<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11261
SONOCO PRODUCTS COMPANY
INCORPORATED UNDER THE LAWS I.R.S. EMPLOYER IDENTIFICATION
OF SOUTH CAROLINA NO. 57-0248420
POST OFFICE BOX 160
HARTSVILLE, SOUTH CAROLINA 29551-0160
TELEPHONE: 843-383-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of exchange on which registered
------------------- ------------------------------------
No par value common stock New York Stock Exchange, Inc.
Series A Cumulative Preferred Stock New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting common stock held by nonaffiliates of the
registrant (based on the New York Stock Exchange closing price) on February 28,
1999, was $2,296,649,282. Registrant does not have any non-voting common stock
outstanding.
As of February 28, 1999, there were 101,845,073 shares of no par value common
stock outstanding.
Documents Incorporated by Reference
Portions of the Annual Report to Shareholders for the fiscal year ended December
31, 1998, are incorporated by reference in Parts I and II; portions of the Proxy
Statement for the annual meeting of shareholders to be held on April 21, 1999,
are incorporated by reference in Part III.
<PAGE> 2
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
PART I
ITEM 1 BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS - The Company is a South
Carolina corporation founded in Hartsville, South Carolina in
1899 as the Southern Novelty Company. The name was
subsequently changed to Sonoco Products Company. The following
items from the 1998 Annual Report to Shareholders (the "1998
Annual Report") are incorporated herein by reference:
Management's Discussion and Analysis on pages 25 - 31, and
Notes 2 and 3 to the Consolidated Financial Statements on
pages 38 - 39.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS - Note 18 to the
Consolidated Financial Statements on page 45 of the 1998
Annual Report is incorporated herein by reference.
(c) NARRATIVE DESCRIPTION OF BUSINESS - The Operations Reviews on
pages 8, 9, 12, and 13 and Management's Discussion & Analysis
on pages 25 - 33 of the 1998 Annual Report are incorporated
herein by reference. As of December 31, 1998, the Company had
approximately 16,500 employees.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES - Note 18 to the Consolidated Financial
Statements on page 45 of the 1998 Annual Report is
incorporated herein by reference.
(e) EXECUTIVE OFFICERS OF THE REGISTRANT - Certain information
with respect to persons who are, or may be deemed to be,
executive officers of the Company is set forth under the
caption "Executive Officers" on pages 50 - 51 of the 1998
Annual Report and is incorporated herein by reference.
ITEM 2 PROPERTIES - Page 31 of Management's Discussion & Analysis of the
1998 Annual Report is incorporated herein by reference.
ITEM 3 LEGAL PROCEEDINGS - Note 15 to the Consolidated Financial Statements
on page 44 of the 1998 Annual Report is incorporated herein by
reference.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER - None.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS - The following items from the 1998 Annual Report are herein
incorporated by reference: the Selected Quarterly Financial Data on
page 24 and Management's Discussion & Analysis on page 30. The
Company's common stock is traded on the New York Stock Exchange under
the stock symbol "SON". At December 31, 1998, there were approximately
43,000 shareholder accounts.
ITEM 6 SELECTED FINANCIAL DATA - The Selected Eleven-Year Financial Data
provided on pages 46 - 47 of the 1998 Annual Report are incorporated
herein by reference.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Management's Discussion & Analysis on pages 25
- 33 of the 1998 Annual Report is incorporated herein by reference.
- 2 -
<PAGE> 3
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
PART II (CONTINUED)
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - Pages
30 -31 of Management's Discussion & Analysis of the 1998 Annual Report
is incorporated herein by reference.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - The following items
provided in the 1998 Annual Report are incorporated herein by
reference: the Selected Quarterly Financial Data on page 24; the
Consolidated Financial Statements and Notes to the Consolidated
Financial Statements on pages 34 - 45; and the Report of Independent
Certified Public Accountants on page 48.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE - None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - The sections
entitled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" as shown on pages 4 - 9 and page 27,
respectively, of the Company's definitive Proxy Statement, set forth
information with respect to the directors of the Company and compliance
with Section 16(a) of the Securities Exchange Act of 1934 and are
incorporated herein by reference.
ITEM 11 EXECUTIVE COMPENSATION - Information with respect to the
compensation of directors and certain executive officers as shown on
pages 18 - 24 of the Company's definitive Proxy Statement under the
captions "Summary Compensation Table", "Long-Term Incentive Plans -
Awards in Last Fiscal Year", "Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values", "Option Grants in Last Fiscal Year",
"Pension Table", "Directors' Compensation", and "Compensation Committee
Interlocks and Insider Participation", is incorporated herein by
reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -
Information with respect to the beneficial ownership of the Company's
Common Stock by management and others as shown on pages 12 - 13 under
the caption "Security Ownership of Management" of the Company's
definitive Proxy Statement is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - The following items
contained in the Company's definitive Proxy Statement are incorporated
herein by reference: the sections titled "Compensation Committee
Interlocks and Insider Participation" on pages 23 - 24; and
"Transactions with Management" on page 24.
- 3 -
<PAGE> 4
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements: Consolidated Balance Sheets as of December 31,
1998 and 1997; Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996; Consolidated Statements of
Shareholders' Equity for the years ended December 31, 1998, 1997 and
1996; and Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.
2. Financial Statement Schedules: All schedules are omitted because they
are not required, are not applicable or the required information is
given in the financial statements or notes thereto.
3. Exhibits
3-1 Articles of Incorporation (incorporated by reference to the
Registrant's 1994 Annual Report on Form 10-K)
3-2 By-Laws (incorporated by reference to the Registrant's Form
10-Q for the quarter ended March 31, 1997)
4 Instruments Defining the Rights of Securities Holders,
including Indentures (incorporated by reference to the
Registrant's Forms S-3 (File Numbers 33-40538, 33-50501, and
33-50503))
10-1 1983 Sonoco Products Company Key Employee Stock Option Plan
(incorporated by reference to the Registrant's Form S-8 dated
September 4, 1985)
10-2 1991 Sonoco Products Company Key Employee Stock Plan
(incorporated by reference to the Registrant's Form S-8 dated
June 7, 1995)
10-3 Sonoco Products Company 1996 Non-Employee Directors' Stock
Plan (incorporated by reference to the Registrant's Form S-8
dated September 25, 1996)
10-4 Sonoco Products Company Employee Savings and Stock Ownership
Plan (incorporated by reference to the Registrant's Form S-8
dated November 27, 1989)
10-5 Engraph, Inc. Retirement Plus Plan (incorporated by reference
to the Registrant's Form S-8 dated November 22, 1993)
10-6 Sonoco Products Company Centennial Shares Plan (incorporated
by reference to the Registrant's Form S-8 dated December 30,
1998)
13 1998 Annual Report to Shareholders (portions incorporated by
reference)
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
99-1 Proxy Statement, filed in conjunction with annual
shareholders' meeting scheduled for April 21, 1999 (previously
filed)
99-2 Form 11-K Annual Report - 1991 Sonoco Products Company Key
Employee Stock Option Plan
(b) Reports on 8-K: No reports on Form 8-K were filed by the Company during
the fourth quarter of 1998.
- 4 -
<PAGE> 5
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this 26th day of
March 1999.
SONOCO PRODUCTS COMPANY
/s/ Peter C. Browning
--------------------------------------
Peter C. Browning
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed below by the following person on behalf of the Registrant
and in the capacities indicated on this 26th day of March 1999.
/s/ F. T. Hill, Jr.
--------------------------------------
F. T. Hill, Jr.
Vice President and
Chief Financial Officer
- 5 -
<PAGE> 6
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
SIGNATURES, CONTINUED
/s/ C. W. Coker Director (Chairman)
- ---------------------------
C. W. Coker
/s/ P. C. Browning President, Chief Executive Officer and
- --------------------------- Director
P. C. Browning
/s/ C. J. Bradshaw Director
- ---------------------------
C. J. Bradshaw
/s/ R. J. Brown Director
- ---------------------------
R. J. Brown
/s/ F. L. H. Coker Director
- ---------------------------
F. L. H. Coker
/s/ J. L. Coker Director
- ---------------------------
J. L. Coker
/s/ T. C. Coxe, III Director
- ---------------------------
T. C. Coxe, III
/s/ H. E. DeLoach, Jr. Director
- ---------------------------
H. E. DeLoach, Jr.
/s/ A. T. Dickson Director
- ---------------------------
A. T. Dickson
/s/ P. Fulton Director
- ---------------------------
P. Fulton
/s/ B. L. M. Kasriel Director
- ---------------------------
B. L. M. Kasriel
/s/ E. H. Lawton, Jr. Director
- ---------------------------
E. H. Lawton, Jr.
/s/ H. L. McColl, Jr. Director
- ---------------------------
H. L. McColl, Jr.
/s/ Dona Davis Young Director
- ---------------------------
Dona Davis Young
/s/ C. D. Spangler, Jr. Director
- ---------------------------
C. D. Spangler, Jr.
- 6 -
<PAGE> 7
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
13 1998 Annual Report to Shareholders (portions
incorporated by reference)
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
99-2 Form 11-K Annual Report - 1991 Sonoco Products
Company Key Employee Stock Option Plan
<PAGE> 1
INDUSTRIAL Packaging
<TABLE>
<S> <C>
The Company has extensive research and development
facilities and is the leader in tube-manufacturing
technology, helping customers maximize the use of their most
modern converting equipment by winding their products faster
and putting more product on each tube or core. No other
[PHOTO] company is in a position to provide this value on a national or
global basis. In addition, the Company is leading the way in
developing new customer service and order fulfillment
processes, which will dramatically increase productivity at
both customer and Sonoco locations.
Excluding acquisitions, 1998 unit volume growth in the
Sonoco's highly engineered, continuously improving Company's global engineered carriers business was up
industrial carriers have been industry standards approximately 3% over 1997.
since the Company's founding in 1899. Today, the Operating profit in our integrated tube, core, cones and
Company is a technology leader in its served markets. paperboard operations for 1998 was essentially flat with 1997,
benefiting from high volume and lower recovered paper costs,
while experiencing start-up costs at the Richmond, Va., paper
mill and lower prices for recovered paper sold through the
SONOCO'S INDUSTRIAL PACKAGING BUSINESSES ACCOUNT Company's collection arm, Paper Stock Dealers, Inc. Higher
FOR APPROXIMATELY 56% OF THE COMPANY'S SALES. THESE information systems costs were substantially offset by
BUSINESSES INCLUDE ENGINEERED CARRIERS AND PAPERBOARD; productivity improvements.
INJECTION MOLDED AND EXTRUDED PLASTICS; DESIGNED
INTERIOR PACKAGING; WOOD AND METAL REELS FOR WIRE AND PAPER OPERATIONS
CABLE PACKAGING; ADHESIVE; AND CONVERTING MACHINERY. Sonoco's paper operations are a key component of the Company's
strategy of vertical integration in its paper packaging
ENGINEERED CARRIERS operations. One of the world's leading products of recycled
Engineered carriers are tubes, cores and cones used by paperboard, the Company has the capacity to manufacture nearly
a wide variety of industries in winding and transporting 1.6 million tons of paperboard annually. Approximately 85%
their products during the manufacturing process. Among of Sonoco's board is used internally. The Company also
the major markets for these products are textiles, produces approximately 185,000 tons of corrugating medium for
paper, film, tape, foil and coiled metals. Other uses Georgia-Pacific under a management fee arrangement that was
for these products include construction, storage, changed in July from the previous equity arrangement.
shipping and mailing.
Sonoco is the world's largest manufacturer of
engineered carriers with a network of more than 100
plants on five continents and sales of approximately
$1.1 billion for tubes, cores, cones and paperboard.
While there is strong local and regional competition in
all served markets, Sonoco is the global leader in these
products, well positioned to benefit from the
worldwide trend of customers seeking fewer, larger
suppliers who can meet their needs wherever they
choose to do business.
</TABLE>
<PAGE> 2
[PHOTO]
<TABLE>
<S> <C>
Wine and Cable Packaging
Sonoco Baker Reels is the leading producer of nailed-wood,
plywood and metal reels for the wire and cable industry in
the United States. This nearly $100 million operation
realized increased volume in 1998, reflecting the strong
housing industry. The wire and cable reel operation serves
customers from six United States manufacturing sites and 27
warehouse locations. To complement the current product
line, the Company recently acquired a manufacturer of
composite (wood and plastic) reels in Greensboro, Ga.
Designed Interior Packaging
Sonoco's designed interior packaging products are sold
primarily for major appliance packaging. The primary product
is Sonopost(R) corner posts, which uses Sonoco paperboard as
the principal raw material. Several large customers,
including Whirlpool and Maytag, have Sonoco packaging
The Company, which has 25 paper mills and 37 paper engineers stationed at certain of their facilities to assist
machines, closed two mills during 1998, one in Amsterdam, in designing and ordering a wide range of interior packaging
N.Y., and one in Terrebonne, Quebec, Canada. Over the products. This business, which continues to grow sales and
past few years, the Company has, through capital and earnings, has three plants in the United States and will be
productivity improvements, increased capacity. The opening a new plant in Mexico to serve a major customer's
closures resulted in removing less efficient capacity new operation there. Sonoco will continue to explore
and a better supply and demand balance. additional growth opportunities for its protective packaging
Recovered paper is one of the Company's primary raw business.
materials, and the Company maintains a network of 46
recovered paper collection facilities around the world Adhesives and Machinery
that last year processed nearly two million tons of Sonoco's vertical integration includes its adhesives
recovered paper. manufacturing and machinery manufacturing operations, which
primarily support the Company's paper converting businesses.
Injection and Extrusion Molded Plastics
Sonoco's injection molded and extruded plastics
operations, with approximately $150 million in sales,
supply customers in the same markets as the Company's
engineered carriers, as well as wire and cable,
automotive, plumbing, filtration, food and quick service
restaurant markets. In 1998, the Company completed the
acquisition of a German plastics manufacturer and closed
one United States plant. The Company now has four plants
in Germany, one in the Netherlands and 11 in the United
States. Profits in this operation were unfavorably
impacted during 1998 by reduced demand in textile markets.
</TABLE>
<PAGE> 3
CONSUMER PACKAGING
<TABLE>
<S> <C>
SONOCO'S CONSUMER PACKAGING OPERATIONS, LED BY COMPOSITE
CANS, COMPRISE APPROXIMATELY 44% OF THE COMPANY'S SALES.
IN ADDITION TO COMPOSITE CANS, THIS SEGMENT INCLUDES HIGH
DENSITY FILM PRODUCTS; FLEXIBLE PACKAGING; FOLDING CARTONS [PHOTO]
AND PACKAGING SERVICES; CAPSEALS; AND COASTERS AND GLASS
COVERS.
Sonoco is the world leader in the manufacture of
composite cans, revolutionizing their role in packaging
with technological breakthroughs in size, shape, shelf
life, product protection, ease of opening and range of
products that can be packaged within. Composite cans are
made from a paperboard body, utilizing a variety of
protective liner materials and closures and are
available with a wide range of label options. They products as snacks; refrigerated dough and pastries; powdered
provide outstanding market differentiation capabilities, beverages, ranging from infant formula to instant formula to
consumer preferred characteristics and, of course, instant iced tea; ground coffee; nuts; candy; cookies;
excellent product protection. cereal; crackers; frozen concentrates; cleansers; adhesives;
Sonoco's composite can operations include more than and many other products. In addition, this operation
40 plants in the United States, Canada, Mexico, England, manufactures plastic and fibre cartridges for the petroleum,
France, Germany, Belgium, Colombia, Brazil, Chile, adhesives and sealants industries.
