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

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

For the transition period from                    to                    

SONOCO PRODUCTS COMPANY

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

1 N. Second St.
Hartsville, S.C. 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: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ      No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o      No þ

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

Indicate by check mark 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 Filer þ    Accelerated Filer o    Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o       No þ

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, which was the last business day of the registrant’s most recently completed second fiscal quarter, was $2,407,357,927. Registrant does not (and did not at June 24, 2005) have any non-voting common stock outstanding.

As of February 18, 2006, there were 98,676,304 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, 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.

 

 

TABLE OF CONTENTS

				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			10
Item 4.		Submission of Matters to a Vote of Security Holders			10
		PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			11
Item 6.		Selected Financial Data			12
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 7A.		Quantitative and Qualitative Disclosures about Market Risk			31
Item 8.		Financial Statements and Supplementary Data			31
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			32
Item 9A.		Controls and Procedures			32
Item 9B.		Other Information			32
		PART III
Item 10.		Directors and Executive Officers of the Registrant			33
Item 11.		Executive Compensation			33
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			33
Item 13.		Certain Relationships and Related Transactions			34
Item 14.		Principal Accounting Fees and Services			34
		PART IV
Item 15.		Exhibits and Financial Statement Schedules			34

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Forward-looking Statements

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 are “forward-looking statements.” The words “estimate,” “project,” “intend,” “expect,” “believe,” “plan,” “anticipate,” “objective,” “goal,” “guidance” and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to statements regarding offsetting high raw material costs; 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 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 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.

We undertake 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 –

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 317 locations in 35 countries.

Information regarding the Company’s acquisitions, dispositions, joint ventures and restructuring activities is provided in Notes 2, 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 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 –

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 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, 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 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, 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 the Company’s second largest revenue-producing business, representing approximately 19%, 17% and 19% of consolidated net sales in 2005, 2004 and 2003, 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%, 44.0% and 45.7% of the Company’s net sales in 2005, 2004 and 2003, respectively. This segment serves its markets through 119 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% 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 45 recovered paper collection facilities throughout the world. In 2005, Sonoco had the capacity to manufacture approximately two 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 the Company’s largest revenue-producing business, representing approximately 32%, 34% and 36% of consolidated net sales in 2005, 2004 and 2003, respectively.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Packaging Services

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

		Products and Services		Markets
Packaging Services		Designing, manufacturing, assembling, packing and distributing temporary, semi-permanent and permanent point-of-purchase (P-O-P) displays; providing brand artwork management and supply chain management services including: contract packing, fulfillment and scalable Service Centers		Consumer packaged goods, including: personal care, beauty, healthcare, electronics, hosiery, confectionery, home and garden, sporting goods, office supplies, pharmaceuticals

All Other Sonoco

All Other Sonoco accounted for 9.7%, 9.9% and 9.8% of the Company’s net sales in 2005, 2004 and 2003, 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 and a partnership with Sonoco CorrFlex to provide the SonoPop™ Display System. Services include an ISTA-certified lab for engineering and testing solutions, on-site engineering 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

Product Distribution – Each of the Company’s operating units has its own sales staff, and maintains direct sales relationships with its customers. Some of the units have service staff at the manufacturing facility that interacts directly with customers. North American operations in the Tubes and Cores/Paper segment (formerly called the Engineered Carriers and Paper segment) also have a customer service center located in Hartsville, South Carolina, which is the main contact point between these business units and customers.

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 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 globally manages patents, trade secrets, confidentiality agreements and license agreements. Some patents have been licensed to other manufacturers, including Sonoco’s associated companies. 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 as www.sonoco.com and www.sonotube.com provide information about Sonoco, its people and products. Trademarks and domain names are also licensed to subsidiaries and other companies where appropriate.

Seasonality – The businesses of the Company’s segments 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, when compared to the first half of the year.

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% of that segment’s sales and the five largest customers in the Consumer Packaging segment accounted for approximately 35% 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% of that segment’s sales.

On October 1, 2005, the Procter & Gamble 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 this customer will exceed 10% of the Company’s consolidated revenues in 2006. 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.

Backlog –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, was not material. The Company expects all backlog orders at December 31, 2005, to be shipped during 2006.

