Sonoco Products Company
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 28, 2008
or
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o |
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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
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Incorporated under the laws
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I.R.S. Employer Identification |
of South Carolina
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No. 57-0248420 |
1 N. Second St.
Hartsville, South Carolina 29550
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 þ No o
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
þ
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock at
October 24, 2008:
Common stock, no par value: 99,727,682
SONOCO PRODUCTS COMPANY
INDEX
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars and shares in thousands)
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September 28, |
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December 31, |
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2008 |
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2007* |
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Assets |
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Current Assets |
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Cash and cash equivalents |
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$ |
147,476 |
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$ |
70,758 |
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Trade accounts receivable, net of allowances |
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497,757 |
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488,409 |
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Other receivables |
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37,342 |
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34,328 |
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Inventories: |
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Finished and in process |
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144,602 |
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138,722 |
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Materials and supplies |
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212,380 |
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204,362 |
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Prepaid expenses |
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46,424 |
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50,747 |
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Deferred income taxes |
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49,905 |
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40,353 |
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1,135,886 |
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1,027,679 |
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Property, Plant and Equipment, Net |
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1,040,202 |
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1,105,342 |
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Goodwill |
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818,724 |
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828,348 |
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Other Intangible Assets, Net |
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133,290 |
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139,436 |
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Other Assets |
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197,443 |
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239,438 |
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Total Assets |
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$ |
3,325,545 |
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$ |
3,340,243 |
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Liabilities and Shareholders Equity |
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Current Liabilities |
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Payable to suppliers |
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$ |
412,481 |
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$ |
426,138 |
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Accrued expenses and other |
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317,097 |
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275,133 |
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Notes payable and current portion of long-term debt |
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39,969 |
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45,199 |
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Accrued taxes |
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12,240 |
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11,611 |
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781,787 |
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758,081 |
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Long-Term Debt, Net of Current Portion |
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746,520 |
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804,339 |
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Pension and Other Postretirement Benefits |
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180,898 |
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180,509 |
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Deferred Income Taxes |
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78,113 |
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84,977 |
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Other Liabilities |
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64,587 |
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70,800 |
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Commitments and Contingencies |
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Shareholders Equity |
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Common stock, no par value |
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Authorized 300,000 shares |
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99,728 and 99,431 shares issued and outstanding
at September 28, 2008 and December 31, 2007, respectively |
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7,175 |
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7,175 |
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Capital in excess of stated value |
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405,091 |
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391,628 |
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Accumulated other comprehensive loss |
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(135,991 |
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(107,374 |
) |
Retained earnings |
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1,197,365 |
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1,150,108 |
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Total Shareholders Equity |
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1,473,640 |
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1,441,537 |
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Total Liabilities and Shareholders Equity |
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$ |
3,325,545 |
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$ |
3,340,243 |
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* |
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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
3
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(Dollars and shares in thousands except per share data)
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Three Months Ended |
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Nine Months Ended |
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September 28, |
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September 30, |
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September 28, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Net sales |
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$ |
1,063,250 |
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$ |
1,029,764 |
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$ |
3,187,813 |
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$ |
2,979,874 |
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Cost of sales |
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878,514 |
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842,485 |
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2,621,994 |
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2,417,357 |
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Gross profit |
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184,736 |
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187,279 |
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565,819 |
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562,517 |
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Selling, general and administrative expenses |
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92,989 |
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96,881 |
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292,039 |
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306,390 |
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Restructuring/Asset impairment charges (see Notes 4 and 5) |
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5,530 |
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17,401 |
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77,838 |
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27,496 |
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Income before interest and income taxes |
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86,217 |
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72,997 |
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195,942 |
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228,631 |
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Interest expense |
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12,682 |
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16,188 |
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40,763 |
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45,261 |
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Interest income |
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(2,053 |
) |
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(2,134 |
) |
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(4,809 |
) |
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(6,959 |
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Income before income taxes |
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75,588 |
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58,943 |
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159,988 |
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190,329 |
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Provision for income taxes |
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21,807 |
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(2,029 |
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46,671 |
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39,541 |
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Income before equity in earnings of affiliates/minority
interest in subsidiaries |
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53,781 |
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60,972 |
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113,317 |
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150,788 |
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Equity in earnings of affiliates/minority interest in
subsidiaries, net of tax |
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3,570 |
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3,561 |
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15,279 |
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9,200 |
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Net income |
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$ |
57,351 |
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$ |
64,533 |
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$ |
128,596 |
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$ |
159,988 |
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Weighted average common shares outstanding: |
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Basic |
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100,371 |
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100,775 |
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100,262 |
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100,831 |
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Diluted |
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101,292 |
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101,859 |
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101,060 |
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102,243 |
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Per common share: |
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Net income: |
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Basic |
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$ |
0.57 |
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$ |
0.64 |
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$ |
1.28 |
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$ |
1.59 |
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Diluted |
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$ |
0.57 |
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$ |
0.63 |
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$ |
1.27 |
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$ |
1.56 |
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Cash dividends |
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$ |
0.27 |
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$ |
0.26 |
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$ |
0.80 |
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$ |
0.76 |
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See accompanying Notes to Condensed Consolidated Financial Statements
4
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
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Nine Months Ended |
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September 28, |
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September 30, |
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2008 |
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2007* |
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Cash Flows from Operating Activities: |
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Net income |
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$ |
128,596 |
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$ |
159,988 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Financial asset impairment |
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42,651 |
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Restructuring-related asset impairment and pension curtailment |
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16,469 |
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14,067 |
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Depreciation, depletion and amortization |
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138,662 |
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133,591 |
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Share-based compensation expense |
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6,840 |
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7,782 |
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Equity in earnings of affiliates/minority interest in subsidiaries |
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(15,279 |
) |
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(9,200 |
) |
Cash dividend from affiliated companies |
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7,507 |
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7,638 |
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Loss on disposition of assets |
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2,203 |
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3,593 |
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Tax effect of nonqualified stock options |
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805 |
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9,525 |
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Excess tax benefit of share-based compensation |
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(705 |
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(9,266 |
) |
Deferred taxes |
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(14,708 |
) |
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(11,931 |
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Change in assets and liabilities, net of effects from acquisitions,
dispositions, and foreign currency adjustments: |
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Trade accounts receivable |
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(15,784 |
) |
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(51,510 |
) |
Inventories |
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(18,242 |
) |
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(15,525 |
) |
Payable to suppliers |
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(7,683 |
) |
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15,495 |
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Prepaid expenses |
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(1,336 |
) |
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(11,139 |
) |
Cash contribution to pension plans |
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(11,141 |
) |
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(9,529 |
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Prepaid income taxes and taxes payable |
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4,014 |
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(23,952 |
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Fox River environmental reserves and insurance receivable |
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39,565 |
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21,100 |
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Other assets and liabilities |
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7,766 |
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27,179 |
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Net cash provided by operating activities |
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310,200 |
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257,906 |
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Cash Flows from Investing Activities: |
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Purchase of property, plant and equipment |
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(91,520 |
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(135,279 |
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Cost of acquisitions, net of cash acquired |