Venezuela and Indonesia, with new facilities planned for Domestic composite can volume for 1998 was flat with the
Malaysia, Thailand and Mexico. previous year, as volume gains in snack foods were offset
Composite cans usually contain more than 50% recycled primarily by lower volume in frozen concentrate and
materials and are used to package such refrigerated dough. International volume continued to
increase, principally in Europe.
[PHOTO] Operating profits in composite cans were adversely
affected by expansion at the Company's Jackson, Tenn., and
Londerzeel, Belgium, facilities where customer volume
projections did not materialize on schedule. However,
operating profits improved in the fourth quarter of 1998, and
are expected to improve for the year 1999.
Sonoco's global strategy for growing composite cans,
which constitute about $700 million in sales, includes
the continuing introduction of new products, the conversion
of other forms of packaging to composite cans and the
conversion of self-manufacturers. The Company expands its
composite can business geographically primarily by providing
existing and new customers with the latest technologies
wherever they choose to do business.
</TABLE>
<PAGE> 4
FLEXIBLE PACKAGING
Sonoco produces flexible packaging at three locations in the United States,
operating seven rotogravure presses, including four wide-web Cerruti presses.
The group also has flexographic and laminating capabilities.
This operation, with annual sales of approximately $100 million, primarily
serves customers with high-quality graphics on paper, foil or film packages,
including some of the best-known names in candy, gum, snacks and cookies. In
addition, the Company's flexible packaging operation supplies Sonoco's
composite can business with lamination, liners, labels and other package
components. Profits and volume increased in this business during 1998. Although
Sonoco currently participates in only a small niche of the total flexible
packaging market, the Company intends to continue investing in this business as
it explores potential growth opportunities.
HIGH DENSITY FILM PRODUCTS
Sonoco is the leading producer of high-density, high-molecular weight,
plastic carryout grocery bags in the United States, with about 35% of the
grocery bag market. This operation, with sales of approximately $200 million,
also produces bags for high-volume retail stores and convenience stores and is
manufacturing agricultural mulch film, a rapidly growing segment of the
business. During 1998, the group expanded its Hartsville, S.C., facility to
manufacture a newly developed bag aimed at the grocery produce market.
The Company's high density film business enjoyed a significant improvement
in 1998, led by higher volume in its grocery and retail operations plus a
decline in resin prices, which helped offset selling price decreases.
PACKAGING SERVICES AND FOLDING CARTONS
For the past two years, Sonoco has been managing Gillette's packaging
operations for their North American line of razors and blades. During 1998,
this operation moved into a new 250,000-square-foot facility built by Gillette
in Devens, Mass., adjacent to their central distribution center. In addition to
providing the packaging services, Sonoco's folding cartons operation also
supplies some of the packaging for this facility. Sonoco continues to
investigate prospects for similar value-added services.
CAPSEALS
At its facility based in England, Sonoco produces seals that are used as
closures inside bottles and jars. This operation serves customers around the
world with seals that provide product protection and state-of-the-art seal
integrity designed to prevent tampering. This business experienced lower volume
and pricing pressures during 1998, reflecting the adverse effect of a strong
pound on its export sales. Also during 1998, Sonoco Capseals formed a marketing
agreement with a United States manufacturer to market several of Sonoco
Capseals' products in the United States.
GLASS COVERS, COASTERS
Sonoco is the leading supplier of coasters and glass covers, which are sold to
hotels, restaurants, hospitals and other businesses. This business, which
became part of the Company with the Engraph acquisition in 1993, increased
sales and profits in 1998 over 1997. Sonoco is exploring possible geographic
expansion for these products that are sold only in North America.
<PAGE> 5
SELECTED Quarterly Financial Data
(unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
(Dollars in thousands except per share) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------
1998
<S> <C> <C> <C> <C>
Net sales(1) $673,315 $637,609 $606,981 $ 640,012
Gross profit(1) 155,257 148,043 139,278 147,139
Net income available to common shareholders 46,495 62,188(2) 39,739 31,821(3)
Per common share(4)
- ------------------
Net income available to common shareholders - basic $ .45 $ .60 $ .39 $ .31
- diluted .43 .59 .39 .31
Cash dividends - common .164 .18 .18 .18
Market price - high 37.67 38.92 31.00 30.38
- low 29.89 30.75 24.19 22.44
- -----------------------------------------------------------------------------------------------------------------------
1997
Net sales $687,648 $714,167 $709,588 $ 736,428
Gross profit 151,971 166,146 153,407 168,215
Net income (loss) available to common shareholders 40,180 44,684 41,247 (126,555)(4)
Per common share(5)
- ------------------
Net income (loss) available to common shareholders - basic $ .41 $ .45 $ .41 $ (1.20)
- diluted .39 .43 .39 (1.20)
Cash dividends - common .15 .164 .164 .164
Market price - high 25.12 28.30 31.76 32.16
- low 22.62 23.86 27.67 29.21
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Net sales and gross profit in the second, third and fourth quarters of 1998
were affected by the divestiture of operations during the year.
2 Includes the gain on the sale of the fibre and plastic drum components of
the industrial containers operation of $40.3 million after tax, the
additional loss on the sale of the North American labels operation of
$(13.7) million after tax, and the extraordinary loss from early
extinguishment of debt of $(11.8) million after tax.
3 Includes the gain on the sale of the intermediate bulk containers component
of the industrial containers operation of $15 million after tax, one-time
charges related to workforce reductions and plant closings of $(18.7)
million after tax, and an asset impairment charge of $(9.8) million after
tax.
4 Includes the asset impairment charge of $174.5 million after tax.
5 Restated to reflect the 10% common stock dividend paid on June 10, 1998.
[GRAPH]
MARKET VS. BOOK VALUE
PER COMMON SHARE
The market price of the Company's stock was $29.63 per share at the end of 1998.
The book value per common share increased to $8.08 in 1998.
[GRAPH]
CASH DIVIDENDS
DECLARED-COMMON
($in millions)
The quarterly dividend increased from $0.164 to $0.18 per share in the second
quarter of 1998 reflecting the 10% stock dividend.
<PAGE> 6
MANAGEMENT'S Discussion and Analysis
Statements included in Management's Discussion & 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 Company cautions readers that forward-looking statements,
including, without limitation, those relating to the Company's future business
prospects, revenues, raw material prices, working capital, liquidity, capital
needs, interest costs, income and successful implementation of the Year 2000
plan, are subject to certain risks and uncertainties that could cause actual
results to differ materially from those indicated in the forward-looking
statements.
SONOCO PRODUCTS COMPANY
NINETEEN NINETY-EIGHT WAS A YEAR OF CHANGE FOR SONOCO. ON THE EVE OF THE
COMPANY'S 100-YEAR ANNIVERSARY, WE MADE A NUMBER OF STRATEGIC CHANGES DESIGNED
TO GENERATE SUSTAINABLE EARNINGS GROWTH INTO THE NEXT CENTURY. Many of those
changes affect the comparability of the year-over-year results of operations.
These items are described below and, to enhance comparability, the segment
detail will be discussed on both an "as reported" and a "pro forma" basis. Pro
forma results will exclude from 1998 all one-time gains and charges and will
restate 1997 results to exclude operations sold during 1998.
During the third quarter of 1997, the Company contributed its partitions
operations in exchange for a 35% interest in RTS Packaging, a joint venture with
Rock-Tenn Company. Based on Sonoco's ownership percentage, sales from the joint
venture have not been consolidated by Sonoco since the date of formation of the
joint venture. Therefore, on a pro forma basis, 1997 sales prior to formation of
the joint venture are excluded.
Early in the second quarter of 1998, the Company completed the cash
sales of its North American labels operation and the fibre and plastic drums
portion of its industrial containers operation. The sale of the labels operation
for approximately $88 million resulted in a non-cash pre-tax asset impairment
charge of $226.4 million in the fourth quarter of 1997. An additional pre-tax
charge of $19.2 million was recognized upon completion of the sale.
The sale of the fibre and plastic drums operations resulted in a
pre-tax gain of $104.6 million in the second quarter of 1998. The Company
received most of the approximately $218 million proceeds from the sale during
the second quarter. In the fourth quarter of 1998, the Company sold the
remaining portion of the industrial containers business, intermediate bulk
containers, resulting in a $15 million pre-tax gain.
Also during the second quarter of 1998, Sonoco sold its Hamilton Hybar
subsidiary, a manufacturer of protective roll wrap for the paper industry, for
$22 million in cash.
[GRAPH]
ASSETS BY CATEGORY
($ in millions)
The decrease in the current asset category is primarily due to the completion of
the sales of the industrial containers and North American labels business.
In July 1998, the Company began a fixed-fee arrangement with
Georgia-Pacific whereby the Company provides Georgia-Pacific with approximately
185,000 tons annually of corrugating medium paperboard on a cost plus fixed
management fee basis. Sonoco previously provided this same tonnage to
Georgia-Pacific under a 50/50-equity arrangement. Under the new agreement,
Georgia-Pacific will receive all net proceeds from the sale of the tonnage at
prevailing market prices. Sonoco will not report sales under the new
arrangement; therefore, on a pro forma basis, sales from July through December
1997 to Georgia-Pacific have been excluded.
During the fourth quarter of 1998, the Company recorded one-time
charges of $30.4 million pretax. Included in this charge were workforce
reductions and asset writeoffs as a result of five plant closings and workforce
reductions in administrative areas. The plant closings included paper mills in
Amsterdam, N.Y., and Terrebonne, Quebec; a molded plastics plant in Greensboro,
N.C.; and composite can facilities in Kansas City, Mo., and Plymouth, Wis.
Annualized savings of approximately $10 million are expected in 1999 from these
actions.
Also in the fourth quarter of 1998, the Company completed an agreement
with Texpack to combine the companies' paper cone operations into a global joint
venture, Conitex-Sonoco, to serve the textile industry. An asset impairment
charge of $10.9 million pretax was recognized as a result of this transaction.
At the beginning of the second quarter, the Company recorded an
extraordinary loss of $11.8 million (net of a $7.5 million income tax benefit)
from the early extinguishment of approximately 60% of its 9.2% debentures due
August 1, 2021.
<PAGE> 7
MANAGEMENT'S Discussion and Analysis
RESULTS OF OPERATIONS
1998 VERSUS 1997
Consolidated net sales for 1998 decreased $289.9 million, or 10.2%, to $2.56
billion from $2.85 billion in 1997. The sales decline is due entirely to the
divestitures noted earlier. On a pro forma basis, net sales increased $18.7
million, or 0.7%, over 1997's pro forma sales of $2.54 billion. The increase in
sales in 1998 is the result of volume gains in many of our consumer operations
and sales totaling $41 million from acquisitions completed in 1998. Lower
average selling prices, primarily the result of declining commodity raw material
costs, impacted sales in our recovered paper and plastic grocery bag businesses
by approximately $20 million, partially offsetting the increased volume. In
addition, foreign currencies declined against the United States dollar in 1998,
decreasing sales by approximately $17 million.
Gross profit margins increased in 1998 to 23.1% from 22.5% in 1997. On
a pro forma basis, gross profit margins declined slightly to 23.3% in 1998,
compared with 23.5% in 1997. Our primary raw material in the papermaking process
is recovered paper. In the second half of 1997, recovered paper costs increased
and margins improved as selling prices were increased to reflect the higher
cost. In 1998, recovered paper costs declined, resulting in a rollback of some
converted product prices.
Margins in 1998 were also negatively affected by several plant
start-ups and plant expansion costs. During 1998, we began a $20 million rebuild
and upgrade project at our Richmond, Va., paper mill. Problems in starting up
the mill after the expansion resulted in a margin loss of approximately $6
million in the second half of 1998. By the end of the fourth quarter, we began
to see significant improvement in this paper mill.
Margins in 1998 were also affected by high depreciation and overhead
costs as we expanded capacity at our Jackson, Tenn., composite can plant. This
plant was expanded in 1998 to accommodate customer growth projections. While
volume levels were greater than in 1997, they fell short of expectations,
resulting in crewing levels and overhead being reduced.
Other start-up costs in 1998 included a new paper tube plant in Turkey
and new composite can and protective packaging operations in Mexico.
We were able to offset many of these costs and maintain margins through
productivity improvement efforts at all our locations.
Selling, General and Administrative (SG&A) expenses increased $4.2
million to $301.6 million in 1998. SG&A as a percentage of sales was 11.8% in
1998, compared with 10.4% in 1997. On a pro forma basis, SG&A expenses were
$266.8 million, or relatively flat with 1997. As a percentage of sales, SG&A
expenses were 10.4% in 1998, compared with 10.7% in 1997. Pro forma SG&A
expenses in 1998 included some excess administrative costs from the
centralization of the industrial products order fulfillment center and
purchasing and logistics operations. We plan to complete the rollout of these
initiatives in the first half of 1999 and begin generating the savings
anticipated from these programs.
The effective tax rate for 1998 was 45.3%, compared with 94.3% in 1997.
The effective tax rate in 1997 was impacted by a deferred tax benefit of only
$51.9 million on the $226.4 million asset impairment charge recorded in 1997.
The 1998 effective tax rate includes additional taxes from the sale of the
Company's industrial containers business, offset partially by the ability to
utilize more of the capital loss generated by the sale of the North American
labels operation. On a pro forma basis, the effective tax rate was 38.5% in 1998
and 38.6% in 1997.
Net income available to common shareholders in 1998 was $180.2 million,
compared with a loss of $0.4 million in 1997. Excluding the 1997 asset
impairment charge, net income available to common shareholders for 1997 would
have been $174.1 million. On a pro forma basis, net income available to common
shareholders for 1998 was $178.9 million, compared with $174.1 million in 1997,
an increase of 2.8%. Reported earnings in 1998 were $1.73 per diluted share,
compared with $0.00 in the prior year. On a pro forma basis, earnings per
diluted share were $1.72 and $1.65 in 1998 and 1997, respectively.
Capital expenditures in 1998 were $198.9 million, compared with $230.7
million in 1997. Vision 2000, an initiative put in place in 1995 to accelerate
internal growth, resulted in accelerated capital expenditures in 1995 through
1998. With the front-loading of this capital, expectations are for 1999 and 2000
to return to more normal levels. Spending in 1998 included the paper machine
rebuild and press upgrade projects at Richmond, Va., and Trent Valley, Canada; a
new paper tube plant in Turkey; and new protective packaging and composite can
operations in Mexico. In addition, spending included capacity expansion projects
at our industrial packaging plant in Alamance, N.C.; plastic bag operations in
North Vernon, Ind., Hartsville, S.C., and Victoria, Texas; and composite can
operations in Jackson, Tenn. Capital spending in 1998 also included continued
spending on new information systems, including a new purchasing system.
Acquisition spending in 1998 totaled $74.9 million, compared with $17.6
million in 1997. During 1998, Sonoco purchased Burk, a manufacturer of injection
molded and extruded plastic products with three manufacturing facilities in
Germany, and the LaRochette group, consisting of four converting operations and
a paper mill in France. Sonoco also purchased the remaining 50% share of two
joint ventures, Coretech-Sonoco, a paper mill core manufacturer, and Montreal
Recycled Board, a recycled paperboard mill, both in Canada. In December, the
Company completed an agreement with Texpack to combine each of their paper cone
operations into a global joint venture, Conitex-Sonoco, to serve the world's
spun yarn textile industry. Sonoco will own 30% of the joint venture. Also, to
consummate the Conitex-Sonoco joint venture, Sonoco purchased the remaining 65%
of a cone joint venture in Greece and plans to contribute the cone-making assets
to the Conitex-Sonoco joint venture in 1999. Sonoco also agreed to purchase from
Conitex tube plants in Brazil and Taiwan.