Competition – The Company’s products are sold in highly competitive market environments, which include paper, textiles, films, food, chemicals, pharmaceuticals, packaging, construction, and wire and cables. Within each of these markets, supply and demand primarily control the market environment. Additionally,

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 –

						Position and Business Experience
Name		Age				For the Past Five Years
Harris E. DeLoach, Jr.			61			Chairman of the Board, President & 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			55			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			64			Vice President, Investor Relations & Corporate Affairs since 1998. 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			57			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			59			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			52			Vice President, Global Industrial Products since January 2006. Previously 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			54			Vice President, Customer & Business Development since 2002. Previously 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.			62			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 in foreign countries where the Company operates may reduce earnings.

Sonoco has operations throughout North and South America, Europe, Australia and Asia, with facilities in 35 countries. In 2005, approximately 34.7% of consolidated sales came from operations and sales outside of the United States. Accordingly, revenues and income may be adversely affected by economic conditions, political situations, and changing laws, and regulations in those countries.

Foreign exchange rate fluctuations may reduce 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’s sales and net income. Financial performance is directly affected by exchange rates, because the results of operations and the assets and liabilities of the Company’s foreign operations, which are recorded in local currencies, are translated into U.S. dollars for financial reporting purposes.

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 has made numerous acquisitions in recent years, and may actively seek new acquisitions that management believes will provide meaningful opportunities in the markets Sonoco 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, 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 increased in 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.

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, use commodity futures or swaps in an attempt to reduce the impact of energy price fluctuations. 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.

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 owned and 69 leased facilities used by operations in the Tubes and Cores/Paper segment, 24 owned and 25 leased facilities used by operations in the Consumer Packaging segment, three owned and 16 leased facilities used by operations in the Packaging Services segment, and 20 owned and 26 leased facilities used by all other operations. Europe, the largest foreign geographic location, has 55 manufacturing locations.

Item 3. Legal Proceedings

Information regarding legal proceedings is provided in Note 14 to the Consolidated Financial Statements on pages F-30 and F-31 of this Annual Report on Form 10-K.

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

Not applicable.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

PART II

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

The Company’s common stock is traded on the New York Stock Exchange under the stock symbol “SON.” As of December 31, 2005, there were approximately 46,000 shareholder accounts. Information required by Item 201(d) of Regulation S-K can be found in Part III, Item 12 of this Annual Report on Form 10-K. The following table indicates high and low sales prices for common stock of Sonoco as reported on the New York Stock Exchange, as well as cash dividends declared per common share:

										Cash
		High				Low				Dividends
2005
First Quarter		$	30.24			$	25.58			$	.22
Second Quarter		$	29.13			$	25.46			$	.23
Third Quarter		$	28.84			$	25.79			$	.23
Fourth Quarter		$	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

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Item 6.		Selected Financial Data

The following table sets forth the Company’s selected consolidated financial information. The information presented below should be read together with “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.

(Dollars and shares in thousands except
per share data)		Years ended December 31
		2005				2004				2003				2002				2001
Operating Results1
Net sales		$	3,528,574			$	3,155,433			$	2,758,326			$	2,701,419			$	2,464,445
Cost of sales and operating expenses			3,232,590				2,897,046				2,549,726				2,455,357				2,204,874
Other expense, net2			21,237				18,982				50,056				10,409				51,175
Interest expense			51,559				47,463				52,399				54,196				52,217
Interest income			(7,938	)			(5,400	)			(2,188	)			(1,649	)			(3,800	)
Income before income taxes			231,126				197,342				108,333				183,106				159,979
Provision for income taxes3			84,174				58,858				37,698				65,075				77,269
Equity in earnings of affiliates/ minority interest4			14,925				12,745				7,543				7,437				(1,214	)
Income from continuing operations			161,877				151,229				78,178				125,468				81,496
Income from discontinued operations, net of income taxes			¾				¾				60,771				9,848				10,113
Net income available to common shareholders		$	161,877			$	151,229			$	138,949			$	135,316			$	91,609
Per common share
Net income available to common shareholders:
Basic		$	1.63			$	1.54			$	1.44			$	1.40			$	.96
Diluted			1.61				1.53				1.43				1.39				.96
Cash dividends – common			.91				.87				.84				.83				.80
Average common shares outstanding:
Basic			99,336				98,018				96,819				96,373				95,370
Diluted			100,418				98,947				97,129				97,178				95,807
Actual common shares outstanding at December 31			99,988				98,500				96,969				96,380				95,453
Financial Position
Net working capital		$	265,014			$	282,226			$	75,671			$	104,671			$	204,899
Property, plant and equipment, net			943,951				1,007,295				923,569				975,368				1,008,944
Total assets			2,981,740				3,041,319				2,520,633				2,436,439				2,352,197
Long-term debt			657,075				813,207				473,220				699,346				885,961
Total debt			781,605				906,961				674,587				833,846				921,810
Shareholders’ equity			1,263,314				1,152,879				1,014,160				867,425				804,122
Current ratio			1.4				1.4				1.1				1.2				1.4
Total debt to total capital5			35.7	%			40.7	%			36.4	%			44.5	%			49.3	%

