SONOCO PRODUCTS CO — Interim / Quarterly Report 2004

May 6, 2004

10-Q 1 g88922e10vq.htm SONOCO PRODUCTS, INC. SONOCO PRODUCTS, INC. PAGEBREAK

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

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 28, 2004
	or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __ to __

Commission File No. 0-516

SONOCO PRODUCTS COMPANY

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

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

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

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

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

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

PAGEBREAK

SONOCO PRODUCTS COMPANY

INDEX

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets — March 28, 2004 (unaudited) and
December 31, 2003
Condensed Consolidated Statements of Income — Three Months Ended March
28, 2004 (unaudited) and March 30, 2003 (unaudited)
Condensed Consolidated Statements of Cash Flow — Three Months Ended
March 28, 2004 (unaudited) and March 30, 2003 (unaudited)
Notes to Condensed Consolidated Financial Statements
Report of Independent Accountants
Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
Item 6. Exhibits and Reports on Form 8-K.

2 PAGEBREAK

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements.

SONOCO PRODUCTS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars and shares in thousands)

	March 28, — 2004	December 31,
	(unaudited)	2003*
Assets
Current Assets
Cash and cash equivalents	$ 80,398	$	84,854
Trade accounts receivable, net of allowances	355,859		320,676
Other receivables	35,482		33,066
Inventories:
Finished and in process	113,186		109,080
Materials and supplies	158,352		143,116
Prepaid expenses and other	71,921		64,473
	815,198		755,265
Property, Plant and Equipment, Net	911,470		923,569
Goodwill	382,792		383,954
Other Assets	456,029		457,845
Total Assets	$ 2,565,489	$	2,520,633
Liabilities and Shareholders’ Equity
Current Liabilities
Payable to suppliers	$ 262,061	$	239,300
Accrued expenses and other	209,738		211,342
Notes payable and current portion of long-term debt	199,396		201,367
Taxes on income	18,588		27,585
	689,783		679,594
Long-Term Debt	469,513		473,220
Pension and Other Postretirement Benefits	143,588		137,494
Deferred Income Taxes and Other	223,828		216,165
Commitments and Contingencies
Shareholders’ Equity
Common stock, no par value
Authorized 300,000 shares
97,783 and 97,217 shares outstanding, of which 97,493
and 96,969 were issued at March 28, 2004 and
December 31, 2003, respectively	7,175		7,175
Capital in excess of stated value	348,718		337,136
Accumulated other comprehensive loss	(139,440	)	(136,091	)
Retained earnings	822,324		805,940
Total Shareholders’ Equity	1,038,777		1,014,160
Total Liabilities and Shareholders’ Equity	$ 2,565,489	$	2,520,633

• The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles.

See accompanying Notes to Condensed Consolidated Financial Statements

3 PAGEBREAK

SONOCO PRODUCTS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (Dollars and shares in thousands except per share data)

	Three Months Ended — March 28,	March 30,
	2004	2003
Net sales	$ 695,416	$	656,480
Cost of sales	573,834		532,565
Selling, general and administrative expenses	70,495		70,385
Restructuring charges (see Note 4)	1,328		1,137
Income before interest and income taxes	49,759		52,393
Interest expense	9,923		12,730
Interest income	(1,175	)	(447	)
Income before income taxes	41,011		40,110
Provision for income taxes	5,425		14,440
Income before equity in earnings of affiliates/Minority interest in subsidiaries	35,586		25,670
Equity in earnings of affiliates/Minority interest in subsidiaries	1,254		1,643
Income from continuing operations	36,840		27,313
Income from discontinued operations, net of income taxes	—		1,685
Net income	36,840		28,998
Average common shares outstanding:
Basic	97,608		96,672
Diluted	98,181		96,958
Per common share
Net income:
Basic	$ 0.38	$	0.30
Diluted	$ 0.38	$	0.30
Cash dividends — common	$ 0.21	$	0.21

See accompanying Notes to Condensed Consolidated Financial Statements

4 PAGEBREAK

SONOCO PRODUCTS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Dollars in thousands)

	Three Months Ended — March 28,	March 30,
	2004	2003
Cash Flows from Operating Activities:
Net income	$ 36,840	$	28,998
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization	36,970		39,258
Equity in earnings of affiliates/minority interest in subsidiaries	(1,254	)	(1,643	)
Cash dividends from affiliated companies	950		300
Loss (gain) on disposition of assets	51		(113	)
Deferred taxes	(64	)	4,355
Change in assets and liabilities, net of effects from acquisitions,
dispositions, and foreign currency adjustments:
Receivables	(37,629	)	(39,671	)
Inventories	(19,798	)	(13,801	)
Prepaid expenses	(7,724	)	(3,261	)
Payables and taxes	6,563		18,586
Other assets and liabilities	8,172		7,647
Net cash provided by operating activities	23,077		40,655
Cash Flows from Investing Activities:
Purchase of property, plant and equipment	(24,908	)	(25,425	)
Proceeds from the sale of assets	991		448
Net cash used in investing activities	(23,917	)	(24,977	)
Cash Flows from Financing Activities:
Proceeds from issuance of debt	10,577		6,431
Principal repayment of debt	(10,274	)	(3,200	)
Net increase in commercial paper borrowings	—		1,500
Net increase in bank overdrafts	5,419		11,077
Cash dividends — common	(20,457	)	(20,256	)
Common shares issued	10,963		1,049
Net cash used in financing activities	(3,772	)	(3,399	)
Effects of Exchange Rate Changes on Cash	156		1
Net (Decrease) Increase in Cash and Cash Equivalents	(4,456	)	12,280
Cash and cash equivalents at beginning of period	84,854		31,405
Cash and cash equivalents at end of period	$ 80,398	$	43,685

