EX-99.2 6 g91150exv99w2.txt EX-99.2 EXHIBIT 99.2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Directors of Sonoco Products Company: We have reviewed the accompanying condensed consolidated balance sheet of Sonoco Products Company as of March 28, 2004, and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 28, 2004, and March 30, 2003. These interim financial statements are the responsibility of the Company's management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2003, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended (not present herein), and in our report dated January 28, 2004, except for Note 17 as to which the date is September 30, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/PricewaterhouseCoopers LLP ----------------------------- PricewaterhouseCoopers LLP Charlotte, North Carolina May 4, 2004, except for Note 11 as to which the date is September 30, 2004 SONOCO PRODUCTS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars and shares in thousands)
MARCH 28, 2004 DECEMBER 31, (UNAUDITED) 2003* ----------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 80,398 $ 84,854 Trade accounts receivable, net of allowances 355,859 320,676 Other receivables 35,482 33,066 Inventories Finished and in process 113,186 109,080 Materials and supplies 158,352 143,116 Prepaid expenses and other 71,921 64,473 ----------- ----------- 815,198 755,265 PROPERTY, PLANT AND EQUIPMENT, NET 911,470 923,569 GOODWILL 382,792 383,954 OTHER ASSETS 456,029 457,845 ----------- ----------- Total Assets $ 2,565,489 $ 2,520,633 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Payable to suppliers $ 262,061 $ 239,300 Accrued expenses and other 209,738 211,342 Notes payable and current portion of long-term debt 199,396 201,367 Taxes on income 18,588 27,585 ----------- ----------- 689,783 679,594 LONG-TERM DEBT 469,513 473,220 PENSION AND OTHER POSTRETIREMENT BENEFITS 143,588 137,494 DEFERRED INCOME TAXES AND OTHER 223,828 216,165 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, no par value Authorized 300,000 shares 97,783 and 97,217 shares outstanding, of which 97,493 and 96,969 were issued at March 28, 2004 and December 31, 2003, respectively 7,175 7,175 Capital in excess of stated value 348,718 337,136 Accumulated other comprehensive loss (139,440) (136,091) Retained earnings 822,324 805,940 ----------- ----------- Total Shareholders' Equity 1,038,777 1,014,160 ----------- ----------- Total Liabilities and Shareholders' Equity $ 2,565,489 $ 2,520,633 =========== ===========
* The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principals. See accompanying Notes to Condensed Consolidated Financial Statements 1 SONOCO PRODUCTS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Dollars and shares in thousands except per share data)
THREE MONTHS ENDED --------------------- MARCH 28, MARCH 30, 2004 2003 --------- --------- Net sales $ 695,416 $ 656,480 Cost of sales 573,834 532,565 Selling, general and administrative expenses 70,495 70,385 Restructuring charges (see Note 4) 1,328 1,137 --------- --------- Income before interest and taxes 49,759 52,393 Interest expense 9,923 12,730 Interest income (1,175) (447) --------- --------- Income before income taxes 41,011 40,110 Provision for income taxes 5,425 14,440 --------- --------- Income before equity in earnings of affiliates/minority interest in subsidiaries 35,586 25,670 Equity in earnings of affiliates/minority interest in subsidiaries 1,254 1,643 --------- --------- Income from continuing operations 36,840 27,313 Income from discontinued operations, net of income tax -- 1,685 --------- --------- Net income $ 36,840 $ 28,998 ========= ========= Average common shares outstanding: Basic 97,608 96,672 Diluted 98,181 96,958 --------- --------- Per common share Net income: Basic $ 0.38 $ 0.30 Diluted $ 0.38 $ 0.30 Cash dividends - common $ 0.21 $ 0.21 ========= =========
See accompanying Notes to Condensed Consolidated Financial Statements 2 SONOCO PRODUCTS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands)