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

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

Overview

Sonoco achieved a number of key performance goals in 2005 despite a challenging operating and market environment. The Company experienced sustained year-over-year quarterly earnings increases, 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 improvements and a positive price/cost relationship was attained, despite rising costs in most raw materials.

Effective December 31, 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 higher selling prices for rigid paper and plastic packaging, wire and cable reels, and molded and extruded plastics, along with the favorable impact of exchange rates as the dollar weakened against foreign currencies.

The Company reported net income of $161.9 million for 2005, compared with $151.2 million for 2004. Earnings growth in 2005 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 in virtually all of the Company’s businesses. Volume and mix had a disproportionately lower impact on operating profits than implied by the increase in sales, as the change in the mix of products sold had an unfavorable effect on operating profits. In addition, approximately $24.8 million of the increased sales in the Packaging Services segment were on a pass-through basis and had very little impact on profits. Rising inflation 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 for 2005 and 2004 included after-tax restructuring charges of approximately $13.1 million and $14.4 million, respectively. 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

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

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

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 asset impairment charge (related to the writeoff/down of assets associated with eleven 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 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.

During 2004, the Company recognized restructuring charges, net of adjustments, of $19 million ($16.2 million after tax), 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 Company also recorded non-cash income in the amount of $1.8 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, 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

The Company completed three acquisitions during 2005, with an aggregate cost of approximately $3.6 million, all of which was paid in cash. 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 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.

The Company completed nine acquisitions during 2004, with an aggregate cost of approximately $367 million, of which $267 million was paid in cash. During 2004, the Company acquired 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 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 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.

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

During the fourth quarter of 2005, the United States Environmental Protection Agency (“EPA”) notified Sonoco U.S. Mills, Inc. (“U.S. Mills”), a wholly owned subsidiary of the Company, that U.S. Mills and another party would be jointly held responsible to undertake a program to remove and dispose of certain PCB-contaminated sediments at a particular site on the lower Fox River in Wisconsin. U.S. Mills and the other party have reached agreement that each would fund 50% of the costs of remediation, which is currently estimated to be between $25 million and $30 million for the project as a whole. Project implementation will begin shortly, with most of the project costs 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 $12.5 million 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 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 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 from third parties, but no amounts have been recognized in the financial statements for such recovery.

During 2005, the Company repatriated $124.7 million from foreign subsidiaries under the provisions of AJCA. Under this temporary incentive, a portion of the repatriated funds qualified for an 85% dividends-received deduction. The Company recorded an additional tax expense of $10.1 million for the U.S. federal and state 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.

In 2004, the Company recognized charges of approximately $5.6 million, which the Company incurred to recognize vested commitments to pay future costs associated with new executive life insurance benefits that replaced split-dollar life agreements made with key executives since 1995. 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. Also in 2004, the U.S. District Court for the Southern District of Ohio entered a judgment against the Company’s subsidiary, Sonoco-U.S. Mills, and the Company. The Company accrued approximately $4.5 million related to this legal proceeding. The charges recognized for the new executive life insurance benefits and the legal proceeding 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 million due to the recognition of certain tax benefits as a result of the Internal Revenue Service (“IRS”) closing its examination of the Company’s tax returns for years 1999 through 2001.

During the fourth quarter of 2004, the Company determined that misstatements were 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.

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 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.

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 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 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 impact on profits, as the change in the mix 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.

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

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. defined benefit pension 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 the Company’s cost of providing pension and postretirement benefits. Although there were no requirements under the Employee Retirement Income Security Act of 1974 (“ERISA”) 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. 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. 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 retiree medical benefits effective January 1, 2006. 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 and active employees. These changes, which will be amortized over a period of approximately five years, will not have a notable impact on year-over-year expense in 2006 as previous favorable plan changes that had lowered expense were fully amortized by the end of 2005.

