UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, ~~2005~~2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 0-516

SONOCO PRODUCTS COMPANY


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

1 N. Second St.
Hartsville, ~~S.C.~~SC 29550
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.


~~Securities registered pursuant to Section 12(g) of the Act:~~Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yesþ Noo

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yeso Noþ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo

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.o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filerþ Accelerated Filero Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ

The aggregate market value of voting common stock held by nonaffiliates of the registrant (based on the New York Stock Exchange closing price) on June ~~24, 2005,~~23, 2006, which was the last business day of the registrant’s most recently completed second fiscal quarter, was ~~$2,407,357,927.~~$2,971,479,057. Registrant does not (and did not at June ~~24, 2005)~~23, 2006) have any non-voting common stock outstanding.

As of February ~~18, 2006,~~21, 2007, there were ~~98,676,304~~99,500,418 shares of no par value common stock outstanding.

Documents Incorporated by Reference

Portions of the Proxy Statement for the annual meeting of shareholders to be held on April ~~19, 2006,~~18, 2007, which statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates, are incorporated by reference in Part III.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Forward-looking Statements

~~This~~Statements included in this Annual Report on Form 10-K ~~includes and incorporates by reference “forward-looking statements” within the meaning of the securities laws. All statements~~ that are not historical ~~facts~~in nature, are intended to be, and are hereby identified as “forward-looking ~~statements.”~~statements” for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended. The words “estimate,” “project,” “intend,” “expect,” “believe,” “consider,” “plan,” “anticipate,” “objective,” “goal,” “guidance” and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to statements regarding offsetting high raw material costs; improved productivity and cost containment; adequacy of income tax provisions; refinancing of debt; adequacy of cash flows; anticipated amounts and uses of cash flows; effects of acquisitions and dispositions; adequacy of provisions for environmental liabilities; financial strategies and the results expected from them; continued payments of dividends; stock repurchases; and producing improvements in earnings.

~~These~~ Such forward-looking statements are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management. Such information includes, without limitation, discussions as to guidance and other estimates, expectations, beliefs, plans, strategies and objectives concerning our future financial and operating performance. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed or forecasted in such forward-looking statements. ~~Such~~The risks and uncertainties include, without limitation availability and pricing of raw materials; success of new product development and introduction; ability to maintain or increase productivity levels and contain or reduce costs; international, national and local economic and market conditions; fluctuations in obligations and earnings of pension and postretirement benefit plans; ability to maintain market share; pricing pressures and demand for products; continued strength of our paperboard-based tubes and cores and composite can operations; anticipated results of restructuring activities; resolution of income tax contingencies; ability to successfully integrate newly acquired businesses into the Company’s operations; currency stability and the rate of growth in foreign markets; use of financial instruments to hedge foreign currency, interest rate and commodity price risk; actions of government agencies; loss of consumer confidence; and economic disruptions resulting from terrorist activities.limitation:

~~We undertake~~

	•		Availability and pricing of raw materials;

	•		Success of new product development and introduction;

	•		Ability to maintain or increase productivity levels and contain or reduce costs;

	•		International, national and local economic and market conditions;

	•		Fluctuations in obligations and earnings of pension and postretirement benefit plans;

	•		Ability to maintain market share;

	•		Pricing pressures and demand for products;

	•		Continued strength of our paperboard-based tubes and cores and composite can operations;

	•		Anticipated results of restructuring activities;

	•		Resolution of income tax contingencies;

	•		Ability to successfully integrate newly acquired businesses into the Company’s operations;

	•		Currency stability and the rate of growth in foreign markets; use of financial instruments to hedge foreign currency, interest rate and commodity price risk;

	•		Actions of government agencies and changes in laws and regulations affecting the Company;

	•		Anticipated costs of environmental remediation actions;

	•		Loss of consumer confidence; and

	•		Economic disruptions resulting from terrorist activities.

The Company undertakes no obligation to publicly update or revise forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Annual Report on Form 10-K might not occur.

References to our Web Site Address

References to our Web site address and domain names throughout this Annual Report on Form 10-K are for informational purposes only, or to fulfill specific disclosure requirements of the Securities and Exchange Commission’s rules or the New York Stock Exchange Listing Standards. These references are not intended to, and do not, incorporate the contents of our Web sites by reference into this Annual Report on Form 10-K.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

PART I

Item 1. Business

(a)

General development of ~~business~~–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 “Company” or “Sonoco”). Sonoco is a manufacturer of industrial and consumer packaging products and a provider of packaging services, with 317The 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 “Company” or “Sonoco”). Sonoco is a manufacturer of industrial and consumer packaging products and a provider of packaging services, with 324 locations in 35 countries.

Information regarding the Company’s acquisitions, dispositions, joint ventures and restructuring activities is provided in Notes 2 and 3 ~~and 4~~ to the Consolidated Financial Statements on pages F-8 through F-14 of this Annual Report on Form 10-K.

(b)

Financial information about segments—

Information regarding the Company’s reportable segments is provided in Note 15 to the Consolidated Financial Statements on pages F-35 through F-37 of this Annual Report on Form 10-K.

~~(b)~~

~~Financial information about segments~~–

~~Information regarding the Company’s reportable segments is provided in Note 16 to the Consolidated Financial Statements on pages F-33 through F-35 of this Annual Report on Form 10-K.~~

(c)

Narrative description of ~~business –~~business—

~~Products and Services~~ –Products and Services — The following discussion outlines the principal products produced and services provided by the Company.

~~Consumer Packaging~~

~~The Consumer Packaging segment accounted for 35.4%, 35.9% and 37.9% of the Company’s net sales in 2005, 2004 and 2003, respectively. The operations in this segment consist of 49~~Consumer Packaging
The Consumer Packaging segment accounted for 35.7%, 35.4% and 35.9% of the Company’s net sales in 2006, 2005 and 2004, respectively. The operations in this segment consist of 51 plants throughout the world. The products, services and markets of the Consumer Packaging segment are as follows:



	Products and Services	Markets

Rigid Packaging — Paper	Round and shaped composite paperboard cans, paperboard pails, single-wrap paperboard packages, fiber cartridges	Food: snacks, nuts, cookies and crackers, confectionery, frozen concentrate, powdered beverages and infant formula, coffee, refrigerated dough, spices/seasonings, nutritional supplements, pet food Nonfood: adhesives, caulks, cleansers, chemicals, lawn and garden, automotive, pet products

Rigid Packaging — Plastic	Bottles, jars, tubs, cups, trays, squeeze tubes	Food: ~~Liquid~~liquid beverage (noncarbonated), including functional beverage and ready-to-drink coffee, processed foods, sauces and pet foods, powdered beverages including coffee, snacks and nuts Nonfood: household chemicals, industrial chemicals, adhesives and sealants, personal care

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES



	Products and Services	Markets

Ends and Closures –— Plastic and Metal	Aluminum, steel and peelable membrane easy-open closures for composite, metal and plastic containers	Canned processed foods, coffee, beverage, powdered beverages and infant formula, snacks, nuts, nutritional supplements, spices/ seasonings, pet food and treats, and nonfood products

Printed Flexible Packaging	Flexible packaging made from thin-gauge, high value-added rotogravure, flexographic and combination printed film including high-performance laminations and rotogravure cylinder engraving	Confectionery and gum, hard-baked goods, coffee, retort, beverages, snack foods, pet food, home and personal care

Sonoco’s rigid packaging — paper ~~business is~~products are the Company’s second largest revenue-producing ~~business,~~group of products and services, representing approximately ~~19%~~16%, ~~17%~~19% and ~~19%~~17% of consolidated net sales in 2006, 2005 ~~2004~~ and ~~2003,~~2004, respectively.

Tubes and Cores/Paper

The Tubes and Cores/Paper segment ~~formerly known as Engineered Carriers and Paper, was renamed to better reflect the nature of its products. This segment~~ accounted for ~~42.0%~~41.7%, ~~44.0%~~42.0% and ~~45.7%~~44.0% of the Company’s net sales in 2006, 2005 ~~2004~~ and ~~2003,~~2004, respectively. This segment serves its markets through ~~119~~121 converting facilities on five continents. Sonoco’s paper operations provide the primary raw material for the Company’s fiber-based packaging. Sonoco uses approximately ~~70%~~65% of the paper it manufactures and the remainder is sold to third parties. This vertical integration strategy is supported by 26 paper mills with 37 paper machines and 4551 recovered paper collection facilities throughout the world. In ~~2005,~~2006, Sonoco had the capacity to manufacture approximately ~~two~~1.8 million tons of recycled paperboard. The products, services and markets of the Tubes and Cores/Paper segment are as follows:



	Products and Services	Markets

Tubes and Cores ~~(formerly known as Engineered Carriers)~~	Paperboard tubes, cores, roll packaging, molded plugs, supply-chain packaging services	Construction, film, flowable products, metal, paper mill, shipping and storage, tape and label, textiles, converters

Paper	Recycled paperboard, chipboard, tubeboard, lightweight corestock, boxboard, linerboard, specialty grades, recovered paper	Converted paper products, spiral winders, beverage insulators, displays, gaming, paper manufacturing

Sonoco’s tubes and cores ~~business is~~products and services are the Company’s largest revenue-producing ~~business,~~group of products and services, representing approximately ~~32%~~31%, ~~34%~~32% and ~~36%~~34% of consolidated net sales in 2006, 2005 ~~2004~~ and ~~2003,~~2004, respectively.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Packaging Services

The Packaging Services segment accounted for ~~12.9%~~12.5%, ~~10.2%~~12.9% and ~~6.7%~~10.2% of the Company’s consolidated net sales in 2006, 2005 ~~2004~~ and ~~2003,~~2004, respectively. The products, services and markets of the Packaging Services segment are as follows:



	Products and Services	Markets

Service Centers	Packaging ~~Services~~supply chain management, including custom packing, fulfillment, scalable service centers and global artwork management	Personal care, baby care, beauty, healthcare, electronics, hosiery, pharmaceuticals and office supplies

Point-of-Purchase	Designing, manufacturing, assembling, packing and distributing temporary, semi-permanent and permanent point-of-purchase (P-O-P) ~~displays; providing brand artwork management~~displays, as well as contract packaging, co-packing and ~~supply chain management~~fulfillment services ~~including: contract packing, fulfillment and scalable Service Centers~~	Consumer packaged goods, including: personal care, beauty, healthcare, ~~electronics, hosiery,~~food confectionery, sporting goods, and home and garden ~~sporting goods, office supplies, pharmaceuticals~~products

All Other Sonoco

All Other Sonoco accounted for ~~9.7%~~10.1%, ~~9.9%~~9.7% and ~~9.8%~~9.9% of the Company’s net sales in 2006, 2005 ~~2004~~ and ~~2003,~~2004, respectively. In addition to the products and services outlined in each of the segments above, the Company produces the following products:



	Products and Services	Markets

Wire and Cable Reels	Baker^™ steel, nailed wooden, plywood, recycled and poly-fiber reels	Wire and cable manufacturers

Molded and Extruded Plastics	Complete offering of product design, tool design and fabrication; manufacturing in both injection molding and extrusion technologies	Consumer and industrial packaging, food services, textiles, wire and cable, fiber optics, plumbing, filtration, automotive, medical, healthcare

Paperboard Specialties	Custom-printed Rixie^™ coasters, Stancap^{^®} glass covers, other paper amenities	Hotels and resorts, casinos, country clubs, catering services, cruise lines, airlines, healthcare facilities, restaurants

Protective Packaging	Proprietary SonoPost^{^®} Technology, SonoBase^™ Carrier ~~System~~Systems, and through a partnership with Sonoco CorrFlex, ~~to provide~~ the SonoPop^™ ~~Display System.~~display system. Services include anTier 1 supplier to several major manufacturers, on-site engineering for multiple customers, ISTA-certified lab ~~for~~testing facilities and providing customers with engineering, design and testing ~~solutions, on-site engineering~~for all types of products and ~~just-in-time fulfillment of multiple packaging~~ materials	Household appliances, heating and air conditioning, lawn and garden including outdoor grills, furniture and office furnishings, automotive, promotional display and palletized distribution solutions

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~

Divisional sales personnel also provide sales management, marketing and product development assistance as needed. For those customers that buy from more than one business unit, the Company often assigns a single representative or team of specialists to handle that customer’s needs. Product distribution is normally directly from the manufacturing plant to the ~~customer. There are~~customer, but in some cases, ~~where~~ product is warehoused in a mutually advantageous location to be shipped to the customer as needed.

Raw Materials –— The principal raw materials used by the Company are recovered paper, paperboard, steel, aluminum and plastic resins. Raw materials are purchased from a number of outside sources. The Company considers the supply and availability of raw materials to be adequate to meet its needs.

Patents, Trademarks and Related Contracts –— Most inventions are made by members of Sonoco’s development and engineering staff, and are important to the Company’s internal growth. Patents have been granted on many inventions created by Sonoco staff in the United States and other countries. These patents are managed globally by a Sonoco intellectual capital management team through one of the Company’s subsidiaries, Sonoco Development, Inc. ~~(“SDI”)~~(SDI). SDI globally manages patents, trade secrets, confidentiality agreements and license agreements. Some patents have been licensed to other ~~manufacturers, including Sonoco’s associated companies.~~manufacturers. Sonoco also licenses a few patents from outside companies and universities for business unit use. U.S. patents expire after 17 or 20 years, depending on the patent issue date. New patents replace many of the abandoned or expired patents.

A second intellectual capital subsidiary of Sonoco, SPC Resources, Inc., globally manages Sonoco’s trademarks, service marks, copyrights and Internet domain names. Most of Sonoco’s products are marketed worldwide under trademarks such as Sonoco^Ò, Sonotube^Ò, Safe-Top^Ò, Sealed Safe^Ò, Duro^Ò and Durox^Ò. Sonoco’s registered Web domain names such aswww.sonoco.com andwww.sonotube.com provide information about Sonoco, its people and products. Trademarks and domain names are also licensed to ~~subsidiaries and other~~outside companies where appropriate.

Seasonality –— The ~~businesses of the~~ Company’s ~~segments~~operations are not seasonal to any significant degree, although the Consumer Packaging and Packaging Services segments normally report slightly higher sales and operating profits in the ~~third and fourth quarters,~~second half of the year, when compared to the first ~~half~~half.

Working Capital Practices — The Company is not required to carry any significant amounts of ~~the year.~~inventory to meet customer requirements or to assure itself continuous allotment of goods, nor does it provide extended terms to customers.

Dependence on Customers ~~– The Company serves many customers with many different product lines, and no single customer represented 10% of consolidated net sales during 2005.~~— On an aggregate basis, the five largest customers in the Tubes and Cores/Paper segment accounted for approximately ~~11%~~14% of that segment’s sales and the five largest customers in the Consumer Packaging segment accounted for approximately ~~35%~~30% of that segment’s sales. The dependence on a few customers in the Packaging Services segment is more significant as the five largest customers in this segment accounted for approximately ~~82%~~79% of that segment’s sales.

~~On October 1, 2005, the~~Sales to Procter & Gamble, the Company’s (“P&G”) acquisition of The Gillette Company (“Gillette”) became effective, and Gillette became a wholly owned subsidiary of P&G. If sales volume to P&G/Gillette remains at the current level, sales attributed to thislargest customer, ~~will exceed 10%~~represented approximately 12% of the Company’s consolidated revenues in 2006. ~~This~~In addition, this concentration of sales volume resulted in a corresponding concentration of credit, representing approximately 10% of the Company’s consolidated trade accounts receivable at December 31, ~~2005.~~2006. No other customer comprised more than 5% of the Company’s consolidated revenues in 2006 or accounts receivable at December 31, 2006.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Backlog ~~–Most~~— Most customer orders are manufactured with a lead time of three weeks or less. Therefore, the amount of backlog orders at December 31, ~~2005 and 2004,~~2006, was not material. The Company expects all backlog orders at December 31, ~~2005,~~2006, to be shipped during ~~2006.~~2007.

Competition –— The ~~Company’s~~Company sells its products ~~are sold~~ in highly competitive ~~market environments,~~markets, which include paper, textiles, films, food, chemicals, pharmaceuticals, packaging, construction, and wire and cables. ~~Within each~~Each of these markets is primarily controlled by supply and demand. Additionally, these markets are influenced by the overall rate of economic activity. The Company manufactures and sells many of its products globally. The Company, having operated internationally since 1923, considers its ability to serve its customers worldwide in a timely and consistent manner a competitive advantage. The Company also believes that its technological leadership, reputation for quality and vertical integration are competitive advantages. Expansion of the Company’s product line and global presence reflect the rapidly changing needs of its major customers, which demand ~~primarily control~~high-quality, state-of-the-art, environmentally compatible packaging, wherever they choose to do business. It is important to be a low-cost producer in order to compete effectively. The Company is constantly focused on productivity improvements and other cost reduction initiatives utilizing the latest in technology.

Research and Development — Company-sponsored research and development expenses totaled approximately $12.7 million in 2006, $14.7 million in 2005 and $15.4 million in 2004. Customer-sponsored research and development expenses were not material in any of these periods. Significant projects in Sonoco’s Tubes and Cores/Paper segment during 2006 included efforts to design and develop new products for the construction industry and for the film and tape industries. In addition, efforts were focused on enhancing performance characteristics of the Company’s tubes and cores in the textile, film and paper packaging areas, as well as on projects aimed at enhancing productivity. The Consumer Packaging segment continued to invest in development of specialty metal closures, flexible packaging enhancements and rigid plastic containers technology during 2006.

Compliance with Environmental Laws — Information regarding compliance with environmental laws is provided in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Risk Management,” on pages 27 and 28 and in Note 13 to the Consolidated Financial Statements on pages F-32 through F-33 of this Annual Report on Form 10-K.

Number of Employees — Sonoco had approximately 17,700 employees worldwide as of December 31, 2006.

(d) Financial information about geographic areas—

Financial information about geographic areas is provided in Note 15 to the Consolidated Financial Statements on page F-37 of this Annual Report on Form 10-K, and in the information about market ~~environment. Additionally,~~risk in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Risk Management” on pages 27 and 28 of this Annual Report on Form 10-K.

(e) Available information—

The Company electronically files with the Securities and Exchange Commission (SEC) its annual reports on Form 10-K, its quarterly reports on Form 10-Q, its periodic reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the “1934 Act), and proxy materials pursuant to Section 14 of the 1934 Act. The SEC maintains a site on the Internet,www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Sonoco also makes its filings available, free of charge, through its Web site,www.sonoco.com, as soon as reasonably practical after the electronic filing of such material with the SEC.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

these markets are influenced by the overall rate of economic activity. Throughout the year, the Company remained highly competitive within each of the markets served. The Company manufactures and sells many of its products globally. Having operated internationally since 1923, the Company considers its ability to serve its customers worldwide in a timely and consistent manner a competitive advantage. The Company also believes that its technological leadership, reputation for quality and vertical integration are competitive advantages. Furthermore, the Company’s product development and global expansion reflect the rapidly changing needs of its major customers, who demand high-quality, state-of-the-art, environmentally compatible packaging, wherever they choose to do business. In addition, the Company is focusing on productivity improvements with the objective of being the low-cost producer in value-added niches of the packaging market. The Company continues to pursue several productivity initiatives aimed at reducing costs and improving processes using the latest in technology.

~~Research and Development~~ – Company-sponsored research and development expenses totaled approximately $14.7 million in 2005, $15.4 million in 2004 and $14.2 million in 2003. Customer-sponsored research and development costs were not material in any of these periods. Significant projects in Sonoco’s Tubes and Cores/Paper segment during 2005 included efforts to design and develop a new generation of products for the construction industry and to enhance performance characteristics of the Company’s tubes and cores in the textile, film and paper packaging areas, as well as projects aimed at enhancing productivity. The Consumer Packaging segment continued to invest in new materials technology and new process technology for a range of packaging options during 2005.

~~Compliance with Environmental Laws~~ – Information regarding compliance with environmental laws is provided in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Risk Management,” and Note 14 to the Consolidated Financial Statements on pages F-30 and F-31 of this Annual Report on Form 10-K.

~~Number of Employees~~ ~~– Sonoco had approximately 17,600 employees worldwide as of December 31, 2005.~~

~~(d)~~

~~Financial information about geographic areas~~–

Financial information about geographic areas is provided in Note 16 to the Consolidated Financial Statements on page F-35 of this Annual Report on Form 10-K, and in the information about market risk under the caption “Risk Management” in Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 24 and 25 of this Annual Report on Form 10-K.

~~(e)~~

~~Available information~~–

The Company electronically files with the Securities and Exchange Commission (“SEC”) its annual reports on Form 10-K, its quarterly reports on Form 10-Q, its periodic reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the “1934 Act”), and proxy materials pursuant to Section 14 of the 1934 Act. The SEC maintains a site on the Internet,~~www.sec.gov~~, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Sonoco also makes its filings available, free of charge, through its Web site,~~www.sonoco.com, as soon as reasonably practical after the electronic filing of such material with the SEC.~~

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~Executive Officers of the Registrant

~~Executive Officers of the Registrant~~–

—


			Position and Business Experience
Name	Age		For the Past Five Years

Harris E. DeLoach, Jr.		6162	Chairman of the Board, President &and Chief Executive Officer since ~~April~~ 2005. Previously President and Chief Executive Officer July 2000-April 2005; Chief Operating Officer April-July 2000; Sr. Executive Vice President, Global Industrial Products/Paper/Molded Plastics 1999-2000; Executive Vice President, High Density Film, Industrial Container, Fibre Partitions, Protective Packaging, Sonoco Crellin and Baker Reels 1996-1999. Joined Sonoco in 1985.

Jim C. Bowen		5556	Sr. Vice President since 2002. Previously Sr. Vice President, Global Paper Operations 2000-2002; Vice President/General Manager –— Paper 1997-2000; Vice President, Manufacturing –— N.A. Paper 1994-1997; Director of Manufacturing 1993-1994. Joined Sonoco in 1972.

Allan V. Cecil		6465	Retired from the Company effective February 28, 2007. Vice President, Investor Relations &and Corporate Affairs ~~since 1998.~~from 1998 until his retirement. Previously Vice President, Investor Relations and Corporate Communications 1996-1998. ~~Prior experience: Vice President, Corporate Communications & Investor Relations, National Gypsum Company and Mesa Petroleum Co.~~ Joined Sonoco in 1996.

Cynthia A. Hartley		5758	Sr. Vice President, Human Resources since 2002. Previously Vice President, Human Resources 1995-2002. ~~Prior experience: Vice President, Human Resources, Dames & Moore and National Gypsum Company.~~ Joined Sonoco in 1995.
~~Ronald E. Holley~~		63	Sr. Vice President since 2002. Previously Sr. Vice President, Global Industrial Products/Molded Plastics 2000-2002; Vice President, Industrial Products – N.A. 1999-2000; Vice President, High Density Film 1993-1999; Vice President, Total Quality Management 1990-1993. Joined Sonoco in 1964.
Charles J. Hupfer		5960	Sr. Vice President, Chief Financial Officer and Corporate Secretary since April 2005. Previously Vice President, Chief Financial Officer and Corporate Secretary 2002-2005; Vice President, Treasurer and Corporate Secretary 1995-2002; Treasurer 1988-1995. Joined Sonoco in 1975.

M. Jack Sanders		5253	Sr. Vice President, Global Industrial Products since ~~January~~October 2006. Previously Vice President, Global Industrial ~~Products–~~Products January 2006-October 2006; Vice President, Industrial Products—N.A. 2001-2006; Division Vice President/General Manager, Protective Packaging 1998-2001; General Manager, Protective Packaging 1991-1998. Joined Sonoco in 1987.

Eddie L. Smith		5455	Vice President, Industrial Products and Paper, Europe since November 2006. Previously Vice President, Customer &and Business Development ~~since 2002. Previously~~2002-2006; Vice President/General Manager, Flexible Packaging 1998-2002; Division Vice President/General Manager, Flexible Packaging 1996-1998; Division Vice President, Consumer Products –— Europe 1994-1996. Joined Sonoco in 1971.

Charles L. Sullivan, Jr.		6263	Executive Vice President since ~~April~~ 2005. Previously Sr. Vice President 2000-2005; Regional Director, Cargill Asia/Pacific in 2000 and President, Cargill’s Salt Division 1995-2000. Joined Sonoco in 2000.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Item 1A. Risk Factors

Risk Factors Relating to Sonoco’s Business

~~Conditions~~The Company is subject to environmental regulations and liabilities that could weaken operating results.

Federal, state, provincial, foreign and local environmental requirements, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), and particularly those relating to air and water quality, are significant factors in ~~foreign countries where~~the Company’s business and generally increase its costs of operations. The Company may be found to have environmental liability for the costs of remediating soil or water that is, or was, contaminated by the Company ~~operates~~or a third party at various sites that are now, or were previously, owned, used or operated by the Company. Legal proceedings may ~~reduce earnings.~~result in the imposition of fines or penalties, as well as mandated remediation programs that require substantial, and in some instances, unplanned capital expenditures.

~~Sonoco~~The Company has ~~operations throughout North~~incurred in the past, and ~~South America, Europe, Australia~~may incur in the future, fines and ~~Asia,~~penalties relating to environmental matters, and costs relating to the damage of natural resources, lost property values and toxic tort claims. The Company has made expenditures to comply with ~~facilities~~environmental regulations and expects to make additional expenditures in ~~35 countries. In 2005,~~the future. As of December 31, 2006, approximately ~~34.7% of consolidated sales came from operations and sales outside~~$15.3 million was reserved for environmental liabilities. Such reserves are established when it is considered probable that the Company has some liability. The estimates represent the lower end of the ~~United States. Accordingly, revenues~~estimated range of the amount of the Company’s potential liability. In part because nearly all of the Company’s potential environmental liabilities are joint and ~~income~~severally shared with others, the Company’s maximum potential liability cannot be reasonably estimated. However, the Company’s actual liability in such cases may be ~~adversely affected by~~substantially higher than the reserved amount. Additional charges could be incurred due to changes in law, or the discovery of new information, and those charges could have a material adverse effect on operating results.

General economic conditions ~~political situations, and changing laws, and regulations~~ in ~~those countries.~~

~~Foreign exchange rate fluctuations~~the United States may ~~reduce~~change, having a negative impact on the Company’s earnings.

As a result of operating globally, the Company is exposed to market risk from changes in foreign exchange rates. These exposures are monitored, and from time to time, currency swaps and forward foreign exchange contracts are used to hedge a portion of forecasted transactions denominated in foreign currencies, foreign currency assets and liabilities or the net investment in foreign subsidiaries. Nonetheless, to the extent unhedged positions or hedging procedures do not work as planned, fluctuating currencies could reduce the Company’sDomestic sales ~~and net income. Financial performance is directly affected by exchange rates, because the results of operations and the assets and liabilities~~accounted for approximately 64% of the Company’s ~~foreign operations, which~~consolidated revenues. Even with the Company’s diversification across various markets and customers, due to the nature of the Company’s products and services, a general economic downturn could have an adverse impact on the Company’s reported results.

Raw materials price increases may reduce net income.

Many of the raw materials the Company uses are ~~recorded~~commodities purchased from third parties. Principal examples are recovered paper, steel, aluminum and resin. Prices of these commodities are subject to substantial fluctuations that are beyond the Company’s control and can adversely affect profitability. Many of the Company’s long-term contracts with customers permit limited price adjustments to reflect increased raw material costs. Although these and other prices may be increased in ~~local currencies, are translated into U.S. dollars for financial reporting purposes.~~an effort to offset increases in raw materials costs, such adjustments may not occur quickly enough, or be sufficient to prevent a materially adverse effect on net income and cash flow.

The Company may encounter difficulties ~~arising from~~ integrating acquisitions, restructuring operations or closing or disposing of facilities.

Sonoco has completed acquisitions, closed higher-cost facilities, sold non-core assets and otherwise restructured operations in an effort to improve cost competitiveness and profitability. Some of these activities are ongoing, and there is no guarantee that any such activities will not divert the attention of management or disrupt the ordinary operations, or those of the Company’s subsidiaries. Moreover, production capacity, or the actual amount of products produced, may be reduced as a result of these activities.

~~Sonoco~~The Company has made numerous acquisitions in recent years, and may actively seek new acquisitions that management believes will provide meaningful opportunities in the markets ~~Sonoco~~it serves. Acquired businesses may not achieve the expected levels of revenue, profit or productivity, or otherwise perform as expected.

Acquisitions also involve special risks, including, without limitation, the potential assumption of unanticipated liabilities and contingencies, and difficulties in integrating acquired businesses. While management believes that acquisitions will improve the Company’s competitiveness and profitability, no assurance can be given that acquisitions will be successful or accretive to earnings.

~~The Company is subject to environmental regulations and liabilities that could weaken operating results.~~

Federal, state, provincial, foreign and local environmental requirements, particularly those relating to air and water quality, are a significant factor in the Company’s business and generally increase the costs of the Company’s operations. The Company may be found to have environmental liability for the costs of remediating soil or water that is, or was, contaminated by the Company or a third party at various sites which are now, or were previously, owned, used or operated by the Company. Legal proceedings may result in the imposition of fines or penalties, as well as mandated remediation programs that require substantial, and in some instances, unplanned capital expenditures. There also may be similar liability at sites with respect to which either the Company has received, or in the future may receive, notice that it may be a potentially responsible party and which are the subject of cleanup activity under the Comprehensive Environmental Response, Compensation and Liability Act, analogous state laws and other laws concerning hazardous substance contamination.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

The Company has ~~incurred in the past,~~closed higher-cost facilities, sold non-core assets and may incur in the future, fines and penalties relating to environmental matters, and costs relating to the damage of natural resources, lost property values and toxic tort claims. The Company has made expenditures to comply with environmental regulations and expects to make additional expenditures in the future. As of December 31, 2005, approximately $16.8 million was reserved for environmental liabilities. However, additional expenditures could be incurred due to changes in law, or the discovery of new information, and those expenditures could have a material adverse effect on operating results.

~~Raw materials price increases may reduce net income.~~

Many of the raw materials used by the Company are commodities purchased from third parties. Principal examples are recovered paper, steel, aluminum and resin. Prices of these commodities are subject to substantial fluctuations that are beyond the Company’s control and can adversely affect profitability. Even though many of the Company’s long-term contracts with customers permit limited price adjustments to reflect increased raw material costs and prices may be increasedotherwise restructured operations in an effort to ~~offset increases in raw materials costs,~~improve cost competitiveness and profitability. Some of these activities are ongoing, and there is no guarantee that any such ~~adjustments~~activities will not divert the attention of management or disrupt the ordinary operations of the Company. Moreover, production capacity, or the actual amount of products produced, may ~~not occur quickly enough, or~~ be ~~sufficient to prevent~~reduced as a ~~materially adverse effect on net income and cash flow.~~result of these activities.

Energy price increases may reduce net income.

The Company’s manufacturing operations require the use of substantial amounts of electricity and natural gas, which may be subject to significant price fluctuations as the result of changes in overall supply and demand. Energy usage is forecasted and monitored, and the Company may, from ~~time-to-time,~~time to time, use commodity futures or swaps in an attempt to reduce the impact of energy price ~~fluctuations.~~increases. The Company cannot guarantee success in these efforts, and could suffer adverse effects to net income and cash flow should the Company be unable to pass higher energy costs through to its customers.

The Company may not be able to develop new products acceptable to the market.

The Company relies on new product development for organic growth within the markets it serves. If new products acceptable to the Company’s customers are not developed in a timely fashion, growth potential may be hindered.

The Company may not be able to locate suitable acquisition candidates.

If significant acquisition candidates that meet the Company’s specific criteria are not located, the Company’s potential for growth may be restricted.

Conditions in foreign countries where the Company operates may reduce earnings.

The Company has operations throughout North and South America, Europe, Australia and Asia, with facilities in 35 countries. In 2006, approximately 36% of consolidated sales came from operations and sales outside of the United States. Accordingly, economic conditions, political situations, and changing laws and regulations in those countries may adversely affect revenues and income.

Foreign exchange rate fluctuations may reduce the Company’s earnings.

As a result of operating globally, the Company is exposed to changes in foreign exchange rates. Generally, each of the Company’s foreign operations both produces and sells in their respective local currencies. As a result, foreign-exchange transaction risk is not significant. However, the Company’s reported results of operations and financial position could be negatively affected by exchange rates when the activities and balances of its foreign operations are translated into U.S. dollars for financial reporting purposes. The Company monitors its exposures and, from time to time, may use currency swaps and forward foreign exchange contracts to hedge certain forecasted transactions denominated in foreign currencies, foreign currency assets and liabilities or the net investment in foreign subsidiaries. To date, the extent to which the Company has hedged its net investments in foreign subsidiaries has been limited.

Item 1B. Unresolved Staff Comments

There are no unresolved written comments from the SEC staff regarding the Company’s periodic or current 1934 Act reports.

Item 2. Properties

The Company’s corporate offices are owned and operated in Hartsville, South Carolina. There are ~~108~~106 owned and 6972 leased facilities used by operations in the Tubes and Cores/Paper segment, 2425 owned and 2526 leased facilities used by operations in the Consumer Packaging segment, three owned and 1617 leased facilities used by operations in the Packaging Services segment, and 20 owned and 2627 leased facilities used by all other operations. Europe, the largest foreign geographic ~~location,~~region, has 55 manufacturing locations.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

liability exposure was very small based on its continuing beliefs that no significant amount of PCB-contaminated raw materials had been used at the U.S. Mills plants and that any significant amount of PCB contamination in the section of the Fox River located adjacent to its plant was not caused by U.S. Mills.

In May/June 2005, U.S. Mills first learned of elevated levels of PCBs (the OU 4 hotspot) in the Fox River adjacent to its DePere plant. U.S. Mills, while still not believing its DePere plant was the source of this contamination, entered into the consent decree to remediate the OU 4 hotspot as discussed above.

