þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Incorporated under the laws of South Carolina |
I.R.S. Employer Identification No. 57-0248420 |
PART I. FINANCIAL INFORMATION | ||
Item 1. |
Financial Statements: | |
Condensed Consolidated Balance Sheets June 26, 2005 (unaudited) and December 31, 2004 | ||
Condensed Consolidated Statements of Income Three and Six Months Ended June 26, 2005 (unaudited) and June 27, 2004 | ||
(unaudited) | ||
Condensed Consolidated Statements of Cash Flow Six Months Ended June 26, 2005 (unaudited) and June 27, 2004 | ||
(unaudited) | ||
Notes to Condensed Consolidated Financial Statements | ||
Report of Independent Registered Public Accounting Firm | ||
Item 2. |
Managements 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. |
2
June 26, | ||||||||
2005 | December 31, | |||||||
(unaudited) | 2004* | |||||||
Assets |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 123,192 | $ | 117,725 | ||||
Trade accounts receivable, net of allowances |
429,896 | 390,024 | ||||||
Other receivables |
34,907 | 37,457 | ||||||
Inventories: |
||||||||
Finished and in process |
136,622 | 123,924 | ||||||
Materials and supplies |
206,786 | 191,087 | ||||||
Prepaid expenses and other |
52,872 | 61,895 | ||||||
984,275 | 922,112 | |||||||
Property, Plant and Equipment, Net |
970,808 | 1,007,295 | ||||||
Goodwill |
574,069 | 570,508 | ||||||
Other Intangible Assets |
77,358 | 88,790 | ||||||
Other Assets |
450,572 | 452,614 | ||||||
Total Assets |
$ | 3,057,082 | $ | 3,041,319 | ||||
Liabilities and Shareholders Equity |
||||||||
Current Liabilities |
||||||||
Payable to suppliers |
$ | 270,300 | $ | 274,224 | ||||
Accrued expenses and other |
245,727 | 255,973 | ||||||
Notes payable and current portion of long-term debt |
115,701 | 93,754 | ||||||
Accrued taxes |
2,875 | 15,935 | ||||||
634,603 | 639,886 | |||||||
Long-Term Debt |
815,382 | 813,207 | ||||||
Pension and Other Postretirement Benefits |
146,958 | 148,214 | ||||||
Deferred Income Taxes and Other |
272,317 | 287,133 | ||||||
Commitments and Contingencies |
||||||||
Shareholders Equity |
||||||||
Common stock, no par value |
||||||||
Authorized 300,000 shares
|
||||||||
98,977 and 98,500 shares were issued and outstanding
at June 26, 2005 and December 31, 2004, respectively |
7,175 | 7,175 | ||||||
Capital in excess of stated value |
390,345 | 376,750 | ||||||
Accumulated other comprehensive loss |
(114,500 | ) | (103,155 | ) | ||||
Retained earnings |
904,802 | 872,109 | ||||||
Total Shareholders Equity |
1,187,822 | 1,152,879 | ||||||
Total Liabilities and Shareholders Equity |
$ | 3,057,082 | $ | 3,041,319 | ||||
* | 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. |
3
Three Months Ended | Six Months Ended | |||||||||||||||
June 26, | June 27, | June 26, | June 27, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net sales |
$ | 878,170 | $ | 763,902 | $ | 1,692,608 | $ | 1,459,318 | ||||||||
Cost of sales |
717,426 | 620,753 | 1,383,548 | 1,194,587 | ||||||||||||
Selling, general and administrative expenses |
88,858 | 74,699 | 169,655 | 142,924 | ||||||||||||
Restructuring charges (see Note 3) |
9,143 | 5,768 | 14,185 | 7,096 | ||||||||||||
Income before interest and income taxes |
62,743 | 62,682 | 125,220 | 114,711 | ||||||||||||
Interest expense |
12,584 | 11,518 | 23,645 | 21,441 | ||||||||||||
Interest income |
(1,772 | ) | (1,196 | ) | (3,438 | ) | (2,371 | ) | ||||||||
Income before income taxes |
51,931 | 52,360 | 105,013 | 95,641 | ||||||||||||
Provision for income taxes |
16,301 | 18,315 | 35,480 | 24,260 | ||||||||||||
Income before equity in earnings of affiliates/minority
interest in subsidiaries |
35,630 | 34,045 | 69,533 | 71,381 | ||||||||||||
Equity in earnings of affiliates/minority
interest in subsidiaries |
4,546 | 2,660 | 7,632 | 3,914 | ||||||||||||
Net income |
$ | 40,176 | $ | 36,705 | $ | 77,165 | $ | 75,295 | ||||||||
Average common shares outstanding: |
||||||||||||||||
Basic |
99,245 | 97,890 | 99,114 | 97,754 | ||||||||||||
Diluted |
100,581 | 98,691 | 100,521 | 98,441 | ||||||||||||
Per common share |
||||||||||||||||
Net income: |
||||||||||||||||
Basic |