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(5,535 |
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(215,341 |
) |
Proceeds from the sale of assets |
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4,557 |
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11,618 |
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Investment in affiliates and other |
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(979 |
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2,652 |
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Net cash used in investing activities |
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(93,477 |
) |
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(336,350 |
) |
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Cash Flows from Financing Activities: |
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Proceeds from issuance of debt |
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23,597 |
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33,868 |
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Principal repayment of debt |
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(98,462 |
) |
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(32,558 |
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Net increase in commercial paper |
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11,000 |
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206,000 |
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Net decrease in bank overdrafts |
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(4,206 |
) |
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(1,325 |
) |
Excess tax benefit of share-based compensation |
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|
705 |
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9,266 |
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Cash dividends |
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(79,626 |
) |
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(76,646 |
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Shares acquired |
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(809 |
) |
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(108,139 |
) |
Shares issued |
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6,370 |
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49,445 |
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Net cash (used in) provided by financing activities |
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(141,431 |
) |
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79,911 |
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Effects of Exchange Rate Changes on Cash |
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1,426 |
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(7,111 |
) |
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Net Increase (Decrease) in Cash and Cash Equivalents |
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76,718 |
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(5,644 |
) |
Cash and cash equivalents at beginning of period |
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|
70,758 |
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|
86,498 |
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Cash and cash equivalents at end of period |
|
$ |
147,476 |
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$ |
80,854 |
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* |
|
Prior years data have been reclassified to conform to the current years presentation. |
See accompanying Notes to Condensed Consolidated Financial Statements
5
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Note 1: |
|
Basis of Interim Presentation |
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|
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, unless otherwise stated)
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
nine months ended September 28, 2008, are not necessarily indicative of the results that
may be expected for the year ending December 31, 2008. 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, 2007. |
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|
On January 1, 2008, the Company adopted the provisions of Emerging Issues Task Force
Issue No. 06-10, Accounting for the Deferred Compensation and Postretirement Benefit
Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements. As a
result, the Company recognized a postretirement benefit liability of $1,459 associated
with its collateral assignment split-dollar life insurance arrangements which was
accounted for as a reduction to the January 1, 2008 balance of retained earnings. |
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|
With respect to the unaudited condensed consolidated financial information of the
Company for the three and nine month periods ended September 28, 2008 and September 30,
2007 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 October 29, 2008 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. |
|
Note 2: |
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Shareholders Equity |
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|
Earnings Per Share |
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|
The following table sets forth the computation of basic and diluted earnings per share: |
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Three Months Ended |
|
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Nine Months Ended |
|
|
|
September 28, |
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September 30, |
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|
September 28, |
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September 30, |
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|
2008 |
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|
2007 |
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2008 |
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|
2007 |
|
Numerator: |
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Net income |
|
$ |
57,351 |
|
|
$ |
64,533 |
|
|
$ |
128,596 |
|
|
$ |
159,988 |
|
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|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
100,371,000 |
|
|
|
100,775,000 |
|
|
|
100,262,000 |
|
|
|
100,831,000 |
|
Dilutive effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
921,000 |
|
|
|
1,084,000 |
|
|
|
798,000 |
|
|
|
1,412,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive shares outstanding |
|
|
101,292,000 |
|
|
|
101,859,000 |
|
|
|
101,060,000 |
|
|
|
102,243,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net income
per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.57 |
|
|
$ |
0.64 |
|
|
$ |
1.28 |
|
|
$ |
1.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.57 |
|
|
$ |
0.63 |
|
|
$ |
1.27 |
|
|
$ |
1.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
|
|
Stock options to purchase 1,250,679 and 617,000 shares at September 28, 2008 and
September 30, 2007, 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. |
|
|
|
Stock Repurchases |
|
|
|
The Companys Board of Directors has authorized the repurchase of up to 5,000,000 shares
of the Companys common stock. No shares were repurchased under this authorization
during the first nine months of 2008. Accordingly, at September 28, 2008, a total of
5,000,000 shares remain available for repurchase. |
|
|
|
The Company occasionally repurchases shares of its common stock to satisfy employee tax
withholding obligations in association with the exercise of stock appreciation rights and
performance-based stock awards. These repurchases, which are not part of a publicly
announced plan or program, totaled 27,316 shares in the first nine months of 2008 at a
cost of $809. |
|
|
Note 3: |
|
Acquisitions |
|
|
|
During the nine months ended September 28, 2008, the Company completed two acquisitions
at an aggregate cost of $5,535 in cash. These included the March 2008 acquisition of
Amtex Packaging, Inc., a packaging fulfillment company accounted for in the Packaging
Services segment, and the February 2008 acquisition of VoidForm International Ltd., a
construction tube business based in Canada accounted for in the Tubes and Cores/Paper
segment. The acquisition of these businesses is expected to generate annual sales of
approximately $6,000. In conjunction with these acquisitions, the Company recorded
identifiable intangibles of $4,890, goodwill of $179, and other net tangible assets of
$466. The Company has accounted for these acquisitions as purchases and, accordingly,
has included their results of operations in consolidated net income from the respective
dates of acquisition. Pro forma results have not been provided, as the acquisitions were
not material to the Companys financial statements individually or in the aggregate. |
|
Note 4: |
|
Restructuring and Asset Impairment |
|
|
|
The Company has two active restructuring plans, one of which was approved in October 2006
(the 2006 Plan), and the other in August 2003 (the 2003 Plan). In addition, during 2007
and 2008, the Company recognized charges associated with other restructuring actions that
were not part of a formal restructuring plan. Following are the total restructuring and
asset impairment charges, net of adjustments, recognized by the Company during the
periods presented: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2008 |
|
|
|
Third |
|
|
Nine |
|
|
Third |
|
|
Nine |
|
|
|
Quarter |
|
|
Months |
|
|
Quarter |
|
|
Months |
|
Restructuring/Asset impairment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other 2008 Actions |
|
$ |
|
|
|
$ |
|
|
|
$ |
4,526 |
|
|
$ |
13,395 |
|
Other 2007 Actions |
|
|
15,105 |
|
|
|
15,105 |
|
|
|
566 |
|
|
|
19,431 |
|
2006 Plan |
|
|
2,458 |
|
|
|
12,556 |
|
|
|
357 |
|
|
|
1,873 |
|
2003 Plan |
|
|
(162 |
) |
|
|
(165 |
) |
|
|
81 |
|
|
|
488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,401 |
|
|
$ |
27,496 |
|
|
$ |
5,530 |
|
|
$ |
35,187 |
|
Income tax benefit |
|
|
(5,835 |
) |
|
|
(8,290 |
) |
|
|
(2,043 |
) |
|
|
(12,063 |
) |
Minority interest impact, net of tax |
|
|
(13 |
) |
|
|
(56 |
) |
|
|
(171 |
) |
|
|
(5,379 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring/Asset impairment
charges, net of adjustments (after
tax) |
|
$ |
11,553 |
|
|
$ |
19,150 |
|
|
$ |
3,316 |
|
|
$ |
17,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and asset impairment charges are included in Restructuring/Asset
impairment charges in the Condensed Consolidated Statements of Income, except for
restructuring charges applicable to equity method investments, which are included in
Equity in earnings of affiliates/minority interest in subsidiaries, net of tax. |
7
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
|
|
The Company expects to recognize future additional costs totaling approximately $4,150 in
connection with previously announced restructuring actions. The Company believes that
the majority of these charges will be incurred and paid by the end of 2008. |
|
|
|
Other 2008 Actions |
|
|
|
During 2008, the Company initiated the following closures in its Tubes and Cores/Paper
segment: a tube and core plant in Spain, a tube and core plant in the United States, a
specialty paper operation at its paper mill in Holyoke, Massachusetts, and a paper mill
in Canada. In addition, the Company initiated the closures of two rigid packaging plants
in the United States that were part of its Consumer Packaging segment. These closures
were not part of a formal restructuring plan. |
|
|
|
Below is a summary of the Other 2008 Actions and related expenses by type incurred and
estimated to be incurred through the end of the restructuring initiative. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
Total |
|
|
|
|
|
|
Third |
|
|
Nine |
|
|
Incurred to |
|
|
Estimated |
|
Other 2008 Actions |
|
Quarter |
|
|
Months |
|
|
Date |
|
|
Total Cost |
|
Severance and Termination
Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tubes and
Cores/Paper segment |
|
$ |
2,261 |
|
|
$ |
3,491 |
|
|
$ |
3,491 |
|
|
$ |
3,491 |
|
Consumer Packaging segment |
|
|
1,729 |
|
|
|
1,729 |
|
|
|
1,729 |
|
|
|
1,729 |
|
Asset Impairment / Disposal
of Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tubes and
Cores/Paper segment |
|
|
140 |
|
|
|
5,490 |
|
|
|
5,490 |
|
|
|
5,490 |
|
Consumer Packaging segment |
|
|
11 |
|
|
|
11 |
|
|
|
11 |
|
|
|
11 |
|
Other Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tubes and
Cores/Paper segment |
|
|
314 |
|
|
|
2,603 |
|
|
|
2,603 |
|
|
|
5,103 |
|
Consumer Packaging segment |
|
|
71 |
|
|
|
71 |
|
|
|
71 |
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,526 |
|
|
$ |
13,395 |
|
|
$ |
13,395 |
|
|
$ |
15,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Costs in the Tubes and Cores/Paper segment include a curtailment charge of $2,289
related to a defined benefit pension plan maintained for the hourly union employees of
the Canadian paper mill. |
|
|
|
The following table sets forth the activity in the Other 2008 Actions restructuring
accrual included in Accrued expenses and other on the Companys Condensed Consolidated
Balance Sheets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
Asset |
|
|
|
|
|
|
|
Other 2008 Actions |
|
and |
|
|
Impairment/ |
|
|
|
|
|
|
|
Accrual Activity |
|
Termination |
|
|
Disposal |
|
|
Other |
|
|
|
|
2008 Year to Date |
|
Benefits |
|
|
of Assets |
|
|
Costs |
|
|
Total |
|
Liability, December 31, 2007 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
New charges |
|
|
5,220 |
|
|
|
5,501 |
|
|
|
2,674 |
|
|
|
13,395 |
|
Cash payments |
|
|
(2,666 |
) |
|
|
|
|
|
|
(385 |
) |
|
|
(3,051 |
) |
Asset writedowns/disposals |
|
|
|
|
|
|
(5,501 |
) |
|
|
|
|
|
|
(5,501 |
) |
Foreign currency translation |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Pension curtailment |
|
|
|
|
|
|
|
|
|
|
(2,289 |
) |
|
|
(2,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability, September 28, 2008 |
|
$ |
2,566 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects to pay the majority of the remaining Other 2008 Actions restructuring
costs by the end of 2008 using cash generated from operations. |
8
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
|
|
Other 2007 Actions |
|
|
|
In the third quarter of 2007, the Company initiated the closures of the following
operations: a metal ends plant in Brazil (Consumer Packaging segment), a rigid packaging
plant in the United States (Consumer Packaging segment), a paper mill in China (Tubes and
Cores/Paper segment), a molded plastics plant in Turkey (All Other Sonoco), and a
point-of-purchase display manufacturing plant in the United States (Packaging Services
segment). These closures were not part of a formal restructuring plan. |
|
|
|
Below is a summary of the Other 2007 Actions and related expenses by type incurred and
estimated to be incurred through the end of the restructuring initiative. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2008 |
|
|
Total |
|
|
|
|
|
|
Third |
|
|
Nine |
|
|
Third |
|
|
Nine |
|
|
Incurred |
|
|
Estimated |
|
Other 2007 Actions |
|
Quarter |
|
|
Months |
|
|
Quarter |
|
|
Months |
|
|
to Date |
|
|
Total Cost |
|
Severance and Termination
Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tubes and Cores/Paper segment |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,867 |
|
|
$ |
8,015 |
|
|
$ |
8,015 |
|
Consumer Packaging segment |
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
651 |
|
|
|
1,525 |
|
|
|
1,525 |
|
Packaging Services segment |
|
|
|
|
|
|
|
|
|
|
(13 |
) |
|
|
120 |
|
|
|
254 |
|
|
|
254 |
|
All Other Sonoco |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
36 |
|
Asset Impairment / Disposal of
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tubes and Cores/Paper segment |
|
|
|
|
|
|
|
|
|
|
145 |
|
|
|
4,873 |
|
|
|
4,873 |
|
|
|
4,873 |
|
Consumer Packaging segment |
|
|
14,660 |
|
|
|
14,660 |
|
|
|
|
|
|
|
3,731 |
|
|
|
20,079 |
|
|
|
20,079 |
|
All Other Sonoco |
|
|
445 |
|
|
|
445 |
|
|
|
(61 |
) |
|
|
(61 |
) |
|
|
536 |
|
|
|
536 |
|
Other Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tubes and Cores/Paper segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216 |
|
|
|
216 |
|
|
|
366 |
|
Consumer Packaging segment |
|
|
|
|
|
|
|
|
|
|
445 |
|
|
|
3,034 |
|
|
|
3,307 |
|
|
|
3,757 |
|
All Other Sonoco |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228 |
|
|
|
228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
15,105 |
|
|
$ |
15,105 |
|
|
$ |
566 |
|
|
$ |
19,431 |
|
|
$ |
39,069 |
|
|
$ |
39,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net charges for the nine months ended September 28, 2008 relate primarily to the
paper mill in China, the metal ends plant in Brazil, and the rigid packaging plant in the
United States. These charges include non-cash asset impairments totaling $8,604 on
property, plant and equipment at the Companys metal ends plant in Brazil and paper mill
in China, and additional reserves on accounts receivable and inventory at the Companys
paper mill in China as a direct result of the closure of this facility. Severance costs
became recognizable upon communication to the affected employees throughout the first and
second quarters of 2008. Other costs relate primarily to the dismantling of machinery
and equipment and other miscellaneous exit costs. |
|
|
|
During the three and nine months ended September 28, 2008, the Company also recorded
non-cash, after-tax offsets in the amounts of $171 and $5,379, respectively, to reflect a
minority interest holders portion of restructuring costs that were charged to expense. |
|
|
|
The following table sets forth the activity in the Other 2007 Actions restructuring
accrual included in Accrued expenses and other on the Companys Condensed Consolidated
Balance Sheets:
|
9
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
Asset |
|
|
|
|
|
|
|
Other 2007 Actions |
|
and |
|
|
Impairment/ |
|
|
|
|
|
|
|
Accrual Activity |
|
Termination |
|
|
Disposal |
|
|
Other |
|
|
|
|
2008 Year to Date |
|
Benefits |
|
|
of Assets |
|
|
Costs |
|
|
Total |
|
Liability, December 31, 2007 |
|
$ |
1,165 |
|
|
$ |
|
|
|
$ |
230 |
|
|
$ |
1,395 |
|
New charges |
|
|
7,780 |
|
|
|
8,604 |
|
|
|
3,250 |
|
|
|
19,634 |
|
Cash payments |
|
|
(3,841 |
) |
|
|
|
|
|
|
(3,462 |
) |
|
|
(7,303 |
) |
Asset writedowns/disposals |
|
|
|
|
|
|
(8,543 |
) |
|
|
|
|
|
|
(8,543 |
) |
Foreign currency translation |
|
|
264 |
|
|
|
|
|
|
|
(12 |
) |
|
|
252 |
|
Adjustments |
|
|
(142 |
) |
|
|
(61 |
) |
|
|
|
|
|
|
(203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability, September 28, 2008 |
|
$ |
5,226 |
|
|
$ |
|
|
|
$ |
6 |
|
|
$ |
5,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The severance accrual above includes approximately $5,200 of severance and termination
benefits for the employees of the Companys paper mill in China. |
|
|
|
The Company expects to pay the majority of the remaining Other 2007 Actions restructuring
costs during 2008 using cash generated from operations. |
|
|
|
The 2006 Plan |
|
|
|
The 2006 Plan included the closure of 12 plant locations and the reduction of
approximately 540 positions worldwide. The majority of the restructuring program focused
on improving the cost effectiveness of international operations, principally in Europe.
These measures began in the fourth quarter of 2006 and are substantially complete.
Significant operations affected in the Tubes and Cores/Paper segment included a paper
mill in France, two tube and core plants in Canada, and one in the United States.