Research and development costs charged to expense were $13.5 million in
1998, compared with $17.8 million in 1997. Part of the year-over-year decrease
in spending is attributable to the sale of the industrial containers and North
American labels businesses in 1998. Significant projects in 1998 included the
commercialization of numerous new tube products in the industrial segment and a
new opening feature for the coffee market in the consumer segment.
<PAGE> 8
[GRAPH]
CAPITAL SPENDING,
INDUSTRIAL SEGMENT
($ in millions)
In 1998, capital spending included plant start-ups and projects to expand
capacity and upgrade information technology systems.
SEGMENT REPORTING
Sonoco reports its results in two primary segments, Industrial Packaging and
Consumer Packaging. International results are reflected in the appropriate
segment based on the products produced or markets served. Operating profit is
revenue less operating costs, excluding interest and income taxes.
INDUSTRIAL PACKAGING SEGMENT-The industrial packaging segment represents
approximately 56% of the Company's sales and includes the following businesses:
engineered carriers (tubes, cores and cones); paperboard; injection molded and
extruded plastics; designed interior packaging; wood, plywood and metal reels
for wire and cable packaging; adhesives and converting machinery. This segment
also included the industrial container businesses, fibre and plastic drums and
intermediate bulk containers, which were sold in 1998.
Sonoco's paper operations include the Company's 25 paper mills, 37
paper machines and 46 collection facilities around the world. Annually, the
paper mills have capacity to produce approximately 1.6 million tons of cylinder
board, of which Sonoco uses almost 85% internally. The Company also produces
approximately 185,000 tons of corrugating medium exclusively for Georgia-Pacific
under the previously described cost plus fixed management fee arrangement.
Trade sales in this segment were $1.43 billion in 1998, compared with
$1.59 billion in 1997. Year-over-year sales comparisons are affected by the
businesses sold in 1998 and the new contract fee arrangement with
Georgia-Pacific. On a pro forma basis, sales increased $44.3 million, or 3.2%,
in 1998 to $1.43 billion from $1.38 billion in 1997. The acquisitions of Burk
and LaRochette during 1998 increased sales by approximately $36 million.
[GRAPH]
IDENTIFIABLE ASSETS,
INDUSTRIAL SEGMENT
($ in billions)
Identifiable assets increased slightly in 1998. The sale of the industrial
containers business was largely offset by acquisitions and internal reinvestment
through capital expenditures.
The cost of recovered paper, a primary raw material in the papermaking
process, declined in 1998 after a sharp run-up in the second half of 1997. Lower
selling prices resulting from the lower recovered paper costs unfavorably
impacted sales in this segment by approximately $12 million. Excluding
acquisitions, unit volume in our global tube and core business was up
approximately 3% over 1997. Paperboard volume was down slightly, primarily in
Europe, due to competitive pressures and lower exports to Asia. Strong volume
gains were experienced in the newer international businesses, such as those in
Asia and Brazil. Some of the volume gains were offset by unfavorable exchange
rates.
Operating profit for this segment was $282.1 million in 1998, compared
with $217.8 million in 1997. Included in the 1998 results was a $119.6 million
gain on the sale of the industrial containers business. One-time adjustments
associated with plant closings, workforce reductions and an asset impairment
charge, totaling $37.5 million, were also included in this segment in 1998. On a
pro forma basis, operating profits were $200 million in 1998, compared with
$203.3 million in 1997.
Operating profit in our integrated tube and core business did benefit
from higher volume, primarily the result of acquisitions and newer start-up
operations, and from lower year-over-year recovered paper costs. Problems in
starting up the Richmond, Va., paper mill, after the expansion of that mill,
resulted in higher costs of approximately $6 million in the second half of 1998.
In addition, higher administrative costs from systems implementations were
largely offset by productivity initiatives totaling approximately $20 million in
1998.
Sonoco's injection and extruded plastics operations expanded during
1998 with the acquisition of the Burk plants in Germany. At the same time, the
Company continued its consolidation of the molded plastics operations by closing
its Greensboro, N.C., plant.
<PAGE> 9
MANAGEMENT'S Discussion and Analysis
[GRAPH]
CAPITAL SPENDING,
CONSUMER SEGMENT
($ in millions)
Capital spending in 1998 included projects to expand capacity and start up new
operations.
[GRAPH]
IDENTIFIABLE ASSETS,
CONSUMER SEGMENT
($ in billions)
Identifiable assets decreased in 1998 due to the completion of the sale of the
Company's North American labels operation.
The protective packaging operation continued to grow, showing strong
volume gains in 1998. This operation, with three plants in the United States,
produces designed interior packaging, such as protective corner posts, and
assists customers with the design and purchase of packaging products for the
appliance industry.
During 1998, volume increased in the wire and cable packaging
operation, Sonoco Baker Reels, as new housing starts continued to increase
throughout most of the year. This operation also experienced lower lumber costs
during 1998 that were largely offset by lower selling prices. Early in 1999, a
$13 million tactical acquisition of a manufacturer of composite (wood and
plastic) reels was completed. The acquisition consists of one manufacturing
location in Georgia.
Capital spending in this segment during 1998 was $143.9 million,
compared with $140.6 million in 1997. Spending included new start-up operations,
projects to expand the capacity of paper machines and the production of tubes
and cores. Spending continued in 1998 to upgrade the Company's information
technology systems including start-up of the implementation phase of a new
purchasing system.
CONSUMER PACKAGING SEGMENT-The consumer packaging segment consists of the
following businesses: composite cans, flexible packaging, caulking cartridges,
capseals, high density film products, packaging services, printed packaging,
coasters and glass covers. This segment also included the North American labels
business sold in March 1998.
Trade sales in this segment were $1.13 billion in 1998, compared with
1997 sales of $1.26 billion. The divestiture of the North American labels
business reduced sales by $102.6 million in 1998. On a pro forma basis, trade
sales of $1.13 billion were 2.1% below 1997's sales (excluding divestitures) of
$1.16 billion. Unit volume gains in most of the Company's consumer packaging
businesses were offset by lower selling prices, primarily in the plastic grocery
bag business, reflecting the significant decline in resin costs in 1998. Volume
in the domestic composite can business was essentially flat with 1997, as volume
gains in the snack businesses were largely offset by lower volume in the frozen
concentrate and refrigerated dough businesses. Volume in the international
composite can business continued to expand, particularly in Europe, with
significantly increased snack can sales. In addition, volume improved in the
powdered drink markets in both Venezuela and Mexico. Late in 1998, installation
of new composite can lines began in Malaysia and Mexico.
Unit volume was strong in our high density film business, increasing
approximately 7.8% over 1997 average levels. Resin prices declined steadily
throughout 1998, resulting in lower selling prices.
Sonoco's flexible packaging operation had record sales in 1998, as
volume increased approximately 14% over 1997 levels. Part of the increase in
volume reflects the internal production of liners for the Company's composite
can operations.
Operating profits in the consumer segment were $106.3 million in 1998,
compared with a loss of $101.8 million in 1997. The 1998 and 1997 results
include charges of $19.2 million and $226.4 million, respectively, related to
the sale of the North American labels business. 1998 profits include a $3.9
million one-time charge related to plant closings and workforce reductions. On a
pro forma basis, profits in 1998 were $129.4 million, an increase of 6.9% over
1997 profits of $121.1 million. Lower raw material costs, particularly resin and
paper, were largely offset by lower selling prices.
<PAGE> 10
Volume gains in most of our consumer businesses, coupled with productivity
improvement projects of approximately $10 million, account for most of the
year-over-year increase in profitability.
Operating profits in the composite can operations were adversely
impacted by the expansion of the Jackson, Tenn., facility. This plant doubled in
size in 1998 to support customer projected demand. Volume, while up, did not
meet the projections, resulting in crewing levels and overhead being reduced in
the second half of 1998. We continued to consolidate the composite can
operations during 1998, resulting in the closing of the Kansas City, Mo., and
Plymouth, Wis., plants. In addition, we began the consolidation of the two
locations in Orlando, Fla.
The Company's high density film products operation improved in 1998.
Sales prices declined reflecting lower resin costs, while unit volume increased
in both the grocery and retail bag operations as well as the agricultural film
business. In addition, the Hartsville, S.C., plant was expanded to produce the
new QuikStar(TM) produce bag.
Profits increased in the flexible packaging business in 1998 aided by
volume growth of approximately 14% over the prior year. Manufacturing and
purchasing initiatives contributed to the strong performance in this operation.
Capital spending in the consumer segment was $55 million in 1998,
compared with $90.1 million in 1997. Spending for 1998 included capacity
expansion projects at the Jackson, Tenn., composite can operation and at plastic
bag operations in North Vernon, Ind., and Victoria, Texas. In addition, spending
included the expansion of the Hartsville, S.C., high density film operation to
include the production of a new QuikStar(TM) produce bag and the start-up of new
composite can operations in Mexico and Malaysia.
FINANCIAL POSITION, LIQUIDITY
AND CAPITAL RESOURCES
SONOCO'S FINANCIAL POSITION REMAINED STRONG IN 1998. AT DECEMBER 31, 1998, THE
COMPANY'S LONG-TERM DEBT WAS RATED "A" BY STANDARD & POOR'S (S&P) AND "A2" BY
MOODY'S. COMMERCIAL PAPER WAS RATED "A1" AND "P1" BY S&P AND MOODY'S,
RESPECTIVELY.
Cash provided by operations was $227.8 million in 1998, compared with
$300 million in 1997 and $291.8 million in 1996. The decrease in 1998 is due to
additional funding of the Company's benefit plans and the divestiture of our
industrial containers and North American labels operations. Excluding one-time
transactions in 1998 and 1997, earnings before interest and taxes were 6.0 times
interest expense in 1998, consistent with 6.1 times interest in 1997 and 6.0
times interest in 1996.
Current assets decreased in 1998 primarily as a result of the sales of
the North American labels and industrial containers operations, the net assets
of which were classified as assets held for sale at December 31, 1997. This
classification resulted in an increase in current assets in 1997 over 1996. As a
result of the sales in 1998, and the use of the resulting proceeds, net working
capital decreased to $225.3 million at December 31, 1998, from $438.9 million in
1997. Net working capital was $262.5 million in 1996. The current ratio was 1.5
at December 31, 1998, in line with the ratio of 1.5 in 1997 (excluding assets
held for sale) and the ratio of 1.6 at December 31, 1996. The current ratio,
including assets held for sale, was 2.0 at December 31, 1997.
Debt decreased $12.7 million to $783.6 million at December 31, 1998.
Proceeds from the sale of assets during 1998 of $296.8 million were used to
repurchase stock under the Company's share repurchase program amounting to
$169.1 million, to fund acquisitions totaling $74.9 million, and to pay down
debt. In 1997, debt decreased $96.7 million to $796.4 million. Debt was reduced
with proceeds from the sale of the screen printing group and normal operating
cash flows in 1997. Capital spending was $198.9 million in 1998, compared with
$230.7 million in 1997 and $232 million in 1996.
[GRAPH]
DEBT TO TOTAL CAPITAL RATIO
(percent)
Debt to total capital ratio was 46.7% at December 31, 1998, up slightly from
46.1% at December 31, 1997. (The 1995-1998 ratios adjust debt levels for excess
cash related to restricted-purpose bonds.)
Interest expense in 1998 was $54.8 million, compared with $57.2 million
in 1997 and $55.5 million in 1996.
On March 30, 1998, the Company announced an offer to purchase its 9.2%
debentures due August 1, 2021, for cash. Through the program, Sonoco repurchased
$58.7 million of the outstanding bonds and realized an after-tax extraordinary
loss of $11.8 million. The repurchase will generate interest savings of
approximately $2.5 million per year over the next 22 years. In 1998, the bond
repurchase generated approximately $1.5 million in interest savings over 1997.
In April 1996, the Company issued $35 million of 6% Industrial Revenue
bonds due April 1, 2026, following an issue in June 1995 of $35.1 million of
6.125% Industrial Revenue bonds due June 1, 2025. As of December 31, 1998, cash
and cash equivalents included $7.4 million of proceeds from these issues held in
trust until qualifying expenditures take place. As of December 31, 1997 and
1996, cash and cash equivalents included $23.8 million and $32.6 million of bond
proceeds, respectively.
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
[GRAPH]
TOTAL DEBT
($ in millions)
Total debt decreased $12.8 million in 1998 as some of the proceeds from the sale
of businesses were used to pay down debt.
During 1996, the Company increased its authorized commercial paper
program from $300 million to $450 million and increased the fully committed bank
lines of credit supporting the program by a like amount. These lines expire in
August 2001. The Company expects internally generated cash flow, along with
borrowing capacity under existing credit facilities, to be sufficient to meet
operating and normal capital expenditure requirements. Capital spending is
expected to be approximately $197 million in 1999. In order to maintain
financial flexibility, the Company has registered for sale up to $250 million of
debt securities under a shelf registration with the Securities and Exchange
Commission.
Shareholders' equity decreased $27.2 million to $821.6 million at
December 31, 1998. The Company repurchased 5,179,541 shares of common stock
during 1998 at a total cost of $169.1 million for an average price of $32.64 per
share. In addition, net income of $180.2 million was reduced by the payment of
$72 million for common dividends. Equity was $848.8 million at December 31,
1997, with net income reduced by the after tax asset impairment charge of $174.5
million and the payment of $67.7 million for preferred and common dividends.
On September 28, 1997, the Company converted to common stock
substantially all of the outstanding shares of its $2.25 Series A Cumulative
Convertible Preferred Stock at a rate of 2.074 common shares per share of
preferred stock.
In April 1998, the Board of Directors declared a 10% stock dividend
payable to common shareholders and a quarterly dividend of $0.18 per share,
representing a 10% increase over the same quarter 1997 dividend of $0.164, as
adjusted. Although the ultimate determination whether to pay dividends is within
the sole discretion of the Board of Directors, the Company plans to
[GRAPH]
CASH PROVIDED
BY OPERATIONS
($ in millions)
Cash provided from operations decreased in 1998 due to additional funding of
benefit plans and the divestiture of businesses.
increase dividends as earnings grow. The return on total equity, excluding
one-time transactions in 1998 and 1997, was 22.1% in 1998, compared with 19% in
1997 and 18.3% in 1996. Return on total equity, including one-time transactions,
was 22% and 0.3% in 1998 and 1997, respectively. The book value per share was
$8.08 in 1998, compared with $8.05 in 1997 and $8.10 in 1996.
The Company's debt to total capital ratio was 46.7% at the end of 1998,
compared with 46.1% and 47.2% at the end of 1997 and 1996, respectively. The
ratios have been adjusted to reduce debt by the amount of cash held related to
the issuance of restricted-purpose bonds.
The Company is exposed to market risk from changes in foreign exchange
rates, interest rates and commodity prices. From time to time, the Company may
enter hedging transactions to offset these risks. The Company does not use
financial instruments for trading purposes or enter leveraged derivative
transactions.
The Company is subject to risk due to foreign exchange rate
fluctuations as a result of operating globally. The exposure is well diversified
as our facilities are spread throughout the world. The Company monitors these
exposures and may use traditional currency swaps and forward foreign exchange
contracts to hedge a portion of the net investment in foreign subsidiaries or to
hedge firm commitments denominated in foreign currencies. The notional value of
such contracts was approximately $19 million and $29 million at December 31,
1998 and 1997, respectively.
The Company is exposed to interest rate fluctuations as a result of
using debt as a major source of financing its operations. When necessary the
Company will use traditional, unleveraged interest rate swaps to manage its mix
of fixed and variable rate debt to ensure exposure to interest rate movements is
maintained within established ranges.
<PAGE> 12
[GRAPH]
NET WORKING CAPITAL
($ in millions)
1997 net working capital excludes net assets held for sale. Reported net working
capital was $438.9 million.