In June 2006, U.S. Mills first received the results of tests it initiated on the U.S. Mills property that suggest that the DePere plant may have processed as part of its furnish more than the de minimus amounts of PCB-contaminated paper reflected in the records available to the Company. This information seemed to contradict the Company’s previous understanding of the history of the DePere plant. Further testing of the site is continuing to attempt to determine the extent of this recently discovered contamination. Based on these most recent findings, it is possible that U.S. Mills might be responsible for a larger portion of the remediation than previously anticipated. The total estimated cost set forth in the ROD for remediation of OU 4 was approximately $257.5 million (the more recent Basis of Design Report estimate is at least $100 million higher) and the estimated cost of monitoring OU 5 was approximately $40 million. There are two alleged PRPs located in OU 4 (of which the smaller is the plant owned by U.S. Mills). It is possible that the owners of these two plants, together with the original generator of the carbonless copy paper, could be required to bear the substantial portion of the remediation costs of OU 4, and share with other PRPs the cost of monitoring OU 5. U.S. Mills has discussed possible remediation scenarios with other PRPs who have indicated that they expect U.S. Mills to bear an unspecified but meaningful share of the costs of OU 4 and OU 5.

In February 2007, USEPA and WDNR issued a general notice of potential liability under CERCLA and a request to participate in remedial action implementation negotiations relating to OUs 2 — 5 to eight PRPs, including U.S. Mills. The notice requests that the PRPs indicate their willingness to participate in negotiations concerning performance of the remaining elements of the remedial action for OUs 2 — 5 and the resolution of the government entities’ claims for unreimbursed costs and natural resource damages. The notice also indicates that, if USEPA and WDNR receive a good faith offer of settlement by April 1, 2007, they will seek to finalize an agreement by no later that July 15, 2007. U.S. Mills plans to discuss joint settlement proposals with other PRPs and may make a good faith offer of settlement either with or without other PRPs. The amount of any such offer has not been determined and will depend on U.S. Mills’ assessment of the level of its responsibility for the contamination and damages, the extent of insurance coverage, and the impact of a settlement on U.S. Mills’ resources and ongoing operations. U.S. Mills is currently evaluating all of its options and intends to vigorously defend against liability to the extent it deems it prudent and cost effective to do so.

Because U.S. Mills has not yet been able to estimate with any certainty the portion of the total remediation costs that it might have to bear, reserves to account for the potential additional liability have not been increased at this point. Since no formal claims for natural resource damages have been made, U.S. Mills does not have a basis for estimating the possible cost of such claims. Accordingly, reserves have not been increased for this potential liability. However, for the entire river remediation project, the lowest estimate in the Governments’ 2000 report on natural resource damages was $176 million.

In addition to its potential liability for OUs 4 and 5, U.S. Mills may have a contingent liability to Menasha Corporation to indemnify it for any amount for which it may be held liable in excess of insurance coverage for any environmental liabilities of a plant on OU 1 that U.S. Mills purchased from Menasha. Due to the uncertainty of Menasha’s liability and the extent of the insurance coverage, U.S. Mills has not established a reserve for this contingency.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

U.S. Mills’ costs of defending itself in connection with environmental matters are expensed as incurred and are not included in the reserve.

The actual costs associated with cleanup of the Fox River site are dependent upon many factors and it is reasonably possible that remediation costs could be higher than the current estimate of project costs. Some, or all, of any costs incurred may be covered by insurance, or may be subject to recoupment from other parties, but no amounts have been recognized in the financial statements of the Company for such recovery. Given the ongoing remedial design work being conducted by NCR and U.S. Mills and the initial stages of remediation, it is possible there could be some additional changes to some elements of the reserve within the next year or thereafter, although that is difficult to predict.

In any event, because the discharges of hazardous materials into the environment occurred before the Company acquired U.S. Mills, and U.S. Mills has been operated as a separate subsidiary of the Company, the Company does not believe that it has any liability for the liabilities of U.S. Mills. Accordingly, as stated above, the Company does not believe that the effect of U.S. Mills’ Fox River liabilities on the Company would result in a pretax loss to the Company that would exceed the net worth of U.S. Mills, which was approximately $90 million at December 31, 2006.

Additional information regarding legal proceedings is provided in Note 1413 to the Consolidated Financial Statements on pages ~~F-30~~F-32 and ~~F-31~~F-33 of this Annual Report on Form 10-K.

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

Not applicable.

1014

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES


Item 6. Selected Financial Data		~~Selected Financial Data~~

The following table sets forth the Company’s selected consolidated financial ~~information.~~information for the past five years. The information presented below should be read together with ~~“Management’s~~Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations,~~” and~~ the Company’s historical consolidated financial statements, and the Notes thereto. The selected statement of income data and balance sheet data are derived from the Company’s Consolidated Financial ~~Statements.~~Statements included in Item 8 to this Annual Report on Form 10-K.


(Dollars and shares in thousands except
per share data)	Years ended December 31															Years ended December 31
	2005			2004			2003			2002			2001			2006			2005			2004			2003			2002

Operating Results¹
Net sales	$	3,528,574		$	3,155,433		$	2,758,326		$	2,701,419		$	2,464,445		$	3,656,839		$	3,528,574		$	3,155,433		$	2,758,326		$	2,701,419
Cost of sales and operating expenses		3,232,590			2,897,046			2,549,726			2,455,357			2,204,874			3,310,751			3,232,590			2,897,046			2,549,726			2,455,357
Other expense, net²		21,237			18,982			50,056			10,409			51,175
Restructuring charges²																	25,970			21,237			18,982			50,056			10,409
Interest expense		51,559			47,463			52,399			54,196			52,217			51,952			51,559			47,463			52,399			54,196
Interest income		(7,938	)		(5,400	)		(2,188	)		(1,649	)		(3,800	)		(6,642	)		(7,938	)		(5,400	)		(2,188	)		(1,649	)

Income before income taxes		231,126			197,342			108,333			183,106			159,979			274,808			231,126			197,342			108,333			183,106
Provision for income taxes³		84,174			58,858			37,698			65,075			77,269			93,329			84,174			58,858			37,698			65,075
Equity in earnings of affiliates/ minority interest⁴		14,925			12,745			7,543			7,437			(1,214	)
Equity in earnings of affiliates/ minority interest, net of tax⁴																	13,602			14,925			12,745			7,543			7,437

Income from continuing operations		161,877			151,229			78,178			125,468			81,496			195,081			161,877			151,229			78,178			125,468
Income from discontinued operations, net of income taxes		¾			¾			60,771			9,848			10,113			—			—			—			60,771			9,848

Net income available to common shareholders	$	161,877		$	151,229		$	138,949		$	135,316		$	91,609		$	195,081		$	161,877		$	151,229		$	138,949		$	135,316

Per common share
Net income available to common shareholders:
Basic	$	1.63		$	1.54		$	1.44		$	1.40		$	.96		$	1.95		$	1.63		$	1.54		$	1.44		$	1.40
Diluted		1.61			1.53			1.43			1.39			.96			1.92			1.61			1.53			1.43			1.39
Cash dividends – common		.91			.87			.84			.83			.80
Average common shares outstanding:
Cash dividends — common																	.95			.91			.87			.84			.83
Weighted average common shares outstanding:
Basic		99,336			98,018			96,819			96,373			95,370			100,073			99,336			98,018			96,819			96,373
Diluted		100,418			98,947			97,129			97,178			95,807			101,534			100,418			98,947			97,129			97,178
Actual common shares outstanding at December 31		99,988			98,500			96,969			96,380			95,453			100,550			99,988			98,500			96,969			96,380

Financial Position
Net working capital	$	265,014		$	282,226		$	75,671		$	104,671		$	204,899		$	282,974		$	265,014		$	282,226		$	75,671		$	104,671
Property, plant and equipment, net		943,951			1,007,295			923,569			975,368			1,008,944			1,019,594			943,951			1,007,295			923,569			975,368
Total assets		2,981,740			3,041,319			2,520,633			2,436,439			2,352,197			2,916,678			2,981,740			3,041,319			2,520,633			2,436,439
Long-term debt		657,075			813,207			473,220			699,346			885,961			712,089			657,075			813,207			473,220			699,346
Total debt		781,605			906,961			674,587			833,846			921,810			763,992			781,605			906,961			674,587			833,846
Shareholders’ equity		1,263,314			1,152,879			1,014,160			867,425			804,122			1,219,068			1,263,314			1,152,879			1,014,160			867,425
Current ratio		1.4			1.4			1.1			1.2			1.4			1.4			1.4			1.4			1.1			1.2
Total debt to total capital⁵		35.7	%		40.7	%		36.4	%		44.5	%		49.3	%		37.5	%		35.7	%		40.7	%		36.4	%		44.5	%

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

Overview

2006 was a good year for both Sonoco and its shareholders. Sonoco achieved records in sales, net income and cash flow from operations and the Company’s stock provided its shareholders with an annual total return of 33.2%. Sonoco’s target is to provide shareholders with a double-digit average annual total return over time. To meet that target, the Company focuses on three major areas: driving profitable sales growth, improving margins, and leveraging the Company’s strong cash flow and financial position.

Sales continued to grow in 2006 from new products and acquisitions, while the Company received a number of ~~key performance goals in 2005 despite a challenging operating and market environment.~~awards for packaging innovation. The Company ~~experienced sustained year-over-year quarterly earnings increases,~~recorded a third consecutive year of operating margin improvement ~~and double-digit sales growth~~ driven ~~principally~~ by acquisitions, improved companywide volume coming from significant new consumer product and market development and geographical expansion. Integration of the CorrFlex acquisition was successfully completed. In addition, the Company’s businesses continued to produce significant cost savings from manufacturing and purchasing improvementsstrong productivity gains and a ~~positive price/~~continued focus on price management, cost ~~relationship was attained, despite rising costs in most raw materials.~~reductions and the turnaround of under-performing operations. The Company’s initiative to reduce working capital and the operational improvement helped boost cash flow to record levels.

~~Effective December 31,~~The Company’s primary growth drivers are acquisitions, geographic expansion, providing total packaging solutions for customers and new product development. In 2006, sales grew 3.6% over 2005, the Company changed the name of the Engineered Carriers and Paper segment to Tubes and Cores/Paper, because the term “tubes and cores” is more generally understood than “engineered carriers” in the marketplace for the primary products offered by the businesses in this segment. There has been no change in the businesses included in this segment.

~~Net sales for the Company in 2005 were $3.53 billion, versus $3.16 billion in 2004,~~ primarily due to higher volume, including the impact of having a full year of the CorrFlex Graphics, LLC (“CorrFlex”) acquisition and the joint venture between Sonoco and Ahlstrom Corporation (“Ahlstrom”) of Helsinki, Finland (“Sonoco-Alcore”). In addition to the impact of acquisitions, the company wide volume increase during the year was driven by higher sales in the Consumer Packaging and Packaging Services segments, partially offset by volume declines for the Tubes and Cores/Paper (formerly called Engineered Carriers and Paper) segment. Also contributing to the sales gain were higherincreased selling prices ~~for rigid paper and plastic packaging, wire and cable reels, and molded and extruded plastics, along with~~throughout the Company, the favorable impact of foreign exchange rates and an increase in volume.

During 2006, the Consumer Packaging segment provided 45% of the total increase in revenue and Tubes and Cores/Paper provided 34%, while revenue in the Packaging Services segment was essentially unchanged. Businesses in All Other Sonoco provided the remaining 21% of the total revenue increase. The Company expects that, over the next several years, growth in the consumer-related portions of its business will outpace growth in the industrial-related portions. Higher volume accounted for 21% of the revenue increase in Consumer Packaging, 40% in Tubes and Cores/Paper and 54% in All Other Sonoco. Volume increases in the Packaging Services segment were more than offset by the impact of the 2005 divestiture of a folding cartons plant.

The acquisitions made in 2006 did not have a significant impact on sales, as two of the ~~dollar weakened against foreign currencies.~~larger ones did not close until late in the fourth quarter. However, these acquisitions are expected to provide additional year-over-year sales in excess of $100 million in 2007. The purchase of the remaining 35.5% interest in the Sonoco-Alcore S.a.r.l. (Sonoco-Alcore) joint venture will not result in additional sales as it was previously consolidated in the Company’s results. A reduction in sales resulting from the December 2005 sale of the folding cartons operation more than offset the positive impact of several smaller acquisitions made earlier in 2006.

The Company reported net income of $195.1 million for 2006, compared with $161.9 million for ~~2005, compared with $151.2 million for 2004.~~2005. Earnings growth in ~~2005~~2006 resulted in large part from ~~strong sales, which were driven by the full year impact of acquisitions completed in 2004 and from higher~~ productivity ~~improvement~~improvements in virtually all of the Company’s ~~businesses.~~businesses along with price increases that effectively offset increases in the costs of labor, material, freight and energy. Volume ~~and mix~~growth had ~~a disproportionately lower~~less impact on operating profits than ~~implied by the increase in~~its effect on sales ~~as the~~due to a change in the mix of products ~~sold had an unfavorable effect on operating profits.~~sold. The change in mix is primarily attributable to increased sales of tissue and towel board in the Tubes and Cores/Paper segment and composite cans to the powdered infant formula market in the Consumer Packaging segment. Both of these products have lower margins relative to other products. In addition, ~~approximately $24.8~~$10.1 million of ~~the~~ increased sales volume in the Packaging Services segment were on a pass-through basis and ~~had very little impact on profits. Rising inflation~~therefore generated no significant additional gross margin.

Operating margins, including both gross profit margin and escalating energy and freight prices negatively impacted operating profits. The Company was able to maintain a favorable selling price/material cost (“price/cost”) relationship during the year, most notably in the Tubes and Cores/Paper segment.net income margin, showed improvement over 2005 levels. Net income for ~~2005 and 2004~~2006 included after-tax restructuring charges of ~~approximately~~$20.9 million, $7.8 million more than the $13.1 million ~~and $14.4 million, respectively.~~net restructuring charges recorded in 2005. Net income for 2005 was ~~also~~ negatively impacted by an after-tax charge of $7.6 million related to an ~~increase in the~~ environmental reserve at a ~~Company~~ subsidiary’s paper operations in Wisconsin, and additional tax expense totaling $10.1 million associated with the repatriation of $124.7 million in foreign earnings under the American Jobs Creation Act of 2004 (“AJCA”).

Cash flow remained strong, with cash generated from operations totaling $227.4 million in 2005, which includes global pension funding totaling $77.0 million. Cash flow was used to fund capital expenditures, pay dividends and decrease debt by $117.8 million. To sustain strong cash flow, the Company remains focused on growing sales by developing new products and markets, expanding geographically and making appropriate acquisitions. At the same time, the Company is committed to aggressively controlling costs and effectively employing its capital by paying close attention to working capital management and capital expenditures.

~~Restructuring Charges, Unusual Items and Other Activities~~

~~Restructuring Charges~~

During 2005, the Company recognized restructuring charges, net of adjustments, of $21.2 million ($14.3 million after tax), primarily related to eleven plant closings in the Tubes and Cores/Paper segment and three plant

1317

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

operations in Wisconsin and additional tax expense of $10.1 million associated with the repatriation of foreign earnings.

Cash flow from operations reached a record $482.6 million in 2006. Cash flow was used to fund capital expenditures, make acquisitions, pay dividends, repurchase Company stock and make net payments on debt. To sustain strong cash flow, the Company emphasizes profitable growth, effective working capital management and capital expenditure control. A portion of key manager incentive compensation is tied to achieving a targeted return on net assets.

Restructuring Charges, Unusual Items and Other Activities

Restructuring Charges
During 2006, the Company recognized restructuring charges, net of adjustments, totaling $26.0 million ($21.3 million after tax) under two restructuring plans — the 2006 Plan and the 2003 Plan. Of this total amount, the Company recognized $17.5 million of restructuring charges, net of adjustments, under the 2006 Plan and $8.5 million, net of adjustments, under the 2003 Plan.

The 2006 Plan, approved in October 2006, initiated cost-reduction measures primarily focused on certain of the Company’s international operations, principally centered around Europe. It calls for the closure of approximately 12 plant locations globally and the reduction of approximately 540 positions worldwide. These measures began in the fourth quarter of 2006 and are expected to be substantially complete by the end of 2007. The 2006 charges related primarily to the closures of a paper mill in France, two tube and core plants—one in Canada and one in the United States, and a flexible packaging operation in Canada. The charges also include the closures of a wooden reels facility and a molded plastics operation in the United States as well as the impact of downsizing actions primarily in the Company’s European tube and core/paper operations. The total pretax cost of the 2006 Plan is estimated to be approximately $35 million, most of which is related to severance and other termination costs; accordingly, the vast majority of the cost will result in the expenditure of cash.

The 2003 Plan, announced in August 2003, was designed to reduce the Company’s overall operating cost structure by approximately $54 million by realigning and centralizing a number of staff functions and eliminating excess plant capacity. Pursuant to the 2003 Plan, the Company has initiated or completed 22 plant closings and has reduced its workforce by approximately 1,120 employees. Net charges recorded in 2006 related primarily to the closure of two tube and core plants and a flexible packaging operation in the United States, and an additional asset impairment charge resulting from a revision to the estimated sales proceeds of a previously closed paper mill located in the United States. These charges consisted of severance and termination benefits of $1.8 million, asset impairment charges of $2.6 million and other exit costs of $4.1 million, consisting of building lease termination charges and other miscellaneous exit costs. Through the end of 2006, the Company has recognized cumulative restructuring charges, net of adjustments, of $103.0 million under the 2003 Plan. Future restructuring charges to be incurred under this plan are expected to be minimal. With the exception of ongoing pension subsidies and certain building lease termination expenses, costs associated with the 2003 Plan are expected to be paid by the end of the 2007 using cash generated from operations.

During 2005, the Company recognized restructuring charges under the 2003 Plan of $21.2 million ($14.3 million after tax), net of adjustments primarily related to 11 plant closings in the Tubes and Cores/Paper segment and three plant closings in the Consumer Packaging segment. Restructuring charges recognized during 2005 consisted of severance and termination benefits of $6.2 million, asset impairment charges of $6.5 million and other exit costs of $8.5 million, consisting of building lease termination charges and other miscellaneous exit costs. These costs are associated with the Company’s general plans, announced in August 2003; to reduce its overall cost structure by approximately $54 million pretax. The Company expects to recognize, in the future, an additional cost of approximately $6.8 million pretax associated with these actions. The objectives of these restructuring actions are to realign and centralize a number of staff functions and eliminate excess plant capacity. With the exception of ongoing pension subsidies and certain building lease termination expenses, costs associated with the 2005 restructuring actions are expected to be paid by the end of the third quarter 2006 using cash generated from operations.

Of the $6.5 million ~~previously mentioned~~of asset impairment ~~charge~~charges (related to the writeoff/down of assets associated with ~~eleven~~11 plant closings), the Company recognized writeoffs/downs of impaired equipment of $5.9 million and writeoffs/downs related to facilities held for sale of ~~$.6~~$0.6 million. Impaired assets are valued at the lower of carrying amount or fair value, less estimated costs to sell, if applicable. During 2005, the Company also recorded non-cash income of $1.3 million after tax to reflect Ahlstrom’s portion of restructuring costs that were charged to expense. This income, which resulted from the closure of certain plants that the Company contributed to Sonoco-Alcore S.a.r.l.(“Sonoco-Alcore”), is included in “Equity in earnings of affiliates/minority interest in subsidiaries” in the Company’s Consolidated Statements of Income.

During the fourth quarter of 2005, the Company began an in-depth review of its global Tubes and Cores/Paper operations. This review, expected to be completed by mid-2006, is intended to examine the Company’s served markets in this segment (principally textiles, paper and film) and address issues such as market growth, capacity, technology and competition. Depending upon the conclusions reached, a further restructuring of operations may result.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

During 2004, the Company recognized restructuring charges ~~net~~ of ~~adjustments, of $19~~$19.0 million ($16.2 million after tax), net of adjustments, primarily related to 10 plant closings in the Tubes and Cores/Paper segment, ~~five plant closings in~~ the Consumer Packaging segment and ~~one plant closing~~ in All Other Sonoco. Included in this amount is $2.2 million in restructuring charges, which resulted from a correction to previously reported financial statements at the Company’s wholly owned subsidiary in Spain. Restructuring charges recognized during 2004 consisted of severance and termination benefits of $6.5 million, asset impairment charges of $6.2 million and other exit costs of $6.3 million, consisting of building lease termination charges and other miscellaneous exit costs.

~~During 2004, the~~The Company also recorded non-cash, after-tax income in the amount of $0.4 million in 2006, $1.3 million in 2005, and $1.8 million ~~after tax~~in 2006 to reflect ~~Ahlstrom’s~~a minority shareholder’s portion of restructuring costs that were charged to expense. This income, which resulted from the closure of certain plants that the Company contributed to Sonoco-Alcore, is included in “Equity in earnings of affiliates/minority interest in subsidiaries” in the Company’s Consolidated Statements of Income.

During 2003, the Company recognized restructuring charges, net of adjustments, of $50.1 million pretax ($35.3 million after tax). Additionally, the Company’s High Density Film business, which was divested in 2003, incurred restructuring charges of $.2 million pretax ($.1 million after tax) in 2003. The 2003 restructuring charges were primarily related to six plant closings in the Tubes and Cores/Paper segment, three plant closings in the Consumer Packaging segment, three plant closings in All Other Sonoco and a global reduction in salaried positions. These restructuring charges consisted of severance and termination benefits of $37.7 million, asset impairment charges of $8.4 million and other exit costs of $4 million, consisting of building lease termination charges and other miscellaneous exit costs.

During 2003, the Company also recorded restructuring charges of $1.5 million after tax related to expenses at a non-consolidated affiliate. The restructuring charges are included in “Equity in earnings of affiliates/minority interest in subsidiaries” in the Company’s Consolidated Statements of Income.

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~

Acquisitions/Joint Ventures

The Company completed ~~three~~six acquisitions during ~~2005, with~~2006, and purchased the remaining 35.5% minority interest of its Sonoco-Alcore joint venture, at an aggregate cost of ~~approximately $3.6~~$227.3 million, all of which was paid in cash. Acquisitions in the Company’s Tubes and Cores/Paper segment included the remaining 75%interest in Demolli Industria Cartaria S.p.A, an Italy-based tube and core/paper manufacturer; and a small tube and core manufacturer in ~~New Zealand~~Canada. Acquisitions made in the Consumer Packaging segment included a rotogravure printed flexible packaging manufacturer in Texas; a rigid paperboard composite container manufacturer located in Ohio; and Clear Pack Company, a manufacturer of thermoformed and extruded plastic materials and containers located in Illinois. In addition, the Company acquired a small ~~molded plug recycler~~packaging fulfillment business in Illinois, which is included in the ~~United States. Additionally,~~Packaging Services segment. These acquisitions are expected to provide approximately $130 million in reported sales in 2007. Also in 2006, the Company purchased the remaining ~~ownership~~35.5% interest in Sonoco-Alcore, a ~~Chilean tubes~~European tube, core and ~~cores business. The~~coreboard joint venture between the Company ~~also acquired certain assets~~and Ahlstrom Corporation. Results for the Sonoco-Alcore joint venture, part of ~~a rigid plastic packaging manufacturer in Brazil, which is reported~~the Tubes and Cores/Paper segment, have been consolidated in the ~~Consumer Packaging segment.~~Company’s results since its original formation in 2004; accordingly, no additional sales will result from the purchase of the remaining interest.

In 2005, the Company completed three minor acquisitions with an aggregate cost of $3.6 million, all of which were paid in cash.

The Company completed nine acquisitions during 2004 with an aggregate cost of ~~approximately~~ $367 million, of which $267 million was paid in cash. ~~During~~The most significant acquisition in 2004 ~~the Company acquired~~was CorrFlex Graphics, LLC, one of the nation’s largest point-of-purchase display companies. The acquired business, which is known as Sonoco CorrFlex, LLC, is reflected in the Packaging Services segment. Acquisitions in the Company’s Tubes and Cores/Paper segment included tube and core manufacturers in Australia, China and the United States. During the fourth quarter of 2004, the Company also completed a business combination with Ahlstrom Corporation, Helsinki, Finland (Ahlstrom), by which each of the companies’ respective European paper-based tube/core and coreboard operations were combined into a joint venture that operates under the name Sonoco-Alcore S.a.r.l. and is reflected in the Tubes and Cores/Paper segment. The Company contributed ownership positions in 25 tube and core plants and five paper mills to Sonoco-Alcore, and held a 64.5% interest in the joint venture. Ahlstrom, a leader in high-performance fiber-based materials serving niche markets worldwide, contributed 14 tube and core plants and one paper mill to Sonoco-Alcore, and held a 35.5% interest in the joint venture. As noted above, the Company acquired this remaining 35.5% interest during 2006. The Company accounted for this transaction as an acquisition and, therefore, consolidated the joint venture and reported Ahlstrom’s ownership as minority interest in the Company’s financial statements. The recognition of Ahlstrom’s share of the joint venture’s net income was included in “Equity in earnings of affiliates/minority interest in subsidiaries” in the Company’s Consolidated Statements of Income until acquisition of the remaining minority interest was completed in 2006. Acquisitions in the Company’s

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Consumer Packaging segment included a composite can manufacturer in Australia, a manufacturer of rotogravure cylinders in Canada and the remaining ownership interest in a manufacturer of rotogravure cylinders in Charlotte, N.C. Acquisitions in the Company’s Tubes and Cores/Paper segment included tube and core manufacturers in Australia, China and the United States. The Company also completed a business combination with Ahlstrom to combine each of the companies’ respective European paper-based tube/core and coreboard operations into a joint venture that operates under the name Sonoco-Alcore and is reflected in the Company’s Tubes and Cores/Paper segment. The Company contributed ownership positions in 25 tube and core plants, and five paper mills to Sonoco-Alcore and holds a 64.5% interest in the joint venture. Ahlstrom, a leader in high-performance fiber-based materials serving niche markets worldwide, contributed 14 tube and core plants and one paper mill to Sonoco-Alcore and holds a 35.5% interest in the joint venture. The Company has accounted for this transaction as an acquisition, and therefore, consolidates the results of the joint venture and reports Ahlstrom’s minority interest as such in its financial statements. The recognition of minority interest is included in “Income before equity in earnings of affiliates/minority interest in subsidiaries” on the Company’s Consolidated Statements of Income. The Company also acquired certain assets of a wooden reel refurbisher in Alabama, which are ~~classified as components of~~reported in All Other Sonoco.

The Company completed four acquisitions during 2003, with an aggregate cost of approximately $11.1 million. Acquisitions in the Company’s Tubes and Cores/Paper segment included a tube and core manufacturer in Australia and a recovered paper operation in Savannah, Ga. The Company also acquired certain assets of a wooden reel manufacturer in Canada and the United States, which were classified as components of All Other Sonoco. In addition, the Company increased its ownership interest in a manufacturer of rotogravure cylinders in Charlotte, N.C., that is included in the Company’s Consumer Packaging segment.

Dispositions

In December 2005, the Company divested its single-plant folding cartons business for a note receivable of approximately $11.0 million, which was collected in early 2006. This transaction resulted in a gain of $2.4 million ($1.6 million after tax). The results of this business unit were immaterial to the Company’s consolidated net income for all periods presented.

In December 2003, the Company divested its High Density Film business to Hilex Poly Co., LLC, of Los Angeles, Calif., at a price of approximately $81 million in cash and the balance in subordinated notes, and preferred nonvoting membership interests, resulting in a gain of approximately $63.1 million pretax ($49.4 million after tax). Operating results of this business are presented as “Income from discontinued operations, net of income taxes” in the Company’s Consolidated Statements of Income for 2003. After-tax income contributed by the High Density Film business was approximately $60.8 million in 2003.

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~

Other Special Charges, ~~and~~ Income Items and Contingencies

During the fourth quarter of 2005, the United States Environmental Protection Agency ~~(“EPA”)~~(EPA) notified ~~Sonoco~~ U.S. Paper Mills ~~Inc. (“U.S. Mills”)~~Corp. (U.S. Mills), a wholly owned subsidiary of the Company, that U.S. Mills and ~~another party~~NCR Corporation (NCR), an unrelated company, would be held jointly ~~held~~ responsible to undertake a program to remove and dispose of certain PCB-contaminated sediments at a particular site on the lower Fox River in Wisconsin. U.S. Mills and ~~the other party have~~NCR reached agreement between themselves that each would fund 50% of the costs of remediation, which isthe Company currently ~~estimated~~estimates to be between ~~$25~~$24 million and ~~$30~~$26 million for the project as a whole. Project implementation ~~will begin shortly, with~~began in 2006; however, most of the project costs are expected to be incurred in 2007. Although the agreement reached does not acknowledge responsibility or prevent ~~the other~~either party from seeking reimbursement from any other parties (including each other), the Company ~~has~~ accrued $12.5 million in 2005 as an estimate of the portion of costs that U.S. Mills expects to fund under the current agreement. The charges recognized for this environmental reserve are included in “Selling, general and administrative expenses” in the Company’s Consolidated Statements of Income. The actual costs associated with ~~clean up~~cleanup of this particular site are dependent upon many factors, and it is reasonably possible that remediation costs could be higher than the current estimate of project costs. The Company acquired U.S. Mills in 2001, and the ~~alleged~~identified contamination predates the acquisition. ~~Based on information currently known to the Company, it does not appear that U.S. Mills is responsible for the alleged contamination.~~ Some or all of any costs incurred may be covered by insurance or be ~~subject to recoupment~~recoverable from third ~~parties, but~~parties; however, there can be no assurance that such claims for recovery will be successful. Accordingly, no amounts have been recognized in the financial statements for such recovery.

In June��2006, U.S. Mills first received the results of tests it initiated on the U.S. Mills property that suggested that its DePere plant might have previously processed more than the de minimus amounts of PCB-contaminated paper reflected in the records available to the Company. This information seemed to contradict the Company’s previous understanding of the history of the DePere plant. Further testing of the site is continuing to attempt to determine the extent of this recently discovered contamination. Based on these most recent findings, it is possible that U.S. Mills might be responsible for a larger portion of the remediation of the lower Fox River than previously anticipated. Governmental estimates of the costs for remediation of the lower Fox River are several hundred millions of dollars. The information currently available to the Company is insufficient to determine the probability or amount of liability that may be attributable to U.S. Mills. Accordingly, as of December 31, 2006, no additional reserve for the potential remediation costs of this site has been established. However, it is possible that U.S. Mills’ ultimate share of the liability could exceed its net worth of approximately $90 million, but Sonoco believes the net worth of U.S. Mills represents the maximum exposure to the Company’s consolidated financial position from these environmental claims. For a more detailed discussion of the Fox River environmental matters, see “Item 3. Legal Proceedings” above.

During 2005, the Company repatriated $124.7 million from foreign subsidiaries under the provisions of ~~AJCA.~~the American Jobs Creation Act of 2004 (AJCA). Under this temporary incentive, a portion of the repatriated funds qualified for an 85% dividends-received deduction. ~~The Company recorded an~~Although the effective tax rate on the repatriated funds was lower than it would have otherwise been absent the AJCA, the repatriation resulted in the recognition of additional ~~tax expense of $10.1 million for the~~ U.S. federal and state income taxes ~~due on the repatriated funds, which will ultimately be used to fund investment in plant and equipment and U.S.-based research and development costs, as permitted by AJCA.~~totaling $10.1 million.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

In 2004, the Company recognized charges of ~~approximately~~ $5.6 million, ~~which~~for the ~~Company incurred to recognize vested commitments to pay~~ future costs ~~associated with~~of new executive life insurance benefits ~~that replaced~~established to replace key executive split-dollar life ~~agreements made with key executives since 1995.~~agreements. Due to regulatory changes, the Company was not able to maintain those split-dollar agreements and the replacement benefits for the affected employees have been provided ~~by the Company~~ to meet the intent and commitments of the previous ~~plan.~~program. Also in 2004, the ~~U.S. District Court for the Southern District of Ohio entered~~Company incurred a ~~judgment against the Company’s subsidiary, Sonoco-U.S. Mills, and the Company. The Company accrued approximately~~ $4.5 million charge related to ~~this legal proceeding.~~a trade secrets dispute. The charges recognized for the new executive life insurance benefits and the ~~legal proceeding~~trade secrets dispute are included in “Selling, general and administrative expenses” in the Company’s Consolidated Statements of Income. Additionally, 2004 net income was positively affected by ~~approximately $9.3~~$9.7 million due to the recognition of certain tax benefits as a result of examination conclusions by the Internal Revenue Service ~~(“IRS”) closing its examination of the Company’s~~(IRS) and state tax ~~returns for years 1999 through 2001.~~authorities.

During the fourth quarter of 2004, the Company determined that misstatements ~~were~~had been made in the financial statements of its wholly owned subsidiary in Spain, which consists of two tube and core plants. The primary impact of these misstatements was an underreporting of expenses over a six-year period totaling approximately $9.4 million, before and after tax, of which $2.2 million was related to restructuring charges as previously discussed. Of the remaining $7.2 million, approximately $1.6 million was associated with the first three quarters of 2004, approximately $1.3 million was associated with 2003, approximately $.3 million was associated with 2002, approximately $1.9 million was associated with 2001 and the remaining amount of approximately $2.1 million was associated with 2000 and prior. As the impact of these misstatements was not material to the reported results of any of the prior periods affected or to the period in which it was recorded, the Company recorded the charge in the fourth ~~quarter.~~quarter of 2004.

Results of Operations 2006 versus 2005

Net income for 2006 was $195.1 million, compared with $161.9 million in 2005. The year-over-year increase is largely attributable to higher operating profits on improved productivity and increased selling prices. Gross profit margin improved to 19.3%, compared with 18.7% in 2005. Also contributing to the year over year net income improvement was the net effect of fewer special charges, which were discussed above.