Operations affected in the Consumer Packaging segment included a rigid packaging plant in
Germany, rigid packaging production lines in the United Kingdom, and a flexible packaging
plant in Canada. Operations affected in All Other Sonoco included a molded plastics
plant and a wooden reels facility, both located in the United States. In addition, the
2006 Plan included downsizing actions in the Companys European tube and core/paper
operations. |
|
|
|
Below is a summary of the 2006 Plan and related expenses by type incurred and estimated
to be incurred through the end of the restructuring initiative. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2008 |
|
|
Total |
|
|
|
|
|
|
Third |
|
|
Nine |
|
|
Third |
|
|
Nine |
|
|
Incurred |
|
|
Estimated |
|
2006 Plan |
|
Quarter |
|
|
Months |
|
|
Quarter |
|
|
Months |
|
|
to Date |
|
|
Total Cost |
|
Severance and Termination
Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tubes and Cores/Paper segment |
|
$ |
1,398 |
|
|
$ |
2,848 |
|
|
$ |
41 |
|
|
$ |
813 |
|
|
$ |
13,975 |
|
|
$ |
13,975 |
|
Consumer Packaging segment |
|
|
68 |
|
|
|
3,696 |
|
|
|
|
|
|
|
(279 |
) |
|
|
5,174 |
|
|
|
5,174 |
|
Packaging Services segment |
|
|
|
|
|
|
451 |
|
|
|
|
|
|
|
|
|
|
|
528 |
|
|
|
528 |
|
All Other Sonoco |
|
|
|
|
|
|
472 |
|
|
|
|
|
|
|
4 |
|
|
|
761 |
|
|
|
761 |
|
Asset Impairment / Disposal
of Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tubes and Cores/Paper segment |
|
|
(84 |
) |
|
|
(707 |
) |
|
|
|
|
|
|
20 |
|
|
|
4,242 |
|
|
|
4,242 |
|
Consumer Packaging segment |
|
|
(50 |
) |
|
|
2,237 |
|
|
|
|
|
|
|
|
|
|
|
1,686 |
|
|
|
1,686 |
|
All Other Sonoco |
|
|
|
|
|
|
|
|
|
|
67 |
|
|
|
67 |
|
|
|
328 |
|
|
|
328 |
|
Other Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tubes and Cores/Paper segment |
|
|
789 |
|
|
|
2,090 |
|
|
|
196 |
|
|
|
853 |
|
|
|
7,055 |
|
|
|
7,355 |
|
Consumer Packaging segment |
|
|
289 |
|
|
|
983 |
|
|
|
20 |
|
|
|
222 |
|
|
|
1,666 |
|
|
|
1,966 |
|
All Other Sonoco |
|
|
48 |
|
|
|
486 |
|
|
|
33 |
|
|
|
173 |
|
|
|
780 |
|
|
|
780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,458 |
|
|
$ |
12,556 |
|
|
$ |
357 |
|
|
$ |
1,873 |
|
|
$ |
36,195 |
|
|
$ |
36,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
|
|
During the three and nine months ended September 30, 2007, the Company recorded non-cash,
after-tax offsets in the amount of $13 and $56, respectively, in order to reflect a
minority interest holders portion of restructuring costs that were charged to expense. |
|
|
|
The following table sets forth the activity in the 2006 Plan restructuring accrual
included in Accrued expenses and other on the Companys Condensed Consolidated Balance
Sheets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
Asset |
|
|
|
|
|
|
|
2006 Plan |
|
and |
|
|
Impairment/ |
|
|
|
|
|
|
|
Accrual Activity |
|
Termination |
|
|
Disposal |
|
|
Other |
|
|
|
|
2008 Year to Date |
|
Benefits |
|
|
of Assets |
|
|
Costs |
|
|
Total |
|
Liability, December 31, 2007 |
|
$ |
3,517 |
|
|
$ |
|
|
|
$ |
470 |
|
|
$ |
3,987 |
|
New charges |
|
|
776 |
|
|
|
87 |
|
|
|
1,297 |
|
|
|
2,160 |
|
Cash payments |
|
|
(3,762 |
) |
|
|
|
|
|
|
(1,175 |
) |
|
|
(4,937 |
) |
Asset impairment (noncash) |
|
|
|
|
|
|
(87 |
) |
|
|
|
|
|
|
(87 |
) |
Foreign currency translation |
|
|
(29 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
(33 |
) |
Adjustments |
|
|
(239 |
) |
|
|
|
|
|
|
(48 |
) |
|
|
(287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability, September 28, 2008 |
|
$ |
263 |
|
|
$ |
|
|
|
$ |
540 |
|
|
$ |
803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Costs consist primarily of building lease termination charges and other
miscellaneous exit costs. The Company expects to pay the majority of the remaining 2006
Plan restructuring costs, with the exception of certain building lease termination
expenses, by the end of 2008, using cash generated from operations. |
|
|
|
The 2003 Plan |
|
|
|
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 completed 22
plant closings and reduced its workforce by approximately 1,120 employees. As of
September 28, 2008, the Company had incurred cumulative pre-tax charges, net of
adjustments, of $103,227 associated with these activities. |
|
|
|
The 2003 Plan is substantially complete. At September 28, 2008, the remaining
restructuring accrual for the 2003 Plan totaled $1,680. The accrual, included in
Accrued expenses and other on the Companys Condensed Consolidated Balance Sheet,
relates primarily to a building lease termination. The Company expects to recognize
future pre-tax charges of approximately $450 associated with the 2003 Plan, primarily
related to this building lease termination. The Company expects both the liability and
the future costs to be fully paid at the end of 2012, using cash generated from
operations. |
|
Note 5: |
|
Financial Asset Impairment |
|
|
|
As a result of the 2003 sale of the High Density Film business, the Company received a
preferred equity interest in the buyer and a subordinated note receivable due in 2013 as
a portion of the selling price. The Companys year-end 2007 financial review of the
buyer indicated that collectibility was probable. However, based on updated information
provided by the buyer late in the first quarter of 2008, the Company concluded that
neither the collection of its subordinated note receivable nor redemption of its
preferred equity interest was probable, and that their value was likely zero.
Accordingly, the Company fully reserved these items in the first quarter of 2008,
recording a charge totaling $42,651 pretax ($30,981 after tax). Both the preferred
equity interest and the subordinated note receivable had been included in Other Assets
in the Companys Condensed Consolidated Balance Sheets. On May 6, 2008, the buyer filed
a petition for relief under Chapter 11 with the United States Bankruptcy Court for the
District of Delaware that included a plan of reorganization, which was subsequently
approved by the court June 26, 2008. As part of the plan of reorganization, the
Companys preferred equity interest and its subordinated note receivable were
extinguished. |
11
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Note 6: |
|
Cash and Cash Equivalents |
|
|
|
At September 28, 2008, cash and cash equivalents included $32,000 of insurance proceeds
arising from the settlement of claims related to the Fox River environmental matter (see
Note 15). The use of this cash, together with the earnings thereon, is restricted to the
payment of liabilities associated with the Fox River matter. |
|
Note 7: |
|
Comprehensive Income |
|
|
|
The following table reconciles net income to comprehensive (loss)/income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 28, |
|
|
September 30, |
|
|
September 28, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
57,351 |
|
|
$ |
64,533 |
|
|
$ |
128,596 |
|
|
$ |
159,988 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments |
|
|
(53,579 |
) |
|
|
42,206 |
|
|
|
(31,002 |
) |
|
|
77,797 |
|
Changes in defined benefit plans,
net of income tax |
|
|
(657 |
) |
|
|
(4,717 |
) |
|
|
4,476 |
|
|
|
435 |
|
Changes in derivative financial
instruments, net of income tax |
|
|
(14,802 |
) |
|
|
(1,669 |
) |
|
|
(2,091 |
) |
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss)/income |
|
$ |
(11,687 |
) |
|
$ |
100,353 |
|
|
$ |
99,979 |
|
|
$ |
238,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the components of accumulated other comprehensive loss and
the changes in accumulated other comprehensive loss, net of tax as applicable, for the
nine months ended September 28, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
Currency |
|
|
Defined |
|
|
Derivative |
|
|
Other |
|
|
|
Translation |
|
|
Benefit |
|
|
Financial |
|
|
Comprehensive |
|
|
|
Adjustments |
|
|
Plans |
|
|
Instruments |
|
|
Loss |
|
Balance at December 31, 2007 |
|
$ |
72,819 |
|
|
$ |
(178,658 |
) |
|
$ |
(1,535 |
) |
|
$ |
(107,374 |
) |
Year-to-date change |
|
|
(31,002 |
) |
|
|
4,476 |
|
|
|
(2,091 |
) |
|
|
(28,617 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 28, 2008 |
|
$ |
41,817 |
|
|
$ |
(174,182 |
) |
|
$ |
(3,626 |
) |
|
$ |
(135,991 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 28, 2008, the Company had commodity swaps outstanding to fix the costs of a
portion of raw materials and energy. These swaps, which have maturities ranging from
October 2008 to June 2011, qualify as cash flow hedges under Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, and related amendments. The amounts included in accumulated other
comprehensive loss related to these commodity swaps were an unfavorable position of
$5,714 ($3,626 after tax) at September 28, 2008, and an unfavorable position of $2,395
($1,535 after tax) at December 31, 2007. |
|
|
|
The tax effect on Derivative Financial Instruments in the three and nine-month periods
ended September 28, 2008, was $8,693 and $1,228, respectively. The cumulative tax effect
of Derivative Financial Instruments was $2,088 and $860, at September 28, 2008 and
December 31, 2007, respectively. |
|
|
|
The tax effect on Defined Benefit Plans in the three and nine-month periods ended
September 28, 2008, was $481 and $(1,208), respectively. The cumulative tax benefit of
the Defined Benefit Plans was $101,597 at September 28, 2008, and $102,805 at December
31, 2007. |
12
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Note 8: |
|
Goodwill and Other Intangible Assets |
|
|
|
Goodwill |
|
|
|
A summary of the changes in goodwill for the nine months ended September 28, 2008 is as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tubes and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cores |
|
|
Consumer |
|
|
Packaging |
|
|
|
|
|
|
|
|
|
/Paper |
|
|
Packaging |
|
|
Services |
|
|
All Other |
|
|
|
|
|
|
Segment |
|
|
Segment |
|
|
Segment |
|
|
Sonoco |
|
|
Total |
|
Balance as of December 31, 2007 |
|
$ |
245,130 |
|
|
$ |
366,223 |
|
|
$ |
151,000 |
|
|
$ |
65,995 |
|
|
$ |
828,348 |
|
Goodwill on 2008 acquisitions |
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179 |
|
Adjustments |
|
|
76 |
|
|
|
1,488 |
|
|
|
|
|
|
|
332 |
|
|
|
1,896 |
|
Foreign currency translation |
|
|
(3,456 |
) |
|
|
(8,132 |
) |
|
|
(103 |
) |
|
|
(8 |
) |
|
|
(11,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 28, 2008 |
|
$ |
241,929 |
|
|
$ |
359,579 |
|
|
$ |
150,897 |
|
|
$ |
66,319 |
|
|
$ |
818,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to goodwill consist of the following: charges totaling $1,381 incurred in
connection with the closures of two plants and an injection molding operation that were
part of the fourth quarter 2007 acquisition of the fiber and plastic container business
of Caraustar Industries, Inc.; tax adjustments of $450 associated with the second quarter
2007 acquisition of Matrix Packaging, LLC; and $65 of other purchase price adjustments
relating to 2007 acquisitions. |
|
|
|
During the third quarter of 2008, the Company completed its annual test for goodwill
impairment in accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets. Based on the results of this evaluation, the
Company concluded that there was no impairment of goodwill for any of our reporting
units. This evaluation used forward-looking projections, which included expected
improvement in certain operations within the Consumer Packaging and Packaging Services
segments. The assessment of the relevant facts and circumstances is ongoing, and if
actual performance in these reporting units falls short of the projected results,
non-cash impairment charges may be required. Total goodwill associated with these
reporting units is approximately $370,000. |
|
|
|
Other Intangible Assets |
|
|
|
A summary of other intangible assets as of September 28, 2008 and December 31, 2007 is as
follows: |
|
|
|
|
|
|
|
|
|
|
|
September 28, |
|
December 31, |
|
|
2008 |
|
2007 |
|
Amortizable intangibles Gross cost |
|
|
|
|
|
|
|
|
Patents |
|
$ |
3,530 |
|
|
$ |
3,360 |
|
Customer lists |
|
|
165,154 |
|
|
|
161,805 |
|
Land use rights |
|
|
7,822 |
|
|
|
7,315 |
|
Supply agreements |
|
|
1,000 |
|
|
|
1,000 |
|
Other |
|
|
10,879 |
|
|
|
11,032 |
|
|
Total gross cost |
|
$ |
188,385 |
|
|
$ |
184,512 |
|
|
Total accumulated amortization |
|
$ |
(55,095 |
) |
|
$ |
(45,076 |
) |
|
Net amortizable intangibles |
|
$ |
133,290 |
|
|
$ |
139,436 |
|
|
|
|
Other intangible assets are amortized, usually on a straight-line basis, over their
respective useful lives, which generally range from three to twenty years. Aggregate
amortization expense was $3,188 and $3,110 for the three months ended September 28, 2008
and September 30, 2007, respectively, and $10,150 and $8,147 for the nine months ended
September 28, 2008 and September 30, 2007, respectively. Amortization expense on other
intangible assets is expected to approximate $13,300 in 2008, $12,600 in 2009, $12,400 in
2010, $12,000 in 2011 and $11,400 in 2012. |
13
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
|
|
The Company recorded $4,890 of identifiable intangibles in connection with 2008 business
acquisitions, all of which related to customer lists that will be amortized over a period
of 15 years. In addition, the Company acquired various patents in the first nine months
of 2008 for a total cost of $170. |
|
Note 9: |
|
Fair Value Measurements |
|
|
|
Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157)
was issued to increase consistency and comparability in fair value measurements and to
expand disclosures about fair value measurements. Applicable provisions of FAS 157 were
adopted by the Company effective January 1, 2008, including the disclosures presented
below. |
|
|
|
The following table sets forth information regarding the Companys financial assets and
financial liabilities that are measured at fair value. The Company does not currently
have any nonfinancial assets or liabilities that are recognized or disclosed at fair
value on a recurring basis. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
|
|
|
|
|
Quoted Market |
|
|
|
|
|
|
|
|
|
|
Prices in Active |
|
Significant |
|
|
|
|
|
|
|
|
Market for |
|
Other |
|
Significant |
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
|
|
|
|
Assets/Liabilities |
|
Inputs |
|
Inputs |
Description |
|
September 28, 2008 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
$ |
1,776 |
|
|
$ |
|
|
|
$ |
1,776 |
|
|
$ |
|
|
Deferred
Compensation
Plan Assets |
|
$ |
1,992 |
|
|
$ |
1,992 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
$ |
6,831 |
|
|
$ |
|
|
|
$ |
6,831 |
|
|
$ |
|
|
|
|
The Company uses derivatives from time to time to mitigate the effect of raw material and
energy cost fluctuations, foreign currency fluctuations and interest rate movements. The
Company records qualifying derivatives in accordance with Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (FAS 133), and related amendments. Fair value measurements for the Companys
derivatives, which at September 28, 2008, consisted primarily of natural gas swaps
entered into for hedging purposes and foreign currency swaps for which hedge accounting
has not been applied, are classified under Level 2 because such measurements are
determined using published market prices or estimated based on observable inputs such as
interest rates, yield curves, spot and future commodity prices and spot and future
exchange rates. |
|
|
|
Certain deferred compensation plan liabilities are funded and the assets invested in
various exchange traded mutual funds. These assets are measured using quoted prices in
accessible active markets for identical assets. |
|
|
|
None of the Companys financial assets or liabilities currently covered by the disclosure
provisions of FAS 157 are measured at fair value using significant unobservable inputs. |
|
Note 10: |
|
Dividend Declarations |
|
|
|
On July 16, 2008, the Board of Directors declared a regular quarterly dividend of $0.27
per share. This dividend was paid September 10, 2008 to all shareholders of record as of
August 15, 2008. |
|
|
|
On October 13, 2008, the Board of Directors declared a regular quarterly dividend of
$0.27 per share. This dividend is payable December 10, 2008 to all shareholders of record
as of November 21, 2008. |
14
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Note 11: |
|
Employee Benefit Plans |
|
|
|
The Company provides non-contributory defined benefit pension plans for a majority of its employees in the United
States and certain of its employees in Mexico and Belgium. Effective December 31, 2003, the Company froze
participation for newly hired salaried and non-union hourly U.S. employees in its traditional defined benefit plan.