$ | 0.40 | $ | 0.37 | $ | 0.78 | $ | 0.77 | ||||||||
Diluted |
$ | 0.40 | $ | 0.37 | $ | 0.77 | $ | 0.76 | ||||||||
Cash dividends common |
$ | 0.23 | $ | 0.22 | $ | 0.45 | $ | 0.43 | ||||||||
4
Six Months Ended | ||||||||
June 26, | June 27, | |||||||
2005 | 2004 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net income |
$ | 77,165 | $ | 75,295 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Asset impairment |
5,565 | 1,698 | ||||||
Depreciation, depletion and amortization |
80,237 | 73,280 | ||||||
Equity in earnings of affiliates/minority interest in subsidiaries |
(7,632 | ) | (3,914 | ) | ||||
Cash dividends from affiliated companies |
2,000 | 1,650 | ||||||
Loss on disposition of assets |
1,957 | 2,179 | ||||||
Tax effect of nonqualified stock options |
969 | | ||||||
Deferred taxes |
(12,386 | ) | 1,256 | |||||
Change in assets and liabilities, net of effects from acquisitions,
dispositions, and foreign currency adjustments: |
||||||||
Receivables |
(43,394 | ) | (48,662 | ) | ||||
Inventories |
(30,999 | ) | (29,218 | ) | ||||
Prepaid expenses |
(1,850 | ) | (14,425 | ) | ||||
Payables and taxes |
(15,525 | ) | 864 | |||||
Other assets and liabilities |
12,118 | (5,477 | ) | |||||
Net cash provided by operating activities |
68,225 | 54,526 | ||||||
Cash Flows from Investing Activities: |
||||||||
Purchase of property, plant and equipment |
(59,430 | ) | (53,540 | ) | ||||
Cost of acquisitions, exclusive of cash acquired |
(1,574 | ) | (259,981 | ) | ||||
Proceeds from the sale of assets |
2,847 | 3,315 | ||||||
Net cash used in investing activities |
(58,157 | ) | (310,206 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Proceeds from issuance of debt |
34,503 | 169,141 | ||||||
Principal repayment of debt |
(11,332 | ) | (12,935 | ) | ||||
Net increase in commercial paper borrowings |
(3,000 | ) | 108,000 | |||||
Net increase in bank overdrafts |
10,974 | 157 | ||||||
Cash dividends common |
(44,472 | ) | (41,926 | ) | ||||
Common shares issued |
10,726 | 14,855 | ||||||
Net cash (used in) provided by financing activities |
(2,601 | ) | 237,292 | |||||
Effects of Exchange Rate Changes on Cash |
(2,000 | ) | (1,217 | ) | ||||
Net Increase (Decrease) in Cash and Cash Equivalents |
5,467 | (19,605 | ) | |||||
Cash and cash equivalents at beginning of period |
117,725 | 84,854 | ||||||
Cash and cash equivalents at end of period |
$ | 123,192 | $ | 65,249 | ||||
5
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 state 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 26, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004. | ||
With respect to the unaudited condensed consolidated financial information of the Company for the three and six month periods ended June 26, 2005 and June 27, 2004 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, 2005 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 a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act. | ||
The Financial Accounting Standards Board (FASB) has 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. FSP 106-2 was effective for interim or annual reporting periods beginning after June 15, 2004. The Company adopted and retroactively applied FSP 106-2 as of the effective date. The Company has restated its Condensed Consolidated Statement of Income for the three and six months ended June 27, 2004 to reflect the reduction in net periodic benefit costs, as required by FSP 106-2. The impact of retroactively applying FSP 106-2 was a decrease to Selling, general and administrative expenses of $2,270 and $4,540, respectively, and an increase to Provision for income taxes of $520 and $1,040, respectively, on the Condensed Consolidated Statement of Income for the three and six months ended June 27, 2004. This restatement resulted in an increase in diluted earnings per share of $0.02 and $0.03, respectively, for the three and six months ended June 27, 2004. | ||
Note 2:
|
Earnings Per Share | |
The following table sets forth the computation of basic and diluted earnings per share: |
Three Months Ended | Six Months Ended | |||||||||||||||
June 26, | June 27, | June 26, | June 27, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Numerator: |
