The new credit agreement matures in July
2009.
NOTE 9: DIVIDEND DECLARATIONS
On April 21, 2004, the Board of Directors declared a regular
quarterly dividend of $0.22 per share. This dividend was paid June
10, 2004 to all shareholders of record as of May 21, 2004.
On July 21, 2004, the Board of Directors declared a regular quarterly
dividend of $0.22 per share, payable September 10, 2004 to all
shareholders of record as of August 20, 2004.
NOTE 10: 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.
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.
10
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
Three Months Ended Six Months Ended
------------------- -------------------
JUNE 27, JUNE 29, JUNE 27, JUNE 29,
2004 2003 2004 2003
-------- -------- -------- --------
Net income, as reported $ 34,955 $ 22,833 $ 71,795 $ 51,831
Add: Stock-based employee compensation cost,
net of related tax effects, included in
net income, as reported 459 280 858 504
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (1,591) (1,425) (2,834) (2,850)
-------- -------- -------- --------
Proforma net income $ 33,823 $ 21,688 $ 69,819 $ 49,485
======== ======== ======== ========
Earnings per share:
Basic - as reported $ 0.36 $ 0.24 $ 0.73 $ 0.54
Basic - proforma $ 0.35 $ 0.22 $ 0.71 $ 0.51
Diluted - as reported $ 0.35 $ 0.24 $ 0.73 $ 0.53
Diluted - proforma $ 0.34 $ 0.22 $ 0.71 $ 0.51
NOTE 11: 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 Six Months Ended
------------------- -------------------
JUNE 27, JUNE 29, JUNE 27, JUNE 29,
2004 2003 2004 2003
-------- -------- -------- --------
DEFINED BENEFIT PLANS
Service cost $ 5,929 $ 5,052 $ 11,854 $ 10,104
Interest cost 14,314 12,942 28,581 25,884
Expected return on plan assets (16,534) (13,823) (33,024) (27,646)
Amortization of net transition
(asset) obligation 144 144 294 288
Amortization of prior service cost 365 416 728 832
Amortization of net actuarial
(gain) loss 5,262 5,556 10,504 11,112
-------- -------- -------- --------
Net periodic benefit cost $ 9,480 $ 10,287 $ 18,937 $ 20,574
======== ======== ======== ========
RETIREE HEALTH AND LIFE INSURANCE
PLANS
Service cost $ 1,281 $ 1,090 $ 2,562 $ 2,180
Interest cost 2,932 2,877 5,864 5,754
Expected return on plan assets (880) (913) (1,760) (1,826)
Amortization of prior service cost (1,529) (1,645) (3,058) (3,290)
Amortization of net actuarial loss 2,448 2,257 4,896 4,514
-------- -------- -------- --------
Net periodic benefit cost $ 4,252 $ 3,666 $ 8,504 $ 7,332
======== ======== ======== ========
11
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
During the six months ended June 27, 2004, the Company made voluntary
contributions of approximately $15,000 to its defined benefit and
retiree health and life insurance plans. The Company anticipates that
it will make additional voluntary contributions of approximately
$5,000 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 (FSP 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. On May 19, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Staff Position 106-2, 'Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003' (FSP 106-2), which requires measures
of the accumulated postretirement benefit obligation and net periodic
postretirement benefit costs to reflect the effects of the Act. FSP
106-2 supersedes FSP 106-1 and is effective for interim or annual
reporting periods beginning after June 15, 2004. Due to the fact that
certain authoritative guidance related to the determination of
actuarial equivalency is not yet available, the Company is currently
unable to determine the impact of its implementation of FSP 106-2 and
the Act on its Condensed Consolidated Financial Statements.
NOTE 12: NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the 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 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
12
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
which it has an ownership, contractual or other monetary interest.
The adoption of FIN 46R did not have a material effect on the
Company's Condensed Consolidated Financial Statements.