See accompanying Notes to Condensed Consolidated Financial Statements

5 PAGEBREAK

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

Note 1:	Basis of Interim Presentation
	In the opinion of the management of Sonoco Products Company (the
“Company”), the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial
position, results of operations and cash flows for the interim periods
reported herein. Operating results for the three months ended March
28, 2004, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004. These condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in
the Company’s annual report for the fiscal year ended December 31,
2003.
	With respect to the unaudited condensed consolidated financial
information of the Company for the three month periods ended March
28, 2004 and March 30, 2003 included in this Form 10-Q,
PricewaterhouseCoopers LLP reported that they have applied limited
procedures in accordance with professional standards for a review of
such information. However, their separate report dated May 4, 2004
appearing herein, states that they did not audit and they do not
express an opinion on that unaudited financial information.
Accordingly, the degree of reliance on their report on such
information should be restricted in light of the limited nature of
the review procedures applied. PricewaterhouseCoopers LLP is not
subject to the liability provisions of Section 11 of the Securities
Act of 1933 for their report on the unaudited financial information
because that report is not a “report” or a “part” of the registration
statement prepared or certified by PricewaterhouseCoopers LLP within
the meaning of Sections 7 and 11 of the Act.
	Beginning in the second quarter of 2003, the Company reclassified
shipping and handling costs related to third-party shipments from net
sales to cost of sales on the Condensed Consolidated Statements of
Income in all periods presented. The Company’s Condensed Consolidated
Statement of Income for the first quarter of 2003 has been restated to
reflect this reclassification. Because this reclassification increased
net sales and cost of sales by the same amount, it did not affect
previously reported net income.
	During the fourth quarter of 2003, the Company completed the sale of
its High Density Film business to Hilex Poly Co., LLC, Los Angeles,
California. Operating results of this business have been presented for
the first quarter of 2003 as “Income from discontinued operations, net
of income taxes” in the Company’s Condensed Consolidated Statements of
Income. Items included in the Notes to Condensed Consolidated
Financial Statements that relate to the Consolidated Statement of
Income for the first quarter of 2003 have been restated to reflect the
reclassification of the Company’s High Density Film business as
discontinued operations.
Note 2:	Discontinued Operations
	The financial statements and accompanying notes for prior periods have
been restated to report the revenues and expenses of the components of
the Company that were disposed of separately as discontinued
operations. Income from discontinued operations, net of income taxes
for the first quarter of 2003 represents the results of operations of
the Company’s High Density Film business, which was sold in December
2003.

6 PAGEBREAK

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

The following table sets forth the operating results for the business unit, which was previously reported in the Company’s Consumer Packaging segment:

	Three Months Ended
	March 30, 2003
Net sales	$ 44,707
Income before income taxes	$ 2,632
Provision for income taxes	947
Income from discontinued operations, net
of income taxes	$ 1,685
Income from discontinued operations, net of income
taxes — per diluted share	$ 0.02

	No interest expense or income was allocated to this business unit.
	The Company has no material continuing involvement in the management or
operations of the divested business.
Note 3:	Earnings Per Share
	The following table sets forth the computation of basic and diluted earnings per share:

	Three Months Ended — March 28, 2004	March 30, 2003
Numerator:
Income from continuing operations	$ 36,840	$ 27,313
Income from discontinued
operations, net of income taxes	—	1,685
Net income	$ 36,840	$ 28,998
Denominator:
Average common shares outstanding	97,608	96,672
Dilutive effect of:
Employee stock options	365	125
Contingent employee share awards	208	161
Dilutive shares outstanding	98,181	96,958
Basic earnings per common share:
Income from continuing operations	$ 0.38	$ 0.28
Income from discontinued
operations, net of income taxes	—	0.02
Net income	$ 0.38	$ 0.30
Diluted earnings per common share:
Income from continuing operations	$ 0.38	$ 0.28
Income from discontinued
operations, net of income taxes	—	0.02
Net income	$ 0.38	$ 0.30

Stock options to purchase approximately 5,378 and 8,657 shares at March 28, 2004 and March 30, 2003, respectively, were not dilutive and, therefore, are not included in the computations of diluted income per common share amounts. No adjustments were made to reported net income in the computations of earnings per share.