The Company is a purchaser of commodities such as recovered paper and
resins. These commodities are generally purchased at market prices that are
established with the vendor as part of the purchase process. In general, the
Company does not engage in material hedging of commodity prices due to a high
correlation between the commodity cost and the ultimate selling price of its
products. On occasion, the Company may enter into commodity future or option
contracts to reduce the effect of price fluctuations on some future
manufacturing requirements.
Subsequent to year end, the Brazilian currency experienced a
significant decline against the U.S. dollar through February 28, 1999. The
Company does not anticipate any material adverse impact to its financial
position, results of operations or cash flows as a result of this devaluation.
The use of financial instruments to hedge foreign exchange, interest
rate and commodity price risk was not material to the financial statements as a
whole as of December 31, 1998, 1997 or 1996.
Except for the impact of raw material prices, as discussed in the
segment information, inflation did not have a material effect on the Company's
operations in 1998, 1997 or 1996.
The Company is subject to various federal, state and local
environmental laws and regulations concerning, among other matters, wastewater
effluent and air emissions. Compliance costs have not been significant due to
the nature of the materials and processes used in manufacturing operations. Such
laws also make generators of hazardous wastes, and their legal successors,
financially responsible for the cleanup of sites contaminated by those wastes.
The Company has been named a potentially responsible party at several
environmentally contaminated sites located primarily in the Northeastern United
States and owned by third parties. These sites are believed to represent the
Company's largest potential environmental liabilities. The Company has accrued
approximately $4 million as of December 31, 1998, with respect to these sites.
Further details are provided in the Notes to the Consolidated Financial
Statements.
The Company's main plant and corporate offices are located in
Hartsville, S.C. There are 134 owned and 79 leased facilities used by operations
in the Industrial Packaging Segment and 26 owned and 36 leased facilities used
by operations in the Consumer Packaging Segment. Europe, the largest foreign
geographic location, has 46 manufacturing locations. The Company believes that
its properties are suitable and adequate for current needs and that the total
productive capacity is adequately utilized.
YEAR 2000 READINESS DISCLOSURE
AND EURO COMPLIANCE
The "Year 2000 issue" relates to the inability of certain computerized
information and production systems to properly recognize and process
date-sensitive information. This is because most of the world's computer
hardware and software have historically used only two digits to identify the
year, resulting in the computers' inability to distinguish between dates in the
1900s and dates in the 2000s.
In May 1997, the Company adopted a Year 2000 Plan ("Plan") to identify
and address the Company's various Year 2000 issues throughout its domestic and
international operations, including financial and administrative systems,
process control and operating systems, and information systems infrastructure.
The Plan provides for six phases: (i) an inventory of all systems that might be
affected by the Year 2000; (ii) assessment of Year 2000 readiness of each
application identified in the inventory; (iii) planning for corrective action,
which includes reviewing and prioritizing the various corrective actions based
on their relative impact on the Company's operations and profitability; (iv)
initiation of corrective actions to replace or repair systems that are not Year
2000 compliant; (v) testing the new, upgraded or repaired systems; and (vi)
implementation of tested systems and post-implementation support, including
contingency plans for those systems most critical to the Company's ongoing
operations and/or most at risk to fail. The Plan is being implemented on a
Company-wide basis under the direction of the Information Services Department in
cooperation with senior management and with the review of the Board of
Directors' Audit Committee.
The Company has completed the inventory, assessment and planning phases
for substantially all of its material systems that may involve a Year 2000
issue. Based on the information developed, of total system-related expenditures,
the Company estimates that the total cost of achieving Year 2000 compliance in
substantially all of its information technology and production systems will be
approximately $30 million, of which $25 million has been spent through December
31, 1998, a portion of which was capitalized and will be amortized to earnings
in future periods. Management anticipates that the remainder will be spent in
the first three quarters of 1999 and believes that the total cost of achieving
Year 2000 compliance will not have a material impact on the Company's financial
condition, results of operations or cash flows. However, the Company currently
is in the process of initiating corrective actions and testing the new, upgraded
or repaired systems. The Company
<PAGE> 13
MANAGEMENT'S Discussion and Analysis
may need to take additional corrective action arising out of the results of the
testing, the costs of which it cannot yet predict. Testing of material systems
is scheduled to be completed in the second quarter of 1999.
The Company is deploying its internal and external resources to install
and test new or upgraded equipment necessary to address the Year 2000 issues in
its operations. Management believes its existing personnel and outside resources
are sufficient to implement the Plan on a timely basis, assuming that no
unanticipated delays are encountered.
The Company's facilities utilize various control systems to monitor and
regulate production operations. Although the production impact of a Year
2000-related failure varies significantly among the facilities, any such failure
could cause manufacturing delays or similar inefficiencies. Due to the
decentralized nature of its operations, however, management believes the
potential impact of such a failure would be isolated to the affected facility.
In most cases, production could be shifted to other Company facilities that have
similar production capabilities and capacity until the Year 2000 issue is
remedied. It is not possible to predict the reasonable likelihood of such an
event occurring or the related financial impact. Based on information developed
to date, the Company does not believe it has a significant amount of software
imbedded in its production equipment that is date dependent. The Company is
continuing to inventory its equipment for imbedded software and, consequently,
may find additional software that requires correction. The Company intends to
have its final contingency plans for its production facilities and equipment
finalized by the third quarter of 1999.
The Company also maintains a wide variety of administrative and
financial applications that require corrective actions to handle Year 2000
dates. The Company is in the process of installing and testing new, more
centralized software systems throughout its North American operations that are
designed to address Year 2000 issues. Management anticipates that the
implementation of these systems will be complete within the time frames
established by the Plan. Such applications generally are decentralized in the
Company's international operations. Consequently, any Year 2000 failure would be
isolated to a single facility or operation. In most instances, the Company has
the ability to run these applications off-line with the assistance of additional
Company personnel, if necessary.
The Company relies on third-party suppliers for certain raw materials,
utilities, transportation and other key services. Under the Plan, the Company
has initiated efforts to evaluate the Year 2000 readiness of its key suppliers
so that it can make contingency plans to reduce risks of disruption in its
production and delivery processes. Paper, the Company's primary raw material, is
produced internally; therefore, the Company believes it will not be subject to
many of the risks attendant to companies that are substantially dependent on
third-party suppliers for raw materials. To date, approximately 70% of those
suppliers that the Company has contacted have responded to the surveys. All have
indicated that they are, or reasonably believe they will be, Year 2000 compliant
with respect to operations that impact the Company.
Although possible Year 2000 interruptions in customers' operations
could result in reduced sales, increased inventory or receivable levels and
reduction in cash flow, the Company believes that its customer base is broad
enough to minimize the effects of such occurrences. Nevertheless, the Company is
taking steps to monitor the status of its more significant customers in order to
devise adequate contingency plans where necessary.
There is a risk that the Company's plan for achieving Year 2000
compliance may not be completed on time, particularly in certain of the
Company's European operations that are more dependent on third parties and for
which information is still being developed. However, the Company anticipates
that if one or more milestones are not met with respect to any system, the Plan
timetable will provide adequate advance notice to permit the Company to take
those steps necessary to implement alternative plans, which could include taking
the system off-line temporarily, stockpiling inventories of raw materials or
finished goods or devoting additional Company personnel to resolve or
substantially mitigate the issues. The Company also is examining the extent to
which its insurance coverages may protect against or offset Year 2000-related
risks.
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing currencies and the
Euro and adopted the Euro as their common legal currency (the "Euro
Conversion"). Although the Company is currently unsure of the total potential
impact that the Euro Conversion will have on its business, financial condition
and results of operations, particularly as it relates to the Company's European
operations, the Company does not anticipate the Euro Conversion will have a
material adverse effect on the Company. The corrective actions that the Company
is taking to address Year 2000 issues with respect to its European operations
already include changes in its administrative and financial applications
necessary to deal with the Euro Conversion at an immaterial incremental cost.
The estimates and conclusions herein contain forward-looking statements
and are based on management's best estimates of future events. Risks to
completing the Plan include the availability of resources, the Company's ability
to discover and correct the potential Year 2000-sensitive problems that could
have a serious impact on specific systems or facilities, and the ability of
suppliers to bring their systems into Year 2000 compliance. All statements made
herein regarding our Year 2000 efforts are "Year 2000 Readiness Disclosures"
made pursuant to the Year 2000 Information and Readiness Disclosure Act, and to
the extent applicable, are entitled to the protections of such act.
RESULTS OF OPERATIONS
1997 VERSUS 1996
Consolidated net sales for 1997 were $2.85 billion, compared with $2.79 billion
in 1996. The increase in sales resulted from volume gains in several businesses,
most notably tubes and cores and composite cans. Acquisitions during 1996 and
1997 added approximately $70 million to year-over-year sales, while the 1996 and
1997 dispositions and the formation of the RTS Packaging joint venture reduced
year-over-year sales by $77 million. See Note 2 to the Consolidated Financial
Statements for more information.
Gross profit margins decreased slightly to 22.5%, from the 23% reported
in 1996. Lower selling prices and higher material and labor costs offset strong
productivity gains. Productivity improvements were notable across the
corporation, including decreased changeover times and reduced scrap.
<PAGE> 14
Cost-control programs throughout the Company reduced selling, general and
administrative costs to 10.4% of sales, compared with 11.1% of sales in 1996.
The Company's effective tax rate in 1997 was 94.3%, as deferred tax
benefits of only $51.9 million on the $226.4 million asset impairment charge
related to assets held for sale were recognized. Excluding the impact of this
transaction, the effective tax rate would have been 38.6% for the year, compared
with 38.4% in 1996.
The net loss available to common shareholders for 1997 was $0.4
million, including the one-time $174.5 million after-tax asset impairment charge
on assets held for sale. Excluding the effect of the one-time charge, net income
available to common shareholders would have been $174.1 million, compared with
$163.7 million in 1996. In 1997, diluted earnings per share were $0.00, or
$1.65, excluding the one-time charge, compared with $1.58 in 1996.
Capital expenditures in 1997 were $230.7 million, compared with $232
million in 1996. Capital projects were focused on increasing productivity and
introducing new technology to several of the businesses. Acquisition spending
totaled $17.6 million, compared with $94.2 million in 1996, as described in Note
2 to the Consolidated Financial Statements. Research and development costs
charged to expense were $17.8 million for 1997, compared with $17.5 million for
1996.
INDUSTRIAL PACKAGING SEGMENT-Trade sales in this segment were $1.59 billion, an
increase of 2% over the $1.56 billion recorded in 1996. Sales increased in this
segment because of increased demand and market share gains, especially in the
tube, core and paperboard businesses. Year-over-year sales comparisons were
negatively affected by low selling prices for corrugating medium and linerboard,
pricing pressures in several operations and only recording nine months of
partitions sales as this operation became part of a separate joint venture in
1997.
Operating profit for this segment was $217.8 million, or 7.3% higher
than the $202.9 million in 1996. Increased volume in nearly all operations,
along with strong gains in productivity, contributed to increased earnings in
this segment.
In the global tube and core business, volume increased in nearly all
markets served around the world. The volume increases came from increased demand
and from gains in market share. The United States business, which was strong in
all major market segments, showed a volume growth gain of more than 8%.
Overall, lower selling prices on corrugating medium and linerboard,
combined with higher material costs, negatively affected operating profit in the
industrial segment by $8 million in 1997, compared with 1996.
The Company's industrial containers operation saw sales drop as a
result of loss of volume in the fibre drum business and lower selling prices in
1997, compared with 1996. Volume in the intermediate bulk containers business,
however, continued to increase throughout 1997. In December 1997, Sonoco signed
a letter of intent to sell the industrial containers businesses. The sale was
completed in 1998 for approximately $218 million in cash.
New products for the quick service restaurant market helped Sonoco's
injection molded and extruded plastics operation increase both sales and profits
during 1997. The protective packaging operation continued to grow, increasing
volume in the corner post business. Sonoco's wire and cable packaging operation,
Sonoco Baker Reels, increased volume by more than 10% in 1997.
Capital spending in this segment during 1997 was $140.6 million,
compared with $163.5 million in 1996. Spending included the completion of the
new order fulfillment center in Hartsville, S.C.; a new plant near Vancouver,
Wash.; several projects to expand the capacity of paper machines; a new
industrial products plant in North Carolina; and continued upgrades of the
Company's information technology systems.
CONSUMER PACKAGING SEGMENT-Trade sales in this segment were $1.26
billion, a 2.3% increase over the $1.23 billion recorded in 1996. Sales were
favorably affected by strong volume growth in the composite can operation.
However, lower selling prices in the labels and the high density film operation
reduced sales in this segment by more than $25 million. Year-over-year sales
comparisons were negatively affected by the sale of the screen print operation
early in 1997. This operation accounted for approximately $60 million in sales
during 1996.
The operating loss of $101.8 million in this segment included the
effect of the $226.4 million pre-tax asset impairment charge taken in the fourth
quarter of 1997 related to assets held for sale. Excluding this charge,
operating profits would have been $124.6 million, compared with $126.4 million
in 1996. In addition to the one-time charge, operating profit in this segment
was affected by the lower selling prices in the labels operation and the
combination of lower selling prices and higher materials cost in the high
density film operation.
In the composite can operation, volume increased in many market
segments, particularly snack foods and powdered beverages. The Company benefited
from new technology introduced during 1997 and 1996, such as the rectangular
composite can. Additional sales in this segment came from the formation of new
joint ventures in Brazil and Chile during the second quarter of 1997.
Productivity improvements and purchasing initiatives improved year-over-year
profits.
Flexible packaging increased sales and profits in 1997. Sales volume
increased slightly, while productivity improvements favorably impacted profits.
Sales volume increased in high density film products in both the grocery and
retail markets. Unfortunately, the negative relationship between lower selling
prices and higher resin costs resulted in lower operating profits for this
operation in 1997, compared with 1996.
Sonoco's labels operation experienced increased volume during 1997;
however, sales and profits were down from the previous year due to lower selling
prices. The North American labels business was sold early in the second quarter
of 1998. The remaining labels business, located in the United Kingdom, was held
for sale as of December 31, 1998.
Capital spending in the consumer segment was $90.1 million in 1997,
compared with $68.5 million in 1996. Among the major projects during the year
were the expansion of the Jackson, Tenn., and Londerzeel, Belgium, snack food
composite can operations and continued investment in the North Vernon, Ind.,
plastic bag operation.
<PAGE> 15
CONSOLIDATED Balance Sheets
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Years ended December 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 57,249 $ 53,600
Trade accounts receivable, net of allowances of $5,420 in 1998 and $5,299 in 1997 297,672 289,991
Other receivables 54,475 12,463
Inventories
Finished and in process 93,829 94,785
Materials and supplies 123,432 115,313
Prepaid expenses 28,599 25,265
Deferred income taxes 866 63,041
Net assets held for sale 5,294 218,582
- ----------------------------------------------------------------------------------------------------------------------------------
661,416 873,040
PROPERTY, PLANT AND EQUIPMENT, NET 1,013,843 939,542
COST IN EXCESS OF FAIR VALUE OF ASSETS PURCHASED, NET 170,361 144,097
OTHER ASSETS 237,363 203,253
- ----------------------------------------------------------------------------------------------------------------------------------
$ 2,082,983 $ 2,159,932
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Payable to suppliers $ 174,218 $ 161,078
Accrued expenses and other 131,570 106,839
Accrued wages and other compensation 17,897 22,689
Notes payable and current portion of long-term debt 96,806 99,690
Taxes on income 15,578 43,848
- ----------------------------------------------------------------------------------------------------------------------------------
436,069 434,144
LONG-TERM DEBT 686,826 696,669
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 43,689 83,161
DEFERRED INCOME TAXES AND OTHER 94,807 97,139
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY*
Serial preferred stock, no par value
Authorized 30,000 shares
0 shares issued and outstanding as of December 31, 1998 and
1997, respectively
Common shares, no par value
Authorized 150,000 shares
101,683 and 105,417 shares issued and outstanding as of December 31, 1998 and 1997, respectively 7,175 7,175
Capital in excess of stated value 431,465 198,271
Accumulated other comprehensive loss (95,139) (91,420)
Retained earnings 478,091 734,793
- ----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 821,592 848,819
- ----------------------------------------------------------------------------------------------------------------------------------
$ 2,082,983 $ 2,159,932
=========== ===========
</TABLE>
* The Shareholders' Equity section has been modified to comply with Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
Accordingly, 1997 figures have been reclassified to reflect the new
requirements. In addition, shares outstanding as of December 31, 1997, have
been restated to reflect the 10% stock dividend paid on June 10, 1998.