In March 2004, the Emerging Issues Task Force ("EITF") reached a
consensus in EITF Issue 03-01, 'The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments'. EITF 03-01
provides guidance on other-than-temporary impairment models for
marketable debt and equity securities accounted for under Statement
of Financial Accounting Standards No. 115, 'Accounting for Certain
Investments in Debt and Equity Securities,' (FAS 115) and Statement
of Financial Accounting Standards No. 124, 'Accounting for Certain
Investments Held by Not-for-Profit Organizations,' (FAS 124) and
non-marketable equity securities accounted for under the cost method.
The EITF developed a basic three-step model to evaluate whether an
investment is other-than-temporarily impaired. The provisions of EITF
03-01 will be effective for the Company's third quarter of 2004 and
will be applied prospectively to all current and future investments.
Quantitative and qualitative disclosures for investments accounted
for under FAS 115 are effective for the Company's fiscal year ending
2004. The implementation of this EITF consensus is not expected to
have a material effect on the Company's Condensed Consolidated
Financial Statements.
On May 19, 2004, the FASB issued FASB Staff Position 106-2,
'Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003' (FSP
106-2), which requires measures of the accumulated postretirement
benefit obligation and net periodic postretirement benefit costs to
reflect the effects of the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (the "Act"). FSP 106-2 supersedes FSP
106-1 and is effective for interim or annual reporting periods
beginning after June 15, 2004. Due to the fact that certain
authoritative guidance related to the determination of actuarial
equivalency is not yet available, the Company is currently unable to
determine the impact of its implementation of FSP 106-2 and the Act
on its Condensed Consolidated Financial Statements. See Note 11 for
further discussion of the Act.
NOTE 13: 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 and six months ended June 27, 2004 and June
29, 2003 to conform to the new segment reporting. The changes to the
financial statements for the three and six months ended June 27, 2004
and June 29, 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 2 - Acquisitions/Joint Ventures, Note
5 - Restructuring Programs and Note 7 - 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
13
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
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 reportable 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.
FINANCIAL SEGMENT INFORMATION (Unaudited)
Three Months Ended Six Months Ended
------------------- -----------------------
JUNE 27, JUNE 29, JUNE 27, JUNE 29,
2004 2003 2004 2003
-------- -------- ---------- ----------
Net Sales:
Engineered Carriers
and Paper $342,392 $318,021 $ 655,880 $ 611,870
Consumer Packaging 272,744 254,216 529,149 506,584
Packaging Services 70,303 44,965 123,376 90,296
All Other Sonoco 78,463 67,365 150,913 132,297
-------- -------- ---------- ----------
Consolidated $763,902 $684,567 $1,459,318 $1,341,047
======== ======== ========== ==========
Income before income taxes:
Engineered Carriers and
Paper - Operating Profit $ 34,952 $ 26,815 $ 55,699 $ 51,941
Consumer Packaging -
Operating Profit 17,743 20,939 35,596 42,285
Packaging Services -
Operating Profit 4,932 1,596 10,418 3,797
All Other Sonoco -
Operating Profit 8,553 6,113 15,554 10,970
Restructuring charges (5,768) (7,828) (7,096) (8,965)
Interest, net (10,322) (13,470) (19,070) (25,753)
-------- -------- ---------- ----------
Consolidated $ 50,090 $ 34,165 $ 91,101 $ 74,275
======== ======== ========== ==========
2003 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.
Total identifiable assets, which represent those assets used by each
reportable segment in its operations, for the Packaging Services
segment, were materially impacted by the Company's acquisition of
CorrFlex. At June 27, 2004, total identifiable assets for the
Packaging Services segment were approximately $327,461, compared to
$49,191 at December 31, 2003.
14
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)
NOTE 14: 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 has also made
claims for certain litigation expenses. The Company accrued
approximately $5,500 related to this legal proceeding for the first
quarter of 2004.
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 June 27, 2004 and December 31, 2003, the Company had accrued
$4,286 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
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.
15