7 PAGEBREAK

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

| Note 4: |
| --- |
| In August 2003, the Company announced general plans to reduce its
overall cost structure by $54,000 pretax by realigning and centralizing
a number of staff functions and eliminating excess plant capacity.
Pursuant to these plans, the Company has initiated or completed 13
plant closings and has terminated approximately 740 employees. As of
March 28, 2004, the Company had incurred cumulative charges, net of
adjustments, of approximately $54,426 pretax associated with these
activities. Of this amount, $30,934 was related to the Industrial
Packaging segment, $8,718 was related to the Consumer Packaging
segment and $14,774 was associated with Corporate. These
restructuring charges, net of adjustments, consisted of severance and
termination benefits of $41,446, asset impairment charges of $8,604 and
other exit costs of $4,376. The Company expects to recognize an
additional cost of approximately $9,500 pretax in the future associated
with these activities. The Company also expects to announce
throughout the remainder of 2004 the closing of an additional five to
ten plants in furtherance of these plans. The costs associated with
these future plant closings have not yet been determined. |
| During the first quarter of 2004, the Company recognized restructuring
charges, net of adjustments, of $1,328 ($861 after tax), which are
reflected as “Restructuring charges” on the Company’s Condensed
Consolidated Statements of Income. Of these charges, $1,227 was
attributed to the Industrial Packaging segment, and $101 was related to
the Consumer Packaging segment. These restructuring charges, net of
adjustments, consisted of severance and termination benefits of $575,
asset impairment charges of $223 and other exit costs of $530. |
| During the first quarter of 2003, the Company recognized restructuring
charges, net of adjustments, of $1,137 ($728 after tax) related to
previously announced restructuring plans that were completed prior to
December 31, 2003. These charges were primarily associated with
severance costs in Europe in the Industrial Packaging segment as well
as lease termination and restoration costs associated with prior plant
closings in the Consumer Packaging segment. Additionally, the
Company’s High Density Film business, which was divested in December
2003, incurred restructuring charges of approximately $200 ($128 after
tax) in the first quarter of 2003. |
| The following table sets forth the activity in the restructuring
accrual included in “Accrued expenses and other” on the Company’s
Condensed Consolidated Balance Sheets. Restructuring charges are
included in “Restructuring charges” on the Company’s Condensed
Consolidated Statements of Income. In accordance with the agreement of
sale for the High Density Film business, the liability of that business
associated with the restructuring has been retained by the Company and
is, therefore, included in the table below: |

	Severance
	and			Other
	Termination	Asset		Exit
	Benefits	Impairment		Costs		Total
Beginning liability
December 31, 2003	$ 14,708	$	—	$	6,386	$	21,094
New charges	759		246		634		1,639
Cash payments	(6,966	)	—		(1,730	)	(8,696	)
Asset impairment	—		(223	)	—		(223	)
Adjustments	(184	)	(23	)	(104	)	(311	)
Ending liability
March 28, 2004	$ 8,317	$	—	$	5,186	$	13,503

8 PAGEBREAK

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

| | During the first quarter of 2004, the Company recognized writeoffs of
impaired equipment in the Industrial Packaging segment in the amount of
$223. Other exit costs are primarily associated with lease termination
and other miscellaneous plant closing costs. |
| --- | --- |
| | The Company expects to pay the remaining restructuring costs, with the
exception of ongoing pension subsidies and certain building lease
termination expenses, by the end of the first quarter of 2005, using
cash generated from operations. |
| Note 5: | Comprehensive Income |
| | The following table reconciles net income to comprehensive income: |

	Three Months Ended — March 28, 2004	March 30, 2003
Net income	$ 36,840	$	28,998
Other comprehensive income:
Foreign currency translation
adjustments	(4,224	)	14,097
Other adjustments, net of income tax	875		1,194
Comprehensive income	$ 33,491	$	44,289

The following table summarizes the components of accumulated other comprehensive income and the changes in accumulated other comprehensive income, net of tax as applicable, for the quarter ended March 28, 2004:

	Foreign		Minimum			Accumulated
	Currency		Pension			Other
	Translation		Liability			Comprehensive
	Adjustment		Adjustment		Other	Loss
Balance at
December 31, 2003	$ (83,906	)	$ (53,826	)	$ 1,641	$ (136,091	)
Year-to-date change	(4,224	)	—		875	(3,349	)
Balance at
March 28, 2004	$ (88,130	)	$ (53,826	)	$ 2,516	$ (139,440	)

| | The cumulative tax benefit of the Minimum Pension Liability Adjustments
was $25,312 at March 28, 2004 and December 31, 2003. Additionally, the
deferred tax liability of Other items was $1,254 and $940 at March 28,
2004 and December 31, 2003, respectively. |
| --- | --- |
| Note 6: | Goodwill and Other Intangible Assets |
| | Goodwill A summary of the changes in goodwill for the quarter ended March 28,
2004 is as follows: |

	Consumer
	Packaging	Packaging
	Segment	Segment		Total
Balance as of January 1, 2004	$ 162,205	$	221,749	$ 383,954
Foreign currency translation	(1,438	)	276	(1,162	)
Balance as of March 28, 2004	$ 160,767	$	222,025	$ 382,792

9 PAGEBREAK

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

Other Intangible Assets A summary of other intangible assets as of March 28, 2004 and December 31, 2003 is as follows:

	March 28, 2004			December 31, 2003
	Gross			Gross
	Carrying	Accumulated		Carrying	Accumulated
	Amount	Amortization		Amount	Amortization
Patents	$ 3,268	$ (2,626	)	$ 3,268	$ (2,564	)
Customer lists	38,223	(5,127	)	38,223	(4,630	)
Land use rights	5,873	(1,999	)	5,873	(1,963	)
Supply agreements	5,261	(4,030	)	5,261	(3,715	)
Other	6,404	(2,978	)	6,404	(2,756	)
Total	$ 59,029	$ (16,760	)	$ 59,029	$ (15,628	)

| | Aggregate amortization expense on intangible assets was $1,132 and $971
for the three months ended March 28, 2004 and March 30, 2003,
respectively. Amortization expense on the other intangible assets
identified in the table above is expected to approximate $3,800 in
2004, $3,800 in 2005, $3,500 in 2006, $3,200 in 2007 and $3,000 in
2008. Other intangible assets are included in “Other Assets” on the
Company’s Condensed Consolidated Balance Sheets. |
| --- | --- |
| Note 7: | Dividend Declarations |
| | On February 4, 2004, the Board of Directors declared a regular
quarterly dividend of $0.21 per share. This dividend was paid March
10, 2004 to all shareholders of record as of February 20, 2004. |
| | On April 21, 2004, the Board of Directors declared a regular quarterly
dividend of $0.22 per share, payable June 10, 2004 to all shareholders
of record as of May 21, 2004. |
| Note 8: | Stock Plans |
| | As permitted by Statement of Financial Accounting Standards No. 123,
‘Accounting for Stock-Based Compensation’ (FAS 123), the Company has
elected to account for its stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board (APB) Opinion
No. 25, ‘Accounting for Stock Issued to Employees,’ and its related
interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the
Company’s stock at the date of the grant over the amount an employee
must pay to acquire the stock. Compensation cost for performance stock
options is recorded based on the quoted market price of the Company’s
stock at the end of the period. |
| | The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition
provisions of FAS 123 to stock-based employee compensation. |

	Three Months Ended — March 28, 2004	March 30, 2003
Net income, as reported	$ 36,840	$	28,998
Add: Stock-based employee
compensation cost, net of
related tax effects, included in
net income, as reported	399		224
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects	(1,243	)	(1,425	)
Proforma net income	$ 35,996	$	27,797
Earnings per share:
Basic — as reported	$ 0.38	$	0.30
Basic — proforma	$ 0.37	$	0.29
Diluted — as reported	$ 0.38	$	0.30
Diluted — proforma	$ 0.37	$	0.29

10 PAGEBREAK

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

| Note 9: |
| --- |
| The Company provides non-contributory defined benefit pension
plans for substantially all of its United States and certain of
its Mexico employees, as well as postretirement healthcare and
life insurance benefits to the majority of its retirees and their
eligible dependents in the United States and Canada. Effective
January 1, 2004, the Company established a defined contribution
plan for all new U.S. employees. The defined benefit plans
discussed above remain in place for all U.S. employees whose
employment with the Company began prior to January 1, 2004. The
Company also sponsors contributory pension plans covering the
majority of its employees in the United Kingdom and Canada. |
| The components of net periodic benefit cost include the following: |

	Three Months Ended — March 28, 2004	March 30, 2003
Retirement Plans
Service cost	$ 5,925	$	5,052
Interest cost	14,267		12,942
Expected return on plan assets	(16,490	)	(13,823	)
Amortization of net transition
(asset) obligation	150		144
Amortization of prior service cost	363		416
Amortization of net actuarial
(gain) loss	5,242		5,556
Net periodic benefit cost	$ 9,457	$	10,287
Retiree Health and Life
Insurance Plans
Service cost	$ 1,281	$	1,090
Interest cost	2,932		2,877
Expected return on plan assets	(880	)	(913	)
Amortization of prior service cost	(1,529	)	(1,645	)
Amortization of net actuarial loss	2,448		2,257
Net periodic benefit cost	$ 4,252	$	3,666

During the three months ended March 28, 2004, the Company made voluntary contributions of $7,900 to its retirement and retiree health and life insurance plans. The Company anticipates that it will make additional voluntary contributions of approximately $15,000 to these plans in 2004.