The Company adopted a defined contribution plan, the Sonoco Investment and Retirement Plan (SIRP), covering its
non-union 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, Canada, and the Netherlands, 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 components of net periodic benefit cost include the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 28, |
|
|
September 30, |
|
|
September 28, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Retirement Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
7,007 |
|
|
$ |
7,298 |
|
|
$ |
20,076 |
|
|
$ |
21,725 |
|
Interest cost |
|
|
17,760 |
|
|
|
17,316 |
|
|
|
55,470 |
|
|
|
52,050 |
|
Expected return on plan assets |
|
|
(22,181 |
) |
|
|
(21,981 |
) |
|
|
(67,205 |
) |
|
|
(65,866 |
) |
Amortization of net transition
obligation |
|
|
186 |
|
|
|
58 |
|
|
|
309 |
|
|
|
174 |
|
Amortization of prior service cost |
|
|
462 |
|
|
|
495 |
|
|
|
1,423 |
|
|
|
1,461 |
|
Amortization of net actuarial loss |
|
|
2,272 |
|
|
|
4,913 |
|
|
|
9,451 |
|
|
|
15,440 |
|
Other |
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
12 |
|
Effect of curtailment loss |
|
|
|
|
|
|
|
|
|
|
2,289 |
|
|
|
|
|
Effect of settlement loss |
|
|
144 |
|
|
|
|
|
|
|
441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
5,650 |
|
|
$ |
8,111 |
|
|
$ |
22,254 |
|
|
$ |
24,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 28, |
|
|
September 30, |
|
|
September 28, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Retiree Health and Life
Insurance Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
516 |
|
|
$ |
586 |
|
|
$ |
1,544 |
|
|
$ |
1,810 |
|
Interest cost |
|
|
1,128 |
|
|
|
1,109 |
|
|
|
3,372 |
|
|
|
3,577 |
|
Expected return on plan assets |
|
|
(481 |
) |
|
|
(542 |
) |
|
|
(1,437 |
) |
|
|
(1,584 |
) |
Amortization of prior service credit |
|
|
(2,593 |
) |
|
|
(2,427 |
) |
|
|
(7,752 |
) |
|
|
(7,279 |
) |
Amortization of net actuarial loss |
|
|
776 |
|
|
|
741 |
|
|
|
2,319 |
|
|
|
3,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit (income) cost |
|
$ |
(654) |
|
|
$ |
(533 |
) |
|
$ |
(1,954 |
) |
|
$ |
(449 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the second quarter of 2008 the Company recognized a $2,289 curtailment loss
associated with the planned closure of a paper mill in Montreal, Quebec. This charge is
included in the caption Restructuring/Asset impairment charges in the Condensed
Consolidated Statements of Income. |
|
|
|
During the nine months ended September 28, 2008, the Company made contributions of $7,404
to its retirement and retiree health and life insurance plans. The Company anticipates
that it will make additional contributions of approximately $2,700 in 2008. The Company
also contributed $3,737 to the SIRP during this same nine-month period. No additional
contributions are expected during the remainder of 2008. Funding of the Companys U.S.
defined benefit pension plan was not required in 2008. The 2009 funding requirement will
not be determined until the December 31, 2008 asset values are known; however, based on
the September 28, 2008 asset values, the Company would not be required to make any
contributions to the Plan in 2009 due to its ability to utilize a credit balance that
exists due to having previously funded the Plan in excess of the minimum requirement. |
15
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Note 12: |
|
Income Taxes |
|
|
|
The Company adopted the provisions of Financial Accounting Standards Board Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), on January 1, 2007. There
have been no significant changes in the Companys liability for uncertain tax positions
since December 31, 2007. |
|
|
|
The Companys effective tax rate for the three and nine month periods ending September
28, 2008, was 28.8% and 29.2%, respectively. The rate for the third quarter varied from
the U.S. statutory rate primarily due to a tax benefit associated with a decrease in the
Companys FIN 48 liabilities. This decrease resulted from the expiration of U.S. federal
and state statutes of limitations. The year-to-date rate varied from the U.S. statutory
rate due to these same factors, as well as a valuation allowance recorded against the
capital loss carryovers created by the impairment of certain financial assets in the
first quarter (see Note 5), the tax benefits from a change in Italian tax law recorded in
the second quarter, the favorable effect of international operations that are subject to
tax rates generally lower than the U.S. rate, and certain restructuring charges for which
tax benefits cannot be recognized. |
|
|
|
The Companys provision for income taxes was a benefit of $2,029 for the third quarter of
2007, primarily due to the release of reserves for uncertain tax positions upon
expiration of their related statutory assessment periods. |
|
|
|
The Company and/or its subsidiaries file federal, state and local income tax returns in
the United States and various foreign jurisdictions. The Company is no longer subject to
U.S. federal income tax examination for years before 2005. With respect to state and
local income taxes, the Company is no longer subject to examination prior to 2002, with
few exceptions. |
|
|
|
The Companys estimate for the potential outcome for any uncertain tax issue is highly
judgmental. Management believes that any reasonably foreseeable outcomes related to these
matters have been adequately provided for. However, future results may include favorable
or unfavorable adjustments to estimated tax liabilities in the period the assessments are
made or resolved or when statutes of limitation on potential assessments expire.
Additionally, the jurisdictions in which earnings or deductions are realized may differ
from current estimates. As a result, the Companys effective tax rate may fluctuate
significantly on a quarterly basis. |
|
Note 13: |
|
New Accounting Pronouncements |
|
|
|
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans (FAS 158). The Company has complied with those
provisions of FAS 158 which became effective on December 31, 2006, and since that time
has recognized in its financial statements the funded status of its defined benefit
plans. The measurement date provision of FAS 158 becomes effective for the Company
beginning with its December 31, 2008 balance sheet. This provision requires companies to
measure the funded status of their plans at fiscal year end. Because the Company
currently uses December 31 as the measurement date for most of its plans, including its
major U.S.-based plans, implementation of this remaining measurement date provision will
not have a material effect on the Companys financial statements. |
|
|
|
In September 2006, the FASB issued FAS 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements. FAS 157 does not require any new fair value measurements. The
provisions of FAS 157 become effective in two phases. As of January 1, 2008, FAS 157
became effective for all financial assets and liabilities and for any nonfinancial assets
and liabilities measured at fair value on a recurring basis. Effective January 1, 2009,
the provisions of FAS 157 will apply to all assets and liabilities. Other than
additional disclosure, the adoption of FAS 157 has not and is not expected to have a
material impact on the Companys financial statements. |
16
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
In December 2007, the FASB issued FAS 141(R), Business Combinations which replaces FAS
141. While FAS 141(R) retains the fundamental requirement that the acquisition method of
accounting be used for all business combinations, several significant changes were made
some of which include: the scope of transactions covered; the treatment of transaction
costs and subsequent restructuring charges; accounting for in-process research and
development, contingent assets and liabilities, and contingent consideration; and how
adjustments made to the acquisition accounting after the transaction are reported. For
Sonoco, this statement applies prospectively to business combinations occurring on or
after January 1, 2009. While application of this standard will not impact the Companys
financial statements for transactions occurring prior to the effective date, its
application will have a significant impact on the Companys accounting for future
acquisitions compared to current practice.
In December 2007, the FASB issued FAS 160, Noncontrolling Interests in Consolidated
Financial Statements which amends current accounting and reporting for a noncontrolling
interest in a subsidiary and the deconsolidation of a subsidiary. This statement provides
that a noncontrolling interest in a subsidiary should be reported as equity rather than
as a minority interest liability and requires that all purchases, sales, issuances and
redemptions of ownership interests in a consolidated subsidiary be accounted for as
equity transactions if the parent retains a controlling financial interest. FAS 160 also
requires that a gain or loss be recognized when a subsidiary is deconsolidated and, if a
parent retains a noncontrolling equity investment in the former subsidiary, that the
investment be measured at its fair value. This statement is effective January 1, 2009,
and will be applied prospectively except for the presentation and disclosure requirements
which are retrospective. As such, the effect of this standard on current noncontrolling
interest positions will be limited to financial statement presentation and disclosure,
but its adoption will impact the Companys accounting and disclosure for all transactions
involving noncontrolling interests after adoption. The expected amount of minority
interest liability to be reclassified as equity upon adoption of this statement is
approximately $15,500.
In March 2008, the FASB issued FAS 161, Disclosures about Derivative Instruments and
Hedging Activities which requires enhanced disclosures about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133, and (c) how derivative instruments and related hedged
items affect an entitys financial position, financial performance, and cash flows. This
Statement is effective for fiscal years and interim periods beginning after November 15,
2008. As described above, the application of this standard will impact the Companys
disclosure of its derivative instruments and hedging activities.
In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the
Useful Life of Intangible Assets which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible
Assets. This Staff Position is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal years.
Early adoption is prohibited. Application of this FSP is not expected to have a
significant impact on Sonocos financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted
in Share-Based Payment Transactions are Participating Securities. This FSP provides
that unvested share-based payment awards that contain nonforfeitable rights to dividends
or dividend equivalents (whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share pursuant to the two-class method.
The Company does not currently have any share-based awards that would qualify as
participating securities. Therefore, application of this FSP is not expected to have an
effect on the Companys financial reporting.
17
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit
Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No 45; and Clarification of the Effective Date of FASB Statement No.161.
This FSP requires certain disclosures to be made by sellers of credit derivatives and
extends disclosures by guarantors to include the current status of the
payment/performance risk of any guarantees. The Company is not a seller of credit
derivatives and does not guarantee the payment or performance of any third party.