||||||||||||||||
Net income |
$ | 40,176 | $ | 36,705 | $ | 77,165 | $ | 75,295 | ||||||||
Denominator: |
||||||||||||||||
Average common shares outstanding |
99,245 | 97,890 | 99,114 | 97,754 | ||||||||||||
Dilutive effect of: |
||||||||||||||||
Employee stock options |
1,114 | 515 | 1,056 | 440 | ||||||||||||
Contingent employee share awards |
222 | 286 | 351 | 247 | ||||||||||||
Dilutive shares outstanding |
100,581 | 98,691 | 100,521 | 98,441 | ||||||||||||
6
Three Months Ended | Six Months Ended | |||||||||||||||
June 26, | June 27, | June 26, | June 27, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Reported net income per common share: |
||||||||||||||||
Basic |
$ | 0.40 | $ | 0.37 | $ | 0.78 | $ | 0.77 | ||||||||
Diluted |
$ | 0.40 | $ | 0.37 | $ | 0.77 | $ | 0.76 | ||||||||
Stock options to purchase approximately 3,256 and 4,487 shares at June 26, 2005 and June 27, 2004, respectively, were not dilutive and, therefore, are excluded from 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 3:
|
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 18 plant closings and has terminated approximately 970 employees. As of June 26, 2005, the Company had incurred cumulative charges, net of adjustments, of $87,275 pretax associated with these activities. Of this amount, $58,622 was related to the Engineered Carriers and Paper segment, $20,320 was related to the Consumer Packaging segment, $333 was related to the Packaging Services segment, $2,693 was related to All Other Sonoco, and $5,307 was associated with Corporate. These restructuring charges, net of adjustments, consisted of severance and termination benefits of $52,193, asset impairment charges of $20,485 and other exit costs of $14,597. The Company expects to recognize an additional cost of approximately $2,864 pretax in the future associated with these activities, which is comprised of approximately $207 in severance and termination benefits, $96 in asset impairment and $2,561 in other exit costs. Of this amount, approximately $2,378 is related to the Engineered Carriers and Paper segment and approximately $486 is related to the Consumer Packaging segment. The Company also expects to announce the closing of up to three additional plants in furtherance of these plans. | ||
During the three months ended June 26, 2005, the Company recognized restructuring charges, net of adjustments, of $9,143 ($6,126 after tax), which are reflected as Restructuring charges on the Companys Condensed Consolidated Statements of Income. Of these charges, $7,938 was attributed to the Engineered Carriers and Paper segment, $1,326 was related to the Consumer Packaging segment and $(121) was related to All Other Sonoco. These restructuring charges, net of adjustments, consisted of severance and termination benefits of $2,434, asset impairment charges of $4,394 and other exit costs of $2,315. | ||
During the three months ended June 27, 2004, the Company recognized restructuring charges, net of adjustments, of $5,768 ($3,716 after tax). 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 six months ended June 26, 2005, the Company recognized restructuring charges, net of adjustments, of $14,185 ($9,772 after tax). Of these charges, $10,240 was attributed to the Engineered Carriers and Paper segment, $4,066 was related to the Consumer Packaging segment and $(121) was related to All Other Sonoco. These restructuring charges, net of adjustments, consisted of severance and termination benefits of $3,871, asset impairment charges of $6,076 and other exit costs of $4,238. | ||
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. |
7
During the three and six months ended June 26, 2005, the Company also recorded non-cash income in the amount of $536 after tax and $1,064 after tax, respectively, in order to reflect Ahlstroms portion of restructuring costs that were charged to expense. This income, which resulted from the expected closure of certain plants that the Company contributed to Sonoco-Alcore S.a.r.l. (Sonoco-Alcore), is included in Equity in earnings of affiliates/minority interest in subsidiaries in the Companys Condensed Consolidated Statements of Income. | ||