Operating Revenue

Consolidated net sales for 2006 were $3.66 billion, a $128 million, or 3.6%, increase over 2005.

The components of the sales change were approximately:


($ in millions)
Volume	$	41
Selling price		51
Currency exchange rate		39
Acquisitions (net of dispositions)		(4	)
Other		1

Total sales increase	$	128

Prices were higher throughout the Company, with the exception of recovered paper operations, as the Company was able to implement price increases to offset the impact of higher costs of labor, energy, freight and materials. Company-wide volume, excluding service center revenue which was on a pass-through basis, increased slightly less than 1.0% from 2005 levels driven by increases in the Tubes and Cores/Paper and Consumer Packaging segments. Domestic sales were $2.3 billion, up 2.3% from 2005. International sales were $1.3 billion, up 6.2% over 2005, driven primarily by the impact of currency translation.

Costs and Expenses

In 2006, defined-benefit pension and postretirement expense increased $1.1 million to $44.1 million, versus $43.0 million in 2005. The Company expects these expenses to total approximately $34 million in 2007.

1621

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

~~Results of Operations 2005 versus 2004~~

~~Operating Revenue~~

~~Consolidated net sales for 2005 were $3.53 billion, versus $3.16 billion in 2004, resulting in an increase of approximately $373 million.~~

~~The components of the sales change were approximately:~~

($ in millions)
|
Volume $ 100
Selling price 60
Currency exchange rate 43
Acquisitions 167
Other 3

Total sales increase $ 373

Sales increased primarily due to the full year of the CorrFlex acquisition and the Sonoco-Alcore joint venture, which increased sales by $80 million and $87 million, respectively. Company-wide volume, excluding the increased service revenue in the Service Centers, which was on a pass-through basis, was approximately 2.4% higher than 2004 levels, driven by increases in the Consumer Packaging and Packaging Services segments. Higher selling prices for rigid paper and plastic packaging, closures, North American tubes and cores, paperboard, wire and cable reels, and molded and extruded plastics, along with the favorable impact of exchange rates as the dollar weakened against foreign currencies, also contributed to the sales gain. Domestic sales were $2.3 billion, up 9.1% from 2004, and international sales were $1.2 billion, up 17.4% over 2004, driven primarily by the impact of a full year of sales from Sonoco-Alcore and the impact of currency translation discussed above.

~~Operating Profits~~

~~Consolidated operating profits, which represent “Income before income taxes” on the Consolidated Statements of Income for 2005 and 2004, are comprised of the following:~~

($ in millions) 2005 2004 % Change

Consumer Packaging Segment $ 103.5 $ 83.1 24.5 %
Tubes and Cores/Paper Segment 107.0 113.0 (5.3 )%
Packaging Services Segment 44.8 30.3 47.9 %
All Other Sonoco 40.6 32.0 26.9 %
Restructuring and Related Impairment charges (21.2 ) (19.0 ) (11.6 )%
Interest expense, net (43.6 ) (42.1 ) (3.6 )%

Consolidated operating profits $ 231.1 $ 197.3 17.1 %

Operating profits for 2005 increased primarily due to savings resulting from ongoing productivity and purchasing initiatives. The Company experienced a favorable price/cost relationship as sales price increases more thanThis reduction will be partially offset ~~higher material costs, most notably in the Tubes and Cores/Paper segment. The full-year impact of acquisitions also contributed to earnings growth. Operating profits for 2005 were negatively impacted~~ by higher energy, labor and freight costs, as well as start-up costs associated with the Company’s new rigid plastic container plant in Wisconsin. Volume, excluding acquisitions, while contributing favorably to the sales growth, had a negligible impactdefined contribution plan costs. The return on ~~profits, as the change in the mix~~assets of products sold had an unfavorable effect on operating profits. In addition, approximately $24.8 million of the increased sales in the Service Centers were on a pass-through basis, with no gross margin, and therefore had very little impact on profits. Gross profit as a percentage of net sales was 18.7% in 2005, compared with 18.2% in 2004. As previously discussed, operating profits included $21.2 million and $19 million of restructuring charges in 2005 and 2004, respectively.

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~

reserve at the Company’s subsidiary in Wisconsin, while 2004 costs included charges of approximately $5.6 million pretax, which the Company incurred to recognize commitments to pay future costs associated with new executive life insurance benefits and a charge of approximately $4.5 million pretax associated with an unfavorable legal judgment that was entered against the Company. All of these unusual charges are discussed under the section above titled, “Restructuring Charges, Unusual Items and Other Activities – Other Special Charges and Income Items.”

In 2006, as part of selling, general and administrative expenses, the Company will recognize stock-based compensation expense as required by the revision to Statement of Financial Accounting Standards No. 123, ‘Share-Based Payment’ (FAS 123R). These costs are estimated to be approximately $4.8 million pretax, of which approximately 50% will be recognized in the first quarter.

During 2005, the Company experienced postretirement and defined-benefit pension expense of approximately $43.0 million, versus $45.8 million in 2004, a decrease of approximately $2.3 million pretax. The market value of U.S.U.S.-based defined benefit ~~pension~~plans was 13.9% in 2006 and 7.2% in 2005. Over time, investment returns on benefit plan assets ~~increased approximately 7% and 13% in 2005 and 2004, respectively. Investment returns earned on assets held by the Company’s benefit plans are used to lower~~impact the Company’s cost of providing pension and postretirement benefits. ~~Although there were no requirements under~~The Company’s U.S.-based qualified defined-benefit pension plan had a positive funded status of $9 million at year end. None of the ~~Employee Retirement Income Security Act of 1974 (“ERISA”) to fund the U.S.~~Company’s other defined benefit ~~pension plan, the Company contributed $68.0 million to the plan during the year to maintain its fully funded status. Other pension~~ plans ~~in the Company~~ were ~~not~~ fully funded as of December 31, ~~2005. These~~2006. The cumulative unfunded liability of these plans ~~including~~at December 31, 2006, was $229 million. The Company also sponsors the ~~Supplemental Executive~~Sonoco Investment and Retirement Plan, a defined contribution pension plan, for its salaried and ~~several international plans had accrued liabilities associated with their plans~~non-union U.S. employees who were hired on or after January 1, 2004. The Company makes an annual contribution of ~~$82.3~~4% of all eligible pay plus 4% of eligible pay in excess of the Social Security wage base. The Company’s total expense under this defined contribution plan was $1.2 million in 2006 and ~~$51.3~~$0.4 million ~~as of December 31, 2005, respectively. For 2005,~~in 2005. The Company expects the defined contribution expense to total approximately $5 million in 2007.

On January 1, 2006, the Company ~~used 8.5% as~~implemented certain changes to its expected long-term rate of return for U.S. pension and postretirement benefit plan assumptions. The Company will continue to use this 8.5% assumption rate in 2006. A new mortality table assumption was adopted by the Company in 2005, moving from the 1983 GAM mortality-table to the RP-2000 CH table. This mortality table change increased pension liabilities by approximately 2%.

~~In the fourth quarter of 2005, the Company announced changes in eligibility for~~U.S.-based retiree medical benefits ~~effective January 1, 2006.~~plan. These changes included the elimination of a Company subsidy toward the cost of retiree medical benefits if certain age and service criteria were not met, as well as the elimination of Company-provided prescription drug benefits for the majority of its ~~retired~~current retirees and ~~active employees.~~all future retirees. These changes resulted in a reduction to the accumulated postretirement benefit obligation of $38 million, which ~~will be~~is being amortized over a period of ~~approximately five~~4.6 years ~~will not have~~beginning in 2006. In addition, 2006 long-term disability expenses were favorably impacted by both a ~~notable impact on year-over-year expense~~decrease in the number of employees receiving benefits and by a decrease in the amount of the average claim.

Selling, general and administrative expenses as a percentage of sales decreased to 9.8% during the year from 10.3% in 2005. Included in 2006 ~~as previous favorable plan changes that had lowered~~was an additional $4.1 million of stock-based compensation expense ~~were fully amortized by~~associated with the ~~end~~issuance of ~~2005.~~stock-settled stock appreciation rights. Recognition of this expense is required under Statement of Financial Accounting Standards No. 123(R), ‘Share-Based Payment,’ which the Company adopted effective January 1, 2006. Expenses in 2005 included the previously mentioned $12.5 million U.S. Mills environmental charge.

Operating profits also reflect restructuring charges of $26.0 million and $21.2 million in 2006 and 2005, respectively. These items are discussed in more detail in the section above titled, “Restructuring Charges, Unusual Items and Other Activities.”

Research and development costs, all of which were charged to expense, totaled $12.7 million and $14.7 million in 2006 and ~~$15.4 million in~~ 2005, ~~and 2004,~~ respectively. Significant 2006 projects in Sonoco’s Tubes and Cores/Paper segment ~~during 2005~~ included efforts to design and develop a new ~~generation of~~ products for the construction industry and ~~to enhance~~for the film and tape industries. In addition, efforts were focused on enhancing performance characteristics of the Company’s tubes and cores in the textile, film and paper packaging areas, as well as projects aimed at enhancing productivity. The Consumer Packaging segment continued to invest in ~~new materials technology~~development of specialty metal closures, flexible packaging enhancements and ~~new process technology~~rigid plastic containers technology.

Interest expense totaled $52.0 million for ~~a range of packaging options.~~

~~Net interest expense increased by approximately $1.5 million from $42.1 million in 2004 to $43.6~~the year ended December 31, 2006, compared with $51.6 million in 2005. The slight increase in ~~net interest expense resulted primarily from~~2006, compared with 2005, was due to higher average interest rates, ~~partially~~substantially offset by ~~decreased~~lower U.S. and international debt ~~levels~~levels. Interest income was $6.6 million in 2006, a decrease of $1.3 million, from the $7.9 million reported in 2005. The decrease was primarily due to the Company’s repatriation of $124.7 million of accumulated offshore cash in December 2005 under the American Jobs Creation Act and ~~increased interest income.~~the subsequent use of the repatriated cash to lower domestic debt.

The effective tax rate for continuing operations in ~~2005~~2006 was ~~36.4%~~34.0%, compared with ~~29.8%~~36.4% in ~~2004.~~2005. Included in the effective tax rate for ~~2005~~2006 was the impact of ~~an additional $10.1~~a $5.3 million ~~expense~~benefit associated with ~~the repatriation of $124.7~~entering into favorable tax agreements with state tax authorities and closing state tax examinations for amounts less than originally anticipated. Partially offsetting this is a $4.9 million ~~in foreign earnings under the AJCA. Included in the~~impact resulting from restructuring charges for which a tax benefit could not be recognized. The 2005 effective tax rate for 2004 was the impact of the recognition of tax benefits totaling approximately $9.3 million, resulting from the IRS closing its examination of the Company’s tax returns for years 1999 through 2001.

Net income for 2005 was $161.9 million, compared with $151.2 million in 2004. This year-over-year increase in net income is largely attributable to higher operating profits, as previously discussed. In addition to the unusual items impacting operating profits discussed above and restructuring charges of approximately $13.1 million, net income in 2005 was negatively impacted by $10.1 million inreflects an additional tax expense associated with the repatriation of foreign earnings. Income for 2004 was positively impacted by $9.3 million as a result of the recognition of certain tax benefits and was negatively impacted by after tax charges for restructuring of approximately $14.4 million along with other unusual items previously discussed.$10.1

1822

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

million of income tax expense associated with the repatriation of foreign earnings under the American Jobs Creation Act.

Operating Segments

~~In 2004, in conjunction with its acquisition~~Consolidated operating profits, also referred to as “Income before income taxes” on the Consolidated Statements of CorrFlex, the Company reviewed the appropriateness of disclosures about its reportable segments in accordance with Statement of Financial Accounting Standards No. 131, ‘Disclosures about Segments of an Enterprise and Related Information’ (FAS 131). As a result of this review, the Company revised its reportable segments on a prospective basis beginning with the third quarter of 2004. Prior period information related to the Company’s reportable segments in this report has been restated to conform to the current presentation.

Prior to the third quarter of 2004, the Company reported its results in two segments, Industrial Packaging and Consumer Packaging. Beginning with the third quarter of 2004, the Company began reporting results in three segments – Tubes and Cores/Paper (formerly known as Engineered Carriers and Paper), Consumer Packaging and Packaging Services. Certain smaller operationsIncome, are ~~reported as All Other Sonoco.~~

~~As part~~comprised of the following:


($ in millions)	2006			2005			% Change
Consumer Packaging Segment	$	109.6		$	103.5			5.9	%
Tubes and Cores/Paper Segment		148.2			107.0			38.4	%
Packaging Services Segment		39.2			44.8			(12.6	)%
All Other Sonoco		49.1			40.6			20.9	%
Restructuring and related impairment charges		(26.0	)		(21.2	)		(22.3	)%
Interest expense, net		(45.3	)		(43.6	)		(3.9	)%

Consolidated operating profits	$	274.8		$	231.1			18.9	%

Segment results viewed by Company management to evaluate segment reporting changes in 2004, certain businesses previously reported in the Industrial Packaging reportable segment have been reclassified as components of All Other Sonoco. Upon the removal of these businesses from the Industrial Packaging reportable segment, the remaining operating segments are those specifically related to the production of tubesperformance do not include restructuring and cores, paper and recovered paper, and therefore, the name of this reportable segment was changed to Engineered Carriers and Paper. The Company’s specialty paperboard business, which was previously a component of the Consumer Packaging reportable segment, has been reclassified as a component of All Other Sonoco. In conjunction with the acquisition of CorrFlex in May 2004, the Company’s existing packaging services operations, which were previously included in the Consumer Packaging reportable segment, were combined with those of CorrFlex, which resulted in a newly created reportable segment – Packaging Services.

~~Effective December 31, 2005, the Company changed the name of the Engineered Carriers and Paper segment to Tubes and Cores/Paper because~~net interest charges. Accordingly, the term “tubes and cores” is more generally understood than “engineered carriers” in the marketplace for the primary products offered by the businesses in this segment. There has been no change to the businesses included in the segment.

~~Operating profits at the segmental level~~“segment operating profits” is defined as the ~~segments’~~segment’s portion of “Income before income taxes” ~~on the Company’s Condensed Consolidated Statements of Income, adjusted for~~excluding restructuring charges and net interest expense. Because segmental results are computed based on the manner in which the Company’s management reviews financial results, restructuring and net interest charges are not considered in the calculation of operating profits at the segmental level. General corporate expenses, with the exception of restructuring charges, interest, and income taxes, have been allocated as operating costs to each of the Company’s reportable segments and All Other Sonoco.

See Note 1615 to the Company’s Condensed Consolidated Financial Statements for more information on reportable segments.

Consumer Packaging Segment–—Results for this segment are presented ~~below:~~as follows:


($ in millions)	2005		2004		% Change			2006		2005		% Change

Trade sales	$	1,247.5	$	1,132.1		10.2	%	$	1,304.8	$	1,247.5		4.6	%
Operating profits		103.5		83.1		24.5	%
Segment operating profits									109.6		103.5		5.9	%
Depreciation, depletion and amortization		56.3		59.4		(5.2	)%		55.1		56.3		(2.1	)%
Capital spending		50.8		50.7		0.2	%		48.2		50.8		(5.2	)%

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~

~~$894~~ $925 million, up ~~6.6%~~3.5% from ~~2004,~~2005, and international sales were approximately ~~$353~~$380 million, up ~~20.6%~~7.4% from ~~2004.~~2005.

~~Operating~~Segment operating profits ~~in this segment~~ were favorably impacted by ~~increased volumes, as well as~~ productivity and purchasing initiatives, while selling price increases were partially offset by increased costs of energy, freight, material and labor. Continued high startup costs at the Company’s rigid plastics container plant in Wisconsin also ~~reduced~~dampened operating profits in the ~~segment. Higher raw material costs, primarily steel~~segment, as did operational issues and ~~aluminum, were largely offset by increased selling prices.~~the loss of a customer at the closures plant in Brazil.

Significant capital spending included numerous productivity and customer development projects in the United States and Europe. ~~The closures business continued to invest in new capacity in Brazil to support increasing global demand.~~

~~Tubes and Cores/Paper Segment~~–~~Results for this segment are presented below:~~

($ in millions) 2005 2004 % Change

Trade sales $ 1,482.1 $ 1,388.5 6.7 %
Operating profits 107.1 113.0 (5.2 )%
Depreciation, depletion and amortization 83.7 85.2 (1.8 )%
Capital spending 62.3 59.4 4.9 %

The increase in sales was due primarily to the recognition of a full year’s impact of the Sonoco-Alcore joint venture, which resulted in $86.6 million of higher sales. The impact of favorable exchange rates as the dollar weakened against foreign currencies along with increased selling prices, were partially offset by lower volume in North American and European tubes and cores. Volume, excluding the impact of the joint venture, declined approximately 2%, due primarily to declines in the textile and newsprint industries. Domestic sales decreased approximately $4 million, or .5%, to $758.0 million, and international sales increased approximately $98 million, or 15.6%, to $724.1 million.

Operating profits in this segment was unfavorably impacted by a charge of $12.5 million related to an increase in the environmental reserve at a Company subsidiary’s paper operations in Wisconsin; decreased volume, primarily in the textile and newsprint markets; and increased costs of energy, freight and labor. These increased costs were partially offset by year-over-year savings from productivity and purchasing initiatives, and a favorable price/cost relationship. A $5.6 million charge associated with an accounting adjustment from a wholly owned subsidiary in Spain, which was related to prior years, was recorded in 2004, as discussed above under “Other Special Charges and Income Items,” while 2005 results were impacted by a $3.0 million asset impairment charge related to operations in Asia.

This segment benefited by approximately $8.9 million by having energy hedges in place during the period. However, the nature of hedges is such that no assurances can be made concerning future benefits that may be realized from these hedges.

~~Significant capital spending included the rebuilding and modification of several paper mills, primarily in the United States, Mexico and Europe, and building new tube and core plants in Asia.~~

2023

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

~~2006. The nature of pension plans, however, is that estimates are made regarding investment returns and actuarial assumptions and no assurances can be made about the future funding requirements.~~

Cash flows used by investing activities decreased from $378.2 million in 2004 to $119.3 million in 2005. In 2004, the Company invested $267.0 million in eight acquisitions, the largest of which was CorrFlex. There were no significant acquisitions in 2005. Capital expenditures increased by $9.3 million to $129.1 million from $119.8 million in 2004. Capital expenditures in 2006 are expected to continue to be in the $130-million range.

Net cash used by financing activities totaled $165.6 million in 2005, compared with net cash provided by financing activities of $156 million in 2004. Debt was reduced by $117.8 million as a result of cash generated from operations and use of accumulated cash balances. Cash dividends increased 6.0% to $90.1 million during 2005.

Current assets decreased by $36.6 million to $885.5 million at December 31, 2005. This decrease is largely attributable to lower levels of cash, as a result of repatriating foreign earnings under the AJCA, allowing for the use of accumulated cash balances. In 2004, current assets increased by $166.8 million to $922.1 million. This increase due in part to the impact of acquisitions, resulted from higher levels of cash, accounts receivable and inventory. Current liabilities decreased by $19.4 million to $620.5 million at December 31, 2005. This decrease was due to ~~lower~~higher accounts payable, accrued ~~expenses~~wages and taxes payable, partially offset by ~~increases~~decreases in current portion of long-term debt. In 2004, current liabilities decreased by $39.7 million to $639.9 million. This decrease resulted from the repayment of $150 million in debentures in November 2004, partially offset by increases in accounts payable and accrued expenses.notes payable. The current ratio was 1.4 at ~~the end of 2005, compared with 1.4~~December 31, 2006 and ~~1.1 at the end of 2004 and 2003, respectively.~~2005.

Contractual Obligations

The following table summarizes contractual obligations at December 31, ~~2005:~~2006:


	Payments Due In										Payments Due In
($ in millions)	Total		2006		2007-2008		2009-2010		Beyond 2010		Total		2007		2008-2009		2010-2011		Beyond 2011

Debt obligations	$	781.6	$	124.5	$	4.5	$	103.6	$	549.0	$	764.0	$	51.9	$	0.6	$	100.0	$	611.5
Interest payments¹		272.3		25.0		50.0		48.2		149.1		354.0		39.5		79.0		72.2		163.3
Operating leases		132.6		31.3		45.2		26.4		29.7		135.7		28.9		43.2		25.8		37.8
Environmental remediation (U.S. Mills)		12.5		.5		12.0
Environmental remediation (U.S. Mills)³												11.7		11.7		—		—		—
Purchase obligations²		149.0		15.3		20.7		19.1		93.9		174.1		11.9		25.8		24.2		112.2

Total contractual obligations	$	1,348.0	$	196.6	$	132.4	$	197.3	$	821.7	$	1,439.5	$	143.9	$	148.6	$	222.2	$	924.8

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~

two and one-half year standstill period, subject to certain conditions, Ahlstrom shall have the right, over the next three and one-half years, to require (through a put option arrangement) the Company to purchase its shares in Sonoco-Alcore. During the seventh year, the Company will have the right to purchase the shares (through a call option arrangement). The price of the share purchase will be determined by a preset formula, which the Company believes approximates fair value, related to an earnings multiple at the time such shares might be put or called.

Capital Resources

Debt decreased by ~~$125.4~~$17.6 million to ~~$781.6~~$764.0 million at December 31, ~~2005, primarily due to funds~~2006, as cash flows from operations ~~and use of accumulated cash balances. These items~~ were partially offset by increased international borrowings at the Sonoco-Alcore joint venture in Europe, in Australia and Canada, in Brazil for acquisitions, and expansion at the Consumer Products joint venture, and for the startup of the Packaging Services plant in Poland.used to pay down debt.

The Company currently operates a commercial paper program totaling $350 million and has fully committed bank lines of credit supporting the program by a like amount. ~~In July 2004,~~On May 3, 2006, the Company entered into an amended and restated credit agreement to extend its $350 million bank line of credit to a new five-year ~~$350 million~~maturity. The amended and restated credit agreement ~~that~~ also provides the Company ~~with~~ the option to increase its credit line to ~~$450~~$500 million subject to the concurrence of its lenders. The Company intends to indefinitely maintain line of credit agreements fully supporting its commercial paper program. The five-year term on the existing line of credit allows commercial paper borrowings up to the maximum amount of the line of credit to be classified as long-term debt. In 2003, the Company’s commercial paper program totaled $450 million with a 364-day backstop line of credit of the same amount that could be extended under a term-out option. This credit line expired in July 2004 and was replaced by the five-year line of credit discussed above. At December 31, ~~2005,~~2006, the amount of the Company’s outstanding commercial paper was ~~$30~~$89 million, compared to ~~$180~~$30 million at December 31, ~~2004.~~2005. Consistent with the maturity of the supporting line of credit, the Company classifies outstanding commercial paper balances as long-term debt.

~~Interest~~One of the Company’s primary growth strategies is growth through acquisitions. The Company believes that cash on hand, cash generated from operations, and the available borrowing capacity under its amended and restated credit agreement will enable it to support this strategy. Although the Company currently has no intent to do so, it may require additional financing in order pursue its growth strategy. Although the Company believes that it has excess borrowing capacity beyond its current lines, there can be no assurance that such financing would be available or, if so, at terms that are acceptable to the Company.

Effective December 31, 2006, the Company adopted the balance sheet recognition provisions of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (FAS 158). FAS 158 requires companies to recognize the funded status of defined benefit plans on the balance sheet. Because FAS 158 is applied on a prospective basis, only the 2006 balance sheet is impacted by this change. Compared to what the balances would have otherwise been at December 31, 2006, applying FAS 158 reduced long-term assets by $260 million, increased total liabilities by $35 million, reduced long-term deferred tax liabilities by $114 million and reduced shareholders’ equity by $181.4 million. The majority of the impact relates to the Company’s U.S. qualified retirement plan which, although in an over-funded position, had a significant prepaid expense ~~totaled $51.6~~balance primarily related to unrecognized actuarial losses that was required to be reclassified to equity on an after-tax basis.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Shareholders’ equity decreased $44.2 million ~~for the year ended~~from December 31, 2005, ~~compared with $47.5~~to $1.22 billion at December 31, 2006. The decrease resulted mainly from net income of $195.1 million in 2006, stock option exercises of $82.7 million, and ~~$52.4~~a foreign currency translation gain of $37.2 million, ~~for the years ended December 31, 2004 and 2003, respectively. The increase in 2005, compared with 2004, was due to higher average interest rates in the United States, partially~~being more than offset by ~~lower U.S. debt levels~~cash dividends of $94.7 million, the repurchase of $82.7 million of the Company’s common stock, and a $181.4 million adjustment, net of tax, from the higher international debt levels referred to above. The increased interest expense was partially offset by an increase in interest income resulting from higher cash balances internationally (before the repatriation dividends mentioned above).

initial application of FASB Statement No. 158. Shareholders’ equity increased $110.4 million from December 31, 2004, to $1.26 billion at December 31, 2005. The increase resulted mainly from net income of $161.9 million in 2005 and stock option exercises of $37.4 million, reduced by dividends of $90.1 million, a foreign currency translation loss of $12.8 million, and minimum pension liability adjustments of ~~$.6~~$0.6 million. ~~Shareholders’ equity increased $138.7~~

During the first six months of 2006, the Company repurchased 2.5 million ~~from December 31, 2003,~~shares of Sonoco common stock for approximately $82.7 million. The shares were repurchased under an existing authorization to ~~$1.15 billion~~repurchase up to approximately 5.29 million shares. On April 19, 2006, the Company’s Board of Directors rescinded all previously approved stock repurchase programs in conjunction with the approval of a new program, which authorizes the repurchase of up to 5.0 million shares of the Company’s common stock. On February 7, 2007, the Company’s Board of Directors, in anticipation of a planned 1.5 million share repurchase, authorized the reinstatement of those shares to its existing 5.0 million share authorization. On February 8, 2007, the Company completed the repurchase of 1.5 million shares of its common stock at ~~December 31, 2004. The increase resulted mainly from net income~~a cost of ~~$151.2~~$56.7 million; accordingly, 5.0 million ~~in 2004, stock option exercises of $34.5 million and foreign currency translation of $36.9 million, reduced by dividends of $85.1 million and minimum pension liability adjustments of $4.5 million.~~shares remain available for repurchase. The Company did not repurchase any of its common stock in 2005, but plans to repurchase between 2 million and 2.5 million shares of its outstanding stock by the end of the first quarter of 2006. At December 31, 2005 and 2004, the Company had remaining authorizations from its Board of Directors to repurchase approximately 5,290,000 shares of common stock.2005.

Although the ultimate determination of whether to pay dividends is within the sole discretion of the Board of Directors, the Company plans to increase dividends as earnings grow. Dividends per common share were $.95 in 2006, $.91 in 2005 and $.87 in ~~2004, and $.84 in 2003.~~2004. On February 7, 2007, the Company declared a regular quarterly dividend of $.24 per common share payable on March 9, 2007, to shareholders of record on February 23, 2007.

Off-Balance Sheet Arrangements

The Company had no material off-balance sheet arrangements at December 31, ~~2005.~~

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~2006.

Risk Management

As a result of operating globally, the Company is exposed to ~~market risk from~~ changes in foreign exchange rates. The exposure is well diversified as the Company’s facilities are spread throughout the world, and the Company generally sells in the same countries where it produces. The Company monitors these exposures and may use traditional currency swaps and forward foreign exchange contracts to hedge a portion of the forecasted transactions that are denominated in foreign currencies, foreign currency assets and liabilities or net investment in foreign subsidiaries. The Company’s foreign operations are exposed to political and cultural risks, but ~~they~~the risks are mitigated by diversification and the relative stability of the countries in which the Company has significant operations.

The Company is exposed to interest-rate fluctuations as a result of using debt as a source of financing its operations. When necessary, the Company uses traditional, unleveraged interest-rate swaps to manage its mix of fixed and variable rate debt to maintain its exposure to interest rate movements within established ranges. ~~All interest-rate swaps qualified as fair-value hedges, whereby fixed interest rates are swapped for floating rates.~~No such instruments were outstanding at December 31, 2006.

The Company is a purchaser of commodities such as recovered paper, energy, steel, aluminum and resin. The Company does not engage in material hedging ~~of many commodities,~~activities, other than for energy, because there is usually a high correlation between the commodity cost and the ultimate selling price of its products. Commodities are generally purchased at market or fixed prices that are established with the vendor as part of the purchase process for quantities expected to be consumed in the ordinary course of business. On occasion, where the correlation between selling price and commodity price is less direct, the Company may enter into commodity futures or swaps to reduce the effect of price fluctuations.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

At the end of ~~2005,~~2006, the Company had ~~commodity swaps~~contracts outstanding to fix the costs of a portion of ~~raw materials~~commodity, energy and ~~energy~~foreign exchange risks for ~~2006~~2007 through June ~~2008.~~2010. The swaps qualify as cash flow hedges under Statement of Financial Accounting Standards No. 133, ‘Accounting for Derivative Instruments and Hedging Activities’ ~~(“FAS 133”)~~(FAS 133). As of December 31, ~~2005,~~2006, the Company had swaps to cover approximately ~~4.4~~8.0 million ~~MMBTU’s~~MMBTUs of natural gas. The hedged natural gas quantities at ~~an average cost~~this date represent approximately 75%, 56%, 31%, and 6% of ~~$5.91 per MMBTU.~~anticipated U.S. and Canadian usage for 2007, 2008, 2009 and 2010, respectively. The use of derivatives to hedge other commodities or foreign exchange was not material as of that date.

The fair market value of ~~commodity swaps~~derivatives was a net unfavorable position of $3.2 million ($2.1 million after tax) and a net favorable position of $17.5 million ($11.2 million after tax) ~~and $3.4 million ($2.2 million after tax)~~ at December 31, 2006 and 2005, ~~and 2004,~~ respectively. ~~Commodity swaps~~Derivatives having a favorable position are reflected as a component of “Other Assets” on the Company’s Consolidated Financial Statements while those having an unfavorable position are reflected as a component of “Other Liabilities.” Derivatives are marked to fair value using published market prices, if available, or estimated values based on current price quotes and a discounted cash flow model. See Note 109 to the Consolidated Financial Statements for more information on financial instruments.

~~Except for the impact on energy and raw material prices, inflation did not have a material effect on the Company’s operations in 2005, 2004 or 2003.~~

The Company is subject to various federal, state and local environmental laws and regulations concerning, among other matters, solid waste disposal, wastewater effluent and air emissions. Although the costs of compliance 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, both owned and not owned by the Company. These regulatory actions and a small number of private party lawsuits are believed to represent the Company’s largest potential environmental liabilities. Accordingly, the Company has accrued ~~approximately $16.8~~$15.3 million (including ~~$12.5~~$11.7 million associated with U.S. Mills) at December 31, ~~2005,~~2006, compared with ~~approximately $4.4~~

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~

$16.8 million at December 31, ~~2004,~~2005 (including $12.5 million associated with U.S. Mills), with respect to these sites. See “Other Special Charges, Income Items and Contingencies” above, Item 3 — Legal Proceedings, and Note 1413 to the Consolidated Financial Statements for more information on environmental matters.

Results of Operations ~~2004~~2005 versus ~~2003~~2004

~~Operating Revenue~~

~~Consolidated~~Net income for 2005 was $161.9 million, compared with $151.2 million in 2004. This year-over-year increase in net ~~sales for 2004 were $3.16 billion, versus $2.76 billion in 2003, an increase of approximately $397 million.~~

~~The components of the sales change were approximately:~~

($ in millions)

Volume $ 124
Selling price 43
Currency exchange rate 70
Acquisitions 148
Other 12

Total sales increase $ 397

~~Sales for the year were~~income is largely attributable to higher due to increased volumes, higher selling prices, the impact of acquisitions and the favorable impact of foreign exchange rates, as the dollar weakened against foreign currencies. Company wide volume, including the impact of acquisitions, was approximately 10% higher than 2003. Domestic sales were $2.11 billion, up 13.6% from 2003, and international sales were $1.05 billion, up 16.1% over 2003.

~~Operating Profits~~

~~Consolidated~~ operating profits in 2005, which ~~represent “Income before income taxes” on the Consolidated Statements of Income for 2004 and 2003, are comprised of the following:~~

($ in millions) 2004 2003 % Change

Consumer Packaging Segment $ 83.1 $ 78.7 5.6 %
Tubes and Cores/Paper Segment 113.0 103.0 9.7 %
Packaging Services Segment 30.3 7.9 >100 %
All Other Sonoco 32.0 19.0 68.4 %
Restructuring and Related Impairment charges (19.0 ) (50.1 ) 62.1 %
Interest expense, net (42.1 ) (50.2 ) 16.1 %

Consolidated operating profits $ 197.3 $ 108.3 82.2 %

~~Operating profits for 2004~~ increased primarily due to ~~higher volumes, the accretive impact of acquisitions and~~ savings resulting from ongoing productivity and purchasing initiatives. The Company experienced a favorable price/cost relationship as sales price increases more than offset higher material costs, most notably in the Tubes and Cores/Paper segment. The full-year impact of acquisitions also contributed to earnings growth. Operating profits for ~~2004~~2005 were negatively impacted by higher energy, labor and freight costs, ~~product~~as well as startup costs associated with the Company’s ~~new multi-line steel easy-open closure operation in Brazil and new~~ rigid plastic container ~~plants~~plant in ~~California and Wisconsin, as well~~Wisconsin. Volume, excluding acquisitions, while contributing favorably to the sales growth, had a negligible impact on profits, as the ~~costs associated with~~change in the ~~movement~~mix of production between plants. The Company experienced increased costs for raw materials, primarily for old corrugated containers (“OCC”), the Company’s primary raw material, and steel. The higher OCC costs were nearly offset through price increases for tubes and cores and for trade sales of recovered paper, and a significant portionproducts sold had an unfavorable effect on operating profits. In addition, approximately $24.8 million of the increased ~~steel costs were offset~~sales in the ~~first quarter of 2005, due to contractual pass through provisions.~~service centers were on a pass-through basis, with no significant gross margin, and therefore had very little impact on profits. Gross profit as a percentage of net sales was 18.7% in 2005, compared with 18.2% in 2004, compared with 18.1% in 2003. As previously discussed under “Restructuring Charges, Unusual Items and Other Activities,” operating profits included $19 million and $50.1 million of restructuring charges in 2004 and 2003, respectively.

