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Sonoco Reports Improved 4th Quarter Income

Feb. 1, 2006 (Press release) - Sonoco today reported earnings per diluted share for the fourth quarter of 2005 of $.38, compared with $.35 for the same period in 2004, it was announced by Harris E. DeLoach, Jr., chairman, president and chief executive officer.

Base earnings per diluted share for the fourth quarter of 2005, a non-GAAP measure that excludes certain unusual items discussed below, were $.58 per diluted share, compared with $.43 per diluted share, for the same period of 2004. (A reconciliation of base earnings per share to reported earnings per share is provided at the end of this news release.)

Results for the fourth quarter of 2005 included the following unusual expenses: $10.1 million ($.10 per diluted share) for additional tax expense associated with the repatriation of $125 million in foreign earnings under the American Jobs Creation Act and an after-tax charge of $7.6 million ($.08 per diluted share) related to an increase in the environmental reserve at a Company subsidiary's paper operations in Wisconsin. Fourth quarter 2005 results also included restructuring costs of $1.9 million after tax ($.02 per diluted share) related to previously announced actions. In the fourth quarter of 2004, results included after-tax restructuring costs of $7.8 million ($.08 per diluted share).

Net sales for the fourth quarter of 2005 were $955 million, compared with $885 million for the same period in 2004. "Sales for the fourth quarter of 2005 were up nearly 8 percent over the same period in 2004 as a result of increased volumes from composite cans, rigid plastic containers, point-of- purchase displays, flexible packaging, ends and closures, wire and cable reels, molded and extruded plastics and protective packaging. Sales were also favorably impacted by having a full quarter's sales related to the joint venture between the European engineered carriers and coreboard operations of Sonoco and Ahlstrom Corporation, which was completed during the fourth quarter of 2004. Higher average prices in most consumer packaging businesses also contributed to increased sales, as did increased service revenue in the Packaging Services businesses and the impact of foreign exchange rates as the dollar weakened against foreign currencies," said DeLoach. He noted that volume increases during the fourth quarter of 2005, which excludes the increased service revenue from Packaging Services, was 4.2 percent over the same period in 2004. Excluding the impact of the joint venture, volume was up 3 percent.

Net income for the fourth quarter of 2005 was $38.8 million, compared with $35 million for the fourth quarter of 2004. Base earnings totaled $58.4 million for the fourth quarter of 2005, compared with $42.8 million for the same period in 2004. (A reconciliation of base earnings to reported net income is provided at the end of this news release.)

"Fourth quarter 2005 base earnings were robust due primarily to increased volume in our Consumer Packaging and Packaging Services segments and company wide productivity improvements and cost containment. In addition, we continued to maintain a positive price/cost relationship in the fourth quarter of 2005, despite higher overall raw material costs," said DeLoach. "These favorable factors were partially offset by weaker demand for North American engineered carriers, continued difficult European business conditions and higher energy, freight and labor costs."

Cash generated from operations for the fourth quarter of 2005 was $66.7 million, compared with $115 million for the same period in 2004. Pension contributions, which are included in these figures, totaled $65.5 million in 2005, versus $17.4 million in 2004. Cash generated from operations was used to fund capital expenditures of approximately $36.9 million and to pay dividends of approximately $22.9 million. Debt was reduced by approximately $110.4 million as a result of repatriated foreign earnings under the American Jobs Creation Act and cash generated from operations.

For the twelve months ended December 31, 2005, net sales were $3.5 billion, compared with $3.2 billion for the full year 2004. Net income for 2005 was $161.9 million, compared with $151.2 million in 2004. Net income in 2005 was negatively impacted by $10.1 million in additional tax expense associated with the repatriation of foreign earnings, $7.6 million (after tax) expense to increase an environmental reserve and $13 million (after tax) in previously announced restructuring costs. Income for the full year 2004 was negatively impacted by restructuring charges of approximately $14.5 million (after tax), a $3.6 million (after tax) charge related to the cost of replacing certain executive life insurance policies and a $2.9 million (after tax) charge for claims against the Company as a result of a legal judgment. 2004 net income was positively impacted by $9.3 million as a result of the recognition of certain tax benefits.

Base earnings totaled $192.6 million for 2005, compared with $162.9 million for 2004. (A reconciliation of base earnings to reported net income is provided at the end of this news release.) The increase in base earnings for 2005 was primarily due to increased volume in the Consumer Packaging segment, higher service revenues in the Packaging Services segment, reduced costs resulting from ongoing productivity and purchasing initiatives and a favorable price/cost relationship, as well as the second quarter of 2004 acquisition of CorrFlex Graphics, LLC. These increases were partially offset by costs associated with the integration of the Sonoco-Alcore joint venture; weaker demand for engineered carriers and paper in Europe and the Americas; continued difficult business conditions in Europe; higher energy, freight and labor costs; and startup costs associated with the Company's new rigid plastic container plant in Wisconsin.