The following table sets forth the activity in the restructuring accrual included in Accrued expenses and other on the Companys Condensed Consolidated Balance Sheets. |
Severance | Asset | |||||||||||||||||
and | Impairment/ | Other | ||||||||||||||||
Termination | Disposal | Exit | ||||||||||||||||
Benefits | of Assets | Costs | Total | |||||||||||||||
Beginning liability
December 31, 2004 |
$ | 6,674 | $ | | $ | 5,168 | $ | 11,842 | ||||||||||
New charges |
3,653 | 6,652 | 4,318 | 14,623 | ||||||||||||||
Cash payments |
(5,938 | ) | | (3,588 | ) | (9,526 | ) | |||||||||||
Asset impairment |
| (6,008 | ) | | (6,008 | ) | ||||||||||||
Foreign currency translation |
(308 | ) | (68 | ) | (136 | ) | (512 | ) | ||||||||||
Adjustments
and disposal of assets |
218 | (576 | ) | (80 | ) | (438 | ) | |||||||||||
Ending liability June 26, 2005 |
$ | 4,299 | $ | | $ | 5,682 | $ | 9,981 | ||||||||||
During the six months ended June 26, 2005, the Company recognized writeoffs of impaired equipment and facilities in the Engineered Carriers and Paper segment in the amount of $4,239, in the Consumer Packaging segment in the amount of $1,367 and in All Other Sonoco in the amount of $(41). Also, during the six months ended June 26, 2005, the Company recognized writeoffs of inventory in the Engineered Carriers and Paper segment in the amount of $511. 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 2006, using cash generated from operations. | ||
Note 4:
|
Comprehensive Income | |
The following table reconciles net income to comprehensive income: |
Three Months Ended | Six Months Ended | |||||||||||||||
June 26, | June 27, | June 26, | June 27, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income |
$ | 40,176 | $ | 36,705 | $ | 77,165 | $ | 75,295 | ||||||||
Other comprehensive income: |
||||||||||||||||
Foreign currency translation
adjustments |
(9,200 | ) | (13,948 | ) | (15,765 | ) | (18,172 | ) | ||||||||
Changes in derivative financial
instruments, net of income tax |
261 | 1,069 | 4,420 | 1,944 | ||||||||||||
Comprehensive income |
$ | 31,237 | $ | 23,826 | $ | 65,820 | $ | 59,067 | ||||||||
8
Foreign | Minimum | Accumulated | ||||||||||||||
Currency | Pension | Derivative | Other | |||||||||||||
Translation | Liability | Financial | Comprehensive | |||||||||||||
Adjustment | Adjustment | Instruments | Loss | |||||||||||||
Balance at
December 31, 2004 |
$ | (46,989 | ) | $ | (58,305 | ) | $ | 2,139 | $ | (103,155 | ) | |||||
Year-to-date net change |
(15,765 | ) | ¾ | 4,420 | (11,345 | ) | ||||||||||
Balance at
June 26, 2005 |
$ | (62,754 | ) | $ | (58,305 | ) | $ | 6,559 | $ | (114,500 | ) | |||||
The cumulative tax benefit of the Minimum Pension Liability Adjustments was $26,888 at June 26, 2005 and December 31, 2004. Additionally, the deferred tax liability of Derivative Financial Instruments was $3,716 and $1,211 at June 26, 2005 and December 31, 2004, respectively. The tax effect on Derivative Financial Instruments for the six months ended June 26, 2005 was $(2,505). There was no tax effect on the Minimum Pension Liability Adjustments during the six months ended June 26, 2005. | ||
Note 5:
|
Goodwill and Other Intangible Assets | |
Goodwill | ||
A summary of the changes in goodwill for the six months ended June 26, 2005 is as follows: |
Engineered | ||||||||||||||||||||
Carriers | Consumer | Packaging | ||||||||||||||||||
and Paper | Packaging | Services | All Other | |||||||||||||||||
Segment | Segment | Segment | Sonoco | Total | ||||||||||||||||
Balance as of January 1, 2005 |
$ | 183,671 | $ | 172,630 | $ | 148,268 | $ | 65,939 | $ | 570,508 | ||||||||||
2005 Acquisitions |
469 | ¾ | ¾ | ¾ | 469 | |||||||||||||||
Goodwill purchase price
adjustments |
10,143 | ¾ | 16 | ¾ | 10,159 | |||||||||||||||
Other adjustments |
(1,041 | ) | ¾ | ¾ | ¾ | (1,041 | ) | |||||||||||||
Foreign currency translation |
(4,789 | ) | (1,001 | ) | (86 | ) | (150 | ) | (6,026 | ) | ||||||||||
Balance as of June 26, 2005 |
$ | 188,453 | $ | 171,629 | $ | 148,198 | $ | 65,789 | $ | 574,069 | ||||||||||