Selling, general and administrative expenses as a percentage of sales remained relatively flat at approximately 10%. In 2004, the Company continued to focus on controlling fixed cost spending, as it realized the majority of the benefits from restructuring actions started in 2003.2004.

2528

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Operating Revenue

Consolidated net sales for 2005 were $3.53 billion, versus $3.16 billion in 2004, resulting in an increase of approximately $373 million.

The components of the sales change were approximately:


($ in millions)

Volume	$	100
Selling price		60
Currency exchange rate		43
Acquisitions		167
Other		3

Total sales increase	$	373

Sales increased primarily due to the full-year impact of the CorrFlex acquisition and the Sonoco-Alcore joint venture, which increased sales by $80 million and $87 million, respectively. Company-wide volume, excluding the increased service revenue in the service centers, which was on a pass-through basis, was approximately 2.4% higher than 2004 levels, driven by increases in the Consumer Packaging and Packaging Services segments. Higher selling prices for rigid paper and plastic packaging, closures, North American tubes and cores, paperboard, wire and cable reels, and molded and extruded plastics, along with the favorable impact of exchange rates as the dollar weakened against foreign currencies, also contributed to the sales gain. Domestic sales were $2.3 billion, up 9.1% from 2004, and international sales were $1.2 billion, up 17.4% over 2004, driven primarily by the impact of a full-year of sales from Sonoco-Alcore and the impact of currency translation discussed above.

Costs and Expenses

During 2005, the Company experienced postretirement and defined-benefit pension expense of $43.0 million, versus $45.8 million in 2004, ~~income before income taxes~~a decrease of $2.3 million. The market value of U.S. defined benefit pension plan assets increased approximately 7% in 2005 and 13% in 2004. Investment returns on assets held by the Company’s benefit plans are used to lower the Company’s cost of providing pension and postretirement benefits. Although there was ~~negatively impacted by~~no requirement under the Employee Retirement Income Security Act of 1974 to fund the U.S. defined benefit pension plan, the Company contributed $68.0 million to the plan during the year to maintain its fully funded status on an accumulated benefit obligation basis. Other pension plans in the Company were not fully funded as of December 31, 2005. These plans, including the Supplemental Executive Retirement Plan, and several international plans had accrued liabilities associated with their plans of $82.3 million and $51.3 million as of December 31, 2005, respectively. For 2005, the Company used 8.5% as its expected long-term rate of return for U.S. pension and postretirement benefit plan assumptions.

Selling, general and administrative expenses as a percentage of sales increased slightly during the year to 10.3% from 9.8% in 2004. Included in 2005 expenses was the $12.5 million expense of establishing an environmental reserve at the Company’s subsidiary in Wisconsin, while 2004 costs included charges of ~~approximately~~ $5.6 million pretax, which the Company incurred to recognize commitments to pay future costs associated with new executive life insurance benefits ~~as discussed above under “Restructuring Charges, Unusual Items~~ and ~~Other Activities – Other Special Charges and Income Items.” Income before income taxes for 2004 was also negatively impacted by~~ a charge of approximately $4.5 million pretax associated with an unfavorable legal judgment that was entered against the Company.

During 2004, the Company experienced lower year-over-year pension and postretirement expense of approximately $11 million pretax, primarily related to the impact of the Company’s adoption of FASB Staff Position 106-2, ‘Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003’ (“FSP 106-2”). As ~~a result of the Company’s adoption of FSP 106-2, the accumulated postretirement benefit obligation was reduced by approximately $48.9~~previously discussed, operating profits included $21.2 million and ~~net periodic benefit costs were reduced by approximately $9.1~~$19.0 million ~~for 2004. The market value~~ of ~~U.S. benefit plan assets increased approximately 13%~~restructuring charges in 2005 and ~~26% in~~ 2004, ~~and 2003,~~ respectively. Investment returns earned on assets held by the Company’s benefit plans are used to lower the Company’s cost of providing pension and postretirement benefits. There were no requirements under ERISA to fund the plan. For 2004, the Company used 8.5% as its expected long-term rate of return for U.S. pension and postretirement benefit plan assumptions.

Research and development costs, all of which were charged to expense, ~~were~~totaled $14.7 million and $15.4 million in 2005 and ~~$14.2 million in~~ 2004, ~~and 2003,~~ respectively. Significant projects in ~~Sonoco’s~~the Company’s Tubes and Cores/Paper segment during ~~2004~~2005 included efforts to design and develop a new generation of products for the construction industry, and to enhance performance characteristics of the Company’s tubes and cores in the textile, film and paper packaging areas, as well as projects aimed at enhancing productivity. The Consumer Packaging

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

segment continued to invest in ~~new materials technology~~development of specialty metal closures, flexible packaging enhancements and ~~new process technology for a range of packaging options, including composite cans and other forms of shaped packaging during 2004.~~rigid plastic containers technology.

Net interest expense ~~decreased~~increased by approximately ~~$8.2~~$1.5 million from ~~2003.~~$42.1 million in 2004 to $43.6 million in 2005. The ~~decrease~~increase in ~~net-interest~~net interest expense resulted primarily from ~~lower~~higher average interest rates, partially offset by decreased debt levels and increased interest income.

The effective tax rate ~~for continuing operations~~ in ~~2004~~2005 was ~~29.8%~~36.4%, compared with ~~34.8%~~29.8% in ~~2003.~~2004. Included in the effective tax rate for 2005 was the impact of an additional $10.1 million expense associated with the repatriation of $124.7 million in foreign earnings under the American Jobs Creation Act. Included in the effective tax rate for 2004 was the impact of the recognition of ~~certain tax benefits. These~~ tax benefits ~~totaled~~totaling approximately ~~$9.3~~$9.7 million, ~~and resulted~~resulting from the conclusions of examinations by the IRS ~~closing its examination of the Company’s~~and state tax returns for years 1999 through 2001. Also included in the effective tax rate for 2004 are tax benefits associated with the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which were partially offset by certain non-deductible foreign restructuring charges. Included in the effective tax rate for 2003 is the impact of certain non-deductible foreign restructuring charges.

Net income for 2004 was $151.2 million, versus $138.9 million (including discontinued operations) in 2003. Income from continuing operations for 2004 was $151.2 million, compared with $78.2 million in 2003. Net income included restructuring charges of $14.4 million after tax, compared with restructuring charges of $36.8 million after tax in 2003. 2004 net income also included after-tax charges of $3.6 million, which the Company incurred to recognize vested commitments to pay future costs associated with the new executive life insurance benefits that replaced split-dollar life agreements made with key executives since 1995; $5.6 million related to prior years for an adjustment in the expenses reported for the Company’s wholly owned subsidiary in Spain; and approximately $2.9 million related to an unfavorable legal judgment against the Company. Although foreign exchange rates had an impact on sales, they did not have a significant impact on earnings in 2004.

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~

estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources. Actual results, under conditions and circumstances different from those assumed, may differ from estimates. The impact and any associated risks related to estimates, assumptions and accounting policies are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Consolidated Financial Statements, if applicable, where such estimates, assumptions and accounting policies affect the Company’s reported and expected financial results.

The Company believes the accounting policies discussed in the Notes to the Consolidated Financial Statements on pages F-7 through ~~F-39~~F-41 are critical to ~~its business operations, and~~understanding the ~~understanding~~results of ~~results of~~its operations. The following discussion represents those policies ~~which most~~that involve the more significant judgments and estimates used in the preparation of ~~its~~the Company’s Consolidated Financial Statements.

Impairment of Long-lived, Intangible, and ~~Intangible~~Other Assets

Assumptions and estimates used in the evaluation of potential impairment may affect the carrying values of long-lived, intangible and other assets and possible impairment expense in the Company’s Consolidated Financial Statements. The Company evaluates its long-lived assets (property, plant and equipment) ~~and~~, definite-lived intangible assets, and other assets (including notes receivable and preferred stock) for impairment whenever indicators of impairment exist, or when it commits to sell the

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

asset. ~~The accounting standards require that if~~If the sum of the undiscounted expected future cash flows from a long-lived asset or definite-lived intangible asset is less than the carrying value of that asset, an asset impairment charge ~~must be~~is recognized. The amount of the impairment charge is calculated as the excess of the asset’s carrying value over its fair value, which generally represents the discounted future cash flows from that asset, or in the case of assets the Company evaluates for sale, at fair value less costs to sell. A number of significant assumptions and estimates are involved in developing operating cash flow forecasts for the Company’s discounted cash flow model, including markets and market share, sales volumes and prices, costs to produce, working capital changes and capital spending requirements. The Company considers historical experience, and all available information at the time the fair values of its assets are estimated. However, fair values that could be realized in an actual transaction may differ from those used to evaluate impairment. In addition, changes in the ~~impairment of long-lived assets and definite-lived intangible assets. Therefore,~~ assumptions and estimates ~~used~~may result in ~~the determination of impairment losses may affect the carrying value of long-lived and intangible assets, and possible impairment expense in the Company’s Consolidated Financial Statements.~~a different conclusion regarding impairment.

Impairment of Goodwill

In accordance with Statement of Financial Accounting Standards No. 142, ‘Goodwill and Other Intangible Assets’ ~~(“FAS 142”)~~(FAS 142), the Company evaluates its goodwill for impairment at least annually, and more frequently if indicators of impairment are present. FAS 142 requires that if the fair value of a reporting unit is less than its carrying value including goodwill, ~~(Step I),~~ an impairment charge for goodwill must be recognized. The impairment charge is calculated as the difference between the implied fair value of the reporting unit goodwill and its carrying ~~value (Step II).~~value.

The Company’s reporting units are the same as its operating segments, as determined in accordance with FAS 131. Accordingly, these reporting units reflect the way the Company manages its business, and impairment testing at this reporting unit level reflects how the Company is managed overall. The components within these reporting units serve similar types of customers, provide similar services, and operate in similar regulatory environments. The benefits of goodwill are shared by each component.

In performing the impairment evaluation required by FAS 142, the Company estimates the fair value of each reporting unit and compares it to the carrying amount of that reporting unit. ~~To the extent~~If the carrying amount of a reporting unit exceeds the fair value of that reporting ~~unit; the Company is required to perform the second step of the impairment test. In this step,~~unit, the Company compares the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized), and liabilities of the reporting unit. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Income Taxes

The Company records an income tax valuation allowance when the realization of certain deferred tax assets, net operating losses and capital loss carryforwards is not likely. These deferred tax assets represent expenses recognized for financial reporting purposes, which will result in tax deductions over varying future periods. Certain judgments, assumptions and estimates may affect the ~~carrying value~~amounts of the valuation allowance and deferred income tax expense in the Company’s Consolidated Financial Statements. Additionally, the Company periodically reviews assumptions and estimates of the Company’s probable tax obligations using historical experience in tax jurisdictions and informed judgments.

Stock Compensation Plans

~~As permitted by~~Effective January 1, 2006, the Company adopted the fair value method of accounting for share-based compensation arrangements in accordance with Statement of Financial Accounting Standards No. 123 ~~‘Accounting for Stock-Based Compensation’ (“FAS 123”~~(revised 2004), ‘Share-Based Payment’ (FAS 123(R)), ~~the Company has chosen to continue to account for stock-based compensation~~ using the ~~intrinsic value~~modified prospective method ~~prescribed in Accounting Principles Board Opinion No. 25, ‘Accounting~~of transition. Using the modified prospective method, compensation expense is recognized beginning at the effective date of adoption of FAS 123(R) for ~~Stock Issued~~all share-based payments (i) granted after the effective date of adoption and (ii) granted prior to ~~Employees,’~~the effective date of adoption and ~~its related interpretations. Accordingly, compensation cost for~~that remain unvested on the date of adoption. The Company had no unvested stock options ~~is measured as the excess, if any, of the quoted market price of the Company’s stock~~outstanding at the date of adoption. The Company recognizes share-based compensation cost ratably over expected vesting periods.

In accordance with the ~~grant over~~adoption of FAS 123(R), the ~~amount an employee must pay~~Company chose to ~~acquire~~adopt the ~~stock. Compensation cost for performance~~short-cut method to determine the pool of windfall tax benefits as it relates to stock-based compensation.

Certain awards are in the form of contingent stock ~~options is recognized over~~units where both the ultimate number of units and the vesting period are performance-based. The amount and ~~is recorded based on the quoted market price~~timing of ~~the Company’s stock at the end of the period.~~

~~The Company records~~ compensation expense associated with these performance-based ~~stock compensation plans~~awards are based on estimates regarding future performance using ~~vesting assumptions that are derived from performance~~ measures as defined in the ~~plans.~~plan. In ~~2005,~~2006, the performance measures consisted of Earnings ~~Per~~per Share and Return on Net Assets Employed. ~~Certain judgments, assumptions and~~Changes in estimates ~~in connection with~~regarding the future achievement of these performance measures may ~~affect~~result in significant fluctuations from period to period in the amount of ~~accrued~~ compensation expense ~~and performance-based stock compensation expense~~reflected in the Company’s Consolidated Financial Statements.

The Company uses the binomial option-pricing model to determine the grant date fair value of its stock options and stock appreciation rights. The binomial option-pricing model requires the input of highly subjective assumptions. Management routinely assesses the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time that result in changes to these assumptions and methodologies, which could materially impact the fair value determination .

Pension and Postretirement Benefit Plans

The Company has significant pension and postretirement benefit costs that are developed from actuarial valuations. The actuarial valuations employ key assumptions, which are particularly important when determining the Company’s projected liabilities for pension and other postretirement benefits. ~~Key~~The key actuarial assumptions used at December 31, 2006, in determining the projected benefit obligation and the accumulated benefit obligation ~~and net periodic benefit cost (income)~~ for U.S. retirement and retiree health and life insurance plans include: a discount rate of ~~5.5%~~5.84%, 5.77%, and 5.68% for the qualified retirement plan, non-qualified retirement plans, and retiree health and life insurance plan, respectively; an expected long-term rate of return on plan assets of 8.5%; and a rate of compensation increase ranging from 4.69% to ~~determine benefit obligations, a~~4.88%. A discount rate of ~~5.75%~~5.50% was used to determine net periodic benefit cost ~~(income), an expected long-term rate of return of 8.5% and a rate of compensation increase of 4.6%. These assumptions are as of December 31, 2005.~~for 2006.

The Company adjusts its discount ~~rate annually in relationship to movements in~~rates at the end of each fiscal year based on yield curves of high-quality debt ~~instruments.~~instruments over durations that match the expected benefit payouts of each plan. The long-term rate of return assumption is based on the Company’s historical plan return ~~performance.~~performance and a range of probable

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~

average annual medical cost increase over the duration of the plan’s liabilities. It provides for real growth in medical costs in excess of the overall ~~inflationary~~inflation level.

During ~~2005,~~2006, the Company incurred total pension and postretirement benefit expenses of approximately ~~$43.0~~$44.1 million, compared with ~~$45.8~~$43.0 million during ~~2004.~~2005. The 2006 amount is net of $83.6 million of expected returns on plan assets at the assumed rate of 8.5%, and includes interest cost of $69.5 million at a discount rate of 5.50%. The 2005 amount is net of $75.2 million of expected returns on plan assets at the assumed rate of 8.5%, and includes interest cost of $67.6 million at a discount rate of 5.75%. ~~The 2004 amount is net of $69.5 million of expected returns on plan assets at the assumed rate of 8.5%, and includes interest cost of $66.4 million at a discount rate of 6.25%.~~ During ~~2005,~~2006, the Company made contributions to pension plans of ~~$77.0~~$10.5 million and postretirement plans of approximately ~~$8.1~~$5.0 million. The contribution amount varies from year to year depending on factors including asset market ~~asset~~value volatility and interest rates. Although the cash portion of these contributions reduced cash flows from operations during the year, under Statement of Financial Accounting Standards No. 87, ‘Employers’ Accounting for Pensions’ (FAS 87), they did not have an immediate significant impact on pension expense. ~~Unrecognized~~Cumulative net actuarial losses were approximately ~~$496.8~~$393.1 million at December 31, ~~2005,~~2006, and are primarily the result of poor asset performance during 2000 through 2002. The amortization period for ~~unrecognized~~ losses/gains is approximately 11 years for the portion outside the 10% corridor as defined by FAS 87, except for curtailments, which would result in accelerated expense.

~~The~~Other assumptions and estimates impacting the projected ~~liability~~liabilities of these plans ~~will be affected by assumptions regarding~~include inflation, ~~investment returns, market interest~~participant withdrawal and mortality rates ~~changes in the number of plan participants~~ and ~~changes in the benefit obligations, and laws and regulations pertaining to benefit obligations.~~retirement ages. The Company annually reevaluates assumptions used in projecting the pension and postretirement liabilities and associated expense. These judgments, assumptions and estimates may affect the carrying value of pension and postretirement plan net assets and liabilities and pension and postretirement plan expenses in the Company’s Consolidated Financial Statements. The ~~effect of lowering~~sensitivity to changes in the ~~selected~~critical assumptions ~~excluding any changes to the investment base, is shown below~~ for the ~~year ended~~Company’s U.S. plans as of December 31, ~~2005, for U.S. plans, assuming no changes in benefit levels in 2005:~~2006 is as follows:

December 31, 2005

December 31, 2006

Projected Benefit

Assumption

Percentage Point

Obligation

2005 Expense

Percentage Point

Obligation

2006 Expense

($ in millions)

Change

Higher (Lower)

Change

Higher (Lower)

Discount rate

-.25 pts

33.7

3.3

-.25 pts

31.3

3.3

Expected return on assets

-.25 pts

N/A

1.8

-.25 pts

N/A

1.9

Report of Independent Registered Public Accounting Firm

To the Shareholders and Directors of Sonoco Products Company:

We have completed integrated audits of Sonoco Products Company’s ~~2005 and 2004~~ consolidated financial statements and of its internal control over financial reporting as of December 31, ~~2005, and an audit of its 2003 consolidated financial statements~~2006 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, ~~on Sonoco Products Company’s 2005, 2004, and 2003 consolidated financial statements and on its internal control over financial reporting as of December 31, 2005,~~ based on our audits, are presented below.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Sonoco Products Company and its subsidiaries at December 31, ~~2005~~2006 and ~~2004,~~2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, ~~2005~~2006 in conformity with accounting principles generally accepted in the United States of America. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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 our opinion.

As discussed in Notes 10 and 11 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation as a result of the adoption of Statement of Financial Accounting Standards No. 123(R), “Share Based Payment;” and adopted the provisions of Statement of Financial Accounting Standards No. 158, “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans,” effective December 31, 2006.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, ~~2005~~2006 based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission ~~(“COSO”)~~(COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2005,~~2006, based on criteria established inInternal Control — Integrated Frameworkissued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

F-1

CONSOLIDATED BALANCE SHEETS
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES


(Dollars and shares in thousands)
At December 31	2005			2004			2006			2005

Assets

Current Assets
Cash and cash equivalents	$	59,608		$	117,725		$	86,498		$	59,608
Trade accounts receivable, net of allowances of $8,325 in 2005 and $8,286 in 2004		413,209			390,024
Trade accounts receivable, net of allowances of $8,983 in 2006 and $8,325 in 2005								459,022			413,209
Other receivables		45,225			37,457			33,287			45,225
Inventories
Finished and in process		124,891			123,924			126,067			124,891
Materials and supplies		193,425			191,087			177,781			193,425
Prepaid expenses		23,068			36,386			27,611			23,068
Deferred income taxes		26,074			25,509			32,532			26,074

		885,500			922,112			942,798			885,500
Property, Plant and Equipment, Net		943,951			1,007,295			1,019,594			943,951
Goodwill		573,903			570,508			667,288			573,903
Other Intangible Assets		73,037			88,790			95,885			73,037
Prepaid Pension Costs		281,904			237,200			—			281,904
Other Assets		223,445			215,414			191,113			223,445

Total Assets	$	2,981,740		$	3,041,319		$	2,916,678		$	2,981,740


Liabilities and Shareholders’ Equity

Current Liabilities
Payable to suppliers	$	265,219		$	274,224		$	357,856		$	265,219
Accrued expenses and other		186,559			219,123			179,462			186,559
Accrued wages and other compensation		44,082			36,850			63,925			44,082
Notes payable and current portion of long-term debt		124,530			93,754			51,903			124,530
Accrued taxes		96			15,935			6,678			96

		620,486			639,886			659,824			620,486
Long-term Debt		657,075			813,207			712,089			657,075
Pension and Other Postretirement Benefits		173,939			148,214			209,363			173,939
Deferred Income Taxes		146,981			168,776			52,809			146,981
Other Liabilities		119,945			118,357			63,525			119,945
Commitments and Contingencies
Shareholders’ Equity
Serial preferred stock, no par value
Authorized 30,000 shares
0 shares issued and outstanding as of December 31, 2005 and 2004
Common shares, no par value
Authorized 300,000 shares
99,988 and 98,500 shares issued and outstanding at December 31, 2005 and 2004, respectively		7,175			7,175
Serial preferred stock, no par value Authorized 30,000 shares 0 shares issued and outstanding as of December 31, 2006 and 2005
Common shares, no par value Authorized 300,000 shares 100,550 and 99,988 shares issued and outstanding at December 31, 2006 and 2005, respectively								7,175			7,175
Capital in excess of stated value		418,668			376,750			430,002			418,668
Accumulated other comprehensive loss		(106,389	)		(103,155	)		(262,305	)		(106,389	)
Retained earnings		943,860			872,109			1,044,196			943,860

Total Shareholders’ Equity		1,263,314			1,152,879			1,219,068			1,263,314

Total Liabilities and Shareholders’ Equity	$	2,981,740		$	3,041,319		$	2,916,678		$	2,981,740

CONSOLIDATED STATEMENTS OF INCOME
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES


(Dollars and shares in thousands except per share data)
Years ended December 31	2005			2004			2003			2006			2005			2004

Net sales	$	3,528,574		$	3,155,433		$	2,758,326		$	3,656,839		$	3,528,574		$	3,155,433
Cost of sales		2,867,623			2,580,643			2,259,887			2,951,799			2,867,623			2,580,643
Selling, general and administrative expenses		364,967			316,403			289,839			358,952			364,967			316,403
Restructuring charges		21,237			18,982			50,056			25,970			21,237			18,982

Income before interest and taxes		274,747			239,405			158,544			320,118			274,747			239,405
Interest expense		51,559			47,463			52,399			51,952			51,559			47,463
Interest income		(7,938	)		(5,400	)		(2,188	)		(6,642	)		(7,938	)		(5,400	)

Income before income taxes		231,126			197,342			108,333			274,808			231,126			197,342
Provision for income taxes		84,174			58,858			37,698			93,329			84,174			58,858

Income before equity in earnings of affiliates/minority interest in subsidiaries		146,952			138,484			70,635			181,479			146,952			138,484
Equity in earnings of affiliates/minority interest in subsidiaries		14,925			12,745			7,543

Income from continuing operations		161,877			151,229			78,178
Income from discontinued operations, net of income taxes		¾			¾			60,771
Equity in earnings of affiliates/minority interest in subsidiaries, net of tax											13,602			14,925			12,745

Net income	$	161,877		$	151,229		$	138,949		$	195,081		$	161,877		$	151,229


Average common shares outstanding:
Weighted average common shares outstanding:
Basic		99,336			98,018			96,819			100,073			99,336			98,018
Assuming exercise of options		1,082			929			310
Assuming exercise of awards											1,461			1,082			929
Diluted		100,418			98,947			97,129			101,534			100,418			98,947

Per common share
Net income
Basic:
From continuing operations	$	1.63		$	1.54		$	.81
From discontinued operations	$	¾		$	¾		$	.63
Net income	$	1.63		$	1.54		$	1.44

Diluted:
From continuing operations	$	1.61		$	1.53		$	.80
From discontinued operations	$	¾		$	¾		$	.63
Net income	$	1.61		$	1.53		$	1.43
Net income:
Basic										$	1.95		$	1.63		$	1.54
Diluted										$	1.92		$	1.61		$	1.53

Cash dividends — common	$	.91		$	.87		$	.84		$	.95		$	.91		$	.87

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES


										Accumulated																	Accumulated
								Capital in		Other														Capital in			Other
	Comprehensive			Common Shares				Excess of		Comprehensive			Retained			Comprehensive			Common Shares					Excess of			Comprehensive			Retained
(Dollars and shares in thousands)	Income			Outstanding		Amount		Stated Value		Loss			Earnings			Income			Outstanding			Amount		Stated Value			Loss			Earnings

January 1, 2003					96,380	$	7,175	$	324,295	$	(212,164	)	$	748,119
January 1, 2004																				96,969		$	7,175	$	337,136		$	(136,091	)	$	805,940
Net income	$	138,949												138,949		$	151,229														151,229
Other comprehensive income (loss):
Translation gain		77,903															36,917
Minimum pension liability adjustment, net of tax		(3,403	)														(4,479	)
Derivative financial instruments, net of tax		1,573															498

Other comprehensive income		76,073									76,073						32,936											32,936

Comprehensive income	$	215,022														$	184,165

Cash dividends														(81,128	)																(85,060	)
Exercise of stock options					589				8,752
Stock-based compensation									4,089

December 31, 2003					96,969		7,175		337,136		(136,091	)		805,940
Net income	$	151,229												151,229
Other comprehensive income (loss):
Translation gain		36,917
Minimum pension liability adjustment, net of tax		(4,479	)
Derivative financial instruments, net of tax		498

Other comprehensive income		32,936									32,936

Comprehensive income	$	184,165

Cash dividends														(85,060	)
Exercise of stock options					1,531				34,463
Impact of stock awards																				1,531					34,463
Stock-based compensation									5,151																5,151

December 31, 2004					98,500		7,175		376,750		(103,155	)		872,109						98,500		$	7,175	$	376,750		$	(103,155	)	$	872,109
Net income	$	161,877												161,877		$	161,877														161,877
Other comprehensive income (loss):
Translation loss		(12,844	)														(12,844	)
Minimum pension liability adjustment, net of tax		568															568
Derivative financial instruments, net of tax		9,042															9,042

Other comprehensive loss		(3,234	)								(3,234	)					(3,234	)										(3,234	)

Comprehensive income	$	158,643														$	158,643

Cash dividends														(90,126	)																(90,126	)
Exercise of stock options					1,488				37,370
Impact of stock awards																				1,488					37,370
Stock-based compensation									4,548																4,548

December 31, 2005					99,988	$	7,175	$	418,668	$	(106,389	)	$	943,860						99,988		$	7,175	$	418,668		$	(106,389	)	$	943,860
Net income																$	195,081														195,081
Other comprehensive income (loss):
Translation gain																	37,203
Minimum pension liability adjustment, net of tax																	1,517
Derivative financial instruments, net of tax																	(13,240	)

Other comprehensive income																	25,480											25,480

Comprehensive income																$	220,561

Adjustment to initially apply FASB Statement No. 158, net of tax																												(181,396	)
Cash dividends																															(94,745	)
Impact of stock awards																				3,062					82,655
Shares repurchased																				(2,500	)				(82,668	)
Stock-based compensation																									11,347

December 31, 2006																				100,550		$	7,175	$	430,002		$	(262,305	)	$	1,044,196

CONSOLIDATED STATEMENTS OF CASH FLOWS
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES


(Dollars in thousands)
Years ended December 31	2005			2004			2003			2006			2005			2004

Cash Flows from Operating Activities
Net income	$	161,877		$	151,229		$	138,949		$	195,081		$	161,877		$	151,229
Adjustments to reconcile net income to net cash provided by operating activities
Asset impairment		9,515			6,153			8,381			7,750			9,515			6,153
Depreciation, depletion and amortization		163,074			163,928			163,234			164,863			163,074			163,928
Non-cash share-based compensation expense											11,347			4,554			5,144
Equity in earnings of affiliates/minority interest in subsidiaries		(14,925	)		(12,745	)		(7,543	)		(13,602	)		(14,925	)		(12,745	)
Cash dividends from affiliated companies		6,758			7,114			11,327			9,496			6,758			7,114
(Gain) loss on disposition of assets		(555	)		2,460			1,228			(4,644	)		(555	)		2,460
Gain on sale of High Density Film business		¾			¾			(49,433	)
Non-cash tax effect of nonqualified stock options		2,753			3,013			410
Tax effect of nonqualified stock options											10,580			2,753			3,013
Excess tax benefit of share-based compensation											(10,580	)		—			—
Deferred taxes		(24,722	)		5,310			11,175			(15,265	)		(24,722	)		5,310
Change in assets and liabilities, net of effects from acquisitions, dispositions, assets held for sale and foreign currency adjustments
Change in assets and liabilities, net of effects from acquisitions, dispositions, and foreign currency adjustments
Receivables		(24,026	)		(23,893	)		5,324			(9,356	)		(24,026	)		(23,893	)
Inventories		(6,447	)		(38,395	)		(10,117	)		33,159			(6,447	)		(38,395	)
Prepaid expenses		2,298			1,272			(7,955	)		(2,854	)		2,298			1,272
Payables and taxes		(10,554	)		12,082			70,727			79,413			(15,108	)		6,938
Cash contribution to pension plans		(77,024	)		(33,360	)		(22,946	)		(10,471	)		(77,024	)		(33,360	)
Other assets and liabilities		39,341			8,020			19,487			37,646			39,341			8,020

Net cash provided by operating activities		227,363			252,188			332,248			482,563			227,363			252,188
Cash Flows from Investing Activities
Purchase of property, plant and equipment		(129,112	)		(119,800	)		(113,574	)		(123,279	)		(129,112	)		(119,800	)
Cost of acquisitions, net of cash acquired		(3,566	)		(267,016	)		(6,232	)		(227,304	)		(3,566	)		(267,016	)
Proceeds from the sale of assets		13,377			8,638			2,709			21,030			13,377			8,638
Proceeds from sale of High Density Film business		¾			¾			81,177
Investment in affiliates and other											(2,500	)		—			—

Net cash used by investing activities		(119,301	)		(378,178	)		(35,920	)		(332,053	)		(119,301	)		(378,178	)
Cash Flows from Financing Activities
Proceeds from issuance of debt		43,859			206,157			20,715			33,535			43,859			206,157
Principal repayment of debt		(11,699	)		(168,528	)		(120,287	)		(116,182	)		(11,699	)		(168,528	)
Net (decrease) increase in commercial paper borrowings		(150,000	)		180,000			(65,500	)
Net increase (decrease) in bank overdrafts		7,765			(7,976	)		(8,075	)
Cash dividends – common		(90,126	)		(85,060	)		(81,128	)
Net increase (decrease) in commercial paper borrowings											59,000			(150,000	)		180,000
Net (decrease) increase in bank overdrafts											(9,614	)		7,765			(7,976	)
Cash dividends — common											(94,745	)		(90,126	)		(85,060	)
Excess tax benefit of share-based compensation											10,580			—			—
Shares acquired											(82,668	)		—			—
Common shares issued		34,617			31,450			8,342			74,413			34,617			31,450

Net cash (used) provided by financing activities		(165,584	)		156,043			(245,933	)		(125,681	)		(165,584	)		156,043
Effects of Exchange Rate Changes on Cash		(595	)		2,818			3,054			2,061			(595	)		2,818

(Decrease) Increase in Cash and Cash Equivalents		(58,117	)		32,871			53,449
Increase (Decrease) in Cash and Cash Equivalents											26,890			(58,117	)		32,871
Cash and cash equivalents at beginning of year		117,725			84,854			31,405			59,608			117,725			84,854

Cash and cash equivalents at end of year	$	59,608		$	117,725		$	84,854		$	86,498		$	59,608		$	117,725

Supplemental Cash Flow Disclosures
Interest paid, net of amounts capitalized	$	46,650		$	41,530		$	50,079		$	41,377		$	46,650		$	41,530
Income taxes paid, net of refunds	$	115,253		$	72,647		$	27,182		$	99,999		$	115,253		$	72,647
Value of stock issued for acquisition	$	¾		$	¾		$	2,700

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE 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 Products Company and its majority-owned subsidiaries (the “Company” or “Sonoco”) after elimination of intercompany accounts and transactions. Investments in affiliated companies in which the Company shares control over the financial and operating decisions, but in which the Company is not the primary beneficiary are accounted for as equity investments (“equity investments”). Income applicable to equity investments is reflected as “Equity in earnings of affiliates/minority interest in subsidiaries” in the Consolidated Statements of Income.Investments related to equity in affiliates are included in “Other Assets” in the Company’s Consolidated Balance Sheets and totaled ~~$115,276~~$102,851 and ~~$110,829~~$115,276 at December 31, ~~2005~~2006 and ~~2004,~~2005, respectively.