The Notes beginning on page 38 are an integral part of these financial
statements.
<PAGE> 16
CONSOLIDATED Statements of Operations
(Dollars and shares in thousands except per share data)
<TABLE>
<CAPTION>
Years ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 2,557,917 $ 2,847,831 $ 2,788,075
Cost of sales 1,968,200 2,208,092 2,148,105
Selling, general and administrative expenses 301,610 297,439 310,605
(Gain) loss on assets held for sale (100,354) 226,358
- -------------------------------------------------------------------------------------------------------------------------------
Income before interest and taxes 388,461 115,942 329,365
Interest expense 54,779 57,194 55,481
Interest income (5,916) (4,971) (6,191)
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 339,598 63,719 280,075
Provision for income taxes 153,989 60,111 107,433
- -------------------------------------------------------------------------------------------------------------------------------
Income before equity in earnings of affiliates/Minority interest in subsidiaries 185,609 3,608 172,642
Equity in earnings of affiliates/Minority interest in subsidiaries 6,387 (991) (1,771)
- -------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss 191,996 2,617 170,871
Extraordinary loss, net of income tax benefit (11,753)
- -------------------------------------------------------------------------------------------------------------------------------
Net income 180,243 2,617 170,871
Preferred dividends (3,061) (7,196)
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders $ 180,243 $ (444) $ 163,675
===========================================
Average common shares outstanding:*
Basic 102,632 100,981 99,564
Assuming conversion of preferred stock 3,923 6,602
Assuming exercise of options 1,643 2,446 2,321
- -------------------------------------------------------------------------------------------------------------------------------
Diluted 104,275 107,350 108,487
===========================================
Per common share*
Basic
- -----
Income before extraordinary loss $ 1.87 $ .00 $ 1.64
Extraordinary loss, net of income tax benefit (.11)
- -------------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 1.76 $ .00 $ 1.64
===========================================
Diluted
- -------
Income before extraordinary loss $ 1.84 $ .00 $ 1.58
Extraordinary loss, net of income tax benefit (.11)
- -------------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 1.73 $ .00 $ 1.58
===========================================
Cash dividends-common $ .704 $ .641 $ .586
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Shares outstanding and per share data have been restated to reflect the 10%
common stock dividend paid on June 10, 1998. The Notes beginning on page 38 are
an integral part of these financial statements.
<PAGE> 17
CONSOLIDATED Statements of Changes in Shareholders' Equity
(Dollars and shares in thousands except per share data)
<TABLE>
<CAPTION>
Common Shares Preferred Shares
Comprehensive ----------------------- -----------------------
Income (Loss) Outstanding Amount Outstanding Amount
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JANUARY 1, 1996 100,229 $7,175 3,450 $ 172,500
Net income $170,871
Other comprehensive income
(loss), net of tax:
Translation loss (647)
Minimum pension liability
adjustment 540
--------
Other comprehensive loss (107)
--------
Comprehensive income $170,764
========
Cash dividends:
Preferred
Common, $0.586 per share
Issuance of shares under
Stock option plan 1,004
Preferred stock conversions 1,138 (499) (24,942)
Shares repurchased:
Preferred (556) (27,802)
Common (3,521)
Other
- ---------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 98,850 7,175 2,395 119,756
Net income 2,617
Other comprehensive loss,
net of tax:
Translation loss (29,835)
Minimum pension liability
adjustment (1,805)
---------
Other comprehensive loss (31,640)
---------
Comprehensive loss $ (29,023)
=========
Cash dividends:
Preferred
Common, $0.641 per share
Issuance of shares under
Stock option plan 913
Employee stock ownership plan 210
Preferred stock conversions 5,464 (2,395) (119,756)
Shares repurchased (20)
Other
- ---------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 105,417 7,175 0 0
Net income 180,243
Other comprehensive loss,
net of tax:
Translation loss (1,821)
Minimum pension liability
adjustment (1,898)
---------
Other comprehensive loss (3,719)
---------
Comprehensive income $ 176,524
=========
Cash dividends:
Common, $0.704 per share
10% common stock dividend
Issuance of shares under
Stock option plan 1,378
Employee stock ownership plan 68
Shares repurchased (5,180)
Other
- ---------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 101,683 $7,175 0 $ 0
==================================================
<CAPTION>
Accumulated
Capital in Other
Excess of Comprehensive Retained
Stated Value Loss Earnings
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
JANUARY 1, 1996 $ 104,066 $(59,673) $ 694,681
Net income 170,871
Other comprehensive income
(loss), net of tax:
Translation loss
Minimum pension liability
adjustment
Other comprehensive loss (107)
Comprehensive income
Cash dividends:
Preferred (7,196)
Common, $0.586 per share (58,480)
Issuance of shares under
Stock option plan 15,914
Preferred stock conversions 24,942
Shares repurchased:
Preferred (5,588)
Common (89,205)
---------
Other 3,457
- ----------------------------------------------------------------------------------------
DECEMBER 31, 1996 53,586 (59,780) 799,876
Net income 2,617
Other comprehensive loss,
net of tax:
Translation loss
Minimum pension liability
adjustment
Other comprehensive loss (31,640)
Comprehensive loss
Cash dividends:
Preferred (3,061)
Common, $0.641 per share (64,639)
Issuance of shares under
Stock option plan 13,436
Employee stock ownership plan 5,675
Preferred stock conversions 119,756
Shares repurchased (592)
Other 6,410
- ----------------------------------------------------------------------------------------
DECEMBER 31, 1997 198,271 (91,420) 734,793
Net income 180,243
Other comprehensive loss,
net of tax:
Translation loss
Minimum pension liability
adjustment
Other comprehensive loss (3,719)
Comprehensive income
Cash dividends:
Common, $0.704 per share (72,028)
10% common stock dividend 364,917 (364,917)
Issuance of shares under
Stock option plan 25,067
Employee stock ownership plan 2,362
Shares repurchased (169,080)
Other 9,928
- ----------------------------------------------------------------------------------------
DECEMBER 31, 1998 $ 431,465 $(95,139) $ 478,091
===========================================
</TABLE>
Shares outstanding and per share data have been restated to reflect the 10%
common stock dividend on June 10, 1998. 1996 and 1997 amounts have been restated
to reflect the adoption of Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." See Note 17 to the Consolidated Financial
Statements.
The Notes beginning on page 38 are an integral part of these financial
statements.
<PAGE> 18
CONSOLIDATED Statements of Cash Flows
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Years ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 180,243 $ 2,617 $ 170,871
Adjustments to reconcile net income to net cash provided by operating activities
Extraordinary loss on debt retirement 11,753
Depreciation, depletion and amortization 145,669 153,524 142,927
Equity in earnings of affiliates/Minority interest in subsidiaries (6,387) 991 1,771
Cash dividends from affiliated companies 10,284 991 1,074
Loss (gain) on disposition of assets 6,168 4,642 (1,892)
(Gain) loss on assets held for sale (100,354) 226,358
Deferred taxes 71,613 (48,357) 9,972
Changes in assets and liabilities, net of effects from acquisitions,
dispositions, assets held for sale and foreign currency adjustments
Accounts receivable 3,637 (8,669) (29,789)
Inventories (2,321) (1,463) (20,434)
Prepaid expenses (3,597) (448) (4,748)
Payables and taxes (22,374) (7,943) 25,196
Other assets and liabilities (66,491) (22,281) (3,172)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 227,843 299,962 291,776
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (198,880) (230,651) (231,986)
Cost of acquisitions, exclusive of cash (74,911) (17,647) (94,212)
Proceeds from the sale of assets 296,845 74,960 15,216
Other (6,489) (3,200)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 16,565 (176,538) (310,982)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt 161,900 76,211 72,812
Principal repayment of debt (248,811) (72,095) (46,772)
Net increase (decrease) in commercial paper borrowings 54,000 (95,391) 173,891
Cash dividends - common and preferred (72,028) (67,700) (65,676)
Common and preferred shares acquired (169,080) (646) (122,595)
Common shares issued 32,882 19,160 17,177
- ----------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (241,137) (140,461) 28,837
Effects of Exchange Rate Changes on Cash 378 (623) 5
- ----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,649 (17,660) 9,636
Cash and cash equivalents at beginning of year 53,600 71,260 61,624
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 57,249 $ 53,600 $ 71,260
===================================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 55,084 $ 54,739 $ 50,671
Income taxes paid $ 95,278 $ 92,240 $ 115,920
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Excluded from the Consolidated Statements of Cash Flows are the effects of
certain non-cash activities. On June 10, 1998, the Company issued a 10% common
stock dividend ($364,917 fair value). In December 1998, the Company received an
obligation for $34,000 in conjunction with the sale of the intermediate bulk
containers operation. During the third quarter of 1997, the Company converted to
common stock substantially all of its outstanding shares of $2.25 Series A
Cumulative Convertible Preferred Stock issued in 1993 at a rate of 2.074 common
shares per share of preferred stock. Debt obligations assumed by the Company in
conjunction with acquisitions were approximately $6,400 in 1998, $9,900 in 1997
and $11,600 in 1996.
The Notes beginning on page 38 are an integral part of these financial
statements.
<PAGE> 19
NOTES to Consolidated Financial Statements
(Dollars in thousands except per share data)
The following notes are an integral part of the consolidated financial
statements. The accounting principles followed by the Company appear in bold
type.
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sonoco and its
subsidiaries after elimination of intercompany accounts and transactions.
Investments in affiliated companies in which the Company owns 20% to 50% of the
voting stock are included on the equity method of accounting.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Certain amounts in the 1997 financial statements have been reclassified
to conform with the current year presentation.
2. ACQUISITIONS/DISPOSITIONS
Sonoco completed several acquisitions during 1998 with an aggregate cost of
approximately $74,900 in cash and the assumption of $6,400 in debt.
During the first quarter of 1998, the Company completed two
acquisitions in its Industrial Packaging segment. The Burk family of companies,
producers of injection and extruded plastics products with three manufacturing
facilities in Germany, and the LaRochette group, consisting of four converting
operations and a paper mill in France, were acquired. Burk and LaRochette have
annual sales of approximately $19,000 and $50,000, respectively.
During the second quarter, the Company completed the sale of its North
American labels operations along with the fibre and plastic drum portions of the
industrial containers operation. The sale of the intermediate bulk containers
portion of the industrial containers operation was completed in December 1998.
See Note 3 to the Consolidated Financial Statements for more information
regarding the sales of these businesses.
In September, the Company purchased the remaining 50% share of its
joint venture partner in Coretech-Sonoco, a paper mill core manufacturer in
Canada, and in a Montreal-based recycled paperboard mill whose production is
primarily dedicated to Coretech-Sonoco. In the fourth quarter of 1998, the
Company completed an agreement with Texpack to combine the paper cone operations
of both companies into a global joint venture to serve the world's textile
industry. The joint venture, in which the Company owns 30%, is named
Conitex-Sonoco.
Sonoco completed several acquisitions during 1997 with an aggregate
cost of approximately $17,600 in cash and the assumption of $9,900 in debt.
Acquisitions included the Industrial Machine Company, a domestic producer of
equipment and tooling primarily for the paper-converting and food-processing
industries, and Corepak LTD, a tube and core producer in England. Joint ventures
were also formed in Brazil and Chile. The Brazilian joint venture, Sonoco
For-Plas, is owned 51% by the Company. It is a major supplier of "peel off"
metal ends and plastic components such as overcaps for cans. The Chilean joint
venture, a manufacturer of paper tubes and composite cans, is also owned 51% by
the Company. Sonoco contributed its fibre partitions operation into a joint
venture with Rock-Tenn Company called RTS Packaging, owned 35% by Sonoco. The
Company also completed the sale of its screen print operations acquired in the
1993 acquisition of Engraph, Inc.
Sonoco completed several acquisitions during 1996 that were
strategically important to both United States and international operations. The
aggregate cost of these acquisitions was approximately $94,200 in cash and the
assumption of $11,600 in debt. Domestic acquisitions included a producer of
moldwood plugs, Moldwood Products Company; a supplier of vapor barrier packaging
materials, Hamilton Hybar, Inc.; a manufacturer of tubes and cores, Stonington
Corporation; a niche producer of composite cans, Specialty Packaging; and two
operations to the Company's wire and cable packaging operations. Significant
international acquisitions for Sonoco were the Hongwen joint venture for
paperboard production in China, the Indonesian joint venture for production of
tubes, cones and cores, and the purchase of two German paperboard can
manufacturers.
During 1995, Sonoco acquired the remaining 50% interest in its
CMB/Sonoco joint venture for composite can production in England and France. The
Edinburgh plant was added to the flexible packaging operations and Cricket
Converters was added to the labels operations. Also during 1995, Sonoco acquired
a minority interest in Demolli Industria Cartaria SRL, and purchased three
converting operations and a paper mill in Brazil, a small tube and paper
manufacturer in France and three recovered paper collection plants in the United
States. During 1994, the Company acquired M. Harland & Son Limited, a leading
producer of roll labels and roll-label application equipment headquartered in
the United Kingdom.
The Company has accounted for all of its acquisitions as purchases and,
accordingly, has included their results of operations in consolidated net income
from the date of acquisition. The pro forma impact of these acquisitions in each
year was immaterial.
3. ASSETS HELD FOR SALE
In December 1997, the Company signed a letter of intent to sell its industrial
containers operations, part of the Company's Industrial Packaging segment.
Accordingly, the $97,870 of net assets of these operations, which consisted
primarily of property, plant and equipment, accounts receivable and inventories,
net of liabilities, were included in net assets held for sale at December 31,
1997. The sale was fully completed in 1998 for cash proceeds of approximately
$218,400 resulting in a pre-tax gain of $119,552 ($55,252 after tax).
In January 1998, the Company signed a letter of intent to sell its
North American labels operations, part of the Company's Consumer Packaging
segment. The cash transaction was completed early in the second quarter of 1998
for net proceeds of approximately $87,700. In accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
recorded a pre-tax charge of $226,358 ($174,500
<PAGE> 20
after tax) in the fourth quarter of 1997 to reduce cost in excess of fair value
to reflect the difference between carrying value and estimated proceeds from the
sale. An additional pre-tax charge of $19,198 ($13,698 after tax) was recognized
in 1998 upon completion of the sale of the North American labels business. At
December 31, 1998, the operations that remain for sale consist of a labels
operation in the United Kingdom and a manufacturer of roll-label application
equipment in the United States. There were approximately $5,294 and $120,712
included in net assets held for sale at December 31, 1998 and 1997,
respectively, consisting primarily of property, plant and equipment, accounts
receivable and inventories, net of liabilities.
The combined net sales of the above operations were $140,000 in 1998,
$437,500 in 1997 and $438,200 in 1996. Combined operating profits were $3,300,
$13,600 and $22,700 in 1998, 1997 and 1996, respectively.