The Company continues to adjust the purchase price allocation related to the Sonoco-Alcore business combination, which was consumated during the fourth quarter of 2004. The purchase price allocation is subject to adjustment through October 31, 2005 pending finalization of the valuation of intangible and fixed assets acquired as well as finalization of the plan for restructuring certain aspects of the acquired business. During the first six months of 2005, the Company reduced the amount of the purchase price that had been allocated to customer lists by $6,048 and identified approximately $4,095 of additional purchase price adjustments, which relate primarily to the closure of certain plants contributed by Ahlstrom. | ||
Other Intangible Assets | ||
A summary of other intangible assets as of June 26, 2005 and December 31, 2004 is as follows: |
June 26, 2005 | December 31, 2004 | |||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
Amount | Amortization | Amount | Amortization | |||||||||||||
Patents |
$ | 3,378 | $ | (2,973 | ) | $ | 3,378 | $ | (2,843 | ) | ||||||
Customer lists |
81,305 | (11,316 | ) | 88,791 | (8,251 | ) | ||||||||||
Land use rights |
6,011 | (2,174 | ) | 6,011 | (2,107 | ) | ||||||||||
Supply agreements |
5,261 | (4,539 | ) | 5,261 | (4,444 | ) | ||||||||||
Other |
6,666 | (4,261 | ) | 6,644 | (3,650 | ) | ||||||||||
Total |
$ | 102,621 | $ | (25,263 | ) | $ | 110,085 | $ | (21,295 | ) | ||||||
9
Intangible assets are amortized, usually on a straight-line basis, over their respective useful lives, which generally range from three to fifteen years. Aggregate amortization expense on intangible assets was $1,655 and $1,499 for the three months ended June 26, 2005 and June 27, 2004, respectively, and $3,502 and $2,631 for the six months ended June 26, 2005 and June 27, 2004, respectively. Amortization expense on the other intangible assets identified in the table above is expected to approximate $7,000 in 2005, $6,700 in 2006, $6,400 in 2007, $6,100 in 2008 and $5,500 in 2009. | ||
Note 6:
|
Dividend Declarations | |
On April 20, 2005, the Board of Directors declared a regular quarterly dividend of $0.23 per share. This dividend was paid June 10, 2005 to all shareholders of record as of May 20, 2005. | ||
On July 20, 2005, the Board of Directors declared a regular quarterly dividend of $0.23 per share. This dividend is payable September 9, 2005 to all shareholders of record as of August 19, 2005. | ||
Note 7:
|
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 Companys 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 Companys 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 | Six Months Ended | |||||||||||||||
June 26, | June 27, | June 26, | June 27, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income, as reported |
$ | 40,176 | $ | 36,705 | $ | 77,165 | $ | 75,295 | ||||||||
Add: Stock-based employee
compensation cost, net of related
tax
effects, included in net income, as
reported |
809 | 459 | 1,698 | 858 | ||||||||||||
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all
awards, net of related tax effects |
(842 | ) | (1,591 | ) | (5,896 | ) | (2,834 | ) | ||||||||
Proforma net income |
$ | 40,143 | $ | 35,573 | $ | 72,967 | $ | 73,319 | ||||||||
Earnings per share: |
||||||||||||||||
Basic as reported |
$ | 0.40 | $ | 0.37 | $ | 0.78 | $ | 0.77 | ||||||||
Basic proforma |
$ | 0.40 | $ | 0.36 | $ | 0.74 | $ | 0.75 | ||||||||
Diluted as reported |
$ | 0.40 | $ | 0.37 | $ | 0.77 | $ | 0.76 | ||||||||
Diluted proforma |
$ | 0.40 | $ | 0.36 | $ | 0.73 | $ | 0.74 |
10
over a one-year period. Therefore, under FAS 123, the Company would have recognized approximately one-fourth of its stock-based employee compensation expense in each of the first and second quarters of 2004. The annual expense would not have been materially different between 2005 and 2004. | ||
Note 8:
|
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. The Company froze participation for newly hired employees in its traditional defined benefit pension plan for salaried and non-union hourly U.S. employees effective December 31, 2003. The Company adopted a new defined contribution plan, which covers U.S. employees hired on or after 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 26, | June 27, | June 26, | June 27, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Retirement Plans |