Investments in affiliated companies in which the Company is not the primary beneficiary are accounted for by the equity method of accounting at December 31, ~~2005 and 2004, are~~2006 as follows:


	Ownership Interest
	Percentage at
Entity	~~Percentage~~December 31, 2006

RTS Packaging JVCO		35.0	%
Cascades Conversion, Inc.		50.0	%
Cascades Sonoco, Inc.		50.0	%
1191268 Ontario, Inc.		50.0	%
Enstel Manufacturing Inc.		50.0	%
AT-Spiral Oy		48.9	%
~~Demolli Industria Cartaria S.p.A.~~		~~25.0~~	%
Showa Products Company Ltd.		20.0	%
Conitex Sonoco Holding BVI Ltd.		30.0	%

For most of 2006, the Company accounted for its 25% ownership interest in Demolli Industria Cartaria S.p.A (Demolli) by the equity method. The Company acquired the remaining 75% ownership interest in Demolli in December 2006; accordingly, it is no longer accounted for under the equity method. For more information, see Note 2.

As a result of the 2003 sale of the High Density Film business to Hilex Poly Co., LLC (Hilex), the Company has a $25,200 note receivable and a $12,800 non-voting preferred membership interest in Hilex. The Company accounts for the preferred membership interest by the cost method.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ~~(“US GAAP”)~~(US GAAP) 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.

In accordance with US GAAP, the Company records revenue when title and risk of ownership pass to the customer, and when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price to the customer is fixed or determinable and when collectibility is reasonably assured. Certain judgments, such as provisions for estimates of sales returns and allowances, may affect the application of the Company’s revenue policy and, therefore, the results of operations in its Consolidated Financial Statements. Shipping and

F-7

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

handling expenses are included in “Cost of sales,” and freight charged to customers is included in “Net sales” in the Company’s Consolidated Statements of Income.

The Company’s trade accounts receivable are non-interest bearing and are recorded at the invoiced amounts. The allowance for doubtful accounts represents the Company’s best estimate of the amount of probable credit losses in existing accounts receivable. Provisions are made to the allowance for doubtful accounts at such time that collection of all or part of a trade account receivable is in question. The allowance for doubtful accounts is monitored on a regular basis and adjustments are made as needed to ensure that the account properly reflects the Company’s best estimate of uncollectible trade accounts receivable. Trade accounts receivable balances that

~~F-7~~

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Dollars in thousands except per share data)~~

are more than 180 days past due are generally 100% provided for in the allowance for doubtful accounts. Account balances are charged off against the allowance for doubtful accounts when the Company determines that ~~it is probable that~~ the receivable will not be recovered.As a result of a business combination during 2005 of two of the Company’s customers, a concentration of credit representing approximately 10% of the consolidated trade accounts receivable ~~exists~~existed at both December 31, 2006 and 2005. Sales to this customer represented approximately 12% of the Company’s consolidated revenues in 2006; no other single customer comprised more than 5% of the Company’s consolidated revenues in 2006, 2005 or 2004.

The Company identifies its reportable segments in accordance with Statement of Financial Accounting Standards No. 131, ‘Disclosures about Segments of an Enterprise and Related Information’ ~~(“FAS 131”)~~, ~~by reviewing~~based on the level of detail reviewed by the ~~Chief Operating Decision Maker,~~chief operating decision maker, gross profit margins, nature of products sold, nature of the production processes, type and class of customer, methods used to distribute ~~product~~products and nature of the regulatory environment.~~While all of~~Of these factors, ~~were reviewed,~~ the Company ~~feels~~believes that the most significant ~~factors~~ are the nature of its products, the nature of the production process and the type of customers served.

~~Effective December 31,~~Research and development costs are charged to expense as incurred and include salaries and other directly related expenses.Research and development costs totaling $12,735 in 2006, $14,668 in 2005, ~~the Company changed the name of the Engineered Carriers~~ and ~~Paper segment to Tubes~~$15,404 in 2004, are included in “Selling, general and ~~Cores/Paper, because the term “tubes and cores” is more generally understood than “engineered carriers”~~administrative expenses” in the ~~marketplace for the primary products offered by the businesses in this segment. There has been no change in the businesses included in this segment.~~Company’s Consolidated Statements of Income.

2. Acquisitions/Dispositions/Joint Ventures

The Company completed six acquisitions during 2006, and purchased the remaining 35.5% minority interest in Sonoco-Alcore S.a.r.l. (Sonoco-Alcore), at an aggregate cost of $227,304, all of which was paid in cash. In connection with these acquisitions, the Company recorded fair value of identified intangibles of approximately $27,800, goodwill of approximately $83,400 (of which approximately $23,500 is expected to be tax deductible), and other net tangible assets of approximately $116,100. Acquisitions in the Company’s Tubes and Cores/Paper segment included the remaining 75% interest in Demolli Industria Cartaria S.p.A, an Italy-based tube and core/paper manufacturer and a small tube and core manufacturer in Canada. Acquisitions in the Consumer Packaging segment included a rotogravure printed flexible packaging manufacturer in Texas; a rigid paperboard composite container manufacturer in Ohio; and Clear Pack Company, a manufacturer of thermoformed and extruded plastic materials and containers in Illinois. The Company also acquired a small packaging fulfillment business in Illinois, which is included in the Packaging Services segment. In addition, the Company purchased the remaining 35.5% interest in Sonoco-Alcore, a European tube, core and coreboard joint venture explained in more detail below. As these acquisitions were not material to the Company’s financial statements individually or in the aggregate, pro forma results have not been provided.

The Company completed three acquisitions during 2005 with an aggregate cost of ~~approximately~~ $3,566 in cash. In connection with these acquisitions, the Company recorded fair value of identified intangibles of $25,

F-8

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

goodwill of $1,081 and other net tangible assets of $2,460. Acquisitions in the Company’s Tubes and Cores/Paper segment included a tube and core manufacturer in New Zealand, ~~and~~ a small molded plug recycler in the United ~~States. Additionally, the Company purchased~~States and the remaining ownership interest in a Chilean tubes and cores business. The Company also acquired certain assets of a rigid plastic packaging manufacturer in Brazil, which is reported in the Consumer Packaging segment.

In December 2005, the Company divested its single-plant folding cartons business for a note receivable of approximately $11,000, which was collected in early 2006. This transaction resulted in a gain of $2,417 ($1,634 after tax). The results of this business unit were immaterial to the Company’s consolidated net income, for all periods presented.

The Company completed nine acquisitions during 2004, with an aggregate cost of approximately $367,000. This amount included $267,016 of cash with the remainder consisting of the assumption of debt and the contribution of assets. In connection with these acquisitions, the Company recorded fair value of identifiable intangibles of approximately $51,000, goodwill of approximately $178,000 (of which approximately $152,000 is expected to be tax deductible) and net tangible assets of approximately $138,000. In May 2004, the Company acquired CorrFlex Graphics, LLC ~~(“CorrFlex”)~~(CorrFlex), one of the nation’s largest point-of-purchase display companies. The acquired business, which is known as Sonoco CorrFlex, LLC, is reflected in the Packaging Services segment. Acquisitions in the Company’s Tubes and Cores/Paper segment included tube and core manufacturers in Australia, China and the United States. During the fourth quarter of 2004, the Company also completed a business combination with Ahlstrom Corporation, Helsinki, Finland ~~(“Ahlstrom”)~~(Ahlstrom), ~~to combine~~by which each of the companies’ respective European paper-based tube/core and coreboard operations were combined into a joint venture that operates under the name Sonoco-Alcore S.a.r.l. ~~(“Sonoco-Alcore”)~~(Sonoco-Alcore) and is reflected in the Tubes and Cores/Paper segment. The Company contributed ownership positions in 25 tube and core plants and five paper mills to Sonoco-Alcore, and ~~holds~~held a 64.5% interest in the joint venture. Ahlstrom, a leader in high-performance fiber-based materials serving niche markets worldwide, contributed 14 tube and core plants and one paper mill to Sonoco-Alcore, and ~~holds~~held a 35.5% interest in the joint venture. As noted above, the Company acquired this remaining 35.5% interest during 2006. The Company ~~has~~ accounted for this transaction as an acquisition and, therefore, ~~consolidates the results of~~consolidated the joint venture and ~~reports~~reported Ahlstrom’s ownership as minority

~~F-8~~

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Dollars~~ interest in ~~thousands except per share data)~~

~~interest as such in its~~the Company’s financial statements. The recognition of ~~minority interest is~~Ahlstrom’s share of the joint venture’s net income was included in ~~“Income before equity~~“Equity in earnings of affiliates/minority interest in subsidiaries” on the Company’s Consolidated Statements of ~~Income.~~Income until acquisition of the remaining minority interest was completed in 2006. Acquisitions in the Company’s Consumer Packaging segment included a composite can manufacturer in Australia, a manufacturer of rotogravure cylinders in Canada and the remaining ownership interest in a manufacturer of rotogravure cylinders in Charlotte, N.C. The Company also acquired certain assets of a wooden reel refurbisher in Alabama, which are ~~classified as components of~~reported in All Other Sonoco.

The Company completed four acquisitions during 2003, with an aggregate cost of approximately $11,077 in cash, assumption of debt, relief of notes receivable and issuance of common stock. In connection with these acquisitions, the Company recorded fair value of identified intangibles of $3,150, goodwill of $2,897 and other net tangible assets of $5,030. Acquisitions in the Company’s Tubes and Cores/Paper segment included a tube and core manufacturer in Australia and a recovered paper operation in Savannah, Ga. The Company also acquired certain assets of a wooden reel manufacturer in Canada and the United States, which are classified as components of All Other Sonoco. In addition, the Company increased its ownership interest in a manufacturer of rotogravure cylinders in Charlotte, N.C., in the Company’s Consumer Packaging segment.

During 2003, the Company decided to divest itself of the High Density Film business in order to redirect the value of those assets to primary-growth vehicles, thereby enhancing the opportunity to increase total returns to shareholders and significantly reduce the Company’s exposure to highly cyclical resin markets. In December 2003, the Company completed this divestiture by selling the business to Hilex Poly Co., LLC, of Los Angeles, Calif., for a price of approximately $118,800, including approximately $80,800 in cash; $28,000 in subordinated notes bearing a 4.95% interest rate maturing in 10 years; and, a $10,000 nonvoting preferred membership interest yielding 10%. This transaction resulted in a gain of $63,112 ($49,433 after tax). Operating results of this business have been presented for all periods as “Income from discontinued operations, net of income taxes” in the Company’s Consolidated Statements of Income.

~~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.~~

3. ~~Discontinued Operations~~

The Company accounts for discontinued operations in accordance with Statement of Financial Accounting Standards No. 144, ‘Accounting for the Impairment or Disposal of Long-Lived Assets’ (“FAS 144”). Accordingly, the results of operations of a material business component are reported in discontinued operations when the component has either been disposed of, or is classified as held for sale and the operations and cash flows of the component have been or will be eliminated and the Company will not have any significant continuing involvement in the operations of the component.

Income from discontinued operations for 2003 represents the results of operations of the Company’s High Density Film business, which was sold in December 2003. See Note 2 for a discussion of this disposition.

~~F-9~~

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Dollars in thousands except per share data)~~

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

2003

Net sales $ 198,759
Operating income before income taxes 17,758
Gain on sale 63,112
Income tax expense (20,099 )

Income from discontinued operations $ 60,771

Income from discontinued operations – per basic share $ .63
Income from discontinued operations – per diluted share $ .63

~~No interest expense or income was allocated to this business unit.~~

~~The Company has no continuing involvement in the management or operations of the divested business.~~

4. Restructuring Programs

The Company accounts for restructuring charges in accordance with Statement of Financial Accounting Standards No. 146, ‘Accounting for Costs Associated with Exit or Disposal Activities’ ~~(“FAS 146”)~~(FAS 146), whereby the liability is recognized when exit costs are incurred.If assets become impaired as a result of ~~the~~a restructuring action, ~~assets become impaired,~~ the assets are written down to the lower of carrying amount or fair value, less estimated costs to sell, if applicable. A number of significant estimates and assumptions are involved in the ~~application~~determination of ~~these techniques.~~fair value. The Company considers historical experience and all available information at the time the estimates are made; however, the fair values that are ultimately realized upon the sale of the divested assets ~~to be divested~~ may differ from the estimated fair values reflected in the Company’s Consolidated Financial Statements.

The Company approved a restructuring plan in October 2006 (the 2006 Plan), and another in August 2003 (the 2003 Plan). The Company recognized restructuring charges, net of adjustments, totaling $25,970

F-9

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

($21,330 after tax) in 2006, $21,237 ($14,343 after tax) in 2005, and $18,982 ($16,154 after tax) in 2004 under these two plans. Restructuring charges are included in “Restructuring charges” in the Consolidated Statements of Income, except for the restructuring charges applicable to equity method investments, which are included in earnings of affiliates/minority interest in subsidiaries.” Additional disclosures concerning each of the plans are provided below.

The 2006 Plan

The 2006 Plan calls for the closure of approximately 12 plant locations and the reduction of approximately 540 positions worldwide. The majority of the restructuring program will focus on international operations, principally centered around Europe, in order to make those operations more cost effective. These measures began in the fourth quarter of 2006 and are expected to be substantially completed by the end of 2007.

The total cost of the 2006 Plan is estimated to be approximately $35,000, most of which is related to severance and other termination costs. Accordingly, the vast majority of the total restructuring cost will result in the expenditure of cash. As of December 31, 2006, the Company had incurred total charges of $17,498 associated with these activities. The following table provides additional details of these charges:


			Asset
	Severance and		Impairment/		Other
	Termination		Disposal		Exit
	Benefits		of Assets		Costs		Total

2006
Tubes and Cores/Paper Segment	$	8,465	$	4,620	$	2,130	$	15,215
Consumer Packaging Segment		1,057		309		156		1,522
Packaging Services Segment		77		—		—		77
All Other Sonoco		375		261		48		684


Total	$	9,974	$	5,190	$	2,334	$	17,498

The charges for 2006 relate primarily to the closures of a paper mill in France, two tube and core plants — one in Canada and one in the United States, and a flexible packaging operation in Canada. The charges also include the closures of a wooden reels facility and a molded plastics operation in the United States as well as the impact of downsizing actions primarily in the Company’s European tube and core/paper operations.

The Company expects to recognize future additional costs totaling approximately $17,500 associated with the 2006 Plan. These charges are expected to consist primarily of severance and termination benefits. Of these future costs, it is estimated that $10,400 will impact the Tubes and Cores/Paper segment, $6,000 will impact the Consumer Packaging segment, $600 will impact the Packaging Services segment, and $500 will impact All Other Sonoco.

The following table sets forth the activity in the 2006 Plan restructuring accrual included in “Accrued expenses and other” on the Company’s Consolidated Balance Sheets:

F-10

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)


				Asset
	Severance and			Impairment/			Other
	Termination			Disposal			Exit
	Benefits			of Assets			Costs			Total

Liability, December 31, 2005	$	—		$	—		$	—		$	—
2006 Charges		9,974			5,190			2,334			17,498
Cash payments		(1,302	)		—			(649	)		(1,951	)
Asset impairment (noncash)		—			(5,247	)		—			(5,247	)
Reclassifications to pension liability		(438	)		—			—			(438	)
Foreign currency translation		30			57			—			87

Liability, December 31, 2006	$	8,264		$	—		$	1,685		$	9,949

Other exit costs consist primarily of building lease termination charges and other miscellaneous exit costs.

The majority of the liability and the remaining 2006 Plan restructuring costs, with the exception of ongoing pension subsidies and certain building lease termination expenses, are expected to be paid by the end of 2007, using cash generated from operations.

During 2006, the Company recognized impairment losses on equipment and facilities held for disposal of $4,681 in the Tubes and Cores/Paper segment, $305 in the Consumer Packaging segment and $261 in All Other Sonoco. Writeoffs in the Tubes and Cores/Paper segment related primarily to the closure of a paper mill in France. Impaired assets were written down to the lower of carrying amount or fair value, less estimated costs to sell, if applicable.

The 2003 Plan

In August 2003, the Company announced general plans to reduce its overall annual operating cost structure by approximately $54,000 ~~pretax~~ by realigning and centralizing a number of staff functions and eliminating excess plant capacity. Pursuant to these plans, the Company has initiated or completed 22 plant closings and has reduced its workforce by approximately ~~1,000~~1,120 employees. As of December 31, ~~2005,~~2006, the Company had incurred cumulative charges, net of adjustments, of ~~approximately $94,536 pretax~~$103,009 associated with these activities. The following table provides additional details of these net charges:


	Severance		Asset								Asset
	and		Impairment/		Other				Severance and		Impairment/		Other
	Termination		Disposal		Exit				Termination		Disposal		Exit
	Benefits		of Assets		Costs		Total		Benefits		of Assets		Costs		Total

Tubes and Cores/Paper Segment	$	35,982	$	16,012	$	12,415	$	64,409	$	36,934	$	18,074	$	17,579	$	72,587
Consumer Packaging Segment		10,334		4,586		6,154		21,074		11,195		5,084		5,186		21,465
Packaging Services Segment		333		¾		¾		333		333		—		—		333
All Other Sonoco		2,995		326		92		3,413		2,999		326		92		3,417
Corporate		5,094		¾		213		5,307		5,094		—		113		5,207

Cumulative Restructuring Charges, net of adjustments	$	54,738	$	20,924	$	18,874	$	94,536	$	56,555	$	23,484	$	22,970	$	103,009

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

The Company expects to recognize an additional cost of approximately $6,810 pretax in the future associated with these activities, which is comprised of approximately $1,334 in severance and termination benefits and $5,476 in other exit costs. Of the additional cost, approximately $5,585 isrecognized restructuring charges related to the ~~Tubes and Cores/Paper segment and approximately $1,225 is related to the Consumer Packaging segment.~~

~~Other exit costs consist primarily of building lease termination charges and other miscellaneous exit costs.~~

~~During 2005, the Company recognized restructuring charges,~~2003 Plan, net of adjustments, of $8,472 in 2006, $21,237 ~~($14,343 after tax).~~in 2005 and $18,982 in 2004. The following table provides additional details of these net charges:


	Severance		Asset										Asset
	and		Impairment/			Other				Severance and			Impairment/			Other
	Termination		Disposal			Exit				Termination			Disposal			Exit
	Benefits		of Assets			Costs		Total		Benefits			of Assets			Costs			Total

2006
Tubes and Cores/Paper Segment	$	4,834	$	4,999		$	6,194	$	16,027	$	952		$	2,062		$	5,164		$	8,178
Consumer Packaging Segment		733		1,557			2,321		4,611		861			498			(968	)		391
All Other Sonoco		640		(41	)		¾		599		3			—			(100	)		(97	)

Total	$	6,207	$	6,515		$	8,515	$	21,237	$	1,816		$	2,560		$	4,096		$	8,472



2005
Tubes and Cores/Paper Segment										$	4,834		$	4,999		$	6,194		$	16,027
Consumer Packaging Segment											733			1,557			2,321			4,611
All Other Sonoco											640			(41	)		—			599

Total										$	6,207		$	6,515		$	8,515		$	21,237



2004
Tubes and Cores/Paper Segment										$	7,021		$	4,459		$	3,254		$	14,734
Consumer Packaging Segment											1,513			1,327			2,439			5,279
All Other Sonoco											559			367			92			1,018
Corporate											(2,548	)		—			499			(2,049	)

Total										$	6,545		$	6,153		$	6,284		$	18,982

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

inventory in the Tubes and Cores/Paper segment related primarily to the closure of tube and core plants and a paper mill in the United States. Writeoffs of impaired equipment, facilities and inventory in the Consumer Packaging segment related primarily to the closure of two flexible packaging plants. Impaired assets were written down to the lower of carrying amount or fair value, less estimated costs to sell, if applicable.

During 2004, the Tubes and Cores/Paper segment recognized writeoffs of impaired equipment and facilities held for disposal of $4,459, attributed to the closing of six plant ~~locations.~~locations under the 2003 Plan. Additionally, the Consumer Packaging segment recognized writeoffs of impaired equipment and facilities held for disposal of $1,327 and pension curtailment of $1,926, related to the closing of two plant locations. Finally, during 2004, All Other Sonoco recognized writeoffs of impaired equipment and facilities held for disposal of $367, attributed to the closing of one plant location. Impaired assets were written down to the lower of carrying amount or fair value, less estimated costs to sell, if applicable.

~~F-13~~

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Dollars in thousands except per share data)~~

During 2003, the Tubes and Cores/Paper segment recognized writeoffs of impaired equipment and facilities held for disposal of $6,621 , attributed to the closing of four plant locations. Additionally, the Consumer Packaging segment recognized writeoffs of impaired equipment of $1,760 related to the closing of one plant location. Impaired assets were written down to the lower of carrying amount or fair value, less estimated costs to sell, if applicable.

5.4. Cash and Cash Equivalents

Cash equivalents are composed of highly liquid investments with an original maturity of three months or ~~less, and~~less. Cash equivalents are recorded at cost, which approximates market. At December 31, ~~2005~~2006 and ~~2004,~~2005, outstanding checks totaling ~~$22,406~~$12,847 and ~~$14,611,~~$22,406, respectively, were included in “Payable to suppliers” on the Company’s Consolidated Balance Sheets. In addition, outstanding payroll checks of ~~$1,161~~$1,106 and ~~$1,192~~$1,161 as of December 31, ~~2005~~2006 and ~~2004,~~2005, respectively, were included in “Accrued wages and other compensation” on the Company’s Consolidated Balance Sheets.

6.5. Inventories

Inventories are stated at the lower of cost or market.The last-in, first-out ~~(“LIFO”)~~(LIFO) method was used to determine costs of approximately 21% and 23% of total inventories at ~~both~~ December 31, 2006 and 2005, ~~and 2004.~~respectively. The remaining inventories are determined on the first-in, first-out ~~(“FIFO”)~~(FIFO) method.

If the FIFO method of accounting had been used for all inventories, total inventory would have been higher by ~~$11,568~~$14,602 and ~~$10,701~~$11,568 at December 31, ~~2005~~2006 and ~~2004,~~2005, respectively.

7.6. 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~~lives of the ~~asset,~~assets, and are reviewed for impairment whenever events indicate the carrying value may not be recoverable.

Equipment lives generally range from 3three to 11 years, and buildings from 15 to 40 years.

Timber resources are stated at cost. Depletion is charged to operations based on the estimated number of units of timber cut during the year.

Depreciation and depletion expense amounted to $155,412 in 2005, $158,212 in 2004 and $148,843 in 2003. Depreciation expense amounted to $9,696 during 2003 for the High Density Film business, which was divested in 2003 and has, therefore, been reclassified as discontinued operations. Details at December 31 are as follows:


	2005			2004			2006			2005

Land	$	46,541		$	51,041		$	66,161		$	46,541
Timber resources		38,224			37,695			38,503			38,224
Buildings		388,414			396,083			421,291			388,414
Machinery and equipment		1,995,737			1,981,331			2,130,006			1,995,737
Construction in progress		68,886			76,428			76,063			68,886

		2,537,802			2,542,578			2,732,024			2,537,802
Accumulated depreciation and depletion		(1,593,851	)		(1,535,283	)		(1,712,430	)		(1,593,851	)

Property, plant and equipment, net	$	943,951		$	1,007,295		$	1,019,594		$	943,951

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

Estimated costs for completion of ~~authorized~~ capital additions under construction totaled approximately ~~$58,338~~$73,500 at December 31, ~~2005.~~2006.

Depreciation and depletion expense amounted to $157,000 in 2006, $155,412 in 2005 and $158,212 in 2004.

The Company has certain properties and equipment that are leased under noncancelable operating leases. Future minimum rentals under noncancelable operating leases with terms of more than one year are as follows: ~~2006 – $31,300;~~ 2007 ~~– $26,000;~~— $28,900; 2008 ~~– $19,200;~~— $23,300; 2009 ~~– $15,400;~~— $19,900; 2010 ~~– $11,000;~~— $14,500; 2011— $11,300 and thereafter ~~– $29,700.~~— $37,800. Total rental expense under operating leases was approximately $42,200 in 2006, $41,900 in 2005 and $35,600 in ~~2004 and $34,000 in 2003.~~2004.

~~Research and development costs are charged to expense as incurred and include salaries and other various expenses.~~Research and development costs included as “Selling, general and administrative expenses” on the Company’s Consolidated Statements of Income charged to the expense were $14,668 in 2005, $15,404 in 2004 and $14,225 in 2003.

8.7. Goodwill and Other Intangible Assets

Goodwill

The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards No. 142 ‘Goodwill and Other Intangible Assets’ ~~(“FAS 142”)~~(FAS 142). Under FAS 142, purchased goodwill and intangible assets with indefinite lives are not amortized. The Company evaluates its goodwill for impairment at least annually, and more frequently if indicators of impairment are present. ~~The Company completed its annual goodwill impairment testing required by FAS 142 during the third quarters of 2005, 2004 and 2003.~~ In performing the impairment test, the Company uses discounted future cash flows to determine fair value of assets of each reporting unit, which is then compared to the carrying value of these assets. If, after completing this test, certain reporting units are deemed impaired, further analysis is completed to calculate the impairment charge required.

The Company completed its annual goodwill impairment testing during the third quarters of 2006, 2005 and 2004. Based on this impairment testing, no adjustment to the recorded goodwill balance was necessary. The evaluation of goodwill impairment that was completed during the third quarter of ~~2005~~2006 used forward-looking projections, which included expected improvement in results at certain reporting units, most notably, the European operations within the Tubes and Cores/Paper ~~segment, to which $66,900 of goodwill is attributed.~~segment. The assessment of the relevant facts and circumstances is ongoing, and if actual performance in this reporting unit falls significantly short of ~~the~~ projected results, it is reasonably possible that a ~~non-cash~~noncash impairment charge would be required.

The changes in the carrying amount of goodwill for the year ended December 31, ~~2005,~~2006, are as follows:

Tubes and
Cores Consumer Packaging
/Paper Packaging Services All Other
Segment Segment Segment Sonoco Total

Balance as of January 1, 2005 $ 183,671 $ 172,630 $ 148,268 $ 65,939 $ 570,508
Goodwill purchase price adjustments 12,936 (4,015 ) 16 ¾ 8,937
Goodwill on 2005 acquisitions 1,022 59 ¾ ¾ 1,081
Other adjustments (2,686 ) ¾ ¾ ¾ (2,686 )
Foreign currency translation (5,308 ) 1,709 (159 ) (179 ) (3,937 )

Balance as of December 31, 2005 $ 189,635 $ 170,383 $ 148,125 $ 65,760 $ 573,903


	Tubes and Cores			Consumer		Packaging
	/Paper			Packaging		Services		All Other
	Segment			Segment		Segment		Sonoco			Total

Balance as of January 1, 2006	$	189,635		$	170,383	$	148,125	$	65,760		$	573,903
Goodwill on 2006 acquisitions		28,369			52,376		2,678		—			83,423
Other adjustments		(249	)		—		—		—			(249	)
Foreign currency translation		8,202			1,898		170		(59	)		10,211

Balance as of December 31, 2006	$	225,957		$	224,657	$	150,973	$	65,701		$	667,288

~~During 2005, the Company~~Adjustments to goodwill consist primarily of changes to deferred tax valuation allowances acquired in connection with acquisitions made adjustments to the purchase price allocation related to the Sonoco-Alcore business combination, which was consummated during the fourth quarter of 2004. In conjunction with the finalization of the valuation analysis, the Company reduced the amount of the purchase price that had beenin prior years.

F-15

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

~~9. Debt~~

~~Debt at December 31 was as follows:~~

2005 2004

Commercial paper, average rate of 3.26% in 2005 and 1.40% in 2004 $ 30,000 $ 180,000
6.75% debentures due November 2010 99,912 99,898
6.5% debentures due November 2013 249,092 250,879
5.625% debentures due November 2016 149,250 157,014
9.2% debentures due August 2021 41,305 41,305
6.125% IRBs due June 2025 34,674 34,650
6.0% IRBs due April 2026 34,360 34,329
Foreign denominated debt, average rate of 8.3% in 2005 and 8.5% in 2004 124,937 93,640
Other notes 18,075 15,246

Total debt 781,605 906,961
Less current portion and short-term notes 124,530 93,754

Long-term debt $ 657,075 $ 813,207

The Company currently operates a commercial paper program totaling $350,000, and has fully committed bank lines of credit supporting the program by a like amount. ~~In July 2004,~~On May 3, 2006, the Company entered into an amended and restated credit agreement to extend its $350,000 bank line of credit to a new five-year ~~$350,000~~maturity. The amended and restated credit agreement ~~that~~ also provides the Company ~~with~~ the option to increase its credit line to ~~$450,000~~$500,000 subject to the concurrence of its lenders. The Company intends to indefinitely maintain line of credit agreements fully supporting its commercial paper program. The ~~five-year term on the new line of credit allows commercial paper borrowings up to the maximum amount of the line of credit to be classified as long-term debt. The~~ amount of the Company’s outstanding commercial paper at December 31, 2006 and 2005, was $89,000 and ~~2004 was~~ $30,000, ~~and $180,000,~~ respectively. Consistent with the maturity of the supporting line of credit, the Company classifies outstanding commercial paper balances as long-term debt.

In addition, at December 31, 2006, the Company had $254,000 available under unused short-term lines of credit. These short-term lines of credit are for general Company purposes, with interest at mutually agreed-upon rates.

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, as defined, at the end of each fiscal quarter be greater than ~~$883,000,~~$1,164,248, increased by 25% of net income after ~~March 28, 2004,~~December 31, 2005, and decreased by stock purchases after ~~July 7, 2004.~~May 3, 2006. This covenant excludes from the above net worth calculation any accumulated other comprehensive income or loss. As of December 31, ~~2005,~~2006, the Company was approximately ~~$312,000~~$261,858 above the minimum level required under this covenant. The Company’s current backstop credit line excludes from the above net worth covenant any charge to shareholders’ equity arising from minimum pension liability adjustments for its U.S. defined benefit pension plan. No such charge existed for the Company’s U.S. defined benefit pension plan at December 31, 2005, 2004 or 2003.

The 6.125% IRBs and the 6.0% IRBs are collateralized by property, plant and equipment at several locations.

The Company had committed availability under unused short-term lines of credit in the amount of approximately $140,704 at December 31, 2005. These short-term lines of credit are for general Company purposes, with interest at mutually agreed-upon rates.

~~The~~ approximate principal requirements of debt maturing in the next five years are: ~~2006 – $124,530;~~ 2007 ~~– $3,200;~~— $51,903; 2008 ~~– $1,300;~~— $404; 2009 ~~– $1,600~~— $200; 2010 — $99,989 and ~~2010 – $102,000.~~

~~F-17~~

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

The Company records qualifying derivatives based on Statement of Financial Accounting Standards No. 133, ‘Accounting for Derivative Instruments and Hedging Activities’ ~~(“FAS 133”)~~(FAS 133), and related amendments. This Statement requires that all derivatives be recognized as assets or liabilities in the balance sheet and measured at fair value. Changes in the fair value of derivatives are recognized in either net income or in other comprehensive income, depending on the designated purpose of the derivative.

The Company uses derivatives from time to time to ~~partially~~ mitigate the effect of raw material and energy cost fluctuations, ~~exposure to~~ foreign currency fluctuations and ~~exposure to~~ interest rate movements. The Company purchases commodities such as recovered paper, metal and energy generally at market or fixed prices that are established with the vendor as part of the purchase process for quantities expected to be consumed in the ordinary course of business. The Company may enter into commodity futures or swaps to reduce the effect of price fluctuation. ~~In addition, the~~The Company may use foreign currency forward contracts and other risk management instruments to manage exposure to changes in foreign currency cash flows and the translation of monetary assets and liabilities on the Company’s Consolidated Financial Statements. The Company is exposed to ~~interest rate~~interest-rate fluctuations as a result of using debt as a source of financing for its operations. ~~When necessary, the~~The Company ~~uses~~may use traditional, unleveraged interest rate swaps to ~~manage~~adjust its mix of fixed and variable rate debt to ~~maintain~~manage its exposure to interest rate ~~movements within established ranges.~~movements. The Company uses published market prices or estimated values based on current price quotes and a discounted cash flow model to estimate the fair market value of ~~the~~ derivatives.

All ~~interest-rate~~interest rate swaps qualified as ~~fair value~~fair-value hedges, under which fixed interest rates are swapped for floating rates. ~~In January~~During 2004, the Company entered into ~~an agreement~~agreements to swap the interest rate from fixed to floating on $100,000 of its $250,000 6.5% notes maturing in ~~2013. During June 2004, the Company entered into an agreement to swap the interest rates from fixed to floating on~~2013, and all $150,000 of its ~~newly issued $150,000 of~~ 5.625% notes maturing in 2016. The fair market value of these interest rate swaps was an unfavorable position of $1,098 and a favorable position of $4,483, respectively, at December 31, 2005, and was reflected inas “Other Liabilities” and “Other Assets,” respectively, in the Company’s Consolidated Balance Sheet. During 2006, the Company terminated both interest rate swaps. At the time of termination, the fair value of the interest rate swap related to the 6.5% notes was an unfavorable position of $3,018, and the fair value of the interest rate swap related to the 5.625% notes was a favorable position of $881. In accordance with FAS 133, interest expense is being adjusted by amortization of the gain and loss associated with these swap terminations over the remaining life of the related bonds. Termination of these swaps increased the Company’s proportion of fixed rate debt, reducing its exposure to the effects of interest rate changes. The Company did not enter into any new fair value hedges during the year ended December 31, 2006.

The Company has entered into certain cash flow hedges to mitigate exposure to commodity, energy and foreign exchange risks. Related hedge gains and/or losses are reclassified from accumulated other comprehensive income and into earnings in the same periods that the forecast purchases or payments affect earnings. The only significant open hedge positions relate to the Company’s forecasted purchase of natural gas. At December 31, 2006, natural gas swaps, covering approximately eight million MMBTUs, were outstanding. The hedged natural gas quantities at this date represent approximately 75%, 56%, 31%, and 6% of anticipated U.S. and Canadian usage for 2007, 2008, 2009 and 2010, respectively. The total fair market value of the Company’s cash-flow hedge derivatives as of December 31, 2006, was a net loss of $2,059 on a tax-adjusted basis. Of this amount, a gain of $244 is expected to be reclassified to earnings in 2007. As a result of the high correlation between the derivative instruments and the associated hedged transactions, ineffectiveness did not have a material impact on the Company’s Consolidated ~~Balance Sheets in accordance with FAS 133.~~Statements of Income for the years ended December 31, 2006, 2005 and 2004.