Therefore, application of these FSP provisions is not expected to have an effect on the
Companys financial reporting. In addition, this FSP clarifies that the derivative
instrument and hedging activity disclosure requirements of FAS 161, as discussed above,
are effective for both interim and annual reporting periods beginning after November 15,
2008.
Note 14: Financial Segment Information
Sonoco reports its results in three segments, Consumer Packaging, Tubes and Cores/Paper
and Packaging Services. The remaining 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
peelable membrane ends and closures.
The Tubes and Cores/Paper segment includes the following products: high-performance paper
and composite paperboard tubes and cores; fiber-based construction tubes and forms;
recycled paperboard, linerboard, recovered paper and other recycled materials.
The Packaging Services segment provides the following products and services: designing,
manufacturing, assembling, packing and distributing temporary, semi-permanent and
permanent point-of-purchase displays; brand artwork management; and supply chain
management services, including contract packing, fulfillment and scalable service
centers.
All Other Sonoco represents the Companys businesses 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, and therefore cannot be
combined with other operating segments into a reportable segment. All Other Sonoco
includes the following products: wooden, metal and composite wire and cable reels; molded
and extruded plastics; custom-designed protective packaging; and paper amenities such as
coasters and glass covers.
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 segment
level is defined as Income before interest and income taxes on the Companys Condensed
Consolidated Statements of Income, adjusted for restructuring/asset impairment charges,
which are not allocated to the reporting segments.
18
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
FINANCIAL SEGMENT INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 28, |
|
|
September 30, |
|
|
September 28, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Packaging |
|
$ |
398,825 |
|
|
$ |
369,472 |
|
|
$ |
1,184,355 |
|
|
$ |
1,051,178 |
|
Tubes and Cores/Paper |
|
|
435,685 |
|
|
|
433,686 |
|
|
|
1,327,289 |
|
|
|
1,268,300 |
|
Packaging Services |
|
|
135,122 |
|
|
|
132,445 |
|
|
|
397,648 |
|
|
|
377,787 |
|
All Other Sonoco |
|
|
93,618 |
|
|
|
94,161 |
|
|
|
278,521 |
|
|
|
282,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
1,063,250 |
|
|
$ |
1,029,764 |
|
|
$ |
3,187,813 |
|
|
$ |
2,979,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Packaging |
|
$ |
294 |
|
|
$ |
748 |
|
|
$ |
1,463 |
|
|
$ |
2,375 |
|
Tubes and Cores/Paper |
|
|
26,447 |
|
|
|
23,642 |
|
|
|
76,602 |
|
|
|
70,181 |
|
Packaging Services |
|
|
151 |
|
|
|
197 |
|
|
|
243 |
|
|
|
521 |
|
All Other Sonoco |
|
|
11,311 |
|
|
|
11,642 |
|
|
|
33,116 |
|
|
|
32,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
38,203 |
|
|
$ |
36,229 |
|
|
$ |
111,424 |
|
|
$ |
105,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Packaging |
|
$ |
28,899 |
|
|
$ |
23,696 |
|
|
$ |
97,665 |
|
|
$ |
75,781 |
|
Tubes and Cores/Paper |
|
|
41,991 |
|
|
|
42,339 |
|
|
|
116,601 |
|
|
|
106,036 |
|
Packaging Services |
|
|
9,074 |
|
|
|
10,924 |
|
|
|
23,945 |
|
|
|
33,869 |
|
All Other Sonoco |
|
|
11,783 |
|
|
|
13,439 |
|
|
|
35,569 |
|
|
|
40,441 |
|
Restructuring/Asset impairment charges |
|
|
(5,530 |
) |
|
|
(17,401 |
) |
|
|
(77,838 |
) |
|
|
(27,496 |
) |
Interest, net |
|
|
(10,629 |
) |
|
|
(14,054 |
) |
|
|
(35,954 |
) |
|
|
(38,302 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
75,588 |
|
|
$ |
58,943 |
|
|
$ |
159,988 |
|
|
$ |
190,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15: 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. The Company is also currently a defendant in a
purported class action by persons who bought Company stock between February 7, 2007 and
September 18, 2007. That suit alleges that the market price of the stock had been
inflated by allegedly false and misleading earnings projections published by the Company.
As is the case with other companies in similar industries, the Company faces exposure
from actual or potential claims and legal proceedings. Some of these exposures have the
potential to be material. Information with respect to these and other exposures appears
in Part I Item 3 Legal Proceedings and Part II Item 8 Financial Statements and
Supplementary Data (Note 13 Commitments and Contingencies) in the Companys Annual
Report on Form 10-K for the year ended December 31, 2007, and in Part II Item 1
Legal Proceedings of this report. The Company cannot currently estimate the final
outcome of many of the items described or the ultimate amount of potential losses.
Pursuant to Statement of Financial Accounting Standards No. 5, Accounting for
Contingencies, accruals for estimated losses are recorded at the time information
becomes available indicating that losses are probable and that the amounts are reasonably
estimable. Amounts so accrued are not discounted. While the ultimate liabilities relating
to claims and proceedings may be significant to profitability in the period recognized,
it is managements opinion that such liabilities, when finally determined, will not have
an adverse material effect on Sonocos consolidated financial position or liquidity.
19
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
Environmental Matters
During the fourth quarter of 2005, the U. S. Environmental Protection Agency
(EPA) notified U.S. Paper Mills Corp. (U.S. Mills), a wholly owned subsidiary of the
Company, that U.S. Mills and NCR Corporation (NCR), an unrelated party, would be jointly
held responsible to undertake a program to remove and dispose of certain PCB-contaminated
sediments at a particular site on the lower Fox River in Wisconsin (the Site) which is
now labeled by EPA as Phase 1. U.S. Mills and NCR reached an agreement between themselves
that each would fund 50% of the costs of remediation, which the Company currently
estimates to be between $29,900 and $39,100 for the Site project as a whole. The Company
has expensed a total of $17,650 for its estimated share of the total cleanup cost. Of
the total expensed, $12,500 was recorded in 2005, and $5,150 was recorded in 2007.
Through September 28, 2008, a total of $9,914 has been spent on remediation of the Site.
The remaining accrual of $7,736 represents the Companys best estimate of what it is
likely to pay to complete the Site project. However, the actual costs associated with
cleanup of this particular site are dependent upon many factors and it is reasonably
possible that remediation costs could be higher than the current estimate of project
costs. Moreover, U.S. Mills and NCR are in the early stages of a mediation proceeding
with a contractor on the project who claims additional compensation. The Company
acquired U.S. Mills in 2001, and the alleged contamination predates the acquisition.
In February 2007, the EPA and Wisconsin Department of Natural Resources (WDNR) issued a
general notice of potential liability under the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA) and a request to participate in remedial action
implementation negotiations relating to a stretch of the lower Fox River, including the
bay at Green Bay, (Operating Units 2 5) to eight potentially responsible parties,
including U.S. Mills. Operating Units 2 5 include but also comprise a vastly larger
area than the Site. Although it has not accepted any liability, U.S. Mills is reviewing
this information and discussing possible remediation scenarios, and the possible
allocation of responsibility therefor, with other potentially responsible parties. On
April 9, 2007, U.S. Mills, in conjunction with other potentially responsible parties,
presented to the EPA and the WDNR a proposed schedule to mediate the allocation issues
among eight potentially responsible parties, including U.S. Mills. Non-binding mediation
began in May 2007 and continued as bilateral/multilateral negotiations. To date, no
agreement among the parties has occurred. NCR and Appleton Papers, Inc. sued a number of
the mediation parties and other potentially responsible parties, and included U.S. Mills
in June 2008. Their suit seeks recovery of costs previously incurred, including natural
resource damages, and an allocation among all the parties of the total cost of
remediation. The court has initially limited discovery to information regarding when
each party knew, or should have known, that recycling NCR-brand carbonless paper would
result in the discharge of PCBs to a water body and what action, if any, each party took
to avoid the risk of further contamination. The court has set a trial date for those
issues only for December 1, 2009. U.S. Mills is vigorously defending the suit against
it.
On November 13, 2007, EPA issued a unilateral Administrative Order for Remedial Action
pursuant to Section 106 of CERCLA. The order requires U.S. Mills and the seven other
respondents to jointly take various actions to clean up Operating Units 2 5. The order
establishes two phases of work. The first phase consists of planning and design work as
well as preparation for dredging and other remediation work and must be completed by
December 31, 2008. The second phase consists primarily of dredging and disposing of
contaminated sediments and capping of the dredged and less contaminated areas of the
river bottom. The second phase is required to begin in 2009 when weather conditions
permit and is expected to continue for several years. The order also provides for a
$32.5 per day penalty for failure by a respondent to comply with its terms as well as
exposing a non-complying respondent to potential treble damages. Although U.S. Mills has
reserved its rights to contest liability for any portion of the work, it is cooperating
with the other respondents to comply with the first phase of the order, although its
financial contribution will likely be determined by the lawsuit commenced in June 2008.
As of September 28, 2008, U.S. Mills had accrued a total of $60,825 for potential
liabilities associated with the Fox River contamination (not including amounts accrued
for remediation at the Site). That amount represents the minimum of the range of
probable loss that can be reasonably estimated based on information available through the
date of this report. The accrual had been $35,000 and $20,000 at March 30, 2008 and
December
20
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(unaudited)
31, 2007, respectively. In two separate actions during 2008, U.S. Mills increased its
estimate of the minimum amount of potential loss it believes it is likely to incur for
all Fox River related liabilities (other than the Site) from $20,000 to $60,825.
Accordingly, U.S. Mills recognized additional pre-tax charges of $40,825 in 2008 ($15,000
in the first quarter, followed by $25,825 in the second quarter) for such potential
liabilities. Also during 2008, settlements totaling $40,825 were reached on certain of
the insurance policies covering the Fox River contamination. The recognition of these
insurance settlements effectively offset the impact to quarterly earnings of the
additional charges in both the first and second quarters of 2008. Nevertheless, U.S.
Mills ultimate share of the liability, and any claims against the Company, could
conceivably exceed the net worth of U.S. Mills. However, the Company does not believe it
is probable that the effect of U.S. Mills Fox River liabilities would result in a
consolidated pre-tax loss that would exceed the net worth of U.S. Mills, which was
approximately $76,000 at September 28, 2008.
The Company has been named as a potentially responsible party at several other
environmentally contaminated sites. All of the sites are also the responsibility of other
parties. The potential remediation liabilities are shared with such other parties, and,
in most cases, the Companys share, if any, cannot be reasonably estimated at the current
time.
As of September 28, 2008 and December 31, 2007, the Company (and its subsidiaries) had
accrued $71,469 and $31,058, respectively, related to environmental contingencies. Of
these, a total of $68,561 and $28,996 relate to U.S. Mills at September 28, 2008 and
December 31, 2007, respectively. These accruals are included in Accrued expenses and
other on the Companys Condensed Consolidated Balance Sheets. As discussed above, U.S.
Mills also recognized a $40,825 benefit from settlements reached on certain insurance
policies covering the Fox River contamination. All of the cash proceeds from these
settlements have been received by U.S. Mills. Of the total received, $32,000 is
restricted for use on liabilities associated with the Fox River contamination. U.S.
Mills two remaining insurance carriers are in liquidation. It is possible that U.S.
Mills may recover from these carriers a small portion of the costs it ultimately incurs.
U.S. Mills may also be able to reallocate some of the costs it incurs among other
parties. There can be no assurance that such claims for recovery would be successful and
no amounts have been recognized in the consolidated financial statements of the Company
for such potential recovery or reallocation.
21
Report of Independent Registered Public Accounting Firm
To the Shareholders and Directors of Sonoco Products Company:
We have reviewed the accompanying condensed consolidated balance sheets of Sonoco Products Company
as of September 28, 2008, and the related condensed consolidated statements of income for the three
month and nine-month periods ended September 28, 2008 and September 30, 2007 and the condensed
consolidated statements of cash flows for the nine-month periods ended September 28, 2008 and
September 30, 2007. These interim financial statements are the responsibility of the Companys
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 (United States), 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, 2007, and the related
consolidated statements of income, shareholders equity and cash flows for the year then ended (not
presented herein), and in our report dated February 28, 2008, 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, 2007, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it has been derived.