THREE MONTHS ENDED --------------------- MARCH 28, MARCH 30, 2004 2003 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 36,840 $ 28,998 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 36,970 39,258 Equity in earnings of affiliates/minority interest in subsidiaries (1,254) (1,643) Cash dividends from affiliated companies 950 300 Loss (gain) on disposition of assets 51 (113) Deferred taxes (64) 4,355 Change in assets and liabilities, net of effects from acquisitions, dispositions and foreign currency adjustments: Receivables (37,629) (39,671) Inventories (19,798) (13,801) Prepaid expenses (7,724) (3,261) Payables and taxes 6,563 18,586 Other assets and liabilities 8,172 7,647 --------- --------- Net cash provided by operating activities 23,077 40,655 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (24,908) (25,425) Proceeds from the sale of assets 991 448 --------- --------- Net cash used in investing activities (23,917) (24,977) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt 10,577 6,431 Principal repayment of debt (10,274) (3,200) Net increase in commercial paper borrowings -- 1,500 Net increase in bank overdrafts 5,419 11,077 Cash dividends - common (20,457) (20,256) Common shares issued 10,963 1,049 --------- --------- Net cash used in financing activities (3,772) (3,399) EFFECTS OF EXCHANGE RATE CHANGES ON CASH 156 1 --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,456) 12,280 Cash and cash equivalents at beginning of period 84,854 31,405 Cash and cash equivalents at end of period $ 80,398 $ 43,685 ========= =========
See accompanying Notes to Condensed Consolidated Financial Statements 3 SONOCO PRODUCTS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands except per share data) (unaudited) NOTE 1: BASIS OF INTERIM PRESENTATION In the opinion of the management of Sonoco Products Company (the "Company"), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows for the interim periods reported herein. Operating results for the three months ended March 28, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report for the fiscal year ended December 31, 2003. With respect to the unaudited condensed consolidated financial information of the Company for the three month periods ended March 28, 2004 and March 30, 2003 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated May 4, 2004 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act. Beginning in the second quarter of 2003, the Company reclassified shipping and handling costs related to third-party shipments from net sales to cost of sales on the Condensed Consolidated Statements of Income in all periods presented. The Company's Condensed Consolidated Statement of Income for the first quarter of 2003 has been restated to reflect this reclassification. Because this reclassification increased net sales and cost of sales by the same amount, it did not affect previously reported net income. During the fourth quarter of 2003, the Company completed the sale of its High Density Film business to Hilex Poly Co., LLC, Los Angeles, California. Operating results of this business have been presented for the first quarter of 2003 as "Income from discontinued operations, net of income taxes" in the Company's Condensed Consolidated Statements of Income. Items included in the Notes to Condensed Consolidated Financial Statements that relate to the Consolidated Statement of Income for the first quarter of 2003 have been restated to reflect the reclassification of the Company's High Density Film business as discontinued operations. NOTE 2: DISCONTINUED OPERATIONS The financial statements and accompanying notes for prior periods have been restated to report the revenues and expenses of the components of the Company that were disposed of separately as discontinued operations. Income from discontinued operations, net of income taxes for the first quarter of 2003 represents the results of operations of the Company's High Density Film business, which was sold in December 2003. 4 SONOCO PRODUCTS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands except per share data) (unaudited) The following table sets forth the operating results for the business unit, which was previously reported in the Company's Consumer Packaging segment:
Three Months Ended March 30, 2003 ------------------ Net sales $ 44,707 =========== Income before income taxes $ 2,632 Provision for income taxes 947 ----------- Income from discontinued operations, net of income taxes $ 1,685 =========== Income from discontinued operations, net of income taxes - per diluted share $ 0.02
No interest expense or income was allocated to this business unit. The Company has no material continuing involvement in the management or operations of the divested business. NOTE 3: EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended ------------------------------ MARCH 28, 2004 MARCH 30, 2003 -------------- -------------- Numerator: Income from continuing operations $ 36,840 $ 27,313 Income from discontinued operations, net of income taxes -- 1,685 -------------- -------------- Net income $ 36,840 $ 28,998 ============== ============== Denominator: Average common shares outstanding 97,608 96,672 Dilutive effect of: Employee stock options 365 125 Contingent employee share awards 208 161 -------------- -------------- Dilutive shares outstanding 98,181 96,958 ============== ============== Basic earnings per common share: Income from continuing operations $ 0.38 $ 0.28 Income from discontinued operations, net of income taxes -- 0.02 -------------- -------------- Net income $ 0.38 $ 0.30 ============== ============== Diluted earnings per common share: Income from continuing operations $ 0.38 $ 0.28 Income from discontinued operations, net of income taxes -- 0.02 -------------- -------------- Net income $ 0.38 $ 0.30 ============== ==============