The decision to sell Sonoco's industrial containers and labels
businesses was based on management's conclusion that neither of these businesses
fit the Company's long-term strategic objectives.
4. CASH AND CASH EQUIVALENTS
Cash equivalents are composed of highly liquid investments with an original
maturity of three months or less and are recorded at market.
At December 31, 1998 and 1997, outstanding checks of $33,227 and
$21,853, respectively, were included in Payable to suppliers.
At December 31, 1998 and 1997, $7,409 and $23,823, respectively, of
cash and cash equivalents represented proceeds from the issuance of the 6% and
6.125% Industrial Revenue Bonds (IRBs) and were restricted to funding qualified
expenditures as provided for by the bonds.
5. INVENTORIES
Inventories are stated at the lower of cost or market. The last-in, first-out
(LIFO) method was used to determine costs of approximately 31% of total
inventories in 1998 and 34% in 1997. The remaining inventories are determined on
the first-in, first-out (FIFO) method.
If the FIFO method of accounting had been used for all inventories, the
totals would have been higher by $11,078 in 1998 and $10,866 in 1997.
6. PROPERTY, PLANT AND EQUIPMENT
Plant assets represent the original cost of land, buildings and equipment less
depreciation computed under the straight-line method over the estimated useful
life of the asset. Equipment lives range from 3 to 11 years, buildings from 20
to 30 years.
Timber resources are stated at cost. depletion is charged to operations
based on the number of units of timber cut during the year.
Depreciation and depletion expense amounted to $136,170 in 1998,
$136,925 in 1997 and $125,167 in 1996. Details of property, plant and equipment
at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Land $ 35,372 $ 37,854
Timber resources 33,714 33,328
Buildings 298,283 261,850
Machinery and equipment 1,433,531 1,310,902
Construction in progress 155,773 115,200
- ---------------------------------------------------------------------------
1,956,673 1,759,134
Accumulated depreciation and depletion (942,830) (819,592)
- ---------------------------------------------------------------------------
$ 1,013,843 $ 939,542
==============================
</TABLE>
Estimated costs for completion of authorized capital additions under
construction totaled approximately $136,000 at December 31, 1998.
Certain operating properties and equipment are leased under
non-cancelable operating leases. Total rental expense under operating leases was
approximately $36,000 in both 1998 and 1997, and $37,000 in 1996. Future minimum
rentals under non-cancelable operating leases with terms of more than one year
are as follows: 1999-$15,600, 2000-$13,100, 2001-$9,400, 2002-$7,500,
2003-$5,900, and 2004 and thereafter-$22,500.
7. COST IN EXCESS OF FAIR VALUE OF ASSETS PURCHASED
Goodwill arising from business acquisitions ($35,000 in 1998 and $5,000 in 1997)
is amortized on a straight-line basis over periods ranging from 15 to 40 years.
the company evaluates, at each balance sheet date, the realizability of goodwill
for each subsidiary having a goodwill balance. amortization expense amounted to
$9,499 in 1998, $16,599 in 1997, and $17,760 in 1996. Accumulated amortization
at December 31, 1998 and 1997 was $48,705 and $44,082, respectively.
8. INVESTMENT IN LIFE INSURANCE
Company-owned life insurance (COLI) policies are used by the Company to aid in
the financing of employee benefits and are recorded net of policy loans in Other
Assets. The net pre-tax cost of COLI, including interest expense, was $4,195 in
1998, $4,477 in 1997 and $9,303 in 1996 and is included in selling, general and
administrative expenses. The related interest expense was $36,392 in 1998,
$38,754 in 1997 and $39,921 in 1996. Legislation was enacted in 1996 that will
phase out the tax deductibility of this interest.
<PAGE> 21
NOTES to Consolidated Financial Statements
(Dollars in thousands except per share data)
9. DEBT
Debt at December 31 was as follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper, average rate of 5.4% in 1998
and 5.5% in 1997 $267,000 $213,000
6.75% debentures due November 2010 99,819 99,819
5.875% debentures due November 2003 99,605 99,538
5.49% debentures due April 2000 75,000 75,000
9.2% debentures due August 2021 41,305 99,928
6.125% IRBs due June 2025 34,509 34,486
6.0% IRBs due April 2026 34,139 34,107
Foreign denominated debt, average rate of 7.5%
in 1998 and 8.4% in 1997 106,626 106,670
Other notes 25,629 33,811
- ------------------------------------------------------------------------------
Total debt 783,632 796,359
Less current portion and short-term notes 96,806 99,690
- ------------------------------------------------------------------------------
Long-term debt $686,826 $696,669
========================
</TABLE>
The Company has authorized a commercial paper program totaling $450,000
and has fully committed bank lines of credit supporting the program by a like
amount. These bank lines expire in the year 2001. It is management's intent to
extend indefinitely the line of credit agreements supporting the commercial
paper program. Accordingly, commercial paper borrowings are classified as
long-term debt.
Certain of the Company's debt agreements impose restrictions with
respect to the maintenance of financial ratios and the disposition of assets.
The most restrictive covenant currently requires that net worth at the end of
each fiscal quarter be greater than $750,000 increased by 50% of net income
after March 31, 1998, and decreased by stock purchases after January 1, 1998.
In addition to the committed availability under the commercial paper
program, unused short-term lines of credit for general Company purposes at
December 31, 1998, were approximately $137,100 with interest at mutually
agreed-upon rates. As of December 31, 1998, the Company has registered debt
securities of $250,000 under shelf registrations with the Securities and
Exchange Commission.
The approximate principal requirements of debt maturing in the next
five years are: 1999-$96,800, 2000-$80,500, 2001-$3,500, 2002-$3,700 and
2003-$102,900.
10. EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT
In 1998, the Company tendered for any and all of its 9.20% debentures due August
1, 2021. The fixed spread offer to purchase the debentures resulted in an
extraordinary charge against earnings in the second quarter of $11,753 (after a
$7,514 income tax benefit), reflecting the tender of approximately $58,700
principal amount of the $100,000 issue.
11. FINANCIAL INSTRUMENTS
The Company enters into currency swaps and foreign exchange forward contracts to
hedge a portion of the net investment in certain foreign subsidiaries. Gains and
losses on such contracts are recognized as a component of accumulated other
comprehensive income. As of December 31, 1998 and 1997, the notional value of
such contracts was approximately $19,000 and $29,000, respectively. All
financial instruments are executed with credit-worthy financial institutions;
therefore, the Company considers the risk of non-performance on these
instruments to be remote.
The following table sets forth the carrying amounts and fair values of
the Company's significant financial instruments where the carrying amount
differs from the fair value. The carrying amount of cash and cash equivalents,
short-term debt and long-term variable-rate debt approximates fair value. The
fair value of long-term debt is based on quoted market prices or by discounting
future cash flows using interest rates available to the Company for issues with
similar terms and average maturities. Foreign currency agreements are valued
based on termination values or quoted market prices of comparable instruments.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
of Asset of Asset of Asset of Asset
(Liability) (Liability) (Liability) (Liability)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term debt $(686,826) $(710,427) $(696,669) $(718,624)
Foreign currency
agreements (583) (583) 1,060 1,060
- ---------------------------------------------------------------------------------
</TABLE>
On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for all
fiscal years beginning after June 15, 1999, and requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. Management of
the Company anticipates that, due to its limited use of derivative instruments,
the adoption of FAS 133 will not have a significant effect on the Company's
results of operations or its financial position.
12. STOCK PLANS
The Company has stock option plans under which common shares are reserved for
sale to certain employees and non-employee directors. Options granted under the
plans were at the market value of the shares at the date of grant. Options are
generally exercisable one year after the date of grant and expire 10 years after
the date of grant. There were 4,115,363 shares reserved for future grants at
December 31, 1998.
<PAGE> 22
On December 31, 1998, the Company granted special one-time Centennial
stock options of 100 shares to substantially all of its employees. These options
may be exercised after two years at the closing price of the shares on December
31, 1998, and expire after six years. A total of 1,543,200 options were granted
under the Centennial Share Program.
On September 2, 1997, one-time awards of contingent share units were
granted to twenty-five of the Company's executives from shares allocated in the
1991 Key Employee Stock Plan. These awards, consisting of performance-based
restricted shares of Common Stock, were granted to provide corporate and
business unit managers with an additional compensation opportunity which is
realized only if targeted creation of shareholder value is achieved. The vesting
of the awards, which can range from 184,250 to 737,000 shares, is tied to growth
in share price over a four-year period. None of the stock units will vest if the
minimum share price growth objective is not achieved. In 1994, the Company
granted one-time awards of contingent shares to certain of the Company's
executives. These options vest over a five-year period with one-third vesting on
the third, fourth and fifth anniversaries of the grant. An executive must be
actively employed by the Company on the vesting date in order for shares to be
issued. Once vested, these options do not expire. As of December 31, 1998,
382,800 options granted under this plan remain outstanding.
A summary of the status of the Company's stock option plans is
presented below:
<TABLE>
<CAPTION>
Weighted-
Option Average
Shares Exercise Price
- ------------------------------------------------------------------
<S> <C> <C>
1996
Outstanding at beginning of year 6,858,425 $15.60
Granted 1,304,952 $23.71
Exercised (1,047,708) $14.25
Canceled (40,081) $20.70
Outstanding at end of year 7,075,588 $17.48
Options exercisable at end of year 5,442,286 $17.05
- ------------------------------------------------------------------
1997
Granted 1,355,370 $23.92
Exercised (944,986) $14.73
Canceled (80,230) $19.05
Outstanding at end of year 7,405,742 $19.00
Options exercisable at end of year 5,801,712 $18.73
- ------------------------------------------------------------------
1998
Granted 2,947,366 $31.28
Exercised (1,397,427) $20.91
Canceled (23,605) $28.25
Outstanding at end of year 8,932,076 $23.13
Options exercisable at end of year 5,848,668 $19.66
- ------------------------------------------------------------------
</TABLE>
The weighted-average fair value of options granted was $6.30, $4.84 and
$4.45 in 1998, 1997 and 1996, respectively.
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
- -------------------------------------------------------------------
Number Weighted-Average Weighted-
Range of Outstanding Remaining Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price
- -------------------------------------------------------------------
<S> <C> <C> <C>
$ 0.00 382,800 $ 0.00
$ 6.61-$15.26 923,345 1.6 years $14.08
$16.23-$24.77 4,708,349 5.8 years $21.59
$25.91-$37.10 2,917,582 7.5 years $31.51
---------
$ 0.00-$37.10 8,932,076 5.9 years $23.13
- -------------------------------------------------------------------
<CAPTION>
Options Exercisable
----------------------------------------------
Number Weighted-
Range of Exercisable Average
Exercise Prices at 12/31/98 Exercise Price
- -------------------------------------------------------------------
<S> <C> <C>
$ 0.00 207,626 $ 0.00
$ 6.61-$15.26 923,345 $14.08
$16.23-$24.77 4,704,970 $21.59
$25.91-$37.10 12,727 $29.83
---------
$ 0.00-$37.10 5,848,668 $19.66
- -------------------------------------------------------------------
</TABLE>
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123), the Company has chosen to
apply APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its plans. Had compensation cost for
the Company's plans been determined consistent with the fair market value
provisions of FAS 123, the Company's net income and net income per common share,
on a diluted basis, would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Net income - as reported $180,243 $ 2,617 $170,871
Net income (loss) - pro forma 174,182 (1,327) 167,551
Earnings per share - as reported 1.73 0.00 1.58
Earnings (loss) per share -
pro forma 1.67 (0.04) 1.54
- ---------------------------------------------------------------------
</TABLE>
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 2.3% 2.3% 2.3%
Expected stock price volatility 20.0% 15.3% 15.0%
Risk-free interest rate 5.4% 6.2% 5.3%
Expected life of options 5 years 5 years 5 years
- ---------------------------------------------------------------------
</TABLE>
<PAGE> 23
NOTES to Consolidated Financial Statements
(Dollars in thousands except per share data)
13. Employee Benefit Plans
The Company provides non-contributory defined benefit pension plans for
substantially all its United States employees, as well as postretirement health
care and life insurance benefits to the majority of its retirees, and their
eligible dependents, in the United States and Canada. The Company also sponsors
contributory pension plans covering the majority of the employees in the United
Kingdom and Canada.
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits" (FAS 132). FAS 132 standardized disclosure requirements to improve the
understandability of benefit disclosures and eliminated certain disclosures that
were previously required. It did not affect the measurement or recognition of
benefit costs.
The components of net periodic benefit cost includes the following:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Retirement Plans
Service cost $ 15,218 $ 15,169 $ 14,266
Interest cost 39,467 37,690 35,065
Expected return on plan assets (57,715) (48,465) (45,670)
Amortization of net transition asset (458) (534) (324)
Amortization of prior service cost 1,643 1,235 1,025
Amortization of net actuarial loss 423 485 617
Effect of curtailment (870)
- -----------------------------------------------------------------------------
Net periodic benefit (income) cost $ (2,292) $ 5,580 $ 4,979
==================================
Retiree Health and
Life Insurance Plans
Service cost $ 2,894 $ 3,831 $ 4,548
Interest cost 7,946 8,663 8,735
Expected return on plan assets (3,784) (2,828) (2,452)
Amortization of prior service cost (4,807) (5,495) (4,902)
Amortization of net actuarial loss 66 708 1,375
Effect of curtailment (2,039)
- -----------------------------------------------------------------------------
Net periodic benefit cost $ 276 $ 4,879 $ 7,304
==================================
Other comprehensive income (expense) $ 1,898 $ 1,805 $ (540)
==================================
</TABLE>
The following tables set forth the plans' obligations and assets at
December 31:
<TABLE>
<CAPTION>
Retiree Health and
Retirement Plans Life Insurance Plans
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Benefit
Obligation
Benefit obligation at January 1 $ 532,856 $ 468,089 $ 124,387 $ 116,317
Service cost 15,218 15,169 2,894 3,831
Interest cost 39,467 37,690 7,946 8,663
Plan participant contributions 1,451 1,435
Plan amendments 6,050 1,958
Actuarial loss (gain) 52,975 34,248 (1,369) 2,958
Benefits paid (28,369) (25,733) (9,246) (7,382)
Other (4,933) (4,492)
- ----------------------------------------------------------------------------------------
Benefit obligation at December 31 $ 614,715 $ 532,856 $ 120,120 $ 124,387
===================================================
Change in Plan Assets
Fair value of plan assets
at January 1 $ 606,453 $ 525,890 $ 35,309 $ 29,770
Actual return on plan assets 74,492 89,047 5,915 5,539
Company contributions 16,359 16,866 39,749 7,382
Plan participant contributions 1,451 1,435
Benefits paid (28,369) (25,733) (9,246) (7,382)
Other (4,087) (1,052) (77)
- ----------------------------------------------------------------------------------------
Fair value of plan assets at
December 31 $ 666,299 $ 606,453 $ 71,650 $ 35,309
===================================================
Reconciliation of Funded
Status, December 31
Funded status of plan $ 51,584 $ 73,597 $ (48,061) $ (89,078)
Unrecognized net actuarial
loss (gain) 33,017 (3,988) 11,110 19,502
Unrecognized prior
service cost 14,313 11,165 (6,738) (13,585)
Unrecognized net
transition obligation (asset) 3 (1,208)
- ----------------------------------------------------------------------------------------
Net amount recognized $ 98,917 $ 79,566 $ (43,689) $ (83,161)
===================================================
</TABLE>
<TABLE>
<CAPTION>
Retirement Plans
1998 1997
------------------------
<S> <C> <C>
Total Recognized Amounts in the
Statement of Financial Position
Prepaid benefit cost $ 113,842 $ 91,619
Accrued benefit liability (26,193) (21,723)
Intangible asset 4,357 4,657
Accumulated other comprehensive income 6,911 5,013
- ----------------------------------------------------------------------------------------
Net amount recognized $ 98,917 $ 79,566
=======================
</TABLE>
<PAGE> 24
The projected benefit obligation (PBO), accumulated benefit obligation and
fair value of plan assets for pension plans with accumulated benefit obligations
in excess of plan assets were $38,599, $36,058 and $9,865, respectively, as of
December 31, 1998, and $33,737, $31,396 and $9,673, respectively, as of December
31, 1997.