Also for the full year 2005, cash generated from operations was $227.4 million, compared with $252.2 million for 2004. The decrease in cash flow is primarily attributable to increased pension contributions, which totaled $77 million in 2005, compared with $33.4 million in the previous year. Cash generated from operations in 2005 was used to fund capital expenditures of $129.1 million and to pay dividends of $90.1 million. Debt was reduced by $117.8 million as a result of repatriated foreign earnings under the American Jobs Creation Act and cash generated from operations.

"Sonoco delivered on its key performance initiatives in 2005. The Company experienced sustained quarterly earnings increases, margin improvement and double-digit sales growth driven by acquisitions, improved company wide volume coming from significant new consumer product and market development, and geographical expansion. Our employees remained focused on meeting the needs of our customers while improving productivity and managing costs in all of our businesses. We continued our efforts to successfully hedge the majority of our natural gas needs to provide more certainty of energy costs, and we maintained a positive price/cost relationship, despite rising costs in most raw materials," said DeLoach.

"At year-end 2005, our domestic pension plan was fully funded, and the Company's debt-to-capital ratio had been reduced to 35.1 percent, after having increased to 43.1 percent following the CorrFlex acquisition in May 2004. We expect cash flow from operations to average approximately $300 million annually over the next several years. We plan to use available cash in 2006 to fund acquisitions, capital spending and benefit plans, further reduce debt and continue paying dividends to our shareholders as we have done without interruption since 1925. In addition, as previously announced, we expect to repurchase between 2 million and 2.5 million shares of our outstanding common stock by the end of the first quarter of 2006. The planned repurchase would be made under an existing authorization of approximately 5.29 million shares," added DeLoach.

"Our fourth quarter 2005 operating performance was strong in most of our businesses. Year-over-year earnings improvement was especially notable in the Engineered Carriers/Paper segment, where North American paper operations, which are traditionally strong in the fourth quarter, had an exceptionally robust performance. This performance was primarily the result of excellent management of the price/cost relationship along with significant productivity improvements.

"2005 may well prove to have been a break out year for our Consumer Packaging and Packaging Services segments, as the addition of CorrFlex along with volume growth, specifically in flexible packaging and ends and closures, provided an excellent foundation for future growth.

"During 2006, we will remain focused on growing our top line and improving margins by managing productivity and costs within our businesses. The Company expects first quarter 2006 base earnings to be in the range of $.41 to $.44 per diluted share, which includes approximately $.02 per diluted share related to the expensing of stock options and excludes any restructuring charges, which cannot be estimated at this time. The first quarter is historically the Company's weakest quarter. The Company previously announced that it expects base earnings per diluted share for the full year 2006 in the range of $1.90 to $1.94, including approximately $.03 per diluted share related to expensing of stock options, excluding any restructuring charges, which cannot be estimated at this time, and assuming no significant changes in volume or pricing. With those same qualifications, we expect base earnings for 2006 to be at the upper end of that guidance. As we move further into 2006, we will continue to evaluate our performance in light of old corrugated container (OCC) prices and general economic conditions such as rising interest rates, historically high personal debt levels and continued weakness in European economies. OCC prices are historically higher in the first half of the year, though that has not yet occurred in 2006. With better clarity into the year, we will determine if earnings guidance should be readdressed," DeLoach concluded.

SEGMENT REVIEW

The Company uses a non-GAAP financial measure when discussing the operational results of the segments. Base Operating Profit at the segmental level is defined as the segments' portion of "Income before income taxes" on the Company's Condensed Consolidated Statements of Income adjusted for restructuring charges, net interest expense and non-recurring or infrequent and unusual items. (A reconciliation of Base Operating Profit for each of the Company's three reportable segments and All Other Sonoco to GAAP Income before income taxes is provided at the end of this news release.)

Consumer Packaging

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

Fourth quarter 2005 sales for the Consumer Packaging segment were $343.1 million, compared with $311.6 million for the same period in 2004. Base operating profit for this segment was $31.7 million in the fourth quarter of 2005, compared with $24.6 million in the fourth quarter of 2004.

Sales in the Consumer Packaging segment were up year-over-year in the fourth quarter of 2005, reflecting increased volume in composite cans, rigid plastic containers and flexible packaging, as well as the impact of increased prices in closures, composite and rigid plastic containers. The increase in operating profit in the fourth quarter of 2005 was due to increased selling prices, higher volume stemming from new products and from manufacturing and purchasing productivity improvements. This was partially offset by higher costs for raw material, freight and labor, and continued, but decreasing, start-up costs stemming from the Company's new rigid plastics facility in Wisconsin.