F-18

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

~~In 2005,~~10. Stock-Based Plans

The Company utilizes various forms of share-based compensation within its stock-based programs which are summarized below. Awards are provided in the ~~Company entered into certain cash flow hedges to mitigate exposure to commodity~~form of stock options, stock appreciation rights, and ~~foreign exchange risks in 2005 through June 2008.~~restricted stock units. The ~~fair market value~~majority of these ~~derivatives as of~~awards are issued pursuant to the Company’s 1991 Key Employee Stock Plan (the “Employee Stock Plan”) and 1996 Non-Employee Directors’ Stock Plan (the “Directors’ Plan”). The Company’s non-employee director stock-based awards have not been material. At December 31, 2006, a total of 3,552,064 shares remain available for future grant under these plans. The Company issues new shares for stock option and stock appreciation right exercises and stock unit conversions. The Company has from time to time repurchased shares to replace those issued under its stock compensation plans, however, there is no specific schedule or policy to do so.

Total compensation cost for share-based payment arrangements was $11,347, $4,554, and $5,144, for 2006, 2005, and 2004, respectively. The related tax benefit recognized in net income was ~~$11,181 on a tax-adjusted basis,~~$3,699, $1,475, and ~~will be reclassified to earnings in~~$1,714, for the same ~~periods that the forecast purchases or payments affect earnings. Based~~years, respectively. Share-based compensation expense is included in selling, general and administrative expense on the current amount of the derivative gain in other comprehensive income, $6,721 after tax would be reclassified to income in 2006. As a result of the high correlation between the hedged instruments and the underlying transactions, ineffectiveness did not have a material impact on the Company’sCondensed Consolidated Statements of ~~Income for the years ended December 31, 2005, 2004 and 2003.~~

~~11. Stock Plans~~Income.

~~Stock Option Plans~~Accounting for Share-Based Compensation

~~The~~Effective January 1, 2006, the Company ~~has stock option plans under which common shares are reserved~~adopted the fair value method of accounting for ~~sale~~share-based compensation arrangements in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), ‘Share-Based Payment’ (FAS 123(R)), using the modified prospective method of transition. Under the modified prospective method, compensation expense is recognized beginning at the effective date of adoption of FAS 123(R) for all share-based payments (i) granted after the effective date of adoption and (ii) granted prior to ~~certain employees~~the effective date of adoption and ~~nonemployee directors. The exercise price of options granted under the plans is the market value of the shares at~~that remain unvested on the date of ~~grant. Options are generally exercisable one year after~~adoption. At the date of adoption, the Company had an estimated 436,301 unvested restricted stock units and performance contingent restricted stock units outstanding, with a total grant date fair value of approximately $10,000, and ~~expire 10 years after~~no unvested stock options outstanding. The Company recognizes share-based compensation cost ratably over the expected vesting period.

Prior to January 1, 2006, the Company accounted for share-based employee compensation plans using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, ‘Accounting for Stock Issued to Employees’ (APB 25), and its related interpretations. Under the provisions of APB 25, no compensation expense was recognized when stock options were granted with exercise prices equal to or greater than market value on the date of ~~grant, although options granted~~grant.

When the tax deduction for an exercised stock option, exercised stock appreciation right or converted stock unit exceeds the compensation cost that has been recognized in ~~2005 vested immediately. There were 4,476,838 shares reserved for future grants at December 31, 2005.~~

~~A summary~~income, an “excess” tax benefit is created. The excess benefit is not recognized on the income statement, but rather on the balance sheet as additional paid-in capital. The additional excess tax benefit realized during 2006 was $10,580. Prior to the adoption of FAS 123(R), the Company presented all tax benefits resulting from share-based compensation as cash flows from operating activities in the condensed consolidated statements of cash flows. FAS 123(R) requires cash flows resulting from tax deductions in excess of the ~~status~~grant-date fair value of share-based awards to be included in cash flows from financing activities. The excess tax benefit of $10,580 recognized during 2006 has been included in cash flows from financing activities. In accordance with the ~~Company’s stock option plans is presented below:~~

Weighted-
Option average Exercise
Shares Price

2003
Outstanding at beginning of year 10,875,626 $ 25.12
Granted 1,419,694 $ 21.19
Exercised (438,470 ) $ 20.96
Canceled (518,209 ) $ 24.59
Outstanding at end of year 11,338,641 $ 24.81
Options exercisable at end of year 9,943,286 $ 25.32

2004
Granted 1,085,817 $ 24.08
Exercised (1,579,386 ) $ 20.95
Canceled (1,091,928 ) $ 29.16
Outstanding at end of year 9,753,144 $ 24.87
Options exercisable at end of year 8,700,656 $ 24.97

2005
Granted 1,140,648 $ 27.26
Exercised (1,469,431 ) $ 23.75
Canceled (51,056 ) $ 26.41
Outstanding at end of year 9,373,305 $ 25.33
Options exercisable at end of year 9,373,305 $ 25.33

adoption of FAS 123(R), the Company chose to adopt the short-cut method to determine the pool of windfall tax benefits as it relates to stock-based compensation.

F-19

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

The ~~weighted-average~~Company’s Condensed Consolidated Financial Statements as of December 31, 2006, reflect the impact of its adoption of FAS 123(R). The effect of the change from applying the original provisions of FAS 123 is outlined in the table below:


	Year Ended
	December 31, 2006 Increase/(Decrease)
Income before income taxes	$	(4,148	)
Net income		(2,796	)
Cash flow provided by operating activities		(10,580	)
Cash flow used in financing activities		10,580
Earnings per share:
Basic		(0.03	)
Diluted		(0.03	)

For purposes of calculating share-based compensation expense under FAS 123(R) for retiree-eligible employees, the service completion date is assumed to be the grant date; therefore, expense associated with share-based compensation to these employees is recognized at that time. The annual impact of recognizing this expense immediately versus over the nominal vesting period is not material because the Company’s employee stock options and stock appreciation rights have one-year vesting periods.

Under the modified prospective method of transition, the Company is not required to restate its prior period financial statements. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation for the years ended December 31, 2005 and 2004:


	Year Ended December 31,
	2005			2004

Net income, as reported	$	161,877		$	151,229
Add: Stock-based employee compensation cost, net of related tax effects, included in net income, as reported		3,078			3,430
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(7,534	)		(6,449	)

Pro forma net income	$	157,421		$	148,210

Earnings per share:
Basic — as reported	$	1.63		$	1.54
Basic — pro forma	$	1.58		$	1.51
Diluted — as reported	$	1.61		$	1.53
Diluted — pro forma	$	1.57		$	1.50

Stock Options and Stock Appreciation Rights (SARs)

The Company typically grants stock options or stock appreciation rights annually on a discretionary basis to its key employees. Prior to 2006, the Company also granted ~~was $5.42, $4.97~~stock options to its non-employee directors. Options granted under the Employee Stock Plan and ~~$4.85 in 2005, 2004 and 2003, respectively. The fair value of each option grant is estimated~~the Directors’ Plan were at market (had an exercise price equal to the closing market price on the date of grant), had 10-year terms and vested over one year, except for the options granted in 2005, which vested immediately. In 2006, the Company began to grant ~~using the binomial option-pricing model with the following assumptions:~~

2005 2004 2003

Expected dividend yield 3.5 % 3.6 % 3.6 %
Expected stock price volatility 26.2 % 27.4 % 31.8 %
Risk-free interest rate 3.7 % 3.2 % 3.0 %
Expected life of options 4.5 years 4.5 years 4.5 years

~~The following tables summarize information about~~stock appreciation rights (SARs) instead of stock options. SARs are at market, vest over one year, have seven-year terms and can be settled only in stock. Both stock options ~~outstanding~~ and ~~stock options~~SARs are exercisable ~~at December 31, 2005:~~

Options Outstanding
Weighted- Weighted-
average average
Range of Number Remaining Exercise
Exercise Prices Outstanding Contractual Life Price

$17.25 - $23.80 3,238,329 5.5 years $ 21.75
$23.83 - $26.81 2,963,137 5.2 years $ 24.51
$27.31 - $37.10 3,171,839 4.8 years $ 29.74
$17.25 - $37.10 9,373,305 5.2 years $ 25.33

Options Exercisable
Range of Number Weighted-average
Exercise Prices Outstanding Exercise Price

$17.25 — $23.80 3,238,329 $ 21.75
$23.83 — $26.81 2,963,137 $ 24.51
$27.31 — $37.10 3,171,839 $ 29.74
$17.25 — $37.10 9,373,305 $ 25.33

~~Performance-based Stock Plans~~

As of December 31, 2005 and 2004, the Company had granted awards in the form of contingent-share units to certain of its executives and other members of its management team. These awards vest over five years with accelerated vesting of three years if performance targets are met. The performance vesting of the awards, which can range from 161,388 to 484,162 shares, is tied to growth in earnings and improved capital effectiveness over a three-year period. The 2004 awards are tied to performance targets through fiscal year 2006, and can range from 76,338 to 229,012 shares. The 2005 awards are tied to performance targets through fiscal year 2007, and can range from 85,050 to 255,150 shares. The Company’s 2003 performance plan completed its three-year performance cycle on December 31, 2005, and participants to whom awards had previously been granted earned 99,005 shares of common stock based on meeting performance goals set by the plan. These shares will be issued during the first quarter of 2006. Non-cash stock based compensation associated with these performance-based plans totaled $3,198, $4,254 and $460 pretax for 2005, 2004 and 2003, respectively.upon vesting.

F-20

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

On January 31, 2006, the Company granted to employees 754,683 stock-settled SARs. An additional 14,500 SARs were granted over the remainder of the year. All SARs were granted at the closing market prices on the dates of grant. As of December 31, 2006, there was $270 of total unrecognized compensation cost related to nonvested SARs. This cost will be recognized over the remaining weighted-average vesting period, which is approximately one month.

The weighted-average fair values of options and SARs granted was $5.85, $5.42 and $4.97 in 2006, 2005 and 2004, respectively. The Company computed the estimated fair values of all options and SARs using the binomial option-pricing model applying the assumptions set forth in the following table:


	2006			2005			2004

Expected dividend yield		2.8	%		3.5	%		3.6	%
Expected stock price volatility		20.8	%		26.2	%		27.4	%
Risk-free interest rate		4.5	%		3.7	%		3.2	%
Expected life of options	4 years			4.5 years			4.5 years

The assumptions employed in the calculation of the fair value of stock options and SARs were determined as follows:

	•		Expected dividend yield — the Company’s annual dividend divided by the stock price at the time of grant.

	•		Expected stock price volatility — based on historical volatility of the Company’s common stock measured weekly for a time period equal to the expected life.

	•		Risk-free interest rate — based on U.S. Treasury yields in effect at the time of grant for maturities equal to the expected life.

	•		Expected life — calculated using the simplified method as prescribed in Staff Accounting Bulletin No. 107, where the expected life is equal to the sum of the vesting period and the contractual term divided by two.

The following tables summarize information about stock options and SARs outstanding and exercisable at December 31, 2006:


	Options and SARs Vested and Expected to Vest
			Weighted-	Weighted-
			average	average
Range of	Number		Remaining	Exercise		Aggregate Intrinsic
Exercise Prices	Outstanding		Contractual Life	Price		Value

$17.25 — $23.80		2,237,476	4.7 years	$	22.06	$	35,806
$23.86 — $27.31		2,503,905	6.3 years	$	25.45	$	31,569
$27.35 — $37.10		2,343,505	4.1 years	$	31.79	$	15,529

$17.25 — $37.10		7,084,886	5.1 years	$	26.48	$	82,904

F-21

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)


	Options and SARs Exercisable
			Weighted-
			average
Range of	Number		Remaining	Weighted-average		Aggregate Intrinsic
Exercise Prices	Exercisable		Contractual Life	Exercise Price		Value

$17.25 — $23.80		2,237,194	4.7 years	$	22.06	$	35,806
$23.86 — $27.31		2,503,905	6.3 years	$	25.45	$	31,569
$27.35 — $37.10		1,611,405	1.9 years	$	31.07	$	11,252

$17.25 — $37.10		6,352,504	5.3 years	$	25.68	$	78,627

The activity related to the Company’s stock options and SARs is as follows:


									Weighted-
									average Exercise
	Nonvested		Vested			Total			Price


Outstanding, December 31, 2005		—		9,373,305			9,373,305		$	25.33
Granted		730,089		39,094			769,183		$	33.34
Exercised		—		(3,030,365	)		(3,030,365	)	$	24.68
Forfeited		—		(27,237	)		(27,237	)	$	25.02

Outstanding, December 31, 2006		730,089		6,354,797			7,084,886		$	26.48

The aggregate intrinsic value of options and SARs exercised during the years ended December 31, 2006, 2005, and 2004 was $27,827, $7,635, and $8,153, respectively. Cash received on option exercises was $74,413, $34,617, and $31,450 for the same years, respectively.

Performance-based Stock Awards

The Company typically grants performance contingent restricted stock units (PCSUs) annually on a discretionary basis to certain of its executives and other members of its management team. Both the ultimate number of PCSUs awarded and the vesting period are dependent upon the degree to which performance targets are achieved for three-year performance periods. Upon vesting, PCSUs are convertible into common shares on a one-for-one basis. These awards are granted under the Employee Stock Plan and vest over five years with accelerated vesting over three years if performance targets are met. For the awards outstanding at December 31, 2006, the ultimate number of PCSUs that could vest ranges from 185,730 to 557,190 and is tied to growth in earnings and improved capital effectiveness over a three-year period. The 2005 awards are tied to performance targets over the three-year period ending December 31, 2007, and can range from 86,450 to 259,350 units. The 2006 awards are tied to performance targets through fiscal year 2008, and can range from 99,280 to 297,840 units.

The three-year performance cycle for the 2004 awards was completed on December 31, 2006. Based on meeting performance goals established at the time of the award, participants to whom awards had been granted earned 181,157 stock units with a vested fair value of $6,895. While these stock units were eligible for conversion to common stock during the first quarter of 2007, most participants have elected to defer receipt of the shares. The Company’s 2003 performance program completed its three-year performance cycle on December 31, 2005. Based on meeting performance goals established at the time of the award, participants earned 99,005 stock units with a vested fair value of $2,911. No PCSUs were earned in 2004 as the relevant performance targets were not achieved.

Non-cash stock-based compensation associated with PCSUs totaled $6,654, $3,198 and $4,254 for 2006, 2005 and 2004, respectively. The adoption of FAS 123(R) did not materially change the expense recognition for PCSUs. As of December 31, 2006, there was approximately $7,654 of total unrecognized compensation cost related to nonvested PCSUs. This cost is expected to be recognized over a weighted-

F-22

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

average period of eighteen months.

Restricted Stock ~~Plan~~Awards

Since 1994, the Company has from time to time granted ~~one-time~~ awards of ~~contingent shares~~restricted stock units to certain of the Company’s executives. These awards 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 for shares to be issued. ~~Once~~Participants can elect to defer receipt. However, once vested these awards do not expire. As of December 31, ~~2005,~~2006, a total of ~~482,804 contingent shares granted under this plan~~363,338 restricted stock units remained outstanding, ~~406,995~~289,420 of which ~~are~~were vested. ~~Non-cash~~Of the vested restricted stock ~~based~~units, 3,694 vested during 2006. No restricted stock units were granted during 2006. Noncash stock-based compensation associated with ~~these~~ restricted stock ~~plans~~grants totaled $419, $1,356 and $890 for 2006, 2005 and ~~$930 pretax~~2004, respectively. The adoption of FAS 123(R) did not materially change the expense recognition for ~~2005, 2004~~the Company’s restricted stock awards. As of December 31, 2006, there was $1,221 of total unrecognized compensation cost related to nonvested restricted stock units. This cost is expected to be recognized over a weighted-average period of three years.

The activity related to the PCSUs and ~~2003, respectively.~~restricted stock units is as follows:


										Grant Date Fair
	Nonvested			Vested			Total			Value Per Share

Outstanding, December 31, 2005		436,301			509,268			945,569		$	23.48
Granted		198,560			—			198,560		$	33.37
Vested		(184,851	)		184,851			—
Converted		—			(142,799	)		(142,799	)	$	21.43
Performance adjustments/other		110,487			8,042			118,529		$	30.00

Outstanding, December 31, 2006		560,497			559,362			1,119,859		$	27.54

~~As permitted by Statement~~Deferred Compensation Plans

Certain officers of ~~Financial Accounting Standards No. 123, ‘Accounting for Stock-Based Compensation’ (“FAS 123”),~~ the Company ~~has chosen~~may elect to ~~continue to account for stock-based~~defer a portion of their compensation in the form of stock units. Units are granted as of the day the cash compensation would have otherwise been paid using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, ‘Accounting for Stock Issued to Employees,’ and its related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted marketclosing price of the Company’s common stock aton that day. The units immediately vest and earn dividend equivalents. Units are distributed in the ~~date~~form of common stock upon retirement over a period elected by the employee. Cash compensation totaling $124 was deferred as stock units during 2006, resulting in 3,744 units being granted. There were no conversions to common stock during 2006.

Non-employee directors are required to defer a minimum of 50% of their fees into stock units. Units are granted as of the ~~grant over~~day the ~~amount an employee must pay to acquire~~cash compensation would have otherwise been paid using the ~~stock. Compensation cost for performance stock options is recognized over the vesting period and is recorded based on the quoted market~~closing price of the Company’s common stock aton that day. The units immediately vest and earn dividend equivalents. Distributions begin after retirement from the ~~end of~~board over a period elected by the ~~period.~~

~~The following table illustrates~~director. Since distributions can be made in stock or cash, units granted under the ~~effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation.~~

2005 2004 2003

Net income, as reported $ 161,877 $ 151,229 $ 138,949
Add: Stock-based employee compensation cost, net of related tax effects included in net income, as reported 3,078 3,430 869
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (7,647 ) (6,355 ) (5,889 )

Pro forma net income $ 157,308 $ 148,304 $ 133,929
Earnings per share:
Basic – as reported $ 1.63 $ 1.54 $ 1.44
Basic – pro forma $ 1.58 $ 1.51 $ 1.38
Diluted – as reported $ 1.61 $ 1.53 $ 1.43
Diluted – pro forma $ 1.57 $ 1.50 $ 1.38

~~F-21~~

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

The Company also provides postretirement healthcare and life insurance benefits to the majority of its retirees and their eligible dependents in the United States and Canada. In the fourth quarter of 2005, the Company announced changes in eligibility for retiree medical benefits effective January 1, 2006, for its U.S. plan. These changes included the elimination of a Company subsidy toward the cost of retiree medical benefits if certain age and service ~~requirements~~criteria were not met, as well as the elimination of Company-provided prescription drug benefits for the majority of its ~~retired~~current retirees and ~~active employees. In 2005,~~all future retirees.

At December 31, 2006, the Company adopted the recognition and disclosure requirements of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Retirement Plans” (FAS 158), which requires balance sheet recognition of the funded status of defined benefit plans. As such, the December 31, 2006, balance sheet reflects the funded status of these ~~changes resulted~~plans. Because FAS 158 prohibits retrospective application, the December 31, 2006, balance sheet and related footnote disclosure are presented in ~~an overall reduction in the accumulated postretirement~~accordance with FAS 158 while prior years’ balance sheets and footnotes continue to reflect benefit ~~obligation of $38,132, which will be amortized over a period of 4.6 years.~~plan assets, liabilities and disclosure as previously reported.

The Company uses a December 31 measurement date for all its plans with the exception of its pension plan in the United Kingdom, which uses a September 30 measurement date.

The incremental effect of applying FAS 158 on individual line items in the Company’s 2006 ending balance sheet is as follows:


	Before						After
	Application						Application of
	of FAS 158			Adjustments			FAS 158
Prepaid Pension Costs	$	269,366		$	(260,315	)	$	9,051

Total Assets	$	269,366		$	(260,315	)	$	9,051


Accrued wages and other compensation	$	8,917		$	11,245		$	20,162
Pension and Other Postretirement Benefits		185,984			23,448			209,432
Deferred Income Taxes		(25,176	)		(113,614	)		(138,790	)

Total Liabilities	$	169,725		$	(78,921	)	$	90,804

Accumulated other comprehensive loss	$	(56,220	)	$	(181,396	)	$	(237,616	)

Total Shareholders’ Equity	$	(56,220	)	$	(181,396	)	$	(237,616	)

Total Liabilities and Shareholders’ Equity	$	113,505		$	(260,317	)	$	(146,812	)

The components of net periodic benefit cost include the following:


	2005			2004			2003			2006			2005			2004

Retirement Plans
Service cost	$	25,994		$	22,880		$	20,209		$	28,545		$	25,994		$	22,880
Interest cost		60,489			57,953			51,767			64,471			60,489			57,953
Expected return on plan assets		(72,316	)		(65,967	)		(55,290	)		(81,332	)		(72,316	)		(65,967	)
Amortization of net translation (asset) obligation		575			615			576
Amortization of net transition obligation											696			575			615
Amortization of prior service cost		1,770			1,558			1,665			1,615			1,770			1,558
Amortization of net actuarial loss		22,705			21,153			22,223			28,177			22,705			21,153
Special termination benefit cost		203			198			10,234			659			203			198
Other		¾			¾			70			13			—			—
Effect of curtailment loss		¾			¾			611

Net periodic benefit cost	$	39,420		$	38,390		$	52,065		$	42,844		$	39,420		$	38,390

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)


	Retirement Plans
	2005

Total Recognized Amounts in the Consolidated Balance Sheets
Prepaid benefit cost	$	281,904
Accrued benefit liability		(133,545	)
Intangible asset		6,486
Accumulated other comprehensive loss		84,484

Net amount recognized	$	239,329


	Retirement Plans
	2006

Total Recognized Amounts in the Consolidated Balance Sheets
Noncurrent assets	$	9,051
Current liabilities		(17,066	)
Noncurrent liabilities		(150,820	)

Net pension liability	$	(158,835	)

Items not yet recognized as a component of net periodic pension cost that are included in Accumulated Other Comprehensive Income as of December 31, 2006, are as follows:


			Retiree Health and
			Life Insurance
	Retirement Plans		Plans

Net actuarial loss	$	349,997	$	43,088
Prior service cost		8,824		(30,977	)
Net transition obligation		5,478		—

	$	364,299	$	12,111

Of the amounts included in Accumulated Other Comprehensive Income as of December 31, 2006, the portions that are expected to be recognized as components of net periodic benefit cost in 2007 are as follows:


			Retiree Health and
			Life Insurance
	Retirement Plans		Plans

Net actuarial loss	$	19,518	$	4,579
Prior service cost		1,428		(9,730	)
Net transition obligation		478		—

	$	21,424	$	(5,151	)

The accumulated benefit obligation for all defined benefit plans was $1,143,897 and $1,099,747 at December 31, 2006 and 2005, respectively.

The projected benefit obligation (PBO), accumulated benefit obligation (ABO) and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were, $428,692, $401,560 and $261,100, respectively, as of December 31, 2006, and $375,655, $348,384 and $216,841, respectively, as of December 31, 2005. As of December 31, 2006, both the ABO and the PBO of the Company’s U.S. qualified pension plan were fully funded.

F-26

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

The following ~~tables set forth the Plans’ obligations and assets at December 31:~~

Retiree Health and
Retirement Plans Life Insurance Plans
2005 2004 2005 2004

Change in Benefit Obligation
Benefit obligation at January 1 $ 1,080,525 $ 911,083 $ 146,764 $ 186,363
Service cost 25,994 22,880 3,487 3,608
Interest cost 60,489 57,953 7,097 8,431
Plan participant contributions 1,557 1,332 4,586 3,558
Plan amendments 4,082 715 (38,132 ) ¾
Actuarial loss (gain) 96,078 110,923 (2,396 ) (36,261 )
Benefits paid (53,255 ) (53,031 ) (19,251 ) (18,982 )
Impact of foreign exchange rates (19,869 ) 19,574 58 47
Special termination benefit cost 203 198 ¾ ¾
Effect of curtailment ¾ ¾ ¾ ¾
Other 579 8,898 ¾ ¾

Benefit obligation at December 31 $ 1,196,383 $ 1,080,525 $ 102,213 $ 146,764

Change in Plan Assets
Fair value of plan assets at January 1 $893,384 $ 790,470 $ 42,347 $ 50,081
Actual return on plan assets 75,435 94,969 2,270 5,238
Company contributions 82,163 39,975 2,930 2,704
Plan participant contributions 1,557 1,332 4,586 3,558
Benefits paid (53,255 ) (53,031 ) (19,251 ) (18,982 )
Impact of foreign exchange rates (14,093 ) 13,721 ¾ ¾
Expenses paid (4,245 ) (3,104 ) (177 ) (252 )
Other 496 9,052 ¾ ¾

Fair value of plan assets at December 31 $ 981,442 $ 893,384 $ 32,705 $42,347

Reconciliation of Funded Status, December 31
Funded status of plan $ (214,941 ) $ (187,565 ) $ (69,508 ) $ (104,417 )
Unrecognized net actuarial loss 439,287 372,669 57,560 64,127
Unrecognized prior service cost 9,356 7,048 (37,917 ) (8,782 )
Unrecognized net transition obligation 5,627 5,914 ¾ ¾

Net amount recognized $ 239,329 $ 198,066 $ (49,865 ) $ (49,072 )

Retirement Plans
2005 2004

Total Recognized Amounts in the Consolidated Balance Sheets
Prepaid benefit cost $ 281,904 $ 237,200
Accrued benefit liability (133,545 ) (129,555 )
Intangible asset 6,486 5,228
Accumulated other comprehensive loss 84,484 85,193

Net amount recognized $ 239,329 $ 198,066

~~F-23~~

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in published benchmark rates (e.g. Moody’s AA Bond Rate). In setting these rates, the Company also uses yield curve models in order to validate the appropriateness of the discount rates selected for each of the plans.thousands except per share data)

A new mortality table assumption was adopted by the Company ~~for~~effective with the measurement of the December 31, 2005, benefit obligations, moving from the 1983 GAM mortality table to the RP-2000 CH table. This change in mortality table increased pension liabilities by approximately 2%.

Medical Trends

The U.S. Retiree Health and Life Insurance Plan makes up ~~97%~~approximately 99% of the Retiree Health liability. Therefore, the following information relates to the U.S. plan only.

Healthcare Cost Trend Rate

2005 13.30 %
2004 10.0 %

Ultimate Trend Rate

2005 6.0 %
2004 6.0 %

Year at which the Rate Reaches the Ultimate Trend Rate

2005 2014
2004 2008


Healthcare Cost Trend Rate	Pre-age 65			Post-age 65

2006		11.30	%		12.30	%
2005		13.30	%		13.30	%


Ultimate Trend Rate	Pre-age 65			Post-age 65

2006		5.0	%		6.0	%
2005		6.0	%		6.0	%


Year at which the Rate Reaches
the Ultimate Trend Rate	Pre-age 65		Post-age 65

2006		2014		2014
2005		2014		2014

Increasing the assumed trend rate for healthcare costs by one percentage point would increase the accumulated postretirement benefit obligation (the ~~“APBO”)~~APBO) and total service and interest cost component approximately ~~$2,369~~$2,179 and ~~$174,~~$213, respectively. Decreasing the assumed trend rate for healthcare costs by one percentage point would decrease the APBO and total service and interest cost component approximately ~~$2,094~~$1,995 and ~~$152,~~$190, respectively. Based on amendments to the U.S. plan approved in 1999, which became effective in 2003, cost increases borne by the Company are limited to the Urban CPI, as defined.

~~F-25~~

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

The Company employs a total-return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Alternative assets such as real estate, private equity and hedge funds may be used judiciously to enhance long-term returns while improving portfolio diversification. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.

U.S. Defined Benefit Plan

The equity investments are ~~invested in~~diversified among U.S. and non-U.S. stocks ~~and further diversified in~~of small and large capitalizations. The current target allocation (midpoint) for the investment portfolio is Equity Securities –— 60%, Debt Securities –— 30%, Alternative –— 10% and Cash –— 0%.

U.K. Plan

The equity investments are diversified ~~across domestic~~among U.K. and international stocks of small and large capitalizations. The current target allocation (midpoint) for the investment portfolio is Equity Securities –— 72%, Debt Securities –— 22%, Alternative –— 5% and Cash –— 1%.

Canadian Plan

The equity investments are diversified ~~across domestic~~among Canadian and international stocks of primarily large capitalizations. The current target allocation (midpoint) for the investment portfolio is Equity Securities –— 50%, Debt Securities –— 50%, Alternative –— 0% and Cash –— 0%.

Retiree Health and Life Insurance Plan Assets

The following table sets forth the weighted-average asset allocations of the Company’s retiree health and life insurance plans at December 31, 2006 and 2005, by asset category. As mentioned previously, the U.S. Retiree Health and Life Insurance Plan makes up approximately 99% of the Retiree Health liability. Therefore, the following information relates to the U.S. Plan only.


Asset Category

Equity securities
2006	58.4	%
2005	54.8	%
Debt securities
2006	32.6	%
2005	30.4	%
Alternative
2006	6.9	%
2005	6.9	%
Cash
2006	2.1	%
2005	7.9	%

Total
2006	100.0	%
2005	100.0	%

~~F-26~~F-29

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

life insurance plans at December 31, 2005 and 2004, by asset category. As mentioned previously, the U.S. Retiree Health and Life Insurance Plan makes up 97% of the Retiree Health liability. Therefore, the following information relates to the U.S. Plan only.

Asset Category

Equity securities
2005 54.8 %
2004 63.1 %
Debt securities
2005 30.4 %
2004 31.2 %
Alternative
2005 6.9 %
2004 3.9 %
Cash
2005 7.9 %
2004 1.8 %

Total
2005 100.0 %
2004 100.0 %

Contributions

The Company estimates that it will make minimal voluntary contributions to its defined-benefit retirement and retiree health and life insurance plans in ~~2006.~~2007.

Medicare Prescription Drug, Improvement and Modernization Act of 2003

In May 2004, the Financial Accounting Standards Board ~~(“FASB”)~~(FASB) issued FASB Staff Position 106-2, ‘Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003’ ~~(“FSP 106-2”)~~(FSP 106-2), which requires measures of the accumulated postretirement benefit obligation and net periodic postretirement benefit costs to reflect the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the ~~“Act”)~~Act). FSP 106-2 was effective for interim or annual reporting periods beginning after June 15, 2004. The Company adopted and retroactively applied FSP 106-2 as of the effective date. In response to the Company’s reflection of the effects of the Act and the adoption of FSP 106-2, the accumulated postretirement benefit obligation was reduced by $48,940 and net periodic benefit costs were reduced by $9,080 in 2004. The reduction in obligation directly related to the subsidy was $3,394 and $3,942 in 2006 and ~~$28,655 in~~ 2005, ~~and 2004~~ respectively.

The projected subsidy as of December 31, ~~2005~~2006, was substantially less than the projected subsidy asat the time of ~~December 31, 2004~~adoption because of changes the Company ~~changed~~made during 2005 to the eligibility for retiree medical ~~benefits during 2005.~~benefits. As part of these changes, prescription drug benefits for Medicare-eligible retirees were eliminated for those employees who retired after 1981 and for all future retirees, thereby significantly reducing the projected subsidy. These changes resulted in an overall reduction in the accumulated postretirement benefit obligation of $38,132 in 2005, which is being amortized over a period of 4.6 years. The benefit of this amortization will cease during 2010.

The following table sets forth the Company’s projected subsidy from the government for the next ten years:

Projected
Year Subsidy

2006 $ 188
2007 198
2008 206
2009 213
2010 218
2011-2015 1,181

~~F-27~~

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Dollars in thousands except per share data)~~


	Projected
Year	Subsidy

2007	$	156
2008	$	162
2009	$	166
2010	$	170
2011	$	171
2012—2016	$	927

Sonoco Savings Plan

The Company sponsors the Sonoco Savings Plan for its U.S. employees, a defined contribution retirement plan. ~~Beginning in 2002, the Company adopted~~In accordance with the IRS “Safe Harbor” matching contributions and vesting provisions ~~which provide~~the plan provides 100% Company matching on the first 3% of pretax contributions, 50% Company matching on the next 2% of pretax contributions and 100% immediate vesting. The plan also provides for participant contributions of 1% to 30% of gross ~~pay beginning in 2004. For 2003 and 2002, the plan provided that all eligible employees could contribute 1% to 20% of their gross~~ pay. The Company’s expenses related to the plan for 2006, 2005 ~~2004~~ and ~~2003~~2004 were approximately $14,000, $13,000 ~~$11,000~~ and ~~$12,000,~~$11,000, respectively.

Sonoco Investment and Retirement Plan

The Company also sponsors the Sonoco Investment and Retirement Plan, a defined contribution pension plan, for its salaried and non-union U.S. employees who were hired on or after January 1, 2004, the Plan’s effective date. The Company makes an annual contribution of 4% of all eligible pay plus 4% of eligible pay in excess of the Social Security wage base to eligible participant accounts. The first such contribution was made in January 2005, in the amount of $35, for those participants eligible to participate in the plan during 2004, ~~and~~ the 2005 expense was ~~$414.~~$414 and the 2006 expense was $1,244. Participants are fully vested after five years of service or upon reaching age fifty-five, if earlier.