The weighted-average discount rate used in determining the PBO was 6.75% in
1998, 7.25% in 1997 and 7.75% in 1996. The assumed compensation increase was 4%
in 1998 and 1997 and 4.25% in 1996. The expected long-term rate of return on
plan assets was 9.5% for all years presented. The assumed health care cost trend
rate was 5% in 1998 continuing until the year 2006. Increasing the assumed trend
rate for health care costs by one percentage point would result in an increase
in the accumulated postretirement benefit obligation (APBO) and total service
and interest cost component of approximately $5,822 and $579, respectively.
Decreasing the assumed trend rate for health care costs by one percentage point
would result in a decrease in the APBO and total service and interest cost
component of approximately $6,536 and $661, respectively.
14. INCOME TAXES
The Company provides for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting requirements and tax laws. Assets and liabilities
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
The provision (benefit) for taxes on income for the years ending December
31 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Pre-tax income
Domestic $ 324,185 $ 27,281 $234,029
Foreign 15,413 36,438 46,046
- -----------------------------------------------------------------------------
Total pre-tax income $ 339,598 $ 63,719 $280,075
======================================
Current
Federal $ 55,737 $ 79,827 $ 74,166
State 16,765 13,650 10,238
Foreign 9,874 14,991 13,057
- -----------------------------------------------------------------------------
Total current $ 82,376 $108,468 $ 97,461
======================================
Deferred
Federal $ 72,340 $(49,161) $ 5,466
State 889 502 758
Foreign (1,616) 302 3,748
- -----------------------------------------------------------------------------
Total deferred $ 71,613 (48,357) 9,972
- -----------------------------------------------------------------------------
Total taxes $ 153,989 $ 60,111 $107,433
======================================
</TABLE>
Cumulative deferred tax liabilities (assets) are comprised of the following
at December 31:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Depreciation $ 61,947 $ 70,442
Employee benefits 38,504 30,399
Other 694
- --------------------------------------------------------------------------------------
Gross deferred tax liabilities 100,451 101,535
- --------------------------------------------------------------------------------------
Retiree health benefits (14,425) (31,745)
Foreign loss carryforwards (14,913) (11,839)
Capital loss carryforwards (7,660)
Employee benefits (16,001) (18,915)
Asset impairment (51,858)
Accrued liabilities and other (19,663) (7,737)
- --------------------------------------------------------------------------------------
Gross deferred tax assets (72,662) (122,094)
Valuation allowance on deferred tax assets 35,104 11,839
- --------------------------------------------------------------------------------------
Total deferred taxes, net $ 62,893 $ (8,720)
=========================
</TABLE>
The net change in the valuation allowance for deferred tax assets is a net
increase of $23,265 in 1998, compared with a net increase of $1,510 in 1997. An
increase of $3,074 is related to net operating losses of foreign subsidiaries
for which their use is limited to future taxable earnings. The remaining
additional allowance of $20,191 was added in 1998 for reserves and capital
losses associated with the dispositions of the North American labels and
industrial containers businesses, the deductibility of which is uncertain.
Approximately $46,000 of foreign subsidiary net operating loss
carryforwards remain at December 31, 1998. Their use is limited to future
taxable earnings of the respective foreign subsidiaries. Of these loss
carryforwards, approximately $35,155 have no expiration date. The remaining loss
carryforwards expire at various dates in the future.
A reconciliation of the United States federal statutory tax rate to the
actual consolidated tax expense is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory tax rate $ 118,859 35.0% $ 22,301 35.0% $ 98,026 35.0%
State income taxes,
net of federal
tax benefit 12,146 3.6 1,623 2.5 6,879 2.5
Goodwill 6,280 1.8 3,508 5.5 3,624 1.3
Asset impairment
and dispositions 15,552 4.6 38,913 61.1
Company-owned
life insurance (3,471) (1.0) (4,908) (7.7) (2,955) (1.1)
Other, net 4,623 1.3 (1,326) (2.1) 1,859 0.7
- ------------------------------------------------------------------------------------
Total taxes $ 153,989 45.3% $ 60,111 94.3% $ 107,433 38.4%
============================================================
</TABLE>
<PAGE> 25
NOTES to Consolidated Financial Statements
(Dollars in thousands except per share data)
The Internal Revenue Service has examined the Company's federal income tax
returns for all years through 1992. Currently, the 1993 through 1995 federal
income tax returns are being examined. The Company believes that it has made
adequate provision for income taxes that may become payable with respect to open
years.
Undistributed earnings of international subsidiaries totaled $92,443 at
December 31, 1998. There have been no United States income taxes provided on the
undistributed earnings since the Company considers these earnings to be
indefinitely reinvested to finance international growth and expansion. If such
amounts were remitted, loaned to the Company or the stock in the foreign
subsidiaries sold, these earnings could become subject to tax.
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. As is the case with other
companies in similar industries, the Company faces exposure from actual or
potential claims and legal proceedings.
The Company has been named as a potentially responsible party at several
environmentally contaminated sites, located primarily in the Northeastern United
States, owned by third parties. These sites represent the Company's largest
potential environmental liabilities. The Company has approximately $4,000
accrued for these contingencies as of December 31, 1998 and 1997. 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. Costs, however,
are accrued as necessary once reasonable estimates are determined.
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.
16. SHAREHOLDERS' EQUITY
On April 15, 1998, the Board of Directors declared a 10% stock dividend payable
June 10, 1998, to all shareholders of record May 15, 1998. Common shares and per
share data have been restated throughout the Consolidated Financial Statements
and Notes to give retroactive effect to the stock dividend.
On December 17, 1997, the Company's Board of Directors authorized a stock
repurchase program to purchase up to $150,000 of the Company's common stock at
current market prices. Throughout 1998, approximately 5,179,541 shares were
repurchased under this and other previously authorized programs at a total cost
of $169,080 for an average price of $32.64 per share. Also in 1997, the Company
called for the redemption or conversion on September 28, 1997, of all of its
outstanding shares of $2.25 Series A Cumulative Convertible Preferred Stock that
was issued in 1993. The Company converted substantially all of its 2,394,125
outstanding shares at a rate of 2.074 common shares per share of preferred
stock.
17. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Accordingly, the
Consolidated Statements of Changes in Shareholders' Equity and the shareholders'
equity section of the Consolidated Balance Sheets have been reclassified to
comply with the new requirements.
The following table summarizes the components of accumulated other
comprehensive income and the changes in accumulated comprehensive income for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Foreign Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustments Adjustment Income
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1997 $(56,572) $(3,208) $(59,780)
Change during 1997 (29,835) (1,805) (31,640)
- -------------------------------------------------------------------------------------------
Balance at December 31, 1997 (86,407) (5,013) (91,420)
Change during 1998 (1,821) (1,898) (3,719)
- -------------------------------------------------------------------------------------------
Balance at December 31, 1998 $(88,228) $(6,911) $(95,139)
=========================================
</TABLE>
<PAGE> 26
18. FINANCIAL REPORTING FOR BUSINESS SEGMENTS
Sonoco reports its results in two primary segments, Industrial Packaging and
Consumer Packaging. The Industrial Packaging segment includes the following
businesses: engineered carriers (tubes, cores, and cones); paperboard; injection
molded and extruded plastics; designed interior packaging; wood, plywood, and
metal reels for wire and cable packaging; adhesives and converting machinery.
This segment also included the industrial containers business (fibre drums,
plastic drums and intermediate bulk containers) sold in 1998. The Consumer
Packaging segment includes the following businesses: composite cans; flexible
packaging; caulking cartridges; capseals; high density film products; packaging
services; printed packaging; coasters and glass covers. This segment also
included the North American labels business sold in March 1998.
The Company adopted Statement of Financial Accounting Standards No. 131
(FAS 131), "Disclosures about Segments of an Enterprise and Related
Information," during 1998. FAS 131 requires the presentation of descriptive
information about reportable segments consistent with that used by management of
the Company to assess performance. Additionally, FAS 131 requires disclosure of
certain information by geographic region. The adoption of FAS 131 did not result
in changes to the Company's reportable business segments.
<TABLE>
<CAPTION>
Years ended Industrial Consumer
December 31 Packaging Packaging Corporate Consolidated
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Revenue
1998 $1,466,133 $ 1,134,003 $ 2,600,136
1997 1,630,969 1,259,337 2,890,306
1996 1,599,129 1,231,770 2,830,899
Intersegment Sales(1)
1998 $ 41,121 $ 1,098 $ 42,219
1997 42,362 113 42,475
1996 41,574 1,250 42,824
Sales to Unaffiliated Customers
1998 $1,425,012 $ 1,132,905 $ 2,557,917
1997 1,588,607 1,259,224 2,847,831
1996 1,557,555 1,230,520 2,788,075
Operating Profit(2)
1998 $ 282,114 $ 106,347 $ (48,863) $ 339,598
1997 217,775 (101,833) (52,223) 63,719
1996 202,928 126,436 (49,289) 280,075
Identifiable Assets(3)
1998 $1,240,915 $ 512,715 $ 329,353 $ 2,082,983
1997 1,228,796 717,172 213,964 2,159,932
1996 1,219,248 861,464 285,184 2,365,896
Depreciation, Depletion and Amortization
1998 $ 98,331 $ 47,338 $ 145,669
1997 93,336 60,188 153,524
1996 90,416 52,511 142,927
Capital Expenditures
1998 $ 143,852 $ 55,028 $ 198,880
1997 140,581 90,070 230,651
1996 163,507 68,479 231,986
- --------------------------------------------------------------------------------
</TABLE>
Geographic Regions
The sales to unaffiliated customers and long-lived assets by geographic region
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales to Unaffiliated Customers
United States $1,959,117 $2,245,772 $2,203,077
Europe 304,435 287,467 283,453
Canada 119,930 121,227 130,106
All other 174,435 193,365 171,439
- -----------------------------------------------------------------------------------
Total $2,557,917 $2,847,831 $2,788,075
==========================================
Long-Lived Assets
United States $ 745,937 $ 712,111 $1,087,804
Europe 235,825 183,950 204,801
Canada 62,676 54,400 55,914
All other 139,766 133,178 102,463
- -----------------------------------------------------------------------------------
Total $1,184,204 $1,083,639 $1,450,982
==========================================
</TABLE>
(1) Intersegment sales are recorded at a market-related transfer price
(2) Industrial Packaging's 1998 results include a pre-tax gain of $119,552 on
the sale of the industrial containers business and one-time, pre-tax
charges of $(37,480). Consumer Packaging's results include pre-tax
charges of $(19,198) in 1998 and $(226,358) in 1997 related to the
disposition of the North American labels business and one-time, pre-tax
charges of $(3,856) in 1998. Interest income and interest expense are
excluded from the operating profits by segment and are shown under
Corporate.
(3) Identifiable assets are those assets used by each segment in its
operations. Corporate assets consist primarily of cash and cash
equivalents, investments in affiliates, headquarters facilities and
prepaid expenses.
<PAGE> 27
SELECTED Eleven-Year Financial Data (Unaudited)
(Dollars and shares in thousands except per share data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results
Net sales $ 2,557,917 $ 2,847,831 $ 2,788,075 $ 2,706,173 $ 2,300,127
Cost of sales and operating expenses 2,269,810 2,505,531 2,458,710 2,396,284 2,055,734
Interest expense 54,779 57,194 55,481 44,004 35,861
Interest income (5,916) (4,971) (6,191) (4,905) (2,398)
Unusual items(1) (100,354) 226,358
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 339,598 63,719 280,075 270,790 210,930
Provision for income taxes 153,989 60,111 107,433 106,640 82,500
Equity in earnings of affiliates/Minority interest 6,387 (991) (1,771) 369 1,419
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in
accounting principles and extraordinary loss 191,996 2,617 170,871 164,519 129,849
Cumulative effect of changes in accounting principles
(FAS 106 and FAS 109)
Extraordinary loss, net of income tax benefit (11,753)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 180,243 2,617 170,871 164,519 129,849
Preferred dividends (3,061) (7,196) (7,763) (7,763)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders $ 180,243 $ (444) $ 163,675 $ 156,756 $ 122,086
============================================================================
Per common share(3)
Net income available to common shareholders:
Basic 1.76 0.00 1.64 1.56 1.21
Diluted 1.73 0.00 1.58 1.49 1.19
Cash dividends-common 0.704 0.641 0.586 0.524 0.481
Average common shares outstanding:(3)
Basic 102,632 100,981 99,564 100,253 100,590
Diluted 104,275 107,350 108,487 110,111 109,420
Actual common shares outstanding at December 31(3) 101,683 105,417 98,850 100,229 100,379
- -----------------------------------------------------------------------------------------------------------------------------------
Financial Position
Net working capital 225,347 438,896 262,533 229,328 222,068
Property, plant and equipment, net 1,013,843 939,542 995,415 865,629 763,109
Total assets 2,082,983 2,159,932 2,365,896 2,098,157 1,821,414
Total debt 783,632 796,359 893,088 686,792 547,380
Shareholders' equity 821,592 848,819 920,613 918,749 832,218
Current ratio 1.5 2.0 1.6 1.5 1.6
Total debt to total capital(2) 46.7% 46.1% 47.2% 39.6% 38.1%
Book value per common share(3) 8.08 8.05 8.10 7.45 6.57
- -----------------------------------------------------------------------------------------------------------------------------------
Other Data
Depreciation, depletion and amortization expense 145,669 153,524 142,927 125,836 112,797
Cash dividends declared-common 72,028 64,639 58,480 53,145 48,287
Market price per common share (ending)(3) 29.63 31.54 23.53 23.86 18.94
Return on total equity (including preferred stock) 22.0% 0.3% 18.3% 18.7% 16.0%
Return on net sales 7.0% 0.0% 6.1% 6.1% 5.6%
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1993 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $1,947,224 $1,838,026 $1,697,058 $1,669,142 $1,655,830 $1,599,751
Cost of sales and operating expenses 1,734,980 1,641,075 1,528,543 1,481,271 1,470,877 1,413,912
Interest expense 31,154 30,364 28,186 28,073 29,440 25,175
Interest income (6,017) (6,416) (6,870) (2,196) (2,573) (1,517)
Unusual items(1) (5,800) 42,000 (8,525) 75,000
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 192,907 131,003 155,724 86,994 158,086 162,181
Provision for income taxes 75,200 51,800 63,600 43,934 60,906 67,029
Equity in earnings of affiliates/Minority interest 1,127 2,048 2,681 7,308 6,381 1,125
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in
accounting principles and extraordinary loss 118,834 81,251 94,805 50,368 103,561 96,277
Cumulative effect of changes in accounting principles
(FAS 106 and FAS 109) (37,892)
Extraordinary loss, net of income tax benefit
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 118,834 43,359 94,805 50,368 103,561 96,277
Preferred dividends (1,264)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders $ 117,570 $ 43,359 $ 94,805 $ 50,368 $ 103,561 $ 96,277
============================================================================
Per common share(3)
Net income available to common shareholders:
Basic 1.17 0.43 0.95 0.50 1.02 0.95
Diluted 1.08 0.43 0.95 0.50 1.01 0.94
Cash dividends-common 0.459 0.425 0.398 0.390 0.351 0.277
Average common shares outstanding:(3)
Basic 100,849 100,176 99,682 100,610 101,402 101,215
Diluted 109,711 101,112 100,225 101,078 102,301 101,940
Actual common shares outstanding at December 31(3) 101,001 100,651 99,897 99,446 101,009 101,319
- -----------------------------------------------------------------------------------------------------------------------------------
Financial Position
Net working capital 209,932 152,478 163,860 184,066 193,035 188,085
Property, plant and equipment, net 737,154 614,018 580,787 562,591 494,290 533,427
Total assets 1,696,349 1,241,783 1,135,940 1,113,594 995,132 977,459
Total debt 515,826 316,010 283,199 312,120 255,286 298,000
Shareholders' equity 788,364 561,890 562,306 512,828 511,574 454,486
Current ratio 1.7 1.5 1.6 1.7 2.1 2.0
Total debt to total capital(2) 38.0% 35.1% 30.6% 34.7% 30.4% 36.8%
Book value per common share(3) 6.10 5.58 5.63 5.15 5.06 4.48
- -----------------------------------------------------------------------------------------------------------------------------------
Other Data
Depreciation, depletion and amortization expense 95,745 83,309 76,561 72,152 67,263 69,055
Cash dividends declared-common 46,333 42,443 39,703 39,216 35,583 28,046
Market price per common share (ending)(3) 19.05 20.67 14.94 14.07 16.02 14.83
Return on total equity (including preferred stock) 19.0% 13.7% 17.8% 9.6% 21.3% 23.0%
Return on net sales 6.1% 4.4% 5.6% 3.0% 6.3% 6.0%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1998 data reflects the net gain on the sale of divested businesses of
$(100,354) pretax, or $(41,554) after tax. 1997 data reflects the asset
impairment charge of $226,358 pretax, or $174,500 after tax. Included in
1993 and 1991 were gains from the early repayment of a note in 1991. Also
includes restructuring charges of $42,000 pretax, or $25,000 after tax, in
1992 and $75,000 pretax, or $54,650 after tax, in 1990.