11 PAGEBREAK

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

| | On December 8, 2003, President Bush signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the
“Act”). The Act expands Medicare, primarily by adding a prescription
drug benefit for Medicare-eligibles starting in 2006. The Act
provides employers currently sponsoring prescription drug programs for
Medicare-eligibles with a range of options for coordinating with the
new government-sponsored program to potentially reduce program cost.
These options include supplementing the government program on a
secondary payor basis or accepting a direct subsidy from the government
to support a portion of the cost of the employer’s program. |
| --- | --- |
| | Paragraph 40 of Statement of Financial Accounting Standards No. 106,
‘Employers’ Accounting for Postretirement Benefits Other Than Pensions’
(FAS 106), requires that presently enacted changes in law impacting
employer-sponsored retiree health care programs which take effect in
future periods be considered in current-period measurements for
benefits expected to be provided in those future periods. Therefore,
under FAS 106 guidance, measures of plan liabilities and annual expense
on or after the date of enactment should reflect the effects of the
Act. |
| | Pursuant to guidance under FASB Staff Position 106-1, however, the
Company has chosen to defer recognition of the potential effects of the
Act in these disclosures. Therefore, the retiree health obligations
and costs reported in these financial statements or accompanying notes
do not yet reflect any potential impact of the Act. Specific,
authoritative guidance on the accounting for the government subsidy is
pending, and that guidance, when issued, could require the Company to
change previously reported information. |
| Note 10: | New Accounting Pronouncements |
| | In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, ‘Consolidation of Variable Interest Entities -
an interpretation of ARB 51’ (FIN 46). FIN 46 addresses when a company
should include in its financial statements the assets, liabilities and
activities of a variable interest entity. It defines variable interest
entities as those entities with a business purpose that either do not
have equity investors with voting rights in proportion to such
investors’ equity, or have investors that do not provide financial
resources in proportion to such investors’ equity for the entity to
support its activities and have equity investors that lack a
controlling financial interest. FIN 46 also requires disclosures about
variable interest entities that a company is not required to
consolidate, but in which it has a significant variable interest. FIN
46 consolidation requirements apply immediately to variable interest
entities created or obtained after January 31, 2003, but this had no
impact on the Company’s 2003 financial statements. A modification to
FIN 46 (FIN 46R) was released on December 17, 2003. FIN 46R delayed
the effective date for variable interest entities created before
February 1, 2003, with the exception of special-purpose entities, until
the first fiscal year or interim period after December 15, 2003. As of
January 1, 2004, the Company adopted FIN 46R. In conjunction with this
adoption, the Company performed an evaluation of variable interest
entities in which it has an ownership, contractual or other monetary
interest and adopted FIN 46R. The adoption of FIN 46R did not have a
material effect on the Company’s Condensed Consolidated Financial
Statements. |
| Note 11: | Financial Segment Information |
| | Sonoco reports its results in two primary segments, Industrial
Packaging and Consumer Packaging. The Industrial Packaging segment
includes the following products: high-performance paper, plastic and
composite engineered carriers; wooden, metal and composite reels for
wire and cable packaging; fiber-based construction tubes and forms;
custom designed protective packaging; and, supply chain management
capabilities. The Consumer Packaging segment includes the following
products and services: round and shaped rigid packaging, both composite
and plastic; printed flexible packaging; and, packaging services. |

12 PAGEBREAK

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

The following table sets forth net sales and operating profit for the Company’s financial segments. Operating profit at the segmental level is defined as “Income before interest and income taxes” on the Company’s Condensed Consolidated Statements of Income adjusted for restructuring charges, which are not allocated to the financial segments.

FINANCIAL SEGMENT INFORMATION (Unaudited)

	Three Months Ended — March 28, 2004	March 30, 2003
Net Sales:
Industrial Packaging	$ 383,661	$	356,731
Consumer Packaging	311,755		299,749
Consolidated	$ 695,416	$	656,480
Income before income taxes:
Industrial Packaging — Operating Profit	$ 27,011	$	30,705
Consumer Packaging — Operating Profit	24,076		22,825
Restructuring charges	(1,328	)	(1,137	)
Interest, net	(8,748	)	(12,283	)
Consolidated	$ 41,011	$	40,110

| | Prior year information has been restated to exclude the impact of the
Company’s High Density Film business, which has been reclassified as
discontinued operations on the Condensed Consolidated Statements of
Income. |
| --- | --- |
| Note 12: | Commitments and Contingencies |
| | The Company is a party to various legal proceedings incidental to its
business and is subject to a variety of environmental and pollution
control laws and regulations in all jurisdictions in which it operates.
As is the case with other companies in similar industries, the Company
faces exposure from actual or potential claims and legal proceedings.
The Company cannot currently determine the final outcome of the
proceedings described below or the ultimate amount of potential losses.
Pursuant to Statement of Financial Accounting Standards No. 5,
‘Accounting for Contingencies’ (FAS 5), management records accruals for
estimated losses at the time that information becomes available
indicating that losses are probable and that the amounts are reasonably
estimable. Accrued amounts are not discounted. Although the level of
future expenditures for legal and environmental matters is impossible
to determine with any degree of probability, it is management’s opinion
that such costs, when finally determined, will not have an adverse
material effect on the consolidated financial position of the Company. |
| | Sonoco-U.S. Paper Lawsuit On April 30, 2004, the Company announced that the U.S. District Court
for the Southern District of Ohio had entered a judgment against its
subsidiary, Sonoco-U.S. Paper, and the Company in the amount of $3,750 in a
case involving alleged trade secrets of the plaintiff. Although not
covered by the judgment, the plaintiff may also make claim for certain
litigation expenses. While the Company is currently considering what
legal steps to take with respect to this judgment, during the first
quarter of 2004, it accrued approximately $5,500 related to this legal
proceeding. |