5 SONOCO PRODUCTS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands except per share data) (unaudited) Stock options to purchase approximately 5,378 and 8,657 shares at March 28, 2004 and March 30, 2003, respectively, were not dilutive and, therefore, are not included in the computations of diluted income per common share amounts. No adjustments were made to reported net income in the computations of earnings per share. NOTE 4: RESTRUCTURING PROGRAMS In August 2003, the Company announced general plans to reduce its overall cost structure by $54,000 pretax by realigning and centralizing a number of staff functions and eliminating excess plant capacity. Pursuant to these plans, the Company has initiated or completed 13 plant closings and has terminated approximately 740 employees. As of March 28, 2004, the Company had incurred cumulative charges, net of adjustments, of approximately $54,426 pretax associated with these activities. Of this amount, $34,636 was related to the Engineered Carriers and Paper segment, $10,239 was related to the Consumer Packaging segment, $333 was attributed to the Packaging Services segment, $2,146 was related to All Other Sonoco, and $7,072 was associated with Corporate. These restructuring charges, net of adjustments, consisted of severance and termination benefits of $41,446, asset impairment charges of $8,604 and other exit costs of $4,376. The Company expects to recognize an additional cost of approximately $9,500 pretax in the future associated with these activities. The Company also expects to announce throughout the remainder of 2004 the closing of an additional five to ten plants in furtherance of these plans. The costs associated with these future plant closings have not yet been determined. During the first quarter of 2004, the Company recognized restructuring charges, net of adjustments, of $1,328 ($861 after tax), which are reflected as "Restructuring charges" on the Company's Condensed Consolidated Statements of Income. Of these charges, $877 was attributed to the Engineered Carriers and Paper segment, $101 was related to the Consumer Packaging segment and $350 was associated with All Other Sonoco. These restructuring charges, net of adjustments, consisted of severance and termination benefits of $575, asset impairment charges of $223 and other exit costs of $530. During the first quarter of 2003, the Company recognized restructuring charges, net of adjustments, of $1,137 ($728 after tax) related to previously announced restructuring plans that were completed prior to December 31, 2003. These charges were primarily associated with severance costs in Europe in the Engineered Carriers and Paper segment as well as lease termination and restoration costs associated with prior plant closings in the Consumer Packaging segment. Additionally, the Company's High Density Film business, which was divested in December 2003, incurred restructuring charges of approximately $200 ($128 after tax) in the first quarter of 2003. The following table sets forth the activity in the restructuring accrual included in "Accrued expenses and other" on the Company's Condensed Consolidated Balance Sheets. Restructuring charges are included in "Restructuring charges" on the Company's Condensed Consolidated Statements of Income. In accordance with the agreement of sale for the High Density Film business, the liability of that business associated with the restructuring has been retained by the Company and is, therefore, included in the table below: 6 SONOCO PRODUCTS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands except per share data) (unaudited)
SEVERANCE AND OTHER TERMINATION ASSET EXIT BENEFITS IMPAIRMENT COSTS TOTAL ----------- ---------- -------- ------- Beginning liability December 31, 2003 $ 14,708 $ -- $ 6,386 $21,094 New charges 759 246 634 1,639 Cash payments (6,966) -- (1,730) (8,696) Asset impairment -- (223) -- (223) Adjustments (184) (23) (104) (311) ----------- ---------- -------- ------- Ending liability March 28, 2004 $ 8,317 $ -- $ 5,186 $13,503 =========== ========== ======== =======
