SONOCO PRODUCTS CO - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended March 28, 2004

		or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from _______________ to _______________

Commission File No. 0-516

SONOCO PRODUCTS COMPANY


Incorporated under the laws of South Carolina		I.R.S. Employer Identification No. 57-0248420

One North Second Street
Post Office Box 160
Hartsville, South Carolina 29551-0160
Telephone: 843-383-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock at April 30, 2004:

Common stock, no par value: 97,880,898

SONOCO PRODUCTS COMPANY

INDEX


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets — March 28, 2004 (unaudited) and December 31, 2003

Condensed Consolidated Statements of Income — Three Months Ended March 28, 2004 (unaudited) and March 30, 2003 (unaudited)

Condensed Consolidated Statements of Cash Flow — Three Months Ended March 28, 2004 (unaudited) and March 30, 2003 (unaudited)

Notes to Condensed Consolidated Financial Statements

Report of Independent Accountants

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Item 4. Controls and Procedures.

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders.

Item 6. Exhibits and Reports on Form 8-K.

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements.

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 principles.

See accompanying Notes to Condensed Consolidated Financial Statements

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 income 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 taxes		—			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

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

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.

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


		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.

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)


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, $30,934 was related to the Industrial Packaging segment, $8,718 was related to the Consumer Packaging segment and $14,774 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, $1,227 was attributed to the Industrial Packaging segment, and $101 was related to the Consumer Packaging segment. 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 Industrial Packaging 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:


	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

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)


		During the first quarter of 2004, the Company recognized writeoffs of impaired equipment in the Industrial Packaging 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.

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:


	Consumer			Industrial
	Packaging			Packaging
	Segment			Segment		Total
Balance as of January 1, 2004	$	162,205		$	221,749	$	383,954
Foreign currency translation		(1,438	)		276		(1,162	)

Balance as of March 28, 2004	$	160,767		$	222,025	$	382,792

SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands except per share data)
(unaudited)


		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.

		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