13 PAGEBREAK

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

| | Environmental Matters The Company has been named as a potentially responsible party at
several environmentally contaminated sites not owned by the Company.
These regulatory actions and a small number of private party lawsuits
represent the Company’s largest potential environmental liabilities.
As of March 28, 2004 and December 31, 2003, the Company had accrued
$3,909 and $3,967, respectively, related to environmental
contingencies. Due to the complexity of determining clean-up costs
associated with the sites, a reliable estimate of the ultimate cost to
the Company cannot be determined. Furthermore, all of the sites are
also the responsibility of other parties. The Company’s liability, if
any, is shared with such other parties, but the Company’s share has not
been finally determined in most cases. In some cases, the Company has
cost-sharing agreements with other potentially responsible parties with
respect to a particular site. Such agreements relate to the sharing of
legal defense costs or clean-up costs, or both. The Company has
assumed, for purposes of estimating amounts to be accrued, that the
other parties to such cost-sharing agreements will perform as agreed.
It appears that final resolution of some of the sites is years away.
Accordingly, a reliable estimate of the ultimate cost to the Company
with respect to such sites cannot be determined. |
| --- | --- |
| Note 13: | Subsequent Events |
| | European Joint Venture On April 19, 2004, the Company announced that it had signed a
definitive agreement with Ahlstrom Corporation, Helsinki, Finland
(“Ahlstrom”) to combine each of the companies’ respective European
paper-based tube/core and coreboard operations into a joint venture
that will operate under the name Sonoco-Alcore S.a.r.l. The Company,
which will contribute to the joint venture ownership positions in 25
tube and core plants and six paper mills, will hold a 64.5% interest in
the joint venture. Ahlstrom, a leader in high-performance fiber-based
materials serving niche markets worldwide, will contribute 15 tube and
core plants and one paper mill to the joint venture and will hold a
35.5% interest in it. Total sales in 2003 for the properties being
contributed by the Company and Ahlstrom to this joint venture were
approximately $235,000 and $102,000, respectively. This joint venture
is expected to be finalized by the end of the third quarter of 2004. |
| | Following an initial two and one-half year standstill period and
subject to certain conditions, Ahlstrom will have the right to require
(through a put option arrangement) the Company to buy the shares not
owned by the Company at any time over the next three and one-half
years. During the seventh year, the Company will have the right to
purchase the shares (through a call option arrangement). The price of
the share purchase will be determined using a formula related to an
earnings multiple at the time such shares might be put or called. |
| | In a separate but related transaction, the Company has signed an
agreement to purchase 100% of Ahlstrom’s Chinese paper tube/core
operation in Shouguang to serve the rapidly growing Chinese market for
paper mill cores. This operation will not be part of the joint
venture. |
| | Acquisition of CorrFlex Graphics On April 29, 2004, the Company announced that it had signed a definitive
agreement to acquire CorrFlex Graphics, LLC (“CorrFlex”) for an all-cash
purchase price of approximately $250,000. CorrFlex, which is privately held,
is one of the nation’s largest point-of-purchase display companies. The
acquisition is expected to be moderately accretive in the first year and is
expected to generate sales on an annualized basis of approximately $200,000 for
2004. The acquisition will be known as Sonoco CorrFlex and is expected to
close by the end of the second quarter of 2004. |

14 PAGEBREAK

Report of Independent Accountants

To the Shareholders and Directors of Sonoco Products Company

We have reviewed the accompanying condensed consolidated balance sheet of Sonoco Products Company as of March 28, 2004, and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 28, 2004, and March 30, 2003. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, 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 auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2003, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the year then ended (not present herein); and in our report dated January 28, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003, is fairly stated in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Charlotte, North Carolina May 4, 2004

15 PAGEBREAK

SONOCO PRODUCTS COMPANY

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

Statements included in Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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,” “plan,” “anticipate,” “objective,” “goal,” “guidance,” and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding offsetting high raw material costs, adequacy of income tax provisions, refinancing of debt, adequacy of cash flows, effects of acquisitions and dispositions, adequacy of provisions for environmental liabilities, financial strategies and the results expected from them, and producing improvements in earnings. Such forward-looking statements are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management. Such information includes, without limitation, discussions as to guidance 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 forecast in such forward-looking statements. Such 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; international, national and local economic and market conditions; 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 engineered carriers and composite can operations; anticipated results of restructuring activities; resolution of income tax contingencies; ability to successfully integrate newly acquired businesses into the Company’s operations; currency stability and the rate of growth in foreign markets; use of financial instruments to hedge foreign exchange, interest rate and commodity price risk; actions of government agencies; loss of consumer confidence; and, economic disruptions resulting from terrorist activities.

Results of Operations

Company Overview During the fourth quarter of 2003, the Company completed the sale of its High Density Film business to Hilex Poly Co., LLC, Los Angeles, California. Operating results of this business have been presented for the first quarter of 2003 as “Income from discontinued operations, net of income taxes” in the Company’s Condensed Consolidated Statements of Income. The Condensed Consolidated Statement of Income for the first quarter of 2003 has been restated to reflect the reclassification of the Company’s High Density Film business as discontinued operations.

Net sales for the first quarter of 2004 were $695 million, compared to $656 million for the first quarter of 2003. This increase was primarily due to the favorable impact of foreign exchange rates of approximately $31 million as the dollar weakened against foreign currencies, and higher average selling prices of approximately $6 million, mainly attributed to the Company’s recovered paper operations. Company-wide volumes during the first quarter of 2004 remained relatively flat when compared to the same period in 2003, decreasing by less than 1%.

Income before income taxes totaled approximately $41 million in the first quarter of 2004, compared to approximately $40 million for the same period in 2003. This increase resulted primarily from reduced costs of approximately $13 million, which were associated with on-going productivity initiatives and savings resulting from the Company’s restructuring activities that were initiated in 2003. Also contributing to this increase was a reduction in net interest expense, which decreased by approximately $3 million from $12 million in the first quarter of 2003 to $9 million in the first quarter of 2004 primarily as a result of lower average debt levels and lower average interest rates. These favorable impacts were partially offset by approximately $7 million, resulting

16 PAGEBREAK

SONOCO PRODUCTS COMPANY

from lower volume and a change in product and customer mix, and a slightly negative price/cost relationship of approximately $2 million. Income before income taxes for the first quarter of 2004 was also negatively impacted by a charge of approximately $5 million associated with an unfavorable legal judgment that was entered against the Company. See Note 12 to the Company’s Condensed Consolidated Financial Statements for more information on litigation. Income before income taxes included charges in connection with the Company’s previously announced restructuring actions of approximately $1 million pretax for the first quarter of each of 2004 and 2003, which were not allocated to the operating segments. Restructuring charges for the first quarter of 2004 consisted primarily of severance charges.