||||||||||||||||
Service cost |
$ | 6,638 | $ | 5,720 | $ | 13,218 | $ | 11,440 | ||||||||
Interest cost |
15,044 | 14,490 | 30,119 | 28,980 | ||||||||||||
Expected return on plan assets |
(18,010 | ) | (16,490 | ) | (35,915 | ) | (32,980 | ) | ||||||||
Amortization of net transition
obligation |
144 | 150 | 299 | 300 | ||||||||||||
Amortization of prior service cost |
368 | 390 | 748 | 780 | ||||||||||||
Amortization of net actuarial loss |
5,725 | 5,290 | 11,430 | 10,580 | ||||||||||||
Net periodic benefit cost |
$ | 9,909 | $ | 9,550 | $ | 19,899 | $ | 19,100 | ||||||||
Retiree Health and Life
Insurance Plans |
||||||||||||||||
Service cost |
$ | 1,021 | $ | 900 | $ | 2,041 | $ | 1,800 | ||||||||
Interest cost |
2,049 | 2,110 | 4,099 | 4,220 | ||||||||||||
Expected return on plan assets |
(723 | ) | (885 | ) | (1,448 | ) | (1,770 | ) | ||||||||
Amortization of prior service cost |
(1,540 | ) | (1,540 | ) | (3,080 | ) | (3,080 | ) | ||||||||
Amortization of net actuarial loss |
1,356 | 1,255 | 2,711 | 2,510 | ||||||||||||
Net periodic benefit cost |
$ | 2,163 | $ | 1,840 | $ | 4,323 | $ | 3,680 | ||||||||
During the six months ended June 26, 2005, the Company made contributions of approximately $3,800 to its retirement and retiree health and life insurance plans. The Company anticipates that it will make additional contributions of approximately $21,000 in 2005. | ||
Note 9:
|
New Accounting Pronouncements | |
The American Jobs Creation Act provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the American Jobs Creation Act also provides for a two-year phase-out of the existing extra-territorial income exclusion (the ETI) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. The Company expects the net effect of the phase out of the ETI and the phase in of this new deduction to result in a decrease in the effective tax rate for fiscal years 2005 and 2006 of approximately 0.2 percentage point based on current earnings levels. In the long term, the Company expects that the new deduction will result in a decrease of the annual effective tax rate by approximately one percentage point based on current earnings levels. The American Jobs Creation Act of 2004 also creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. |
11
In December 2004, the FASB issued FASB Staff Position 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (FSP 109-2). Under the guidance of FSP 109-1, the deduction will be treated as a special deduction as described in Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109). As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on the Companys tax return. | ||
In December 2004, the FASB issued FASB Staff Position 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP 109-2). Under the guidance of FSP 109-2, an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the American Jobs Creation Act of 2004 on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FAS 109. The deduction is subject to a number of limitations. The Company has not yet decided whether, or to what extent, foreign earnings will be repatriated, however, depending on the source countries involved, withholding tax may be incurred on any distribution. Based on its analysis to date, it is possible that the Company may repatriate some amount between $0 to $100,000 with the respective tax liability ranging from $0 to $9,000. The Company expects to be in a position to finalize its assessment by September 30, 2005. | ||