F-30

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

~~Deferred tax liabilities (assets) are comprised of the following at December 31:~~

2005 2004

Depreciation $ 100,623 $ 123,874
Employee benefits 116,090 107,380
Other 10,516 10,524

Gross deferred tax liabilities 227,229 241,778

Retiree health benefits (26,429 ) (21,345 )
Foreign loss carryforwards (39,023 ) (36,617 )
Capital loss carryforwards (4,448 ) (7,176 )
Employee benefits (45,659 ) (44,528 )
Accrued liabilities and other (33,785 ) (32,037 )

Gross deferred tax assets (149,344 ) (141,703 )

Valuation allowance on deferred tax assets 43,022 43,192

Total deferred taxes, net $ 120,907 $ 143,267

The net decrease in the valuation allowance in 2005 for deferred tax assets of $170 is due to an increase of net operating and capital losses of foreign subsidiaries of $1,778, for which tax benefit has not been recognized, offset by a decrease of $1,948 related to loss carryforwards and other deferred tax assets for which a valuation allowance was no longer required.

Approximately ~~$131,799~~$187,148 of foreign subsidiary loss carryforwards remain at December 31, ~~2005.~~2006. Their use is limited to future taxable earnings of the respective foreign subsidiaries. Of these loss carryforwards, approximately ~~$97,756 has~~$153,012 have no expiration date. The remaining loss carryforwards expire at various dates in the future. Approximately ~~$5,498~~$5,054 of state loss carryforwards and ~~$3,634~~$3,153 of state credit carryforwards remain at December 31, ~~2005.~~2006. The state loss and credit carryforwards expire at various dates in the future.

A reconciliation of the U.S. federal statutory tax rate to the actual consolidated tax expense is as follows:


	2005					2004					2003					2006					2005					2004

Statutory tax rate	$	80,894		35.0	%	$	69,070		35.0	%	$	66,222		35.0	%	$	96,183		35.0	%	$	80,894		35.0	%	$	69,070		35.0	%
State income taxes, net of federal tax benefit		1,204		.5			1,425		0.7			3,085		1.6			3,182		1.2			1,836		0.8			1,857		0.9
Repatriation		9,891		4.3			¾		¾			¾		¾			—		—			9,891		4.3			—		—
Valuation allowance		5,001		2.2			7,777		3.9			(8,790	)	(4.6	)		9,175		3.3			5,001		2.2			7,777		3.9
IRS examination		¾		¾			(9,261	)	(4.7	)		¾		¾
IRS and state examinations and settlements																	(5,354	)	(1.9	)		(632	)	(0.3	)		(9,693	)	(4.9	)
Other, net		(12,816	)	(5.6	)		(10,153	)	(5.1	)		(2,720	)	(1.5	)		(9,857	)	(3.6	)		(12,816	)	(5.6	)		(10,153	)	(5.1	)

Total taxes	$	84,174		36.4	%	$	58,858		29.8	%	$	57,797		30.5	%	$	93,329		34.0	%	$	84,174		36.4	%	$	58,858		29.8	%

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Dollars in thousands except per share data)~~

repatriated funds qualified for an 85% dividends-received deduction. The Company ~~has accrued the~~recorded U.S. federal and state taxes ~~due~~ on the repatriated funds of $10,074. ~~During 2004, the IRS~~The Company also closed ~~its examination of the Company’s~~state tax ~~returns for years 1999 through 2001, which resulted~~examinations resulting in the reversal of previously accrued taxes totaling approximately ~~$9,261.~~ $632. During 2004, IRS and state tax examinations were concluded resulting in the reversal of previously accrued taxes totaling approximately $9,693.

The ~~Company has resolved all issues with~~Company’s income tax returns for 2003 through 2006 are open for examination by the ~~IRS for all years through 2001.~~IRS. The Company believes that it has made adequate provision for income taxes with respect to open years.

~~14.~~13. Commitments and Contingencies

Contingencies

The Company is a party to various claims and legal proceedings incidental to its business and is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which it operates. ~~The~~As is the case with other companies in similar industries, the Company ~~also~~ faces exposure from actual or potential claims and legal proceedings. The Company cannot currently determine the final outcome of the proceedings described below or the ultimate amount of potential losses.Pursuant to Statement of Financial Accounting Standards No. 5, ‘Accounting for Contingencies’ ~~(“FAS 5”)~~(FAS 5), management records accruals for estimated losses at the time that information becomes available

F-32

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

indicating that losses are probable and that the amounts can be reasonably ~~estimated.~~estimable. Accrued amounts are not discounted.Although the level of future expenditures for legal and environmental matters is impossible to determine with any degree of probability, it is management’s opinion that such costs, when finally determined, will not have a material adverse effect on the consolidated financial position of the Company.

Environmental Matters

During the fourth quarter of 2005, the United States Environmental Protection Agency ~~(“EPA”)~~(EPA) notified ~~Sonoco~~ U.S. Paper Mills ~~Inc. (“U.S. Mills”)~~Corp. (U.S. Mills), a ~~wholly-owned~~wholly owned subsidiary of the Company, that U.S. Mills and ~~another party~~NCR Corporation (NCR) would be jointly held responsible to undertake a program to remove and dispose of certain ~~PCB contaminated~~PCB-contaminated sediments at a particular site on the lower Fox River in Wisconsin. U.S. Mills and ~~the other party have~~NCR reached an agreement between themselves that each would fund 50% of the costs of remediation, which isthe Company currently ~~estimated~~estimates to be between ~~$25,000~~$24,000 and ~~$30,000~~$26,000 for the project as a whole. Although project implementation ~~will begin shortly,~~began in 2006, most of the project cost is expected to be incurred in 2007. Although the agreement reached does not acknowledge responsibility or prevent the other party from seeking reimbursement from any other parties (including each other), the Company ~~has~~ accrued $12,500 in the fourth quarter of 2005 as an estimate of the portion of costs that U.S. Mills expects to fund under the current agreement. This charge is included in “Selling, general and administrative expenses” in the Company’s Consolidated Statements of Income. The actual costs associated with cleanup of this particular site are dependent upon many factors and it is reasonably possible that remediation costs could be higher than the current estimate of project costs. The Company acquired U.S. Mills in 2001, and the alleged contamination predates the acquisition. ~~Based on information currently known to~~

In June 2006, U.S. Mills became aware of the ~~Company,~~potential for further liability along a larger stretch of the lower Fox River, including the bay at Green Bay. Although it ~~does~~has not ~~appear that~~accepted any liability nor entered into any cost sharing agreements with interested parties, U.S. Mills is in the early stages of reviewing this new information and is discussing possible remediation scenarios with other potentially responsible parties and cannot reasonably estimate the amount of its liability, if any, at this time. Accordingly, no additional reserve for ~~the alleged contamination. Some, or all, of any~~potential remediation costs ~~incurred may be covered by insurance, or be subject to recoupment from other parties, but no amounts have~~has been recognized inby U.S. Mills at December 31, 2006. Although U.S. Mills’ liability could exceed its net worth, Sonoco Products Company believes the maximum exposure to its financial ~~statements for such recovery.~~position is limited to the equity position of U.S. Mills which is approximately $90,000 as of December 31, 2006, excluding any tax benefits that may further reduce the net charge.

The Company has ~~also~~ been named as a potentially responsible party at several other environmentally contaminated sites not owned by the Company. ~~These regulatory actions (including those described in the prior paragraph) and a small number of private-party lawsuits represent the Company’s largest potential environmental liabilities.~~ 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 cleanup 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

~~F-30~~

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

Income Taxes

The Company is subject to ongoing examinations by tax authorities of the jurisdictions in which it operates. The Company regularly assesses the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income and other taxes. The Company believes that adequate provision has been made for tax adjustments that are probable as a result of any examination. While the status of the Company’s ongoing tax examinations is constantly changing due to new tax law developments, statute expirations and other factors, the Company does not expect the outcome of any tax examination to have a material effect on its consolidated financial position, results of operations or cash flows.

Commitments

In December 2003, the Company entered into an agreement with the majority shareholders of Demolli Industria Cartaria S.p.A., an Italy-based manufacturer of paperboard and tubes and cores that is 25% owned by the Company and reported as an equity method investment. This agreement allows the majority shareholder to require (through a put option arrangement) the Company to buy the shares not currently owned by the Company at any time between the date of the agreement and December 2006. The agreement also gives the Company the right to purchase the shares (through a call option arrangement) any time after December 2006 through December 2009. The price of the share purchase will be determined by a preset formula, which the Company believes approximates fair value, related to an earnings multiple at the time such shares might be put or called. The Company is in discussion with the majority shareholders of Demolli Industria Cartaria S.p.A to potentially extend the terms (both the put and the call) of this agreement.

In November 2004, and in conjunction with the Sonoco-Alcore joint venture, the Company entered into an agreement with Ahlstrom, the minority shareholder of Sonoco-Alcore. This agreement states that, following a two and one-half year standstill period, subject to certain conditions, Ahlstrom shall have the right over the following three and one-half years to require (through a put option arrangement) the Company to purchase its shares in Sonoco-Alcore. During the seventh year, the Company will have the right to purchase the shares (through a call option arrangement). The price of the share purchase will be determined by a preset formula, which the Company believes approximates fair value, related to an earnings multiple at the time such shares might be put or called.

As of December 31, ~~2005,~~2006, the Company had long-term obligations to purchase electricity and steam, which it uses in its production processes. The purchase contracts require the Company to make total payments of approximately ~~$148,432~~$174,098 through ~~2018.~~

~~F-31~~

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Dollars~~2021, as follows: $11,933 in ~~thousands except per share data)~~2007; $13,164 in 2008; $12,680 in 2009; $12,119 in 2010 and a total of $124,202 from 2011 through 2021.

~~15.~~14. Shareholders’ Equity and Earnings per Share

Stock Repurchases

In 2001, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to 5,000,000 shares of the Company’s common stock, in addition to approximately 290,000 shares that were authorized for repurchase prior to 2001. Therefore, the Company had authorizations to repurchase approximately 5,290,000 shares of common stock as of December 31, 2005. ~~In December 2005,~~From February 3, 2006 through April 4, 2006, the Company ~~announced~~repurchased 2,500,000 shares of Sonoco common stock for $82,668. On April 19, 2006, the Company’s Board of Directors rescinded all previously approved stock repurchase programs in conjunction with its ~~intention~~approval of a new program, which authorizes the repurchase of up to 5,000,000 shares of the Company’s common stock. On February 7, 2007, the Company’s Board of Directors, in anticipation of a planned 1,500,000 share repurchase, ~~between 2,000,000 and 2,500,000~~authorized the reinstatement of those shares to its existing 5,000,000 authorization. On February 8, 2007, the Company completed the repurchase of 1,500,000 shares of its ~~outstanding~~ common stock ~~during the first quarter~~for a total cost of ~~2006.~~$56,700; accordingly, 5,000,000 shares remain available for repurchase. The Company did not repurchase any of its common stock in 2005.

Earnings ~~Per~~per Share

The following table sets forth the computation of basic and diluted earnings per share:


	2005		2004		2003		2006		2005		2004

Numerator:
Net income	$	161,877	$	151,229	$	138,949	$	195,081	$	161,877	$	151,229
Denominator:
Average common shares outstanding		99,336,000		98,018,000		96,819,000
Dilutive effect of stock based compensation		1,082,000		929,000		310,000
Weighted average common shares outstanding								100,073,000		99,336,000		98,018,000
Dilutive effect of stock-based compensation								1,461,000		1,082,000		929,000

Diluted outstanding shares		100,418,000		98,947,000		97,129,000		101,534,000		100,418,000		98,947,000
Net income per common share
Basic	$	1.63	$	1.54	$	1.44	$	1.95	$	1.63	$	1.54
Diluted	$	1.61	$	1.53	$	1.43	$	1.92	$	1.61	$	1.53

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Dollars in thousands except per share data)~~

~~16.~~15. Financial Reporting for Business Segments

The Company identifies its reportable segments in accordance with Statement of Financial Accounting Standards No. 131, ‘Disclosures about Segments of an Enterprise and Related Information’ ~~(“FAS 131”)~~(FAS 131), by evaluating the level of detail reviewed by the ~~Chief Operating Decision Maker,~~chief operating decision maker, gross profit margins, nature of products sold, nature of the production processes, type and class of customer, methods used to distribute product and nature of regulatory environment.~~While all of these factors were reviewed,~~

The Consumer Packaging segment includes the ~~Company feels that the most significant factors are the nature of its products, the nature of the production process~~following products: round and ~~the type of customers served.~~

~~Effective December 31, 2005, the Company changed the name of the Engineered Carriers~~shaped rigid packaging, both paper and ~~Paper segment to Tubes~~plastic; printed flexible packaging; and ~~Cores/Paper, because the term “tubes~~metal and cores” is more generally understood than “engineered carriers” in the marketplace for the primary products offered by the businesses in this segment. There has been no change in the businesses included in this segment.plastic ends and closures.

The Tubes and Cores/Paper segment includes the following products and services: high-performance paper and composite paperboard tubes and cores; fiber-based construction tubes and forms; recycled paperboard; ~~linerboard;~~linerboard and ~~supply-chain packaging services.~~

~~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.~~recovered paper.

The Packaging Services segment provides the following products and services: point-of-purchase displays; packaging fulfillment; contract packing; brand ~~management;~~management and supply chain management.

All Other Sonoco represents the activities and businesses of the Company’s consolidated subsidiaries that do not meet the aggregation criteria outlined in FAS 131, and therefore cannot be combined with other operating segments into a reportable segment. All Other Sonoco includes the following products: wooden, metal and composite reels; molded and extruded plastics; custom-designed protective packaging; and paper amenities such as coasters and glass covers.

~~F-33~~F-35

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

Included in Corporate operating profits are restructuring charges, interest expense and interest income.


Years ended	Tubes and Cores		Consumer		Packaging		All Other								Consumer		Tubes and Cores/		Packaging		All Other
December 31	/Paper		Packaging		Services		Sonoco		Corporate			Consolidated			Packaging		Paper		Services		Sonoco		Corporate			Consolidated

Total Revenue														Total Revenue
2006															$	1,308,184	$	1,614,721	$	456,877	$	407,411	$	—		$	3,787,193
2005	$	1,569,170	$	1,250,916	$	456,161	$	377,968	$	¾		$	3,654,215			1,250,916		1,569,170		456,161		377,968		—			3,654,215
2004		1,470,213		1,134,782		321,251		343,813		¾			3,270,059			1,134,782		1,470,213		321,251		343,813		—			3,270,059
2003		1,334,223		1,046,525		185,006		295,029		¾			2,860,783
Intersegment Sales¹														Intersegment Sales¹
2006															$	3,430	$	89,163	$	44	$	37,717	$	—		$	130,354
2005	$	87,113	$	3,465	$	284	$	34,779	$	¾		$	125,641			3,465		87,113		284		34,779		—			125,641
2004		81,701		2,712		206		30,007		¾			114,626			2,712		81,701		206		30,007		—			114,626
2003		74,391		2,143		386		25,537		¾			102,457
Sales to Unaffiliated Customers														Sales to Unaffiliated Customers
2006															$	1,304,754	$	1,525,558	$	456,833	$	369,694	$	—		$	3,656,839
2005	$	1,482,057	$	1,247,451	$	455,877	$	343,189	$	¾		$	3,528,574			1,247,451		1,482,057		455,877		343,189		—			3,528,574
2004		1,388,512		1,132,070		321,045		313,806		¾			3,155,433			1,132,070		1,388,512		321,045		313,806		—			3,155,433
2003		1,259,832		1,044,382		184,620		269,492		¾			2,758,326
Operating Profits²														Operating Profits²
2006															$	109,624	$	148,177	$	39,181	$	49,106	$	(71,280	)	$	274,808
2005	$	107,060	$	103,505	$	44,813	$	40,607	$	(64,859	)	$	231,126			103,505		107,060		44,813		40,607		(64,859	)		231,126
2004		113,032		83,111		30,266		31,978		(61,045	)		197,342			83,111		113,032		30,266		31,978		(61,045	)		197,342
2003		102,938		78,733		7,935		18,995		(100,268	)		108,333
Identifiable Assets³														Identifiable Assets³
2006															$	836,705	$	1,388,453	$	326,518	$	185,287	$	179,715		$	2,916,678
2005	$	1,258,166	$	738,023	$	321,742	$	189,369	$	474,440		$	2,981,740			738,023		1,258,166		321,742		189,369		474,440			2,981,740
2004		1,107,223		735,162		320,401		191,975		686,558			3,041,319			735,162		1,107,223		320,401		191,975		686,558			3,041,319
2003		1,075,707		683,284		49,191		195,799		516,652			2,520,633
Depreciation, Depletion and Amortization
Depreciation, Depletion and Amortization⁴														Depreciation, Depletion and Amortization⁴
2006															$	55,074	$	85,863	$	11,942	$	11,985	$	—		$	164,864
2005	$	83,737	$	56,281	$	11,994	$	11,062	$	¾		$	163,074			56,281		83,737		11,994		11,062		—			163,074
2004		85,153		59,413		8,236		11,126		¾			163,928			59,413		85,153		8,236		11,126		—			163,928
2003		83,647		52,549		3,453		13,040		¾			152,689
Capital Expenditures
Capital Expenditures⁴														Capital Expenditures⁴
2006															$	48,153	$	63,290	$	3,439	$	8,397	$	—		$	123,279
2005	$	62,312	$	50,802	$	4,913	$	11,085	$	¾		$	129,112			50,802		62,312		4,913		11,085		—			129,112
2004		59,410		50,686		3,279		6,425		¾			119,800			50,686		59,410		3,279		6,425		—			119,800
2003		48,612		50,951		5,069		3,785		¾			108,417

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

Geographic Regions

Sales to unaffiliated customers and long-lived assets by geographic region are as follows:

2005 2004 2003

Sales to Unaffiliated Customers

United States $ 2,303,890 $ 2,112,248 $ 1,859,609
Europe 539,918 443,463 392,198
Canada 340,532 315,978 262,826
All other 344,234 283,744 243,693

Total $ 3,528,574 $ 3,155,433 $ 2,758,326

Long-lived Assets

United States $ 1,054,430 $ 1,090,187 $ 884,863
Europe 342,601 277,088 187,588
Canada 165,243 164,550 157,587
All other 143,894 130,409 120,886

Total $ 1,706,168 $ 1,662,234 $ 1,350,924

~~Sales information from the United States does not include the impact of the High Density Film business, which is classified as discontinued operations.~~


	2006		2005		2004

Sales to Unaffiliated Customers
United States	$	2,343,046	$	2,291,302	$	2,102,229
Europe		576,096		552,506		453,482
Canada		369,563		340,532		315,978
All other		368,134		344,234		283,744

Total	$	3,656,839	$	3,528,574	$	3,155,433

Long-lived Assets
United States	$	1,217,462	$	1,054,430	$	1,090,187
Europe		353,841		342,601		277,088
Canada		165,796		165,243		164,550
All other		148,519		143,894		130,409

Total	$	1,885,618	$	1,706,168	$	1,662,234

Sales are attributed to countries/regions based upon the plant location from which products are shipped. Long-lived assets are comprised of property, plant and equipment, goodwill, intangible assets and investment in affiliates (see Notes 76 and 8)7).

~~17.~~16. Accumulated Other Comprehensive Loss

The following table summarizes the components of accumulated other comprehensive loss, and the changes in accumulated comprehensive loss, net of tax as applicable, for the years ended December 31, ~~2005~~2006 and ~~2004:~~2005:


	Foreign			Minimum					Accumulated												Accumulated
	Currency			Pension			Derivative		Other			Foreign Currency						Derivative			Other
	Translation			Liability			Financial		Comprehensive			Translation			Defined Benefit			Financial			Comprehensive
	Adjustments			Adjustments			Instruments		Loss			Adjustments			Plans			Instruments			Loss

Balance at December 31, 2003	$	(83,906	)	$	(53,826	)	$	1,641	$	(136,091	)
Change during 2004		36,917			(4,479	)		498		32,936

Balance at December 31, 2004		(46,989	)		(58,305	)		2,139		(103,155	)	$	(46,989	)	$	(58,305	)	$	2,139		$	(103,155	)
Change during 2005		(12,844	)		568			9,042		(3,234	)		(12,844	)		568			9,042			(3,234	)

Balance at December 31, 2005	$	(59,833	)	$	(57,737	)	$	11,181	$	(106,389	)		(59,833	)		(57,737	)		11,181			(106,389	)
Change during 2006													37,203			(179,879	)		(13,240	)		(155,916	)

Balance at December 31, 2006												$	(22,630	)	$	(237,616	)	$	(2,059	)	$	(262,305	)

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

17. New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (FAS 158). FAS 158 required the Company to recognize the funded status of each of its defined benefit plans as an asset or liability on the December 31, 2006 balance sheet, the impact of which is discussed in Note 11. Under FAS 158 any future changes in funded status that are not reflected in net income will be recognized in other comprehensive income. FAS 158 does not change how pensions and other postretirement benefits plans are accounted for and reported in the income statement. FAS 158 will require the Company to measure the funded status of its plans as of year end beginning with its December 31, 2008 balance sheet. Because the Company currently uses December 31 as the measurement date for most of its plans, including its major U.S.-based plans, this change will not have a material effect on the Company’s financial statements.

In October 2006, the Financial Accounting Standards Board issued FASB Staff Position FAS 123(R)-5, “Amendment of FASB Staff Position FAS 123(R)-1.” This FASB Staff Position (FSP) excludes from treatment as a modification a change to the terms of certain awards if that change is made solely to reflect an equity restructuring and certain other conditions are met. If an entity did not apply Statement 123(R) in a manner consistent with the provisions of this FSP, then that entity would be required to retrospectively apply the provisions in this FSP to prior periods when those periods’ financial statements are included for comparative purposes with current-period financial statements. The provisions of this FASB Staff Position are effective for the Company beginning in the first quarter of 2007. Because Sonoco has not made any changes to the terms of previously granted stock-based awards, its implementation will have no effect on the Company’s financial reporting.

In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). This interpretation modified the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109, “Accounting for Income Taxes” (FAS 109). Specifically, FIN 48 changes the application of FAS 109 by establishing criteria that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. Additionally, FIN 48 provides new rules for measurement, derecognition, classification, interest and penalties, accounting for income taxes in interim periods, as well as disclosure and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. The cumulative effect of adopting FIN 48 will be recorded in retained earnings and the liability for uncertain tax positions. The Company currently expects the impact of this adjustment will be an increase in the liability for uncertain tax positions of between $2 million and $5 million. The Company does not believe there will be any impact to the Income Statement at the time of adoption.

F-38

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

18. ~~New Accounting Pronouncements~~

~~During 2005, there were no new accounting policies that had a material impact on the Company.~~

In May 2004, the FASB issued FASB Staff Position 106-2, ‘Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003’ (“FSP 106-2”), which requires measures of the accumulated postretirement benefit obligation and net periodic postretirement benefit costs to reflect the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP 106-2 was effective for interim or annual reporting periods beginning after June 15, 2004. The Company adopted and retroactively applied FSP 106-2 as of the effective date. See Note 12 for further information about the reduction in net periodic benefit costs.

In December 2004, the FASB issued FASB Staff Position 109-1, ‘Application of FASB Statement No. 109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004’ (“FSP 109-1”). Under the guidance of FSP 109-1, the deduction will be treated as a “special deduction” as described in Statement of Financial Accounting Standards No. 109, ‘Accounting for Income Taxes’ (“FAS 109”). As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on the Company’s tax return.

In December 2004, the FASB issued FASB Staff Position 109-2, ‘Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004’ (“FSP 109-2”). Under the guidance of FSP 109-2, an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the AJCA on its plan for reinvestment, or repatriation, of foreign earnings for purposes of applying FAS 109. The deduction is subject to a number of limitations. The Company repatriated $124,658 of foreign earnings during 2005, resulting in a tax liability of $10,074.

In December 2004, the FASB issued a revision to Statement of Financial Accounting Standards No. 123, ‘Share-Based Payment’ (“FAS 123R”), which requires companies to expense the value of employee stock options and similar awards. Under FAS 123R, share-based payment awards result in a cost that will be measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest. FAS 123R is effective for the Company on January 1, 2006. The Company is planning to use the “modified prospective” transition method, which does not require restating previous periods’ results. No additional compensation expense will be recorded for any vested awards outstanding as of the effective date. The Company did not have any unvested awards that will be affected by FAS 123R outstanding as of the effective date. Based on its current expectations, the Company expects that earnings per diluted share will decrease by approximately $.03 in 2006 and annually thereafter. The historical impact on net income and earnings per share if stock options had been expensed is set forth in
~~Note 11.~~

~~F-36~~

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Dollars in thousands except per share data)~~

~~19.~~ Selected Quarterly Financial Data

The following table sets forth selected quarterly financial data of the Company:

First Second Third Fourth
(Unaudited) Quarter Quarter Quarter Quarter

2005

Net sales $ 814,438 $ 878,170 $ 881,058 $ 954,908
Gross profit 148,316 160,744 163,392 188,499
Net income^1,2
36,989 40,176 45,913 38,799

Per common share
Net income — basic $ .37 $ .40 $ .46 $ .39
— diluted .37 .40 .46 .38
Cash dividends — common .22 .23 .23 .23
Market price — high 30.24 29.13 28.84 30.64
— low 25.58 25.46 25.79 25.43

2004

Net sales $ 695,416 $ 763,902 $ 811,117 $ 884,998
Gross profit 121,582 143,149 153,545 156,514
Net income^3,4
38,590 36,705 40,940 34,994

Per common share
Net income — basic $ .40 $ .37 $ .42 $ .36
— diluted .39 .37 .41 .35
Cash dividends — common .21 .22 .22 .22
Market price — high 25.21 25.99 26.50 29.73
— low 22.92 23.70 24.53 25.12


		First		Second		Third		Fourth
(Unaudited)		Quarter		Quarter		Quarter		Quarter

2006
Net sales		$	818,769	$	917,010	$	931,522	$	989,538
Gross profit			156,176		174,026		181,568		193,270
Net income¹			45,144		49,342		61,091		39,504

Per common share
Net income	- basic	$	.45	$	.50	$	.61	$	.39
	- diluted		.44		.49		.60		.39
Cash dividends	- common		.23		.24		.24		.24
Market price	- high		34.75		34.75		34.75		38.71
	- low		28.76		29.45		30.30		33.10

2005
Net sales		$	814,438	$	878,170	$	881,058	$	954,908
Gross profit			148,316		160,744		163,392		188,499
Net income^2,3			36,989		40,176		45,913		38,799

Per common share
Net income	- basic	$	.37	$	.40	$	.46	$	.39
	- diluted		.37		.40		.46		.38
Cash dividends	- common		.22		.23		.23		.23
Market price	- high		30.24		29.13		28.84		30.64
	- low		25.58		25.46		25.79		25.43


¹		Includes restructuring charges of $2,355 ($1,473 after tax), $2,565 ($1,669 after tax), $1,064 ($713 after tax) and $19,987 ($17,473 after tax) in the first, second, third and fourth quarter, respectively. The first, second, third and fourth quarters also include income of $100, $121, $142 and $53 after tax, respectively, associated with the allocation of restructuring charges to the minority interest shareholder of Sonoco-Alcore and Sonoco For Plas do Brazil Ltda.

²		The fourth quarter of 2005 includes $10,074 for additional tax expense associated with the repatriation of $124,658 in foreign earnings under American Jobs Creation Act and a charge of $12,500 ($7,596 after tax) related to an increase in the environmental reserve at a Company subsidiary’s paper operations in Wisconsin.

³		Includes restructuring charges of $5,042 ($3,646 after tax), $9,143 ($6,126 after tax), $4,275 ($2,599 after tax) and $2,777 ($1,972 after tax) in the first, second, third and fourth quarter, respectively. The first, second, third and fourth quarters also include income of $528, $536, $140 and $56 after tax, respectively, associated with the allocation of restructuring charges to the minority interest shareholder of Sonoco-Alcore.

²		The fourth quarter of 2005 includes $10,074 for additional tax expense associated with the repatriation of $124,658 in foreign earnings under AJCA and a charge of $12,500 ($7,596 after tax) related to an increase in the environmental reserve at a Company subsidiary’s paper operations in Wisconsin.

³		Includes restructuring charges of $1,328 ($1,091 after tax), $5,768 ($4,604 after tax), $1,148 ($952 after tax) and $10,738 ($9,507 after tax) in the first, second, third and fourth quarter, respectively. The fourth quarter also includes income of $1,778 ($1,778 after tax) associated with the allocation of restructuring charges to the minority interest shareholder of Sonoco-Alcore.

⁴		The fourth quarter of 2004 includes the correction associated with the misstatement of expenses in the Company’s wholly owned subsidiary in Spain. This correction totaled approximately $9,400, before and after tax, of which $2,200 was related to restructuring charges. Of the remaining $7,200, approximately $1,600 was associated with the first three quarters of 2004, approximately $1,300 was associated with 2003, approximately $300 was associated with 2002 approximately $1,900 was associated with 2001 and the remaining amount of approximately $2,100 was associated with years prior to 2001.

~~F-37~~F-39

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

~~Not applicable.~~On April 7, 2005, the Sonoco Savings Plan (the Plan) dismissed PricewaterhouseCoopers LLP (PWC) as the independent registered public accounting firm for the Plan. This change pertained only to the financial statements of the Plan and did not affect PWC’s engagement as the independent registered public accounting firm of Sonoco Products Company for its 2006 fiscal year. The reports of PWC on the financial statements of the Plan as of and for the years ended December 31, 2003 and 2002, did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principle. During the years ended December 31, 2003 and 2002, and through April 7, 2005, there were no disagreements with PWC on any matter of accounting principles or practices, financial statement disclosure or auditing scope of procedure, which disagreements, if not resolved to the satisfaction of PWC, would have caused PWC to make reference to the subject matter of the disagreement in connection with its reports on the Plan’s financial statements for such years. During the years ended December 31, 2003 and 2002, and through April 7, 2005, there were no “reportable events” with respect to the Plan as that term is defined in Item 304(a)(1)(v) of Regulation S-K.

On April 20, 2005, the Plan appointed McGladrey & Pullen, LLP (M&P) as the independent registered public accounting firm for the Plan for the year ended December 31, 2004. During the years ended December 31, 2003 and 2002 and through April 7, 2005, the Plan did not consult with M&P with respect to the Plan regarding any of the matters or events set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K. The change in the registered public accounting firm described above was approved by the Sonoco Benefits Committee, which has delegated authority to do so.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision, and with the participation, of our management, including our ~~Chief Executive Officer~~principal executive officer and ~~Chief Financial Officer,~~principal financial officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our ~~Chief Executive Officer~~principal executive officer and ~~Chief Financial Officer~~principal financial officer concluded that such controls and procedures, as of the end of the year covered by this Annual Report on Form 10-K, were effective.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act ~~Rule 13a-15(f).~~of 1934. Under the supervision and with the participation of our management, including our ~~Chief Executive Officer~~principal executive officer and ~~Chief Financial Officer,~~principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control –— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control –— Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, ~~2005.~~2006. PricewaterhouseCoopers LLP, our independent registered public accounting firm, has audited our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, ~~2005,~~2006, as evidenced by their attestation report, which appears on pages F-1 and F-2 of this Annual Report on Form ~~10-K, and is incorporated by reference here.~~10-K.

Changes in Internal Control ~~Over~~over Financial Reporting

The Company is continuously seeking to improve the efficiency and effectiveness of its operations and of its internal controls. This results in refinements to processes throughout the Company. However, there has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

Not applicable.

3237

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

PART III

Item 10. Directors and Executive Officers of the Registrant

The sections entitled “Election of Directors,” “Information Concerning Directors Whose Terms Continue” and “Section 16(a) Beneficial Ownership Reporting Compliance” as shown on pages 7-11 and page 23, respectively ofinformation set forth in the Company’s definitive Proxy Statement for the annual meeting of shareholders to be held on April ~~19, 2006~~18, 2007 (the ~~“Proxy Statement”)~~Proxy Statement), ~~set forth information with respect~~under the captions “Election of Directors,” “Information Concerning Directors Whose Terms Continue and Director Who Has Chosen Not to ~~the directors of the Company~~Stand for Re-Election” and ~~compliance with Section~~“Section 16(a) ~~of the Securities Exchange Act of 1934,~~Beneficial Ownership Reporting Compliance” on pages 7 through 11 and ~~are~~page 26, is incorporated herein by reference. Information about executive officers of the Company is set forth ~~under~~in Item 1 of this Annual Report on Form ~~10-K.~~10-K under the caption “Executive Officers of the Registrant”.

Code of Ethics — The Company has adopted a code of ethics (as defined in Item 406 of Regulation S-K) that applies to its senior executive and senior financial officers. This code of ethics is available through the Company’s Web site,www.sonoco.com, and is available in print to any shareholder who requests it. Any waivers or amendments to the provisions of this code of ethics will be posted to this Web site within five business days after the waiver or amendment.

Audit Committee Members –— The Company has a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The audit committee is comprised of the following members: Thomas E. Whiddon, ~~Chairman,~~Chairman; James L. ~~Coker,~~Coker; Pamela L. ~~Davies,~~Davies; Caleb C. ~~Fort,~~Fort; Edgar H. Lawton, ~~III,~~III; James M. Micali and Marc D. Oken.

Audit Committee Financial Expert –— The Company’s Board of Directors has determined that the Company has at least one “audit committee financial expert,” as that term is defined by Item ~~401(h)~~407(d)(5) of Regulation S-K promulgated by the Securities and Exchange Commission, serving on its audit committee. The Chairman of the audit committee, Thomas E. Whiddon, meets the terms of the definition and is independent based on the criteria in the New York Stock Exchange Listing Standards. Pursuant to the terms of Item ~~401(h)~~407(d)(5) of Regulation S-K, a person who is determined to be an “audit committee financial expert” will not be deemed an expert for any purpose as a result of being designated or identified as an “audit committee financial expert” pursuant to Item ~~401,~~407, and such designation or identification does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the audit committee and Board of Directors in the absence of such designation or identification. Further, the designation or identification of a person as an “audit committee financial expert” pursuant to Item ~~401~~407 does not affect the duties, obligations or liability of any other member of the audit committee or Board of Directors.