Engineered Carriers and Paper

The Engineered Carriers and Paper segment includes the following products: high-performance paper and composite engineered carriers; fiber-based construction tubes and forms, paperboard and recovered paper.

Fourth quarter 2005 sales for the Engineered Carriers and Paper segment were $392.6 million, compared with $389.4 million for the same period in 2004. Base operating profit for the Engineered Carriers and Paper segment for the fourth quarter of 2005 was $35.8 million, compared with $24.2 million in the fourth quarter of 2004.

Fourth quarter 2005 sales in this segment increased due to the favorable impact of having a full quarter's sales related to the joint venture between the European engineered carriers and coreboard operations of Sonoco and Ahlstrom Corporation, which was completed during the fourth quarter of 2004, partially offset by lower volume in North America and Europe. Base operating profit in the segment increased primarily due to productivity improvements and cost containment, along with a favorable price/cost relationship resulting from lower OCC prices, partially offset by lower volume from North American and European engineered carriers, a $3 million asset impairment charge and higher energy, freight and labor costs. A $7.2 million accounting adjustment from a wholly owned subsidiary in Spain was recorded in the fourth quarter of 2004, providing a favorable variance for the fourth quarter of 2005. North American paper mill operations reported capacity utilization rates of 99 percent in the fourth quarter of 2005 versus 93 percent in the same period in 2004.

Packaging Services

The Packaging Services segment includes the following services: packaging fulfillment, product handling, brand management, and supply chain management.

Fourth quarter 2005 sales for the Packaging Services segment were $124.5 million, compared with $100 million in the same quarter of 2004. Base operating profit for this segment was $11.6 million, compared with $10.9 million in the same period in 2004.

Sales in the Packaging Services segment were up primarily due to increased sales in Packaging Services operations and to a lesser extent, in Sonoco CorrFlex. Much of the sales increase in Packaging Services is on a pass- through basis, so the year-over-year change in base operating profit in the segment is primarily due to productivity improvements in Packaging Services and the volume impact of CorrFlex sales. In addition, the segment recorded a gain on the sale of Sonoco's single plant folding carton business.

All Other Sonoco

All Other Sonoco includes the following products: wooden, metal and composite reels for wire and cable packaging; molded plastics; custom design protective packaging, adhesives; machinery manufacturing; and specialty packaging.

Fourth quarter 2005 sales for All Other Sonoco were $94.7 million, compared with $83.9 million in the fourth quarter of 2004. Base operating profit for the fourth quarter of 2005 for All Other Sonoco was $11.9 million, compared with $8.4 million in the same period in 2004.

Fourth quarter sales in All Other Sonoco increased over the same period in 2004 primarily due to volume and price increases in wire and cable reels, protective packaging and molded and extruded plastics. Base operating profit for All Other Sonoco in the fourth quarter of 2005 increased primarily because of higher volumes and productivity improvements.

Corporate

During the fourth quarter of 2005, the United States Environmental Protection Agency ("EPA") notified Sonoco U.S. Mills, Inc. ("U.S. Mills"), a wholly owned subsidiary acquired by the Company in 2001, that U.S. Mills and another party would be jointly held responsible to undertake a program to remove and dispose of PCB contaminated sediments at a particular site in the vicinity of a U.S. Mills plant on the lower Fox River in Wisconsin. The contamination occurred over thirty years ago and U.S. Mills has not admitted any responsibility. U.S. Mills and the other party have reached agreement with each other that each would fund 50 percent of the costs of remediation demanded by the EPA which is currently estimated to be between $25 million and $30 million for the project as a whole. The Company has accrued $12.5 million as an estimate of the portion of costs that U.S. Mills expects to fund under the current agreement. Some or all of any costs incurred may be covered by insurance or be subject to recoupment from third parties, but no amounts have been recognized in the financial statements for such recovery.

Depreciation and amortization expense for the fourth quarter of 2005 was $42.3 million, compared with $44 million in 2004. Net interest expense for the fourth quarter of 2005 increased slightly to $11.5 million, compared with $11.3 during the same period in 2004.

The effective tax rate for the Company for the year ended December 31, 2005, was 36.4 percent, compared with 29.8 percent in 2004. The increase in the effective tax rate was due to tax expense of $10.1 million associated with the repatriation of $125 million in foreign earnings under the American Jobs Creation Act in 2005 and the recognition of certain tax benefits totaling $9.3 million in 2004.

SOURCE: Sonoco




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