In December 2004, the FASB issued a revision to Statement of Financial Accounting Standards No. 123, Share-Based Payment (FAS 123R), which requires companies to expense the value of employee stock options and similar awards. Under FAS 123R, share-based payment awards result in a cost that will be measured at fair value on the awards grant date, based on the estimated number of awards that are expected to vest. In April 2005, the Securities and Exchange Commission delayed the effective date of FAS 123R to annual periods beginning after June 15, 2005. The Company is planning to use the modified prospective transition method, which does not require restating previous periods results. No additional compensation expense would be recorded for any vested awards outstanding as of the effective date. Although the Company continues to reevaluate the number of stock options to be granted each year, based on its current expectations, the Company expects that earnings per diluted share will decrease by approximately $.04 in 2006 and annually thereafter. | ||
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143 (FIN 47), which requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liabilitys fair value can be reasonably estimated. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company is currently evaluating the effect that the adoption of FIN 47 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact. | ||
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3 (FAS 154). FAS 154 establishes retrospective application as the required method for reporting a change in accounting principle, unless it is impracticable in which the changes should be applied to the latest practicable date presented. FAS 154 also requires that a correction of an error be reported as a prior period adjustment by restating prior period financial statements. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. | ||
Note 10:
|
Financial Segment Information | |
Sonoco reports its results in three segments, Consumer Packaging, Engineered Carriers and Paper and Packaging Services. Certain smaller operations are reported as All Other Sonoco. | ||
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. |
12
The Engineered Carriers and Paper segment includes the following products: high-performance paper and composite engineered carriers; paperboard; fiber-based construction tubes and forms; and recovered paper. | ||
The Packaging Services segment provides the following products and services: point-of-purchase displays; folding cartons; packaging fulfillment; product handling; brand management; and supply chain management. | ||
All Other Sonoco represents the activities and businesses of the Companys 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, intersegment sales and operating profit for the Companys three reportable segments and All Other Sonoco. Operating profit at the segmental level is defined as the segments portion of Income before income taxes on the Companys Condensed Consolidated Statements of Income adjusted for restructuring charges and net interest expense. Because segmental results are computed based on the manner in which the Companys management reviews financial results, restructuring and net interest charges are not considered in the calculation of operating profit. |
Three Months Ended | Six Months Ended | |||||||||||||||
June 26, | June 27, | June 26, | June 27, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net Sales: |
||||||||||||||||
Consumer Packaging |
$ | 312,369 | $ | 272,744 | $ | 589,224 | $ | 529,149 | ||||||||
Engineered Carriers and Paper |
367,926 | 342,392 | 721,081 | 655,880 | ||||||||||||
Packaging Services |
111,639 | 70,303 | 216,377 | 123,376 | ||||||||||||
All Other Sonoco |
86,236 | 78,463 | 165,926 | 150,913 | ||||||||||||
Consolidated |
$ | 878,170 | $ | 763,902 | $ | 1,692,608 | $ | 1,459,318 | ||||||||
Intersegment Sales: |
||||||||||||||||
Consumer Packaging |
$ | 685 | $ | 767 | $ | 1,842 | $ | 1,636 | ||||||||
Engineered Carriers and Paper |
21,129 | 19,852 | 40,191 | 38,650 | ||||||||||||
Packaging Services |
60 | 54 | 113 | 120 | ||||||||||||
All Other Sonoco |
9,277 | 6,954 | 17,126 | 14,290 | ||||||||||||
Consolidated |
$ | 31,151 | $ | 27,627 | $ | 59,272 | $ | 54,696 | ||||||||
Income before income taxes: |
||||||||||||||||
Consumer Packaging Operating
Profit |
$ | 24,541 | $ | 18,696 | $ | 46,873 | $ | 37,502 | ||||||||
Engineered Carriers and Paper
Operating Profit |
26,521 | 35,905 | 51,757 | 57,606 | ||||||||||||
Packaging Services
Operating Profit |
10,738 | 5,023 | 21,337 | 10,600 | ||||||||||||
All Other Sonoco Operating
Profit |