~~Code of Ethics~~ – The Company has adopted a code of ethics (as defined in Item 406 of Regulation S-K) that applies to its senior executive and senior financial officers. This code of ethics is available through the Company’s Web site, www.sonoco.com, and is available in print to any shareholder who requests it. Any waivers or amendments to the provisions of this code of ethics will be posted to this web site within five business days after the waiver or amendment.

The Company’s Corporate Governance Guidelines, Audit Committee Charter, Corporate Governance and Nominating Committee Charter and Executive Compensation Committee Charter are available through the Company’s Web site, www.sonoco.com. This information is available in print to any shareholder who requests it.

Item 11. Executive Compensation

~~Information with respect to~~The information set forth in the ~~compensation of directors and certain executive officers as shown on pages 21 and 22 of the Company’s definitive~~ Proxy Statement under the ~~captions “Directors’ Compensation” and~~caption “Compensation Committee Interlocks and Insider ~~Participation,” and~~Participation” on page 22, under the caption “Management Compensation” on pages 3427 through 3957, and 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,” and “Pension Plan Table,”caption “Director Compensation” on pages 57 through 60 is incorporated herein by reference.

~~Item 12. Security Ownership of Certain Beneficial Owners and Management~~

~~Information with respect to~~ The information set forth in the ~~beneficial ownership of the Company’s Common Stock by management and others as shown on page 23 of the Company’s definitive~~ Proxy Statement under the caption ~~“Security~~“Compensation Committee Report” on page 43 is also incorporated herein by reference, but pursuant to the Instructions to Item 407(e)(5) of Regulation S-K shall be deemed to be “furnished” and not “filed” and will not be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 as a result of being so furnished.

3338

~~SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES~~


3.		Exhibits


3-1		Articles of Incorporation, as amended (incorporated by reference to the Registrant’s Form 10-Q for the quarter ended June 27, 1999)

3-2		By-Laws, as amended (incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2003)

4-1		Indenture, dated as of June 15, 1991, between Registrant and The Bank of New York, as Trustee (incorporated by reference to the Registrant’s Form S-4 (File Number 333-119863))

4-2		First Supplemental Indenture, dated as of June 23, 2004, between Registrant and The Bank of New York, as Trustee (incorporated by reference to the Registrant’s Form 10-Q for the quarter ended June 27, 2004)

4-3		Form of Note for 5.625% Notes due 2016 (incorporated by reference to the Registrant’s Form S-4 (File Number 333-119863))

10-1		1991 Sonoco Products Company Key Employee Stock Plan, as amended (incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2002)

10-2		Sonoco Products Company 1996 ~~Non-Employee~~Non-employee Directors’ Stock Plan, as amended (incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2003)

10-3		Sonoco Savings Plan (incorporated by reference to the Registrant’s Form S-8 filed October 28, 2002 (File No. 333-100799))

10-4		Credit Agreement, dated as of July 7, 2004, among Sonoco Products Company, the several lenders from time to time party thereto and Bank of America, N.A., as agent (incorporated by reference to the Registrant’s Form 10-Q for the quarter ending June 27, 2004)

~~10-5~~		Deferred Compensation Plan for Corporate Officers of Sonoco Products Company (incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2002)

~~10-6~~10-5		Omnibus Benefit Restoration Plan of Sonoco Products Company (incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2002)

~~10-7~~		~~Contribution Agreement, dated April 19, 2004, between Registrant and Ahlstrom Corporation (incorporated by reference to the Registrant’s Form 10-Q for the quarter ending June 27, 2004)~~

~~10-8~~10-6		Form of Executive Bonus Life Agreement between the Company and ~~each of the persons who are named executive officers, as defined in Regulation S-K, Item 402(a)(3), and between the Company and~~ certain ~~other~~ executive officers (incorporated by reference to the Registrant’s Form 10-Q for the quarter ~~ending~~ended September 26, 2004)

~~10-9~~10-7		Form of Executive Bonus Life Agreement between the Company and Charles L. Sullivan, Jr. (incorporated by reference to Registrant’s Form 10-K for the year ~~ending~~ended December 31, 2004)

~~10-10~~10-8		Adjustment to Supplemental Executive Retirement Plan for Charles L. Sullivan, Jr. (incorporated by reference to Registrant’s Form 8-K filed April 22, ~~2004)~~2005)

~~10-11~~10-9		Description of Long-term Restricted Stock Unit Grants (incorporated by reference to the Registrant’s Form 8-K filed February 7, 2005)

~~10-12~~10-10		Amendment to terms of Restricted Stock Units granted to Harris E. DeLoach, Jr. (incorporated by reference to Registrant’s Form 8-K filed October 19, 2005)

~~10-13~~10-11		Amendment to 2006 Director Compensation Program (incorporated by reference to Registrant’s Form 8-K filed October 19, 2005)

~~10-14~~		~~Description of Retirement Agreement with Charles W. Coker (incorporated by reference to the Registrant’s Form 8-K filed February 7, 2005)~~

~~10-15~~10-12		Description of Stock Appreciation Rights and Long-term Restricted Stock Units granted to executive officers of the Registrant on January 31, 2006 (incorporated by reference to Registrant’s Form 8-K filed February 3, 2006)

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

EXHIBIT INDEX


3-1		Articles of Incorporation, as amended (incorporated by reference to the Registrant’s Form 10-Q for the quarter ended June 27, 1999)

3-2		By-Laws, as amended (incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2003)

4-1		Indenture, dated as of June 15, 1991, between Registrant and The Bank of New York, as Trustee (incorporated by reference to the Registrant’s Form S-4 (File Number 333-119863))

4-2		First Supplemental Indenture, dated as of June 23, 2004, between Registrant and The Bank of New York, as Trustee (incorporated by reference to the Registrant’s Form 10-Q for the quarter ended June 27, 2004)

4-3		Form of Note for 5.625% Notes due 2016 (incorporated by reference to the Registrant’s Form S-4 (File Number 333-119863))

10-1		1991 Sonoco Products Company Key Employee Stock Plan, as amended (incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2002)

10-2		Sonoco Products Company 1996 ~~Non-Employee~~Non-employee Directors’ Stock Plan, as amended (incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2003)

10-3		Sonoco Savings Plan (incorporated by reference to the Registrant’s Form S-8 filed October 28, 2002 (File No. 333-100799))

10-4		Credit Agreement, dated as of July 7, 2004, among Sonoco Products Company, the several lenders from time to time party thereto and Bank of America, N.A., as agent (incorporated by reference to the Registrant’s Form 10-Q for the quarter ending June 27, 2004)

~~10-5~~		Deferred Compensation Plan for Corporate Officers of Sonoco Products Company (incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2002)

~~10-6~~10-5		Omnibus Benefit Restoration Plan of Sonoco Products Company (incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2002)

~~10-7~~		~~Contribution Agreement, dated April 19, 2004, between Registrant and Ahlstrom Corporation (incorporated by reference to the Registrant’s Form 10-Q for the quarter ending June 27, 2004)~~

~~10-8~~10-6		Form of Executive Bonus Life Agreement between the Company and ~~each of the persons who are named executive officers, as defined in Regulation S-K, Item 402(a)(3), and between the Company and~~ certain ~~other~~ executive officers (incorporated by reference to the Registrant’s Form 10-Q for the quarter ~~ending~~ended September 26, 2004)

~~10-9~~10-7		Form of Executive Bonus Life Agreement between the Company and Charles L. Sullivan, Jr. (incorporated by reference to Registrant’s Form 10-K for the year ~~ending~~ended December 31, 2004)

~~10-10~~10-8		Adjustment to Supplemental Executive Retirement Plan for Charles L. Sullivan, Jr. (incorporated by reference to Registrant’s Form 8-K filed April 22, ~~2004)~~2005)

~~10-11~~10-9		Description of Long-term Restricted Stock Unit Grants (incorporated by reference to the Registrant’s Form 8-K filed February 7, 2005)

~~10-12~~10-10		Amendment to terms of Restricted Stock Units granted to Harris E. DeLoach, Jr. (incorporated by reference to Registrant’s Form 8-K filed October 19, 2005)

~~10-13~~10-11		Amendment to 2006 Director Compensation Program (incorporated by reference to Registrant’s Form 8-K filed October 19, 2005)

~~10-14~~		~~Description of Retirement Agreement with Charles W. Coker (incorporated by reference to the Registrant’s Form 8-K filed February 7, 2005)~~

~~10-15~~10-12		Description of Stock Appreciation Rights and Long-term Restricted Stock Units granted to executive officers of the Registrant on January 31, 2006 (incorporated by reference to Registrant’s Form 8-K filed February 3, 2006)

~~10-16~~10-13		Amendment to Non-employee ~~Directors~~Directors’ Stock Plan (incorporated by reference to Registrant’s Form 8-K filed February 3, 2006)

10-14		Amended and Restated Credit Agreement (incorporated by reference to Registrant’s Form 10-Q for the quarter ending June 25, 2006)

12		Statements regarding Computation of Ratio of Earnings to Fixed Charges

21		Subsidiaries of the Registrant


	Severance			Asset												Asset
	and			Impairment/			Other						Severance and			Impairment/			Other
	Termination			Disposal			Exit						Termination			Disposal			Exit
	Benefits			of Assets			Costs			Total			Benefits			of Assets			Costs			Total

Liability, December 31, 2002	$	9,162		$	—		$	5,214		$	14,376

2003 Charges		40,526			8,709			3,142			52,377
Cash payments		(21,953	)		—			(2,970	)		(24,923	)
Asset impairment (noncash)		—			(8,381	)		—			(8,381	)
Reclassifications to pension liability		(10,234	)		—			—			(10,234	)
Adjustments		(2,793	)		(328	)		1,000			(2,121	)

Liability, December 31, 2003		14,708			—			6,386			21,094		$	14,708		$	—		$	6,386		$	21,094

2004 Charges		9,815			5,894			5,970			21,679			9,815			5,894			5,970			21,679
Cash payments		(16,595	)		—			(5,642	)		(22,237	)		(16,595	)		—			(5,642	)		(22,237	)
Asset impairment/pension curtailment (noncash)		—			(6,153	)		(1,926	)		(8,079	)		—			(6,153	)		(1,926	)		(8,079	)
Foreign Currency Translation		2,016			—			66			2,082
Foreign currency translation														2,016			—			66			2,082
Adjustments		(3,270	)		259			314			(2,697	)		(3,270	)		259			314			(2,697	)

Liability, December 31, 2004		6,674			—			5,168			11,842			6,674			—			5,168			11,842

2005 Charges		6,232			7,099			8,992			22,323			6,232			7,099			8,992			22,323
Cash payments		(8,600	)		—			(7,329	)		(15,929	)		(8,600	)		—			(7,329	)		(15,929	)
Asset impairment (noncash)		—			(6,515	)		—			(6,515	)		—			(6,515	)		—			(6,515	)
Foreign Currency Translation		(859	)		—			140			(719	)
Foreign currency translation														(859	)		—			140			(719	)
Adjustments		(538	)		(584	)		36			(1,086	)		(538	)		(584	)		36			(1,086	)

Liability, December 31, 2005	$	2,909		$	—		$	7,007		$	9,916			2,909			—			7,007			9,916
2006 Charges														2,101			2,672			6,009			10,782
Cash payments														(4,272	)		—			(7,089	)		(11,361	)
Asset impairment (noncash)														—			(2,560	)		—			(2,560	)
Foreign currency translation														114			—			98			212
Adjustments														(285	)		(112	)		(1,913	)		(2,310	)

Liability, December 31, 2006													$	567		$	—		$	4,112		$	4,679


	2005			2004			2006			2005

Amortizable intangibles – Gross cost
Amortizable intangibles — Gross cost
Patents	$	3,378		$	3,378		$	3,360		$	3,378
Customer lists		81,026			88,791			108,741			81,026
Land use rights		6,011			6,011			6,855			6,011
Supply agreements		5,261			5,261			1,000			5,261
Other		6,703			6,644			8,302			6,703

Total gross cost		102,379			110,085		$	128,258		$	102,379

Accumulated amortization
Patents		(3,110	)		(2,843	)	$	(3,255	)	$	(3,110	)
Customer lists		(14,690	)		(8,251	)		(20,651	)		(14,690	)
Land use rights		(2,148	)		(2,107	)		(2,797	)		(2,148	)
Supply agreements		(4,619	)		(4,444	)		(550	)		(4,619	)
Other		(4,775	)		(3,650	)		(5,120	)		(4,775	)

Total accumulated amortization		(29,342	)		(21,295	)	$	(32,373	)	$	(29,342	)

Net amortizable intangibles	$	73,037		$	88,790		$	95,885		$	73,037


		Page
	PART I
Item 1.	Business		3
Item 1A.	Risk Factors		9
Item 1B.	Unresolved Staff Comments		10
Item 2.	Properties		10
Item 3.	Legal Proceedings		1011
Item 4.	Submission of Matters to a Vote of Security Holders		1014

	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		1115
Item 5C.	Issuer Purchase of Equity Securities		15
Item 6.	Selected Financial Data		1216
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		1317
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		3136
Item 8.	Financial Statements and Supplementary Data		3136
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		3237
Item 9A.	Controls and Procedures		3237
Item 9B.	Other Information		3237

	PART III
Item 10.	Directors and Executive Officers of the Registrant		3338
Item 11.	Executive Compensation		3338
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		3339
Item 13.	Certain Relationships and Related Transactions		3439
Item 14.	Principal ~~Accounting~~Accountant Fees and Services		3439

	PART IV
Item 15.	Exhibits and Financial Statement Schedules		3439


Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		~~Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities~~


					Cash						Cash
	High		Low		Dividends		High		Low		Dividends

2006
First Quarter							$	34.75	$	28.76	$	.23
Second Quarter							$	34.75	$	29.45	$	.24
Third Quarter							$	34.75	$	30.30	$	.24
Fourth Quarter							$	38.71	$	33.10	$	.24
2005
First Quarter	$	30.24	$	25.58	$	.22	$	30.24	$	25.58	$	.22
Second Quarter	$	29.13	$	25.46	$	.23	$	29.13	$	25.46	$	.23
Third Quarter	$	28.84	$	25.79	$	.23	$	28.84	$	25.79	$	.23
Fourth Quarter	$	30.64	$	25.43	$	.23	$	30.64	$	25.43	$	.23
2004
First Quarter	$	25.21	$	22.92	$	.21
Second Quarter	$	25.99	$	23.70	$	.22
Third Quarter	$	26.50	$	24.53	$	.22
Fourth Quarter	$	29.73	$	25.12	$	.22


¹		Operating results for 2004 ~~and 2005~~through 2006 are not comparable to previous years due to the impact of the CorrFlex acquisition that occurred in May 2004 and the formation of the Sonoco-Alcore joint venture that occurred in November 2004. Operating results for ~~2001-2002~~2002 have been restated to reclassify the High Density Film business, which was sold in 2003, as discontinued operations.

²		2006 data reflects net charges of $25,970 pretax, $21,330 after tax, for restructuring charges. 2005 data reflects net charges of $21,237 pretax, $14,343 after tax, for restructuring costs. 2004 data reflects net charges of $18,982 pretax, $16,154 after tax, for restructuring costs. 2003 data reflects net charges of $50,056 pretax, $35,329 after tax, for restructuring costs. 2002 data reflects net charges of $10,409 pretax, $6,663 after tax, for restructuring costs. ~~2001 data reflects net charges of $51,175 pretax, $49,028 after tax, for the net gain from legal settlements, costs of corporate-owned life insurance (“COLI”) and restructuring costs.~~

³		The provision for income taxes included $10,074 in 2005 related to the repatriation of foreign earnings under the American Jobs Creation Act of 2004 and ($~~9,261)~~9,693) associated with the closing of previous years’ examinations in ~~2004 and $11,295 related to COLI in 2001.~~2004.

⁴		2006, 2005, 2004 ~~2003~~ and ~~2001~~2003 data includes the minority interest owner’s portion of restructuring charges/(income) of $(416), $(1,260), $(1,778), and $1,455, ~~and $6,591,~~ respectively.

⁵		Calculated as Total Debt divided by the sum of Total Debt, Shareholders’ Equity and Long-term Deferred Tax Liability.


¹		Includes interest payments on outstanding fixed-rate, long-term debt obligations that do not have associated fair value hedges as well as financing fees on the backstop line of credit.

²		Includes only long-term contractual commitments. Does not include short-term obligations for the purchase of goods and services used in the ordinary course of business.

³		Environmental remediation reserved in 2005.


	2003

Net sales	$	198,759
Operating income before income taxes		17,758
Gain on sale		63,112
Income tax expense		(20,099	)

Income from discontinued operations	$	60,771

Income from discontinued operations – per basic share	$	.63
Income from discontinued operations – per diluted share	$	.63


	Tubes and
	Cores			Consumer			Packaging
	/Paper			Packaging			Services			All Other
	Segment			Segment			Segment			Sonoco			Total

Balance as of January 1, 2005	$	183,671		$	172,630		$	148,268		$	65,939		$	570,508
Goodwill purchase price adjustments		12,936			(4,015	)		16			¾			8,937
Goodwill on 2005 acquisitions		1,022			59			¾			¾			1,081
Other adjustments		(2,686	)		¾			¾			¾			(2,686	)
Foreign currency translation		(5,308	)		1,709			(159	)		(179	)		(3,937	)

Balance as of December 31, 2005	$	189,635		$	170,383		$	148,125		$	65,760		$	573,903


	2006		2005

Commercial paper, average rate of 5.01% in 2006 and 3.26% in 2005	$	89,000	$	30,000
6.75% debentures due November 2010		99,926		99,912
6.5% debentures due November 2013		249,208		249,092
5.625% debentures due November 2016		149,322		149,250
9.2% debentures due August 2021		41,305		41,305
6.125% Industrial Revenue Bonds (IRBs) due June 2025		34,697		34,674
6.0% IRBs due April 2026		34,392		34,360
Foreign denominated debt, average rate of 7.6% in 2006 and 8.3% in 2005		50,576		124,937
Other notes		15,566		18,075

Total debt		763,992		781,605
Less current portion and short-term notes		51,903		124,530

Long-term debt	$	712,089	$	657,075


	2005		2004

Commercial paper, average rate of 3.26% in 2005 and 1.40% in 2004	$	30,000	$	180,000
6.75% debentures due November 2010		99,912		99,898
6.5% debentures due November 2013		249,092		250,879
5.625% debentures due November 2016		149,250		157,014
9.2% debentures due August 2021		41,305		41,305
6.125% IRBs due June 2025		34,674		34,650
6.0% IRBs due April 2026		34,360		34,329
Foreign denominated debt, average rate of 8.3% in 2005 and 8.5% in 2004		124,937		93,640
Other notes		18,075		15,246

Total debt		781,605		906,961
Less current portion and short-term notes		124,530		93,754

Long-term debt	$	657,075	$	813,207


¹		The fair value of long-term debt at December 31, 2005, does not include the impact of interest-rate swaps. The fair value of long-term debt is $692,489, ~~when the impact of interest rate swaps is included.~~

²		~~The fair value of long-term debt at December 31, 2004, does not include the impact of interest-rate swaps. The fair value of long-term debt is $861,430,~~ when the impact of interest-rate swaps is included.


				Weighted-
	Option			average Exercise
	Shares			Price

2003
Outstanding at beginning of year		10,875,626		$	25.12
Granted		1,419,694		$	21.19
Exercised		(438,470	)	$	20.96
Canceled		(518,209	)	$	24.59
Outstanding at end of year		11,338,641		$	24.81
Options exercisable at end of year		9,943,286		$	25.32


2004
Granted		1,085,817		$	24.08
Exercised		(1,579,386	)	$	20.95
Canceled		(1,091,928	)	$	29.16
Outstanding at end of year		9,753,144		$	24.87
Options exercisable at end of year		8,700,656		$	24.97


2005
Granted		1,140,648		$	27.26
Exercised		(1,469,431	)	$	23.75
Canceled		(51,056	)	$	26.41
Outstanding at end of year		9,373,305		$	25.33
Options exercisable at end of year		9,373,305		$	25.33


	Options Outstanding
			Weighted-	Weighted-
			average	average
Range of	Number		Remaining	Exercise
Exercise Prices	Outstanding		Contractual Life	Price

$17.25 - $23.80		3,238,329	5.5 years	$	21.75
$23.83 - $26.81		2,963,137	5.2 years	$	24.51
$27.31 - $37.10		3,171,839	4.8 years	$	29.74
$17.25 - $37.10		9,373,305	5.2 years	$	25.33


	Options Exercisable
Range of	Number		Weighted-average
Exercise Prices	Outstanding		Exercise Price

$17.25 — $23.80		3,238,329	$	21.75
$23.83 — $26.81		2,963,137	$	24.51
$27.31 — $37.10		3,171,839	$	29.74
$17.25 — $37.10		9,373,305	$	25.33


							Retiree Health and
	Retirement Plans						Life Insurance Plans
	2006			2005			2006			2005

Change in Benefit Obligation
Benefit obligation at January 1	$	1,196,383		$	1,080,525		$	102,213		$	146,764
Service cost		28,545			25,994			2,545			3,487
Interest cost		64,471			60,489			5,077			7,097
Plan participant contributions		2,080			1,557			4,263			4,586
Plan amendments		1,010			4,082			(2,790	)		(38,132	)
Actuarial (gain) loss		(18,263	)		96,078			(7,166	)		(2,396	)
Benefits paid		(56,927	)		(53,255	)		(12,396	)		(19,251	)
Impact of foreign exchange rates		25,484			(19,869	)		106			58
Special termination benefit cost		659			203			—			—
Other		160			579			—			—

Benefit obligation at December 31	$	1,243,602		$	1,196,383		$	91,852		$	102,213


Change in Plan Assets
Fair value of plan assets at January 1	$	981,442		$	893,384		$	32,705		$	42,347
Actual return on plan assets		131,118			75,435			4,068			2,270
Company contributions		13,915			82,163			1,532			2,930
Plan participant contributions		2,080			1,557			4,263			4,586
Benefits paid		(56,927	)		(53,255	)		(12,396	)		(19,251	)
Impact of foreign exchange rates		18,556			(14,093	)		—			—
Expenses paid		(5,397	)		(4,245	)		(156	)		(177	)
Other		(20	)		496			—			—

Fair value of plan assets at December 31	$	1,084,767		$	981,442		$	30,016		$	32,705


Reconciliation of Funded Status, December 31
Funded status of plan	$	(158,835	)	$	(214,941	)	$	(61,836	)	$	(69,508	)

Unrecognized net actuarial loss					439,287						57,560
Unrecognized prior service cost					9,356						(37,917	)
Unrecognized net transition obligation					5,627						—

Net amount recognized				$	239,329					$	(49,865	)


Weighted-average assumptions used to										U.S. Retiree Health and
determine benefit obligations at December 31	U.S.			Foreign Plans			U.S. Retirement Plans			Life Insurance Plans			Foreign Plans

Retirement Plans and Retiree Health and Life Insurance Plans:
Discount Rate
2006								5.83	%		5.68	%		4.00—5.25	%
2005		5.50	%		4.00-5.25	%		5.50	%		5.50	%		4.00—5.25	%
2004		5.75	%		4.50-6.25	%
Rate of Compensation Increase
2006								4.88	%		4.69	%		1.00—4.00	%
2005		4.80	%		3.00-5.50	%		4.80	%		4.50	%		3.00—5.50	%
2004		4.60	%		1.50-4.00	%


Weighted-average assumptions used to determine
net periodic benefit cost for years ended December 31	U.S.			Foreign Plans

Retirement Plans and Retiree Health and Life Insurance Plans:
Discount Rate
2005		5.75	%		4.25-6.00	%
2004		6.25	%		5.00-6.50	%
2003		6.75	%		5.00-7.00	%
Expected Long-term Rate of Return
2005		8.50	%		3.75-8.00	%
2004		8.50	%		4.00-8.00	%
2003		8.75	%		5.50-8.50	%
Rate of Compensation Increase
2005		4.60	%		3.00-5.50	%
2004		4.60	%		1.50-4.00	%
2003		4.60	%		1.50-5.00	%


*Weighted-average assumptions used to*
*determine net periodic benefit cost for*	U.S. Retirement			U.S. Retiree Health and
*years ended December 31*	Plans			Life Insurance Plans			Foreign Plans

Discount Rate
2006		5.50	%		5.50	%		4.00—5.25	%
2005		5.75	%		5.75	%		4.25—6.00	%
2004		6.25	%		6.25	%		5.00—6.50	%
Expected Long-term Rate of Return
2006		8.50	%		8.50	%		3.75—8.00	%
2005		8.50	%		8.50	%		3.75—8.00	%
2004		8.50	%		8.50	%		4.00—8.00	%
Rate of Compensation Increase
2006		4.80	%		4.50	%		1.00—4.00	%
2005		4.60	%		4.50	%		3.00—5.50	%
2004		4.60	%		4.50	%		1.50—4.00	%


Asset Category	U.S.			U.K.			Canada			U.S.			U.K.			Canada

Equity securities
2006											61.8	%		72.4	%		68.3	%
2005		56.0	%		74.0	%		62.6	%		56.0	%		74.0	%		62.6	%
2004		66.6	%		71.4	%		59.9	%
Debt securities
2006											27.7	%		21.8	%		31.7	%
2005		25.7	%		20.7	%		37.4	%		25.7	%		20.7	%		37.4	%
2004		28.1	%		22.8	%		40.1	%
Alternative
2006											10.5	%		4.8	%		0.0	%
2005		10.2	%		4.4	%		0.0	%		10.2	%		4.4	%		0.0	%
2004		5.3	%		4.4	%		0.0	%
Cash
2006											0.0	%		1.0	%		0.0	%
2005¹		8.1	%		0.9	%		0.0	%		8.1	%		0.9	%		0.0	%
2004		0.0	%		1.4	%		0.0	%

Total
2006											100.0	%		100.0	%		100.0	%
2005		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
2004		100.0	%		100.0	%		100.0	%


¹		A contribution of $63,000 made to the U.S. Defined Benefit Pension Plan in late December 2005 is included in cash.


	2006			2005

Depreciation	$	109,824		$	100,623
Employee benefits		2,942			116,090
Intangibles		45,776			28,486
Other		—			7,732

Gross deferred tax liabilities		158,542			252,931

Retiree health benefits		(24,433	)		(20,431	)
Foreign loss carryforwards		(49,984	)		(39,023	)
Capital loss carryforwards		(9,048	)		(4,448	)
Employee benefits		(85,996	)		(78,779	)
Accrued liabilities and other		(25,558	)		(32,365	)

Gross deferred tax assets		(195,019	)		(175,046	)

Valuation allowance on deferred tax assets		56,754			43,022

Total deferred taxes, net	$	20,277		$	120,907


¹		Intersegment sales are recorded at a market-related transfer price.

²		Corporate 2006, 2005 ~~2004~~ and ~~2003~~2004 includes restructuring costs of ~~$(16,020)~~$(1,912), ~~$(14,752)~~$(4,617) and ~~$(31,413)~~$(5,261) respectively, associated with the Consumer Packaging segment; $(23,655), $(16,020) and $(14,752), respectively, associated with the Tubes and Cores/Paper segment; ~~$(4,617)~~$(77), ~~$(5,261) and $(9,469), respectively, associated with the Consumer Packaging segment; $0,~~ $0 and ~~$(335),~~$0, respectively, associated with the Packaging Services segment; ~~$(600)~~$(453), ~~$(1,018)~~$(600) and ~~$(1,806)~~$(1,018), respectively, associated with All Other Sonoco; and a reversal of previously recorded restructuring charges of $127 in 2006 and $2,049 in 2004 ~~and $(7,033) for 2003, for Corporate~~ related ~~restructuring.~~to Corporate. Interest expense and interest income are also 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.

⁴		Depreciation, depletion and amortization, as well as capital expenditures that are incurred at Corporate, are allocated to the reportable segments and all other Sonoco.


	Column A		Column B - Additions						Column C			Column D		Column A		Column B — Additions						Column C			Column D
	Balance at		Charged to									Balance				Charged to									Balance
	Beginning		Costs and			Charged to						at End		Balance at		Costs and			Charged to						at End
	of Year		Expenses			Other			Deductions			of Year		Beginning of Year		Expenses			Other			Deductions			of Year
2006
Allowance for Doubtful Accounts														$	8,325	$	2,263		$	1,169	²	$	2,774	¹	$	8,983
LIFO Reserve															11,568		3,034	³								14,602
Valuation Allowance on Deferred Tax Assets															43,022		9,175			4,557	⁶					56,754
2005
Allowance for Doubtful Accounts	$	8,286	$	3,661	²	$	(162	)²	$	3,460	¹	$	8,325	$	8,286	$	3,661	²	$	(162	)²	$	3,460	¹	$	8,325
LIFO Reserve	$	10,701	$	867	³							$	11,568		10,701		867	³								11,568
Valuation Allowance on Deferred Tax Assets	$	43,192	$	5,001	⁵				$	5,171	^2,4	$	43,022		43,192		5,001	⁵					5,171	^2,4		43,022
2004
Allowance for Doubtful Accounts	$	8,199	$	4,186	²				$	4,099	¹	$	8,286	$	8,199	$	4,186	²				$	4,099	¹	$	8,286
LIFO Reserve	$	10,462	$	239	³							$	10,701		10,462		239	³								10,701
Valuation Allowance on Deferred Tax Assets	$	26,941	$	7,777	⁴	$	8,474	^2,4				$	43,192		26,941		7,777	⁴		8,474	^2,4					43,192
2003
Allowance for Doubtful Accounts	$	8,335	$	5,132	²				$	5,268	¹	$	8,199
LIFO Reserve	$	10,284	$	178	³							$	10,462
Valuation Allowance on Deferred Tax Assets	$	35,731	$	13,617	⁴				$	22,407	^2,4	$	26,941


¹		Includes amounts written off.

²		Includes translation adjustments and other insignificant adjustments.

³		Includes adjustments based on pricing and inventory levels.

⁴		Includes utilization and expiration of domestic capital loss carryforwards and increases from foreign net operating losses for which no tax benefit can be realized.

⁵		Includes utilization of domestic capital loss carryforwards and increases from foreign net operating losses for which no tax benefit can be realized.

1)		~~Awards vest in three years if performance targets are met, or in five years otherwise.~~

2)⁶		The financial performance measures used to determine the amount of share units vested are corporate earnings per share (as adjusted to exclude certain items) and average return on net assets employed (“RONAE”).Includes translation adjustments.


(a) 1.		Financial Statements — The following financial statements are provided on pages F-1 through F-40 of this report:

	–•		Consolidated Balance Sheets as of December 31, ~~2005~~2006 and ~~2004~~2005

	–•		Consolidated Statements of Income for the years ended December 31, 2006, 2005 ~~2004~~ and ~~2003~~2004

	–•		Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2006, 2005 ~~2004~~ and ~~2003~~2004

	–•		Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 ~~2004~~ and ~~2003~~2004

	–•		Notes to Consolidated Financial Statements

	–•		Report of Independent Registered Public Accounting Firm


31		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and 17 C.F.R. 240.13a-14(a)

32		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 17 C.F.R. 240.13a-14(b)

99		Proxy Statement, filed in conjunction with annual shareholders’ meeting scheduled for April ~~19, 2006~~18, 2007 (to be filed within 120 days after December 31, ~~2005)~~2006)


	SONOCO PRODUCTS COMPANY
	/s/ Harris E. DeLoach, Jr.
	Harris E. DeLoach, Jr.
	Chairman, President and Chief Executive Officer



	/s/~~C. J.~~ C.J. Hupfer
	~~C. J.~~C.J. Hupfer
	Senior Vice President and Chief Financial Officer (principal financial officer)


	/s/Barry L. Saunders
	Barry L. Saunders
	Staff Vice President and Corporate Controller (principal accounting officer)



/s/ ~~H.E. DeLoach, Jr.~~ H.E. DeLoach, Jr.		President, Chief Executive Officer and Director (Chairman)

H.E. DeLoach, Jr.

~~C. J. Bradshaw~~		Director

C.J. Bradshaw

~~R. J. Brown~~		Director

F.L.H. Coker

~~F. L. H.~~/s/ J.L. Coker		Director

J.L. Coker

/s/ ~~J. L. Coker~~ ~~J. L. Coker~~P.L. Davies		Director

P.L. Davies

/s/ ~~P. L. Davies~~ ~~P. L. Davies~~C.C. Fort		Director

C.C. Fort

~~/s/ C. C. Fort~~ ~~C. C. Fort~~		Director

B.L.M. Kasriel

~~P. Fulton~~ /s/ E.H. Lawton, III		Director

E.H. Lawton, III

~~B. L. M. Kasriel~~		Director

J.E. Linville

/s/ ~~E. H. Lawton, III~~ ~~E. H. Lawton, III~~J.M. Micali		Director

J.M. Micali

~~J. E. Linville~~		Director

J.H. Mullin, III

/s/ ~~J. M. Micali~~ ~~J. M. Micali~~M.D. Oken		Director

M.D. Oken

~~J. H. Mullin, III~~ /s/ T.E. Whiddon		Director


~~/s/ M. D. Oken~~ ~~M. D. Oken~~		~~Director~~
T.E. Whiddon

~~/s/ T. E. Whiddon~~ ~~T. E. Whiddon~~		~~Director~~