The effective tax rate for the quarter ended March 28, 2004 was 13.2%, compared to 36.0% for the quarter ended March 30, 2003. This decrease was primarily due to the reversal of previously accrued taxes totaling $9 million as a result of the Internal Revenue Service closing its examination of the Company’s tax returns for years 1999 through 2001.

Operating Segments The Company reports results in two operating segments, Consumer Packaging and Industrial Packaging. Operating profit at the segmental level is defined as “Income before interest and income taxes” on the Company’s Condensed Consolidated Statements of Income adjusted for restructuring charges, which are not allocated to the financial segments. General corporate expenses, with the exception of restructuring charges, interest and income taxes, have been allocated as operating costs to each of the Company’s financial segments. See Note 11 to the Company’s Condensed Consolidated Financial Statements for more information on operating segments.

Consumer Packaging Segment The Consumer Packaging segment includes the following products and services: round and shaped rigid packaging, both composite and plastic; printed flexible packaging; and packaging services.

Net sales of the Consumer Packaging segment for the first quarter of 2004 totaled approximately $312 million, compared to approximately $300 million in the first quarter of 2003. This increase was due primarily to favorable foreign exchange rates of approximately $11 million and higher selling prices of approximately $2 million, offset in part by decreased volume of approximately $1 million associated with rigid paper and plastics and flexible packaging.

Operating profit, as defined above, for the Consumer Packaging segment in the first quarter of 2004 was approximately $24 million, up from approximately $23 million for the same period in 2003. This increase resulted primarily from reduced costs of approximately $7 million, which were related to on-going productivity initiatives and savings resulting from the Company’s restructuring activities that were initiated in 2003, and a favorable price/cost relationship of approximately $1 million. Lower volume and a change in product and customer mix negatively impacted operating profit by approximately $5 million. In addition, product start-up costs, primarily associated with the Company’s new multi-line steel easy-open closure operation in Brazil, resulted in a reduction in operating profit of approximately $2 million.

Industrial Packaging Segment The Industrial Packaging segment includes the following products: high-performance paper, plastic and composite engineered carriers; wooden, metal and composite reels for wire and cable packaging; fiber-based construction tubes and forms; custom designed protective packaging; and supply chain management capabilities.

Net sales of the Industrial Packaging segment for the first quarter of 2004 totaled approximately $384 million, compared to approximately $357 million in the first quarter of 2003. This increase was due primarily to favorable foreign exchange rates of approximately $20 million and higher selling prices of approximately $4 million, offset

17 PAGEBREAK

SONOCO PRODUCTS COMPANY

in part by decreased volume of approximately $1 million associated primarily with the Company’s paper operations.

Operating profit, as defined above, for the Industrial Packaging segment in the first quarter of 2004 was approximately $27 million, down from approximately $31 million for the same period in 2003. Operating profit was negatively impacted by approximately $2 million related to lower volume, approximately $3 million related to a negative price/cost relationship, and approximately $5 million related to charges associated with an unfavorable legal judgment that was entered against the Company. Lower volume was associated primarily with the Company’s global engineered carriers and paperboard operations, and the negative price/cost relationship resulted primarily from higher prices for old corrugated containers (OCC), the Company’s primary raw material. These unfavorable impacts were partially offset by reduced costs of approximately $6 million related to on-going productivity initiatives and savings resulting from the Company’s restructuring activities that were initiated in 2003. Operating profit was also positively impacted by approximately $1 million associated with the favorable impact of foreign exchange rates.

Financial Position, Liquidity and Capital Resources

The Company’s financial position remained strong during the first quarter of 2004. Total debt decreased by $6 million to $669 million from $675 million at December 31, 2003.

For the first quarter of 2004, cash generated from operations totaled approximately $23 million, compared with approximately $41 million for the same period in 2003. This decrease of approximately $18 million was primarily a result of larger increases in inventory levels and prepaid expenses as well as increased pension plan funding in the first quarter of 2004, compared to the first quarter of 2003. The larger increases in inventory levels and prepaid expenses were attributable in part to the Company’s new multi-line steel easy-open closure operation in Brazil. The increase in inventory was also attributable to higher levels of OCC. Cash generated from operations for the first quarter of 2004 included the impact of approximately $8 million for funding the Company’s benefit plans, compared to approximately $1 million for the first quarter of 2003.

During the first quarter of 2004, the Company received cash proceeds of approximately $11 million from the issuance of common stock, which related primarily to the exercise of stock options. These proceeds, combined with cash generated from operations, were used to partially fund capital expenditures of approximately $25 million and to pay dividends of approximately $20 million in the first quarter of 2004.

During the first quarter of 2004, the Company entered into a $100 million swap against a $250 million 6.5% bond maturing in 2013. Consistent with the treatment of all of the Company’s interest rate swaps, this contract qualified as a fair value hedge under Statement of Financial Accounting Standards No. 133, ‘Accounting for Derivative Instruments and Hedging Activities’ (FAS 133) and swapped fixed interest for floating.