10,086 | 8,826 | 19,438 | 16,099 | ||||||||||||
Restructuring charges |
(9,143 | ) | (5,768 | ) | (14,185 | ) | (7,096 | ) | ||||||||
Interest, net |
(10,812 | ) | (10,322 | ) | (20,207 | ) | (19,070 | ) | ||||||||
Consolidated |
$ | 51,931 | $ | 52,360 | $ | 105,013 | $ | 95,641 | ||||||||
13
Note 11:
|
Income Taxes | |
The effective tax rate for the quarter ended June 26, 2005 was 31.4%, compared to the expected rate of 35.4%. This decrease is primarily due to a tax benefit in the amount of approximately $2,000 from the recognition of deferred tax assets in Mexico for which a valuation allowance is no longer required. | ||
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 managements opinion that such costs, when finally determined, will not have an adverse material effect on the consolidated financial position of the Company. | ||
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 Companys largest potential environmental liabilities. All of the sites are also the responsibility of other parties. The Companys liability, if any, is shared with such other parties, but the Companys 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, the ultimate cost to the Company with respect to such sites cannot be determined. As of June 26, 2005 and December 31, 2004, the Company had accrued $4,694 and $4,440, respectively, related to environmental contingencies. Actual costs to be incurred for these environmental matters in future periods will likely vary from current estimates because of the inherent uncertainties in evaluating environmental exposures. | ||
Income Taxes | ||
The Company is subject to ongoing examinations by tax authorities of the jurisdictions in which it operates. The Company regularly assesses the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income and other taxes. The Company believes that adequate provision has been made for tax adjustments that are probable as a result of any examination. While the status of the Companys ongoing tax examinations is constantly changing due to new tax law developments, statute expirations and other factors, the Company does not expect the outcome of any tax examination to have a material effect on its consolidated financial position, results of operations or cash flows. |
14
/s/ PricewaterhouseCoopers LLP | ||||
15
($ in millions) | ||||
Volume |
$ | 29 | ||
Selling price |
15 | |||
Currency exchange rate |
14 | |||
Acquisitions |
56 | |||
Total sales increase |
$ | 114 | ||
16
17
($ in millions) | ||||
Volume |
$ | 36 | ||
Selling price |
38 | |||
Currency exchange rate |
28 | |||
Acquisitions |
132 | |||
Total sales increase |
$ | 234 | ||
18
19
20
21
22
Exhibit 15
|
Letter re unaudited interim financial information | |
Exhibit 31
|
Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and 17 C.F.R. 240.13a-14(a) | |
Exhibit 32
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 17 C.F.R. 240.13a-14(b) |
23
SONOCO PRODUCTS COMPANY (Registrant) |
||||
Date: July 28, 2005 | By: | /s/ Charles J. Hupfer | ||
Charles J. Hupfer | ||||
Senior Vice President and Chief Financial Officer | ||||
By: | /s/ Barry L. Saunders | |||
Barry L. Saunders | ||||
Staff Vice President and Chief Accounting Officer |
24
Exhibit | ||
Number | Description | |
15
|
Letter re: unaudited interim financial information | |
31
|
Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and 17 C.F.R. 240.13a-14(a) | |
32
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 17 C.F.R. 240.13a-14(b) |
25
1. | I have reviewed this quarterly report on Form 10-Q of Sonoco Products Company; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: July 28, 2005 | By: | /s/ Harris E. DeLoach, Jr. | ||
Harris E. DeLoach, Jr. | ||||
Chief Executive Officer |
1. | I have reviewed this quarterly report on Form 10-Q of Sonoco Products Company; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: July 28, 2005 | By: | /s/ Charles J. Hupfer | ||
Charles J. Hupfer | ||||
Senior Vice President and Chief Financial Officer |
/s/ Harris E. DeLoach, Jr. | ||||
Harris E. DeLoach, Jr. | ||||
Chief Executive Officer | ||||
/s/ Charles J. Hupfer | ||||
Charles J. Hupfer | ||||
Chief Financial Officer |