/s/PricewaterhouseCoopers LLP
Charlotte, North Carolina
October 29, 2008
22
SONOCO PRODUCTS COMPANY
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Statements included in this report that are not historical in nature, are intended to be, and are
hereby identified as forward-looking statements for purposes of the safe harbor provided by
Section 21E of the Securities Exchange Act of 1934, as amended. The words estimate, project,
intend, expect, believe, consider, plan, anticipate, objective, goal, guidance,
outlook, forecasts and similar expressions identify forward-looking statements.
Forward-looking statements include, but are not limited to statements regarding offsetting high
raw material costs; improved productivity and cost containment; adequacy of income tax
provisions; refinancing of debt; adequacy of cash flows; anticipated amounts and uses of cash
flows; effects of acquisitions and dispositions; adequacy of provisions for environmental
liabilities; financial strategies and the results expected from them; continued payments of
dividends; stock repurchases; and producing improvements in earnings. Such forward-looking
statements are based on current expectations, estimates and projections about our industry,
managements beliefs and certain assumptions made by management. Such information includes,
without limitation, discussions as to guidance and other estimates, expectations, beliefs, plans,
strategies and objectives concerning our future financial and operating performance. These
statements are not guarantees of future performance and are subject to certain risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ
materially from those expressed or forecasted in such forward-looking statements. The risks and
uncertainties include, without limitation:
|
|
|
Availability and pricing of raw materials; |
|
|
|
|
Success of new product development and introduction; |
|
|
|
|
Ability to maintain or increase productivity levels and contain or reduce costs; |
|
|
|
|
International, national and local economic and market conditions; |
|
|
|
|
Availability of credit to us, our customers and/or our suppliers in needed amounts
and/or on reasonable terms; |
|
|
|
|
Fluctuations in obligations and earnings of pension and postretirement benefit plans; |
|
|
|
|
Ability to maintain market share; |
|
|
|
|
Pricing pressures and demand for products; |
|
|
|
|
Continued strength of our paperboard-based tubes and cores and composite can
operations; |
|
|
|
|
Anticipated results of restructuring activities; |
|
|
|
|
Resolution of income tax contingencies; |
|
|
|
|
Ability to successfully integrate newly acquired businesses into the Companys
operations; |
|
|
|
|
Currency stability and the rate of growth in foreign markets; |
|
|
|
|
Use of financial instruments to hedge foreign currency, interest rate and commodity
price risk; |
|
|
|
|
Actions of government agencies and changes in laws and regulations affecting the
Company; |
|
|
|
|
Liability for and anticipated costs of environmental remediation actions; |
|
|
|
|
Ability to weather the current economic downturn; |
|
|
|
|
Loss of consumer or investor confidence; and |
|
|
|
|
Economic disruptions resulting from terrorist activities. |
The Company undertakes no obligation to publicly update or revise forward-looking statements,
whether as a result of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this report might not occur.
23
SONOCO PRODUCTS COMPANY
COMPANY OVERVIEW
Sonoco is a leading manufacturer of industrial and consumer packaging products and provider of
packaging services, with 334 locations in 35 countries.
Sonoco competes in multiple product categories with the majority of its operations organized and
reported in three segments: Consumer Packaging, Tubes and Cores/Paper and Packaging Services.
Various other operations are reported as All Other Sonoco. The majority of the Companys revenues
are from products and services sold to consumer and industrial products companies for use in the
packaging of their products for sale or shipment. The Company also manufactures paperboard,
primarily from recycled materials, for both internal use and open market sale. Each of the
Companys operating units has its own sales staff and maintains direct sales relationships with its
customers.
Third Quarter 2008 Compared with Third Quarter 2007
RESULTS OF OPERATIONS
The following discussion provides a review of results for the three months ended September 28, 2008
versus the three months ended September 30, 2007.
OVERVIEW
Sales for the third quarter were higher than the same period last year, despite volume declines,
due to price increases and the favorable impact of foreign currency translation. On a net basis,
selling price increases did not add significantly to gross profit as they were implemented to
offset the effect of higher costs. Therefore, reduced volume, resulting partially from slowing
economic activity, was the major contributor to a decline in gross profit margin to 17.4%, compared
with 18.2% in 2007.
Selling, general and administrative expenses (S&A) decreased from prior year levels, primarily due
to cost containment efforts as well as lower management incentive expenses. Included in 2007 costs
was a $1.1 million adjustment to an environmental reserve. The S&A cost decrease largely offset
the impact of lower gross margins.
Net income for the third quarter of 2008 was $57.4 million, down from the $64.5 million reported
for the same period in 2007. 2008 earnings included $3.3 million of after-tax charges stemming
from previously announced plant closings, while 2007 results included after-tax asset impairment
and restructuring charges totaling $11.5 million and a $0.6 million after-tax environmental reserve
adjustment associated with a subsidiarys paper operation. Income taxes accounted for a
significant portion of the difference in net income between years. The Companys provision for
income taxes was a benefit of $2.0 million for the third quarter of 2007, primarily due to the
release of reserves for uncertain tax positions upon expiration of their related statutory
assessment periods.
Growing weakness in the economy, exacerbated by recent credit market turmoil, together with higher
year-over-year raw material, energy, freight and other costs, has pressured results in most of the
Companys businesses, particularly those that sell into industrial markets. These factors are
expected to continue to impact the Company in the fourth quarter and well into the next year. In
the case of steel, it is anticipated that due to the timing of price resets, the Companys 2009
usage will be at costs significantly higher than in 2008. The Company has implemented, or intends
to implement, various price increases to help offset higher costs and is working to further
streamline operations, control expenses, and maximize cash flow from operations. While the success
of these efforts and the depth and duration of the current negative economic environment and its
impact on the Company are uncertain, management believes the Companys strong balance sheet and
diverse mix of business leave it well positioned to weather the downturn.
OPERATING REVENUE
Net sales for the third quarter of 2008 were $1,063 million, compared to $1,030 million for the
third quarter of 2007, an increase of $33 million.
24
SONOCO PRODUCTS COMPANY
The components of the sales change were:
|
|
|
|
|
($ in millions) |
|
|
|
|
|
Selling Prices |
|
$ |
30 |
|
Foreign Currency Translation |
|
|
27 |
|
Acquisitions/Divestitures |
|
|
9 |
|
Volume/Mix |
|
|
(33 |
) |
|
Total Sales Increase |
|
$ |
33 |
|
|
Selling prices throughout most of the Company were higher than in the third quarter of 2007,
reflecting price increases implemented over the past year to offset the higher costs of materials,
energy and freight. Company-wide volume was approximately 3% below third quarter 2007 levels, with
declines in the Tubes and Cores/Paper and Packaging Services segments, along with those businesses
in All Other Sonoco, being only partially offset by volume increases in the Consumer Packaging
segment.
COSTS AND EXPENSES
Charges and related asset impairments recorded in connection with restructuring actions totaled
$5.5 million and $17.4 million for the third quarters of 2008 and 2007, respectively. The third
quarter of 2007 includes asset impairment charges of $15.1 million, primarily related to the
Companys metal ends plant in Brazil and its rigid plastics plant in Wisconsin. Additional
information regarding restructuring and impairment actions is provided in Note 4 to the
Consolidated Financial Statements. These charges are not allocated to the reporting segments.
Results for the third quarter of 2007 also included a $1.1 million charge to the environmental
reserve at a subsidiarys paper operation.
Expenses related to the Companys defined benefit pension plans totaled $5.7 million and $8.1
million for the quarters ended September 28, 2008 and September 30, 2007, respectively. For its
U.S. defined benefit pension plans, the expected return on plan assets for 2008 was 8.5%; however,
recent declines in global equity markets through September 28, 2008, have resulted in a negative
return of approximately 14%, significantly reducing the fair value of the Companys plan assets.
The 2008 expense for these plans will not be affected by the decline in asset values; however,
because the 2009 expense will be based on asset values as of December 31, 2008, the declines will
likely impact next years expense. If the 2009 pension expense for its U.S. plans were to be based
on the market value of plan assets at September 28, 2008, it would result in a higher
year-over-year expense of approximately $30 million.
Operating costs were negatively affected by increasing market prices for raw materials, energy and
freight, although offset by higher selling prices. Manufacturing productivity improvements were
able to largely offset higher labor and other converting costs. Selling and administrative costs
decreased from prior year levels, primarily due to cost containment efforts as well as a reduction
of management incentive expenses. Included in 2007 spending was a $1.1 million adjustment to an
environmental reserve. These decreases largely offset the impact of lower gross margins.
Net interest expense for the third quarter of 2008 decreased to $10.6 million, compared with $14.1
million during the same period in 2007, due to lower debt levels and reduced interest rates.
The effective tax rate for the Company for the third quarter of 2008 was 28.9 % compared to a net
income tax benefit of $2.0 million (3.4%) for the same period of 2007, primarily due to the release
of reserves upon expiration of their related statutory assessment periods, which were higher in
2007 than in 2008.
ANNUAL GOODWILL REVIEW
During the third quarter, the Company completed its annual test for goodwill impairment in
accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets. No impairment charge for goodwill was required. The evaluation used forward-looking
projections, which included expected improvement in the results of certain operations within the
Consumer Packaging and Packaging Services segments. If actual performance in these reporting units
falls short of the projected results, non-cash impairment charges may be required. Total goodwill
associated with these reporting units is approximately $370 million.
25
SONOCO PRODUCTS COMPANY
REPORTABLE SEGMENTS
The following table recaps net sales for the third quarters of 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 28, 2008 |
|
|
September 30, 2007 |
|
Net Sales: |
|
|
|
|
|
|
|
|
Consumer Packaging |
|
$ |
398,825 |
|
|
$ |
369,472 |
|
Tubes and Cores/ Paper |
|
|
435,685 |
|
|
|
433,686 |
|
Packaging Services |
|
|
135,122 |
|
|
|
132,445 |
|
All Other Sonoco |
|
|
93,618 |
|
|
|
94,161 |
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
1,063,250 |
|
|
$ |
1,029,764 |
|
|
|
|
|
|
|
|
Consolidated operating profits, also referred to as Income before income taxes on the Condensed
Consolidated Statements of Income, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 28, 2008 |
|
|
September 30, 2007 |
|
Income before income taxes: |
|
|
|
|
|
|
|
|
Segment Operating Profit |
|
|
|
|
|
|
|
|
Consumer Packaging |
|
$ |
28,899 |
|
|
$ |
23,696 |
|
Tubes and Cores/ Paper |
|
|
41,991 |
|
|
|
42,339 |
|
Packaging Services |
|
|
9,074 |
|
|
|
10,924 |
|
All Other Sonoco |
|
|
11,783 |
|
|
|
13,439 |
|
Restructuring & Impairment Charges |
|
|
(5,350 |
) |
|
|
(17,401 |
) |
Interest, net |
|
|
(10,629 |
) |
|
|
(14,054 |
) |
|
|
|
|
|
|
|
Consolidated |
|
$ |
75,588 |
|
|
$ |
58,943 |
|
|
|
|
|
|
|
|
Segment results are used by Company management to evaluate segment performance and do not include
restructuring, impairment and net interest charges. Accordingly, the term segment operating
profit is defined as the segments portion of Income before income taxes excluding those items.
All other general corporate expenses have been allocated as operating costs to each of the
Companys reportable segments and All Other Sonoco.
Consumer Packaging
Sonocos Consumer Packaging segment includes the following products: round and shaped rigid
packaging (both composite and plastic); printed flexible packaging; and metal and peelable membrane
ends and closures.
Third quarter 2008 sales increased $29 million, or 8%, in the segment compared with the third
quarter of 2007. Higher selling prices increased third quarter sales in this segment by
approximately $18 million. Acquisitions (net of a reduction from the partial exit of the composite
can business in Europe) and favorable foreign currency translation, also contributed to the sales
increase. Overall segment volume was slightly favorable compared to 2007 levels, as increases in
ends and closures along with North American rigid paper and plastic were nearly offset by lower
volume in rigid packaging in Europe and flexible packaging.
Segment operating profit was up 22% in the third quarter, primarily due to productivity
improvements resulting from the resolution of operational issues experienced last year in flexible
packaging and an improved mix of business attributable in part to the closing of a metal ends plant
in Brazil and the transfer of some of this business to the United States at a higher margin.
Higher selling prices offset inflation in material, energy and freight costs.
Tubes and Cores/Paper
The Tubes and Cores/Paper segment includes the following products: high-performance paper and
composite paperboard tubes and cores; fiber-based construction tubes and forms; recycled
paperboard, linerboard, recovered paper and other recycled materials.