Restructuring and Impairment

In August 2003, the Company announced general plans to reduce its overall cost structure by $54 million pretax by realigning and centralizing a number of staff functions and eliminating excess plant capacity. Pursuant to these plans, the Company has initiated or completed 13 plant closings and has terminated approximately 740 employees. As of March 28, 2004, the Company had incurred cumulative charges, net of adjustments, of approximately $53.2 million pretax associated with these activities. The Company expects to recognize an additional cost of approximately $9.5 million pretax in the future associated with these charges. As part of the target to reduce its cost structure by $54 million, the Company also expects to announce throughout the remainder of 2004 the closing of an additional five to ten plants in furtherance of these plans. The costs associated with these future plant closings have not yet been determined. The Company expects to pay the

18 PAGEBREAK

SONOCO PRODUCTS COMPANY

remaining restructuring costs, with the exception of ongoing pension subsidies and certain building lease termination expenses, by the end of the first quarter of 2005, using cash generated from operations.

During the first quarter of 2004, the Company recognized restructuring charges of $1.3 million ($0.9 million after tax), primarily associated with previously announced plant closings, four of which were in the Industrial Packaging segment and one of which was in the Consumer Packaging segment. These restructuring charges, net of adjustments, consisted primarily of severance and termination benefits of $0.6 million, asset impairment charges of $0.2 million and other exit costs of $0.5 million.

During the first quarter of 2003, the Company recognized restructuring charges, net of adjustments of $1.1 million ($0.7 million after tax) related to previously announced restructuring plans that were completed prior to December 31, 2003. These charges were primarily associated with severance costs in Europe in the Industrial Packaging segment as well as lease termination and restoration costs associated with prior plant closings in the Consumer Packaging segment. Additionally, the Company’s High Density Film business, which was divested in December 2003, incurred restructuring charges of approximately $0.2 million ($0.1 million after tax) in the first quarter of 2003.

New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, ‘Consolidation of Variable Interest Entities — an interpretation of ARB 51’ (FIN 46). FIN 46 addresses when a company should include in its financial statements the assets, liabilities and activities of a variable interest entity. It defines variable interest entities as those entities with a business purpose that either do not have equity investors with voting rights in proportion to such investors’ equity, or have investors that do not provide financial resources in proportion to such investors’ equity for the entity to support its activities and have equity investors that lack a controlling financial interest. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. FIN 46 consolidation requirements apply immediately to variable interest entities created or obtained after January 31, 2003, but this had no impact on the Company’s 2003 financial statements. A modification to FIN 46 (FIN 46R) was released on December 17, 2003. FIN 46R delayed the effective date for variable interest entities created before February 1, 2003, with the exception of special-purpose entities, until the first fiscal year or interim period after December 15, 2003. As of January 1, 2004, the Company adopted FIN 46R. In conjunction with this adoption, the Company performed an evaluation of variable interest entities in which it has an ownership, contractual or other monetary interest and adopted FIN 46R. The adoption of FIN 46R did not have a material effect on the Company’s Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Information about the Company’s exposure to market risk was disclosed in its 2003 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 2, 2004. There have been no material quantitative or qualitative changes in market risk exposure since the date of that filing.

Item 4. Controls and Procedures.

Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or 240.15d-15(b) of the Company’s disclosure controls and procedures (as defined in 17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the Company’s chief executive officer and chief financial officer concluded that the effectiveness of such controls and procedures, as of the end of the period covered by this quarterly report, was adequate.

No disclosure is required under 17 C.F.R. Section 229.308(c).

19 PAGEBREAK

SONOCO PRODUCTS COMPANY

PART II. OTHER INFORMATION

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

The Company’s annual meeting of shareholders was held on April 21, 2004. The following matters, as described more fully in the Company’s Proxy Statement, were approved by the shareholders at this meeting:

(1) The following directors were elected:

	Term	VOTES — For	Withheld
F.L.H. Coker	3-year	86,305,370	2,617,562
C.C. Fort	3-year	87,076,862	1,846,070
B.L.M. Kasriel	3-year	86,080,948	2,841,984
J.H. Mullin, III	3-year	87,145,584	1,777,348
T.E. Whiddon	3-year	85,407,561	3,515,371
J.M. Micali	2-year	87,147,818	1,775,114

(2) Shareholder proposal urging the Company’s Board of Directors to arrange for the prompt sale of the Company to the highest bidder. The shareholders voted 4,228,801 for and 72,137,857 against this proposal, with 796,205 abstaining. There were 11,759,666 broker non-votes for this matter.

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

(a)	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)
(b)	Reports on Form 8-K: During the quarter ended March 28, 2004, the
Company filed a Current Report on Form 8-K dated January 28, 2004. The
Current Report included information under Items 7 and 12.

20 PAGEBREAK

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: May 6, 2004	By:	/s/ C.J. Hupfer
		C.J. Hupfer
		Vice President and Chief Financial Officer

21 PAGEBREAK

SONOCO PRODUCTS COMPANY

EXHIBIT INDEX

Exhibit
Number	Description
15	Letter re: unaudited interim financial information
31	Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and 17 C.F.R. 240.13a-14(a)
32	Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and 17 C.F.R. 240.13a-14(b)

22