During the first quarter of 2004, the Company recognized writeoffs of impaired equipment in the Engineered Carriers and Paper segment in the amount of $223. Other exit costs are primarily associated with lease termination and other miscellaneous plant closing costs. The Company expects to pay the remaining restructuring costs, with the exception of ongoing pension subsidies and certain building lease termination expenses, by the end of the first quarter of 2005, using cash generated from operations. NOTE 5: COMPREHENSIVE INCOME The following table reconciles net income to comprehensive income:
Three Months Ended ------------------------------ MARCH 28, 2004 MARCH 30, 2003 -------------- -------------- Net income $ 36,840 $ 28,998 Other comprehensive income: Foreign currency translation adjustments (4,224) 14,097 Other adjustments, net of income tax 875 1,194 -------------- -------------- Comprehensive income $ 33,491 $ 44,289 ============== ==============
The following table summarizes the components of accumulated other comprehensive income and the changes in accumulated other comprehensive income, net of tax as applicable, for the quarter ended March 28, 2004:
FOREIGN MINIMUM ACCUMULATED CURRENCY PENSION OTHER TRANSLATION LIABILITY COMPREHENSIVE ADJUSTMENT ADJUSTMENT OTHER LOSS ----------- ---------- ------- ------------- Balance at December 31, 2003 $ (83,906) $ (53,826) $ 1,641 $ (136,091) Year-to-date change (4,224) -- 875 (3,349) ----------- ---------- ------- ------------- Balance at March 28, 2004 $ (88,130) $ (53,826) $ 2,516 $ (139,440) =========== ========== ======= =============
The cumulative tax benefit of the Minimum Pension Liability Adjustments was $25,312 at March 28, 2004 and December 31, 2003. Additionally, the deferred tax liability of Other items was $1,254 and $940 at March 28, 2004 and December 31, 2003, respectively. 7 SONOCO PRODUCTS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands except per share data) (unaudited) NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill A summary of the changes in goodwill for the quarter ended March 28, 2004 is as follows:
ENGINEERED CARRIERS CONSUMER PACKAGING AND PAPER PACKAGING SERVICES ALL OTHER SEGMENT SEGMENT SEGMENT SONOCO TOTAL ----------- ---------- --------- --------- ---------- Balance as of January 1, 2004 $ 151,469 $ 165,376 $ 1,263 $ 65,846 $ 383,954 Foreign currency translation (102) (1,115) 64 (9) (1,162) ----------- ---------- --------- --------- ---------- Balance as of March 28, 2004 $ 151,367 $ 164,261 $ 1,327 $ 65,837 $ 382,792 =========== ========== ========= ========= ==========
Other Intangible Assets A summary of other intangible assets as of March 28, 2004 and December 31, 2003 is as follows: March 28, 2004 December 31, 2003 ----------------------- ---------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION --------- ------------ -------- ------------ Patents $ 3,268 $ (2,626) $ 3,268 $ (2,564) Customer lists 38,223 (5,127) 38,223 (4,630) Land use rights 5,873 (1,999) 5,873 (1,963) Supply agreements 5,261 (4,030) 5,261 (3,715) Other 6,404 (2,978) 6,404 (2,756) --------- ------------ -------- ------------ Total $ 59,029 $ (16,760) $ 59,029 $ (15,628) ========= ============ ======== ============ Aggregate amortization expense on intangible assets was $1,132 and $971 for the three months ended March 28, 2004 and March 30, 2003, respectively. Amortization expense on the other intangible assets identified in the table above is expected to approximate $3,800 in 2004, $3,800 in 2005, $3,500 in 2006, $3,200 in 2007 and $3,000 in 2008. Other intangible assets are included in "Other Assets" on the Company's Condensed Consolidated Balance Sheets. NOTE 7: DIVIDEND DECLARATIONS On February 4, 2004, the Board of Directors declared a regular quarterly dividend of $0.21 per share. This dividend was paid March 10, 2004 to all shareholders of record as of February 20, 2004. On April 21, 2004, the Board of Directors declared a regular quarterly dividend of $0.22 per share, payable June 10, 2004 to all shareholders of record as of May 21, 2004. NOTE 8: STOCK PLANS As permitted by Statement of Financial Accounting Standards No. 123, 'Accounting for Stock-Based Compensation' (FAS 123), the Company has elected to account for its stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, 'Accounting for Stock Issued to Employees,' and its related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Compensation cost for performance stock options is recorded based on the quoted market price of the Company's stock at the end of the period. 8 SONOCO PRODUCTS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands except per share data) (unaudited) The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation.