Third quarter 2008 sales for the segment were up $2 million, less than 1%, compared with the same
period in 2007, benefiting from higher selling prices throughout the segment and the favorable
effect of foreign currency translation.
26
SONOCO PRODUCTS COMPANY
Partially offsetting these favorable factors was the effect of lower volume in most global tube,
core and paper markets and the Companys closure at the end of last year of its paper operations in
China. The lower volume in tubes and cores is primarily due to the effect of the slowing economy
on the film core and textile markets.
Segment operating profit showed a small decrease of $0.3 million as the impact of lower volumes and
higher costs for energy, freight and labor were only partially offset by productivity improvements
and selling price increases. 2007 results included the unfavorable impact of a $1.1 million
adjustment to the environmental reserve at a subsidiarys paper operation.
Packaging Services
The Packaging Services segment includes the following products and services: designing,
manufacturing, assembling, packing and distributing temporary, semipermanent and permanent
point-of-purchase displays; brand artwork management; and supply chain management services,
including contract packing, fulfillment and scalable service centers.
Third quarter 2008 sales for the segment increased 2% or $3 million from third quarter 2007 levels.
Lower volume throughout the segment and lower selling prices in the pack centers were more than
offset by the benefit of foreign currency translation.
Segment operating profit declined nearly 17% in the third quarter, compared with the same period in
2007. The primary cause of this drop was lower volume in point-of-purchase displays and
fulfillment along with lower prices in the pack centers. The decreased contract packing volume had
a minimal impact on segment profitability due to the pass-through nature of these sales.
All Other Sonoco
All Other Sonoco includes businesses that are not aggregated in a reportable segment and includes
the following products: wooden, metal and composite wire and cable reels, molded and extruded
plastics, custom-designed protective packaging and paper amenities such as coasters and glass
covers.
Third quarter 2008 sales in All Other Sonoco declined slightly from the same period in 2007. The
slow housing market resulted in lower volumes in wire and cable reels, protective packaging and
molded plastics. However, increased selling prices, the effect of a fourth quarter 2007
acquisition in molded plastics, and favorable foreign currency translation mostly offset the impact
to sales of the lower volume.
Operating profit for the third quarter was down 12% from the same period in 2007, due to lower
volumes and an unfavorable shift in the mix of business, partially offset by productivity
improvements. Increased selling prices were more than offset by higher costs of materials, freight
and energy.
Nine Months Ended September 28, 2008 Compared with Nine Months Ended September 30, 2007
RESULTS OF OPERATIONS
The following discussion provides a review of results for the nine months ended September 28, 2008
versus the nine months ended September 30, 2007.
OVERVIEW
Sales for the first nine months of 2008 were higher than the same period last year due to price
increases, acquisitions and the favorable impact of foreign currency translation, despite volume
declines. Because the selling price increases were largely offset by the effect of global raw
material inflation and rising energy and freight costs, their impact on gross profit was reduced.
As a result, gross profit was up 0.6 % from 2007 levels, but this increase came on a 7% increase in
reported sales and resulted in a decline in the gross profit margin to 17.7%, compared with 18.9%
in 2007.
Selling, general and administrative expenses decreased from prior year levels, primarily due to a
$21.1 million charge in 2007 related to an environmental claim at a subsidiarys paper operations
in Wisconsin.
27
SONOCO PRODUCTS COMPANY
Net income for the first three quarters of 2008 was $128.6 million, a decrease of approximately 20%
when compared to $160.0 million for the same period in 2007. Current year results were
significantly affected by a $31.0 million after-tax non-cash impairment charge for the Companys
remaining financial interest related to the 2003 sale of its high density film business. In
addition, current year-to-date results include after-tax restructuring charges of $17.7 million.
Prior year results included after-tax asset impairment charges of $9.9 million, primarily at the
Companys metal ends plant in Brazil and its rigid plastics plant in Wisconsin, $9.2 million of
after-tax restructuring charges and a $12.4 million after-tax impact from the environmental claim
noted above. Although results for 2008 also included an after-tax charge of $24.4 million related
to this same environmental claim, the charge was effectively offset by recognized insurance
recoveries.
OPERATING REVENUE
Net sales for the first three quarters of 2008 were $3,188 million, compared to $2,980 million for
the same period of 2007, an increase of $208 million or 7%.
The components of the sales change were:
|
|
|
|
|
($ in millions) |
|
|
|
|
|
Foreign Currency Translation |
|
$ |
119 |
|
Selling Prices |
|
|
89 |
|
Acquisitions/Divestitures |
|
|
73 |
|
Volume/Mix |
|
|
(73 |
) |
|
Total Sales Increase |
|
$ |
208 |
|
|
The increase from selling prices reflects adjustments implemented over the past year to offset
higher costs of material, energy and freight. The acquisition of Matrix Packaging, Inc. in May 2007
accounted for the majority of the effect of acquisitions on year-over-year net sales. Volume
improvements in rigid paper and plastics, contract packing, and Latin America tubes and cores/paper
were more than offset by declines throughout most of the rest of the Company, most notably in those
businesses serving industrial markets.
COSTS AND EXPENSES
During the first nine months of 2008, the Company incurred a non-cash impairment charge of $42.7
million for the Companys remaining financial interest related to the 2003 sale of its high density
film business. Restructuring and restructuring related asset impairment charges totaled $35.2
million and $27.5 million for the first nine months of 2008 and 2007, respectively. Additional
information regarding restructuring actions is provided in Note 4 to the Consolidated Financial
Statements. These charges are not allocated to the reporting segments. In addition, 2007
results included a charge of $21.1 million related to an environmental claim at a subsidiarys
paper operations in Wisconsin.
Current year operating expenses were significantly affected by the rising cost of raw materials,
primarily old corrugated containers, in addition to energy and freight, but the impact was offset
by higher selling prices. Manufacturing productivity improvements partially offset the effect of
lower volume, an unfavorable change in the mix of business, and increased converting costs. Selling
and administrative costs were lower than the first nine months of 2007 by $14.4 million, due to the
$21.1 million charge in 2007 related to the environmental claim discussed above.
Net interest expense for the first three quarters of 2008 decreased to $36.0 million, compared with
$38.3 million during the same period of 2007. The decrease was due primarily to lower debt levels
and lower average interest rates versus the prior year. As a result of the impairment of the
financial assets discussed above, the Company ceased accruing interest income on these instruments,
accounting for approximately $1.4 million of a year-over-year decrease in interest income,
partially offsetting the favorable impacts of lower debt levels and lower interest rates.
The effective tax rate for the first nine months of 2008 was 29.2% compared with 20.8% for the same
period last year. Tax expense in 2008 included the favorable effect of a tax law change in Italy,
the unfavorable effects of a valuation allowance recorded against capital loss carryovers created
by the impairment of financial assets discussed above, and certain restructuring charges for which
tax benefits could not be recognized. The effective tax rates for both periods reflect the
benefits of reduced reserves due to the expiration of U.S. federal and state statutes of
limitations, which were higher in 2007 than in 2008.
28
SONOCO PRODUCTS COMPANY
REPORTABLE SEGMENTS
The following table recaps net sales for the first three quarters of 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 28, 2008 |
|
|
September 30, 2007 |
|
Net Sales: |
|
|
|
|
|
|
|
|
Consumer Packaging |
|
$ |
1,184,355 |
|
|
$ |
1,051,178 |
|
Tubes and Cores/ Paper |
|
|
1,327,289 |
|
|
|
1,268,300 |
|
Packaging Services |
|
|
397,648 |
|
|
|
377,787 |
|
All Other Sonoco |
|
|
278,521 |
|
|
|
282,609 |
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
3,187,813 |
|
|
$ |
2,979,874 |
|
|
|
|
|
|
|
|
Consolidated operating profits, which are referred to as Income before income taxes on the
Condensed Consolidated Statements of Income, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 28, 2008 |
|
|
September 30, 2007 |
|
Income before income taxes: |
|
|
|
|
|
|
|
|
Segment Operating Profit |
|
|
|
|
|
|
|
|
Consumer Packaging |
|
$ |
97,665 |
|
|
$ |
75,781 |
|
Tubes and Cores/ Paper |
|
|
116,601 |
|
|
|
106,036 |
|
Packaging Services |
|
|
23,945 |
|
|
|
33,869 |
|
All Other Sonoco |
|
|
35,569 |
|
|
|
40,441 |
|
Restructuring & Impairment Charges |
|
|
(77,838 |
) |
|
|
(27,496 |
) |
Interest, net |
|
|
(35,954 |
) |
|
|
(38,302 |
) |
|
|
|
|
|
|
|
Consolidated |
|
$ |
159,988 |
|
|
$ |
190,329 |
|
|
|
|
|
|
|
|
Consumer Packaging
Sales in the Consumer Packaging segment increased approximately $133 million, or 13%, from last
years first nine months. This increase was due to the year-over-year impact of acquisitions made
in 2007, selling price increases throughout the segment and the favorable effect of foreign
currency translation. Excluding the effect of acquisitions, year-to-date volume decreased less than
1% as a decline in flexible packaging was partially offset by higher sales of rigid paper and
plastic containers.
Segment operating profit increased approximately 29% due to productivity improvements resulting
from the resolution of operational issues experienced last year in flexible packaging and rigid
paper and plastic, and an improved mix of business attributable in part to the closing of a metal
ends plant in Brazil and the related transfer of certain business to the United States at a higher
margin. Selling price increases offset higher converting costs and increased costs for raw
materials, energy and freight, while the favorable effect of foreign currency translation was able
to only partially offset the effects of declining volume.
Tubes and Cores/Paper
Sales in the Tubes and Cores/Paper segment increased approximately $59 million, or 5%, from 2007
levels. This increase resulted from higher selling prices throughout the segment and favorable
foreign currency translation, partially offset by lower volume resulting from a slower economy, the
closure of several customers paper mills in North America, and the effect of plant closures in
China.
Segment operating profit showed an increase of nearly $11 million as prior year results included a
$21 million charge for environmental reserves. Manufacturing productivity improvements, along with
the effect of favorable foreign currency translation, also contributed to the rise in segmental
operating profit. These factors were partially offset by lower volume throughout the segment and an
unfavorable shift in the mix of business. In addition, selling price increases did not compensate
for higher costs of material, energy, freight and converting costs.
29
SONOCO PRODUCTS COMPANY
Packaging Services
Sales during the first nine months of 2008 in the Packaging Services segment increased
approximately $20 million, or 5%, from 2007. Sales in the segment benefited from higher contract
packing volume along with the favorable effect of foreign currency translation. These factors were
partially offset by lower volumes and prices in point-of-purchase displays, both down as a result
of the unfavorable outcome of 2007 competitive bidding activity with a major customer. In
addition, lower contract packing pricing had a negative impact on the year over year sales
comparison.
The volume declines in point of purchase displays along with lower prices throughout the segment
were the primary drivers of a 29% decline in segment operating profit. Because contract packing
services are performed on a cost pass-through basis, the volume decrease did not have a significant
impact on operating profits.
All Other Sonoco
Sales in All Other Sonoco decreased approximately $4 million, or 1% from the first three quarters
of 2007. Volume declines in wire and cable reels, protective packaging and molded plastics,
primarily as a result of a slow housing market, more than offset selling price increases, favorable
foreign currency translation and the impact of a small acquisition made in the fourth quarter of
2007.
Operating profit decreased 12% as a result of the volume decline along with an unfavorable shift in
the mix of business. Productivity improvements in protective packaging, wire and cable reels and
molded and extruded plastics partially offset these negative factors. Selling price increases
offset higher material, energy and freight costs.
Financial Position, Liquidity and Capital Resources
The Companys financial position remained strong during the third quarter of 2008. Cash flows from
operations totaled $310.2 million in the first nine months of 2008, compared with $257.9 million in
the same period last year. The year-over-year increase of $52.3 million was primarily the result of
higher net income (excluding non-cash asset impairment charges), cash received from insurance
settlements relating to the Fox River environmental issue at the Companys U.S. Paper Mills Corp.
subsidiary, and relative year-over-year improvements in working capital.
During the nine months ended September 28, 2008, the Company funded capital expenditures of $91.5
million, acquisitions of $5.5 million, and paid dividends of $79.6 million. Total debt decreased
by $63.0 million during the first nine months of 2008 to $786.5 million at September 28, 2008, as
cash generated from operations was used to pay down outstanding borrowings. On January 2, 2008,
the Company prepaid its 6.125% industrial revenue bond with $35.1 million of other lower rate
borrowings classified as long-term. On April 1, 2008, the Company prepaid its 6.0% industrial
revenue bond with $35.0 million of other lower rate borrowings classified as long-term.