(2) Debt levels for 1995 through 1998 have been adjusted for cash related to the
issuance of restricted-purpose bonds.
(3) Prior years' data have been restated for the 10% common stock dividend paid
on June 10, 1998.
<PAGE> 28
REPORT of Management
The management of Sonoco Products Company is responsible for the integrity and
objectivity of the financial statements and other financial information included
in this annual report. These statements have been prepared in conformity with
generally accepted accounting principles. Sonoco's accounting systems are
supported by internal control systems augmented by written policies, internal
audits and the selection and training of qualified personnel.
The Board of Directors, through its Audit Committee, consisting of outside
directors, is responsible for reviewing and monitoring the Company's financial
reporting and accounting practices. This committee meets periodically with
management, the internal auditors and the independent accountants to assure each
is carrying out its responsibilities.
PricewaterhouseCoopers LLP, independent certified public accountants, have
audited the financial statements, and their report is herein.
/s/ F. Trent Hill, Jr.
F. Trent Hill, Jr.
Vice President and Chief Financial Officer
REPORT of Independent Certified Public Accountants
TO THE SHAREHOLDERS AND DIRECTORS
OF SONOCO PRODUCTS COMPANY:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows (appearing on pages 34 through 45 of this report) present fairly, in all
material respects, the consolidated financial position of Sonoco Products
Company at December 31, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Charlotte, North Carolina
January 27, 1999
<PAGE> 29
OFFICERS
<TABLE>
<S> <C> <C> <C>
EXECUTIVE OFFICERS JIM C. BOWEN, 48 ALLAN V. CECIL, 57 HARRIS E. DELOACH, JR., 54
Vice President & General Vice President-Investor Executive Vice President
PETER C. BROWNING, 57 Manager-Paper Division. Relations & Corporate Affairs. with responsibility for Global
President & Chief Executive Previously Vice President- Previously Vice President- Industrial Products/Paper &
Officer. Previously President & Manufacturing North America, Investor Relations & Corporate Sonoco Crellin (molded and
Chief Operating Officer Paper since 1994-1997; Director Communications 1996-1998. extruded plastics). Previously
1996-1998; Executive Vice of Manufacturing 1993-1994. Prior to Sonoco was Vice Executive Vice President
President-Global Industrial Joined Sonoco in 1972. President-Corporate responsible for High Density
Products/Paper 1993-1996. Communications & Investor Film Products, Industrial
Prior to Sonoco was President, BERNARD W. CAMPBELL, 49 Relations, National Gypsum Container, Fibre Partitions,
Chairman & Chief Executive Vice President-Information Company and previously with Protective Packaging, Sonoco
Officer, National Gypsum Services. Previously Staff Vice Mesa Petroleum Company. Crellin & Baker Reels 1996-
Company 1990-1993; President-Information Services Joined Sonoco in 1996. 1998; Group Vice President
Continental Can Company 1991-1996; Director-Corporate 1993-1996; Vice President-Film,
1966-1990 where he last served Information Services 1990-1991. Plastics & Special Products 1993.
as Executive Vice President. Joined Sonoco in 1988. Joined Sonoco in 1985.
Joined Sonoco in 1993.
</TABLE>
<PAGE> 30
OFFICERS
<TABLE>
<CAPTION>
<S> <C>
CYNTHIA A. HARTLEY, 50 HARRY J. MORAN, 66
Vice President-Human Resources. Executive Vice President with
Previously Vice President- responsibility for Flexible
Human Resources, National Packaging, Capseals, Trident,
Gypsum Company and Dames & Standard Cap, Folding Cartons,
Moore and previous experience High Density Film, Baker Reels,
with Continental Can Company. Protective Packaging and the
Joined Sonoco in 1995. Pack Center. Previously Executive
Vice President responsible for
F. TRENT HILL, JR., 46 Consumer Packaging Group
Vice President & Chief Financial 1996-1998; Group Vice President-
Officer. Previously Vice President- Consumer Packaging 1993-1996.
Finance 1994-1995; Vice Joined Sonoco in 1983.
President-Industrial Products,
N.A. 1990-1994; Vice President- CHARLES F. PATERNO, 42
Finance 1987-1989. Joined Vice President-Industrial
Sonoco in 1979. Products/Paper, Europe.
Previously Division Vice
RONALD E. HOLLEY, 56 President-Industrial Products/
Vice President-Industrial Paper, Europe 1996-1998;
Products, N.A. Previously President-Sonoco Limited
Vice President-High Density 1994-1995. Joined Sonoco
Film Products 1993-1999; in 1983.
Vice President-Total Quality
Management 1990-1993; Vice EDDIE L. SMITH, 47
President-Industrial Products Vice President/General Manager,
1987-1990. Joined Sonoco Flexible Packaging. Previously
in 1964. Division Vice President/General
Manager-Flexible Packaging
CHARLES J. HUPFER, 52 1996-1998; Division Vice
Vice President, Treasurer & President-Consumer Products,
Corporate Secretary. Previously Europe 1994-1996. Joined
Treasurer 1988-1995; Director Sonoco in 1971.
of Tax & Audit 1985-1988.
Director-International Finance PERRY D. SMITH, 48
& Accounting 1980-1985. Vice president & Managing
Joined Sonoco in 1975. Director-Sonoco Asia, LLC.
Previously Managing Director-
J. RANDY KELLEY, 44 Sonoco Asia, L.L.C., 1994-1996;
Vice president & Assistant to Director-Business Development,
the CEO. Previously Vice Asia Pacific 1992-1994. Joined
President-Industrial Products, Sonoco in 1988.
N.A. 1994-1999; Division Vice
President Industrial Container
1991-1993. Joined Sonoco
in 1978.
RAYMOND L. MCGOWAN, JR., 47
Vice President & General
Manager-Global Consumer
Products. Previously Vice
President-Consumer Products
1997-1998; Vice President &
General Manager-Consumer
Products, United States &
Canada 1994-1997. Joined
Sonoco in 1983.
</TABLE>
<PAGE> 1
EXHIBIT 21
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
Subsidiaries of Sonoco Products Company, pursuant to Item 601(21) of Regulation
S-K, as of December 31, 1998 are:
1. Paper Stock Dealers, Inc., 100%-owned domestic subsidiary,
incorporated in the State of North Carolina.
2. Sonoco-Crellin Holdings, Inc., 100%-owned domestic subsidiary,
incorporated in the State of Delaware.
a. Crellin International, Inc., 100%-owned domestic
subsidiary, incorporated in the State of Delaware,
holder of securities in:
1. Sonoco-Crellin, Inc., 100%-owned domestic
subsidiary, incorporated in the State of New
York.
a. Crellin Europe B.V., 100%-owned
Dutch subsidiary.
1. Crellin B.V., 100%-owned
Dutch subsidiary.
2. Sebro Plastics, Inc., 100%-owned domestic
subsidiary, incorporated in the State of
Michigan.
a. Convex Mold, Inc., 100%-owned
domestic subsidiary, incorporated
in the State of Michigan.
3. Injecto Mold, 100%-owned domestic
subsidiary, incorporated in the State of
Illinois.
3. SPC Management, Inc., 100%-owned domestic subsidiary,
incorporated in the State of Delaware.
a. SPC Capital Management, Inc., 100%-owned domestic
subsidiary, incorporated in the State of Delaware.
b. SPC Resources, Inc., 100%-owned domestic subsidiary,
incorporated in the State of Delaware.
4. Timber Properties, Ltd., (B.V.I.), 100%-owned by Sonoco
Products Company.
<PAGE> 2
EXHIBIT 21
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT, CONTINUED
5. Sonoco International, Inc., 100%-owned domestic subsidiary,
incorporated in the State of Delaware, holder of securities
in:
a. Sonoco Limited, 100%-owned Canadian subsidiary.
b. Sonoco U.K. Limited Inc., 100%-owned subsidiary
incorporated in the State of Delaware, holder of
securities in:
1. Sonoco Products Company U.K. Limited,
100%-owned U.K. subsidiary.
a. Sonoco Limited, 100%-owned U.K.
subsidiary.
b. Sonoco Consumer Products Limited,
U.K., 100%-owned U.K. subsidiary.
2. The Harland Group Limited, 100%-owned U.K.
subsidiary.
a. Harland Machine Systems Ltd.,
100%-owned U.K. subsidiary.
b. Harland France SARL, 100%-owned
French subsidiary.
c. Sonoco Deutschland Holdings GmbH, 100%-owned German
subsidiary.
1. Sonoco Deutschland GmbH, 100%-owned German
subsidiary.
2. Sonoco Plastics GmbH, 100%-owned German
subsidiary.
3. Sonoco IPD GmbH, 100%-owned German
subsidiary.
a. Sonoco MBS GmbH, 100%-owned German
subsidiary.
b. OPV Oberrhein GmbH, 100%-owned
German subsidiary.
c. Sonoco MBS GmbH and Company,
100%-owned German partnership.
d. OPV Textihulsen GmbH, 100%-owned
German partnership.
<PAGE> 3
EXHIBIT 21
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT, CONTINUED
4. Caprex AG, 72%-owned Swiss subsidiary.
5. Sonoco CPD, GmbH, 100%-owned German
subsidiary.
d. Sonoco SNC, 100%-owned French partnership with the
following subsidiaries and affiliate:
1. Sonoco Holdings, 100%-owned French
subsidiary.
a. Sonoco Lhomme S.A., 100%-owned
French subsidiary.
1. Sonoco Eurocore, Belgium,
100%-owned Belgian
subsidiary.
2. Papeteries Du Rhin,
47%-owned French
affiliate.
b. Sonoco Consumer Products S.A.,
100%-owned French subsidiary.
e. Sonoco Asia, L.L.C., 70%-owned limited liability
company.
1. Sonoco Singapore Pte, Ltd., 100%-owned
Singapore subsidiary.
a. Malaysia Holding, SDN BHD,
100%-owned Malaysian subsidiary.
b. Sonoco Malaysia, SDN BHD,
100%-owned Malaysian subsidiary.
2. Sonoco Taiwan Limited, 100%-owned Republic
of China subsidiary.
3. Sonoco Thailand Ltd., 70%-owned Thai
subsidiary.
4. Sonoco-Hongwen, L.L.C., 80%-owned limited
liability company.
f. Sonoco Asia Management Company, L.L.C., 70%-owned
limited liability company.
<PAGE> 4
EXHIBIT 21
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT, CONTINUED
g. Sonoco do Brazil LTDA., 100%-owned Brazilian
subsidiary.
h. Sonoco Participaceos, 99%-owned Brazilian subsidiary.
1. Sonoco For-Plas, 51%-owned Brazilian
subsidiary.
i. Inversiones Sonoco Limitada, 99%-owned Chilean
subsidiary.
1. Sonoco de Chile, 51%-owned Chilean
subsidiary.
6. Southern Plug & Manufacturing Co., Inc., 100%-owned domestic
subsidiary, incorporated in the State of Louisiana.
7. Sonoco "SPG", Inc., 100%-owned domestic subsidiary,
incorporated in the State of Wisconsin.
8. Sonoco Flexible Packaging Company, Inc., 100%-owned domestic
subsidiary incorporated in the state of South Carolina.
9. Sonoco Paperboard Group, L.L.C., 100%-owned limited liability
company.
10. Sonoco LP, a 100%-owned limited partnership organized in the
state of Tennessee.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference into the registration statements of
Sonoco Products Company on Form S-8 (September 4, 1985, November 27, 1989,
November 22, 1993, June 7, 1995, September 25, 1996 and December 30, 1998) and
Form S-3 (filed June 6, 1991, File No. 33-40538; filed October 4, 1993, File No.
33-50501 as amended; filed October 4, 1993, File No. 33-50503 as amended) of our
report dated January 27, 1999, on our audits of the consolidated financial
statements of Sonoco Products Company as of December 31, 1998 and 1997, and for
each of the three years in the period ended December 31, 1998, which report is
incorporated by reference in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SONOCO PRODUCTS COMPANY FOR THE YEAR ENDED DECEMBER 31,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 49,840
<SECURITIES> 7,409
<RECEIVABLES> 303,092
<ALLOWANCES> 5,420
<INVENTORY> 217,261
<CURRENT-ASSETS> 661,416
<PP&E> 1,956,673
<DEPRECIATION> 942,830
<TOTAL-ASSETS> 2,082,983
<CURRENT-LIABILITIES> 436,069
<BONDS> 686,826
0
0
<COMMON> 7,175
<OTHER-SE> 814,417
<TOTAL-LIABILITY-AND-EQUITY> 2,082,983
<SALES> 2,557,917
<TOTAL-REVENUES> 2,557,917
<CGS> 1,968,200
<TOTAL-COSTS> 1,968,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,320
<INTEREST-EXPENSE> 54,779
<INCOME-PRETAX> 339,598
<INCOME-TAX> 153,989
<INCOME-CONTINUING> 191,996
<DISCONTINUED> 0
<EXTRAORDINARY> 11,753
<CHANGES> 0
<NET-INCOME> 180,243
<EPS-PRIMARY> 1.76
<EPS-DILUTED> 1.73
</TABLE>
<PAGE> 1
EXHIBIT 99-2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
FORM 11-K
ANNUAL REPORT
PURSUANT TO SECTION 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
SONOCO PRODUCTS COMPANY
1991 KEY EMPLOYEE STOCK PLAN
SONOCO PRODUCTS COMPANY
NORTH SECOND STREET
HARTSVILLE, SOUTH CAROLINA 29550
<PAGE> 2
EXHIBIT 99-2
The Consolidated Financial Statements and Notes to Consolidated Financial
Statements of Sonoco Products Company represent the financial statements of the
1991 Key Employee Stock Option Plan and are incorporated herein by reference in
this Form 11-K Annual Report.