Three Months Ended ------------------------------- MARCH 28, 2004 MARCH 30, 2003 -------------- -------------- Net income, as reported $ 36,840 $ 28,998 Add: Stock-based employee compensation cost, net of related tax effects, included in net income, as reported 399 224 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1,243) (1,425) -------------- -------------- Proforma net income $ 35,996 $ 27,797 ============== ============== Earnings per share: Basic - as reported $ 0.38 $ 0.30 Basic - proforma $ 0.37 $ 0.29 Diluted - as reported $ 0.38 $ 0.30 Diluted - proforma $ 0.37 $ 0.29
NOTE 9: EMPLOYEE BENEFIT PLANS The Company provides non-contributory defined benefit pension plans for substantially all of its United States and certain of its Mexico employees, as well as postretirement healthcare and life insurance benefits to the majority of its retirees and their eligible dependents in the United States and Canada. Effective January 1, 2004, the Company established a defined contribution plan for all new U.S. employees. The defined benefit plans discussed above remain in place for all U.S. employees whose employment with the Company began prior to January 1, 2004. The Company also sponsors contributory pension plans covering the majority of its employees in the United Kingdom and Canada. The components of net periodic benefit cost include the following: Three Months Ended ------------------------------- MARCH 28, 2004 MARCH 30, 2003 -------------- -------------- RETIREMENT PLANS Service cost $ 5,925 $ 5,052 Interest cost 14,267 12,942 Expected return on plan assets (16,490) (13,823) Amortization of net transition (asset) obligation 150 144 Amortization of prior service cost 363 416 Amortization of net actuarial (gain) loss 5,242 5,556 -------------- -------------- Net periodic benefit cost $ 9,457 $ 10,287 ============== ============== 9 SONOCO PRODUCTS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands except per share data) (unaudited) RETIREE HEALTH AND LIFE INSURANCE PLANS Service cost $ 1,281 $ 1,090 Interest cost 2,932 2,877 Expected return on plan assets (880) (913) Amortization of prior service cost (1,529) (1,645) Amortization of net actuarial loss 2,448 2,257 -------------- -------------- Net periodic benefit cost $ 4,252 $ 3,666 ============== ==============
During the three months ended March 28, 2004, the Company made voluntary contributions of $7,900 to its retirement and retiree health and life insurance plans. The Company anticipates that it will make additional voluntary contributions of approximately $15,000 to these plans in 2004. On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act"). The Act expands Medicare, primarily by adding a prescription drug benefit for Medicare-eligibles starting in 2006. The Act provides employers currently sponsoring prescription drug programs for Medicare-eligibles with a range of options for coordinating with the new government-sponsored program to potentially reduce program cost. These options include supplementing the government program on a secondary payor basis or accepting a direct subsidy from the government to support a portion of the cost of the employer's program. Paragraph 40 of Statement of Financial Accounting Standards No. 106, 'Employers' Accounting for Postretirement Benefits Other Than Pensions' (FAS 106), requires that presently enacted changes in law impacting employer-sponsored retiree health care programs which take effect in future periods be considered in current-period measurements for benefits expected to be provided in those future periods. Therefore, under FAS 106 guidance, measures of plan liabilities and annual expense on or after the date of enactment should reflect the effects of the Act. Pursuant to guidance under FASB Staff Position 106-1, however, the Company has chosen to defer recognition of the potential effects of the Act in these disclosures. Therefore, the retiree health obligations and costs reported in these financial statements or accompanying notes do not yet reflect any potential impact of the Act. Specific, authoritative guidance on the accounting for the government subsidy is pending, and that guidance, when issued, could require the Company to change previously reported information. NOTE 10: NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, 'Consolidation of Variable Interest Entities - an interpretation of ARB 51' (FIN 46). FIN 46 addresses when a company should include in its financial statements the assets, liabilities and activities of a variable interest entity. It defines variable interest entities as those entities with a business purpose that either do not have equity investors with voting rights in proportion to such investors' equity, or have investors that do not provide financial resources in proportion to such investors' equity for the entity to support its activities and have equity investors that lack a controlling financial interest. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. FIN 46 consolidation requirements apply immediately to variable interest entities created or obtained after January 31, 2003, but this had no impact on the Company's 2003 financial statements. A modification to FIN 46 (FIN 46R) was released on December 17, 2003. FIN 46R delayed the 10 SONOCO PRODUCTS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands except per share data) (unaudited) effective date for variable interest entities created before February 1, 2003, with the exception of special-purpose entities, until the first fiscal year or interim period after December 15, 2003. As of January 1, 2004, the Company adopted FIN 46R. In conjunction with this adoption, the Company performed an evaluation of variable interest entities in which it has an ownership, contractual or other monetary interest and adopted FIN 46R. The adoption of FIN 46R did not have a material effect on the Company's Condensed Consolidated Financial Statements. NOTE 11: FINANCIAL SEGMENT INFORMATION The Company has determined that it will change its reportable segments on a prospective basis beginning with the third quarter of 2004. Accordingly, the Company has changed its disclosure of segment information for the three months ended March 28, 2004 and March 30, 2003 to conform to the new segment reporting. The changes to the financial statements for the three months ended March 28, 2004 and March 30, 2003 relate solely to the presentation of segment specific disclosures and had no impact on the condensed consolidated balance sheets, statements of income or statements of cash flows. Other financial statement footnotes affected by this change in segment reporting include Note 4 - Restructuring Programs and Note 6 - Goodwill and Intangible Assets. Previously, the Company reported its results in two segments, Industrial Packaging and Consumer Packaging. As presented below, the Company will now report results in three segments, Engineered Carriers and Paper, Consumer Packaging and Packaging Services. Sonoco will report certain smaller operations as All Other Sonoco. The Engineered Carriers and Paper segment includes the following products: high-performance paper and composite engineered carriers; paperboard; and, fiber-based construction tubes and forms. The Consumer Packaging segment includes the following products: round and shaped rigid packaging, both composite and plastic; printed flexible packaging; and, metal and plastic ends and closures. The Packaging Services segment provides the following services: packaging fulfillment; product handling; brand management; and, supply chain management. The Packaging Services segment also includes the production of folding cartons. All Other Sonoco represents the activities and businesses of the Company's consolidated subsidiaries that do not meet the aggregation criteria outlined in Statement of Financial Accounting Standards No. 131, 'Disclosures about Segments of an Enterprise and Related Information' (FAS 131) and therefore cannot be combined with other operating segments into a reportable segment. All Other Sonoco includes the following products: wooden, metal and composite reels for wire and cable packaging; molded plastics; custom designed protective packaging; adhesives; machinery manufacturing; and specialty packaging. The following table sets forth net sales and operating profit for the Company's financial segments. Operating profit at the segmental level is defined as "Income before interest and income taxes" on the Company's Condensed Consolidated Statements of Income adjusted for restructuring charges, which are not allocated to the financial segments. 11 SONOCO PRODUCTS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands except per share data) (unaudited) FINANCIAL SEGMENT INFORMATION (Unaudited)
Three Months Ended ------------------------------- MARCH 28, 2004 MARCH 30, 2003 -------------- -------------- Net Sales: Engineered Carriers and Paper $ 313,488 $ 293,849 Consumer Packaging 256,405 252,368 Packaging Services 53,073 45,331 All Other Sonoco 72,450 64,932 -------------- -------------- Consolidated $ 695,416 $ 656,480 ============== ============== Income before income taxes: Engineered Carriers and Paper - Operating Profit $ 20,747 $ 25,126 Consumer Packaging - Operating Profit 17,853 21,346 Packaging Services - Operating Profit 5,486 2,201 All Other Sonoco - Operating Profit 7,001 4,857 Restructuring charges (1,328) (1,137) Interest, net (8,748) (12,283) -------------- -------------- Consolidated $ 41,011 $ 40,110 ============== ==============