During the nine months ended September 28, 2008, the Company made contributions of $11.1 million to
its various retirement and postretirement benefit plans. Funding of the Companys U.S. defined
benefit pension plan was not required in 2008. The 2009 funding requirement will not be determined
until the December 31, 2008 asset values are known; however, based on the September 28, 2008 asset
values, the Company would not be required to make any contributions to the Plan in 2009 due to its
ability to utilize a credit balance that exists due to having previously funded the Plan in excess
of the minimum requirement.
The Company operates a $500 million commercial paper program that provides a flexible source of
domestic liquidity. The program is supported by the Companys five-year committed bank credit
facility of an equal amount established May 3, 2006, with a syndicate of twelve lenders. Although
the commercial paper program has continued to operate efficiently during the recent disruption of
global credit markets, the Company has experienced an increase in the effective borrowing rate for
the commercial paper it issues. In the event that the disruption of global credit markets was to
become so severe that the Company was unable to issue commercial paper, it has the contractual
right to draw funds directly on the underlying bank credit facility. Based on the information
currently available to it, the Company believes that the lenders continue to have the ability to
meet their obligations under the facility. At the Companys discretion, the borrowing rate for
such loans could be based on either the agent banks prime rate, or a pre-established spread over
LIBOR. Outstanding commercial paper, a component of the Companys long-term debt, totaled $180.0
million at September 28, 2008.
30
SONOCO PRODUCTS COMPANY
Certain assets and liabilities are reported in the Companys financial statements at fair value,
the fluctuation of which can affect the Companys financial position and results of operations.
Items reported by the Company on a recurring basis at fair value include derivative contracts and
pension and deferred compensation related assets. The vast majority of these items are valued
based either on quoted prices in active and accessible markets or on other observable inputs.
Pension assets are valued annually and currently reflect values as of December 31, 2007. Less than
five percent of the fair values of the Companys pension plan assets are measured using
unobservable inputs. The remaining items are reflected in the financial statements at their fair
value as of the respective balance sheet dates. Fair value measurements are discussed further in
Note 9 to the Consolidated Financial Statements.
At September 28, 2008, the Company had commodity swaps outstanding to fix the cost of a portion of
anticipated raw materials and natural gas purchases. These swaps, which have maturities ranging
from October 2008 to June 2011, qualify as cash flow hedges under FAS 133. The fair market value of
these commodity swaps was a net unfavorable position of $5.8 million at September 28, 2008, and a
net unfavorable position of $2.6 million at December 31, 2007. Natural gas contracts covering an
equivalent of 6.6 million MMBtu, and aluminum contracts covering 7.2 thousand metric tons, were
outstanding at September 28, 2008.
Restructuring and Impairment
Information regarding restructuring charges and restructuring-related asset impairment charges is
provided in Note 4 to the Companys Condensed Consolidated Financial Statements. Information
regarding financial asset impairment charges is provided in Note 5 to the Companys Condensed
Consolidated Financial Statements.
New Accounting Pronouncements
Information regarding new accounting pronouncements is provided in Note 13 to the Companys
Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Information about the Companys exposure to market risk is discussed under Part I, Item 2 in this
report and was disclosed in its Annual Report on Form 10-K for the year ended December 31, 2007,
which was filed with the Securities and Exchange Commission on February 28, 2008. Except for the
change noted in Part II Item 1A Risk Factors of this report, there have been no other
material quantitative or qualitative changes in market risk exposure since the date of that
filing.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision, and with the participation, of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation pursuant to Rule
13a-15(b) under the Securities Exchange Act of 1934 of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on this evaluation,
our principal executive officer and principal financial officer concluded that such controls and
procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were
effective.
Changes in Internal Controls
The Company is continuously seeking to improve the efficiency and effectiveness of its operations
and of its internal controls. This results in refinements to processes throughout the Company.
However, there has been no change in the Companys internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
31
SONOCO PRODUCTS COMPANY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Information with respect to legal proceedings and other exposures appears in Part I Item 3
Legal Proceedings and Part II Item 8 Financial Statements and Supplementary Data (Note 13 -
Commitments and Contingencies) in the Companys Annual Report on Form 10-K for the year ended
December 31, 2007, and in Part I Item 1 Financial Statements (Note 15 Commitments and
Contingencies) of this report. In April 2006, the United States and the State of Wisconsin
(plaintiffs) sued U.S. Paper Mills Corp. (U.S. Mills), a wholly owned subsidiary of the Company,
and NCR Corporation (NCR), an unrelated company, to recover certain costs incurred for response
activities undertaken regarding the release and threatened release of hazardous substances and
specific areas of elevated concentrations of polychlorinated biphenyls (PCBs) in sediments in the
Lower Fox River and Green Bay in northeastern Wisconsin (hereinafter the Site). Pursuant to a
Consent Decree agreed to by NCR and U.S. Mills as a consequence of the litigation, the Site is to
be cleaned up on an expedited basis and NCR and U.S. Mills started removing contaminated sediment
in May 2007. The remediation involves removal of sediment from the riverbed, dewatering of the
sediment and storage at an offsite landfill. U.S. Mills and NCR reached an agreement between
themselves that each would fund 50% of the costs of remediation, which the Company currently
estimates to be between $29.9 million and $39.1 million for the project as a whole. The actual
costs associated with cleanup of this particular site are dependent upon many factors and it is
reasonably possible that remediation costs could be higher than the current estimate of project
costs. Moreover, U.S. Mills and NCR are in the early stages of a mediation proceeding with a
contractor who claims additional compensation.
In addition to the Site discussed above, as previously disclosed in its Annual Report on Form 10-K
for the year ended December 31, 2007, U.S. Mills faces additional exposure related to potential
natural resource damage and environmental remediation costs for a larger stretch of the lower Fox
River, including the bay at Green Bay, which includes the Site discussed above (Operating Units 2
5). On April 9, 2007, U.S. Mills, in conjunction with other potentially responsible parties
(PRPs), presented to the U.S. Environmental Protection Agency and the Wisconsin Department of
Natural Resources a proposed schedule to mediate the allocation issues among eight PRPs, including
U.S. Mills. Non-binding mediation began in May 2007 and continued as bilateral/multilateral
negotiations although no agreement among the parties occurred. On June 12, 2008, NCR and Appleton
Papers, Inc., as plaintiffs, commenced suit in the United States District Court for the Eastern
District of Wisconsin (No. 08-CV-0016-WCG) against U.S. Mills, as one of a number of defendants,
seeking a declaratory judgment allocating among all the parties the costs and damages associated
with the pollution and clean up of the Lower Fox River. The suit also seeks damages from the
defendants for amounts already spent by the plaintiffs, including natural resource damages, and
future amounts to be spent by all parties with regard to the pollution and cleanup of the Lower Fox
River. The court has initially limited discovery to information regarding when each party knew, or
should have known, that recycling NCR-brand carbonless paper would result in the discharge of PCBs
to a water body and what action, if any, each party took to avoid the risk of further
contamination. The court has set a trial date for those issues only for December 1, 2009. U.S.
Mills plans to vigorously defend the suit.
As of September 28, 2008, U.S. Mills had accrued a total of $60.8 million for potential liabilities
associated with the Fox River contamination (not including amounts accrued for remediation at the
Site). That amount represents the minimum of the range of probable loss that can be reasonably
estimated based on information available through the date of this report. At December 31, 2007,
the accrual had been $20.0 million. In two separate actions during 2008, U.S. Mills increased its
estimate of the minimum amount of potential loss it believes it is likely to incur for all Fox
River related liabilities (other than the Site) from $20.0 million to $60.8 million. Accordingly,
U.S. Mills recognized additional pre-tax charges of $40.8 million in 2008 ($15.0 million in the
first quarter, followed by $25.8 million in the second quarter) for such potential liabilities.
Also during 2008, settlements totaling $40.8 million were reached on certain of the insurance
policies covering the Fox River contamination. The recognition of these insurance settlements
effectively offset the impact to quarterly earnings of the additional charges in both the first and
second quarters of 2008. Although the Company lacks a reasonable basis for identifying any amount
within the range of possible loss as a better estimate than any other amount, as has previously
been disclosed, the upper end of the range may exceed the net worth of U.S. Mills. However,
because the discharges of hazardous materials into the environment occurred before the
32
SONOCO PRODUCTS COMPANY
Company acquired U.S. Mills, and U.S. Mills has been operated as a separate subsidiary of the
Company, the Company does not believe that it bears financial responsibility for these legacy
environmental liabilities of U.S. Mills. Therefore, the Company continues to believe that the
maximum additional exposure to its consolidated financial position is limited to the equity
position of U.S. Mills, which was approximately $76 million at September 28, 2008.
On July 7, 2008, the Company was served with a complaint filed in the United States District Court
for South Carolina by the City of Ann Arbor Employees Retirement System, individually and on
behalf of others similarly situated. The suit purports to be a class action on behalf of those who
purchased the Companys common stock between February 7, 2007 and September 18, 2007, except
officers and directors of the Company. The complaint alleges that the Company issued press
releases and made public statements during the class period that were materially false and
misleading because the Company allegedly had no reasonable basis for the earnings projections
contained in the press releases and statements, and that such information caused the market price
of the Companys common stock to be artificially inflated. The Complaint also names certain
Company officers as defendants and seeks an unspecified amount of damages plus interest and
attorneys fees. The Company believes that the claims are without merit and intends to vigorously
defend itself against the suit.
Item 1A. Risk Factors.
Recent turmoil in the credit markets has resulted in higher short-term borrowing costs and, for
some companies, has limited their access to short-term funding. Beyond added borrowing costs, it
is possible that further deterioration in the credit markets could adversely affect the Companys
ability to access funds on reasonable terms in a timely manner. Should such conditions arise and
persist over a period of several weeks, it would significantly impact the Companys ability to
operate its business and execute its plans. In addition, disruption in the credit markets may
negatively impact our customers and/or suppliers ability to conduct business on a normal basis.
Item 6. Exhibits.
|
Exhibit 10-1 |
|
Deferred Compensation Plan for Key Employees of Sonoco Products Company
(a.k.a. Deferred Compensation Plan for Corporate Officers of Sonoco Products
Company), as amended October 15, 2008 |
|
|
Exhibit 10-2 |
|
Omnibus Benefit Restoration Plan of Sonoco Products Company, amended and
restated as of January 1, 2008 |
|
|
Exhibit 10-3 |
|
Deferred Compensation Plan for Outside Directors of Sonoco Products
Company, as amended October 15, 2008 |
|
|
Exhibit 10-4 |
|
Sonoco Products Company Amended and Restated Trust Agreement for
Executives, as of October 15, 2008 |
|
|
Exhibit 10-5 |
|
Sonoco Products Company Amended and Restated Directors Deferral Trust
Agreement, as of October 15, 2008 |
|
|
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) |
33
SONOCO PRODUCTS COMPANY
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
SONOCO PRODUCTS COMPANY |
|
|
|
|
(Registrant) |
|
|
|
|
|
|
|
Date: October 29, 2008
|
|
By: /s/ Charles J. Hupfer
Charles J. Hupfer
|
|
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
|
|
(principal financial officer) |
|
|
|
|
|
|
|
|
|
By: /s/ Barry L. Saunders
Barry L. Saunders
|
|
|
|
|
Vice President and Corporate Controller |
|
|
|
|
(principal accounting officer) |
|
|
34
SONOCO PRODUCTS COMPANY
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
10-1
|
|
Deferred Compensation Plan for Key Employees of Sonoco Products
Company (a.k.a. Deferred Compensation Plan for Corporate Officers
of Sonoco Products Company), as amended October 15, 2008 |
|
|
|
10-2
|
|
Omnibus Benefit Restoration Plan of Sonoco Products Company,
amended and restated as of January 1, 2008 |
|
|
|
10-3
|
|
Deferred Compensation Plan for Outside Directors of Sonoco
Products Company, as amended October 15, 2008 |
|
|
|
10-4
|
|
Sonoco Products Company Amended and Restated Trust Agreement for
Executives, as of October 15, 2008 |
|
|
|
10-5
|
|
Sonoco Products Company Amended and Restated Directors Deferral
Trust Agreement, as of October 15, 2008 |
|
|
|
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) |
35