Prior year information has been restated to exclude the impact of the Company's High Density Film business, which has been reclassified as discontinued operations on the Condensed Consolidated Statements of Income. NOTE 12: COMMITMENTS AND CONTINGENCIES The Company is a party to various legal proceedings incidental to its business and is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which it operates. As is the case with other companies in similar industries, the Company faces exposure from actual or potential claims and legal proceedings. The Company cannot currently determine the final outcome of the proceedings described below or the ultimate amount of potential losses. Pursuant to Statement of Financial Accounting Standards No. 5, 'Accounting for Contingencies' (FAS 5), management records accruals for estimated losses at the time that information becomes available indicating that losses are probable and that the amounts are reasonably estimable. Accrued amounts are not discounted. Although the level of future expenditures for legal and environmental matters is impossible to determine with any degree of probability, it is management's opinion that such costs, when finally determined, will not have an adverse material effect on the consolidated financial position of the Company. Sonoco-U.S. Paper Lawsuit On April 30, 2004, the Company announced that the U.S. District Court for the Southern District of Ohio had entered a judgment against its subsidiary, Sonoco-U.S. Paper, and the Company in the amount of $3,750 in a case involving alleged trade secrets of the plaintiff. Although not covered by the judgment, the plaintiff may also make claim for certain litigation expenses. While the Company is currently considering what legal steps to take with respect to this judgment, during the first quarter of 2004, it accrued approximately $5,500 related to this legal proceeding. Environmental Matters The Company has been named as a potentially responsible party at several environmentally contaminated sites not owned by the Company. These regulatory actions and a small number of private party lawsuits represent the Company's largest potential environmental liabilities. As of March 28, 2004 and December 31, 2003, the Company had accrued $3,909 and $3,967, respectively, related to environmental contingencies. Due to the complexity of determining clean-up costs associated with the sites, a reliable estimate of the ultimate cost to the Company cannot be determined. Furthermore, all of the sites are also the responsibility of other parties. The Company's 12 SONOCO PRODUCTS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands except per share data) (unaudited) liability, if any, is shared with such other parties, but the Company's share has not been finally determined in most cases. In some cases, the Company has cost-sharing agreements with other potentially responsible parties with respect to a particular site. Such agreements relate to the sharing of legal defense costs or clean-up costs, or both. The Company has assumed, for purposes of estimating amounts to be accrued, that the other parties to such cost-sharing agreements will perform as agreed. It appears that final resolution of some of the sites is years away. Accordingly, a reliable estimate of the ultimate cost to the Company with respect to such sites cannot be determined. NOTE 13: SUBSEQUENT EVENTS European Joint Venture On April 19, 2004, the Company announced that it had signed a definitive agreement with Ahlstrom Corporation, Helsinki, Finland ("Ahlstrom") to combine each of the companies' respective European paper-based tube/core and coreboard operations into a joint venture that will operate under the name Sonoco-Alcore S.a.r.l. The Company, which will contribute to the joint venture ownership positions in 25 tube and core plants and six paper mills, will hold a 64.5% interest in the joint venture. Ahlstrom, a leader in high-performance fiber-based materials serving niche markets worldwide, will contribute 15 tube and core plants and one paper mill to the joint venture and will hold a 35.5% interest in it. Total sales in 2003 for the properties being contributed by the Company and Ahlstrom to this joint venture were approximately $235,000 and $102,000, respectively. This joint venture is expected to be finalized by the end of the third quarter of 2004. Following an initial two and one-half year standstill period and subject to certain conditions, Ahlstrom will have the right to require (through a put option arrangement) the Company to buy the shares not owned by the Company at any time over the next three and one-half years. During the seventh year, the Company will have the right to purchase the shares (through a call option arrangement). The price of the share purchase will be determined using a formula related to an earnings multiple at the time such shares might be put or called. In a separate but related transaction, the Company has signed an agreement to purchase 100% of Ahlstrom's Chinese paper tube/core operation in Shouguang to serve the rapidly growing Chinese market for paper mill cores. This operation will not be part of the joint venture. Acquisition of CorrFlex Graphics On April 29, 2004, the Company announced that it had signed a definitive agreement to acquire CorrFlex Graphics, LLC ("CorrFlex") for an all-cash purchase price of approximately $250,000. CorrFlex, which is privately held, is one of the nation's largest point-of-purchase display companies. The acquisition is expected to be moderately accretive in the first year and is expected to generate sales on an annualized basis of approximately $200,000 for 2004. The acquisition will be known as Sonoco CorrFlex and is expected to close by the end of the second quarter of 2004. 13