Research and development costs, all of which were charged to expense, totaled $14.7 million and $15.4 million in 2005 and 2004, respectively. 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.

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

The effective tax rate for continuing operations in 2005 was 36.4%, compared with 29.8% in 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 AJCA. Included in the 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 in 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.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

In 2004, in conjunction with its acquisition 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 operations are reported as All Other Sonoco.

As part of the 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 tubes 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 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 is defined as the segments’ portion of “Income before income taxes” on the Company’s Condensed Consolidated Statements of Income, adjusted for 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 16 to the Company’s Condensed Consolidated Financial Statements for more information on reportable segments.

Consumer Packaging Segment – Results for this segment are presented below:

($ in millions)		2005				2004				% Change
Trade sales		$	1,247.5			$	1,132.1				10.2	%
Operating profits			103.5				83.1				24.5	%
Depreciation, depletion and amortization			56.3				59.4				(5.2	)%
Capital spending			50.8				50.7				0.2	%

Sales in this segment increased due to increased selling prices of closures, composite cans and plastic packaging. Higher volumes throughout the segment, but specifically in flexible packaging, also contributed significantly to the sales increases, as did the impact of favorable exchange rates, as the dollar weakened against foreign currencies. Overall, volumes were up nearly 5% in the segment. Domestic sales were approximately

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

$894 million, up 6.6% from 2004, and international sales were approximately $353 million, up 20.6% from 2004.

Operating profits in this segment were favorably impacted by increased volumes, as well as productivity and purchasing initiatives, partially offset by increased costs of energy, freight and labor. Continued high startup costs at the Company’s rigid plastics container plant in Wisconsin also reduced operating profits in the segment. Higher raw material costs, primarily steel and aluminum, were largely offset by increased selling prices.

Significant 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.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Packaging Services Segment – Results for this segment are presented below:

($ in millions)		2005				2004				% Change
Trade sales		$	455.9			$	321.0				42.0	%
Operating profits			44.8				30.3				47.9	%
Depreciation, depletion and amortization			12.0				8.2				46.3	%
Capital spending			4.9				3.3				48.5	%

Sales in this segment increased primarily due to the recognition of a full year’s impact of the May 2004 acquisition of CorrFlex. In addition, higher volumes contributed $56.5 million to the increase in sales. Domestic sales increased to $356.7 million, a 43.9% increase, while international sales increased to $99.2 million, or 35.5%.

Although the increase in operating profits in this segment is largely attributable to the full year’s impact of the acquisition of CorrFlex, productivity and purchasing initiatives in the Service Centers also contributed to the improvement. Approximately $25 million of increased sales in the Company’s Service Centers were on a pass-through basis and, therefore, had very little impact on profits. The impact of inflation partially offset the favorable variances discussed above.

Significant spending included numerous productivity and customer development projects in the United States and Europe.

All Other Sonoco – Results for all other businesses not included in the segments above are presented below:

($ in millions)		2005				2004				% Change
Trade sales		$	343.2			$	313.8				9.3	%
Operating profits			40.6				32.0				26.9	%
Depreciation, depletion and amortization			11.1				11.1				0.0	%
Capital spending			11.1				6.4				73.4	%

Sales for All Other Sonoco increased due to price increases for molded and extruded plastics, wire and cable reels, and protective packaging, along with higher volumes in wire and cable reels and protective packaging. Domestic sales were approximately $283 million, up 11.5% from 2004, and international sales were approximately $60 million, basically flat compared with the prior year.

Operating profits in All Other Sonoco increased due primarily to manufacturing productivity and purchasing initiatives and a favorable price/cost relationship, as the Company was able to recover increases in raw material costs, including lumber, resin and paper, via price increases to the customers. Although higher volume was a significant reason for the increased sales, operating profits were not impacted materially as changes in the mix of products resulted in lower profit margins.

Significant spending included investing in customer development projects in the United States and Europe for molded and extruded plastics, protective packaging and wire and cable reels.

Cash Flow

Cash flow from operations totaled $227.4 million in 2005, compared with $252.2 million in 2004. This decrease is primarily attributed to higher contributions to the Company’s pension plans, as $77.0 million was contributed in 2005, versus $33.4 million in 2004. These higher contributions were partially offset by increased earnings, along with slightly lower inventory levels. The U.S. Defined Benefit Pension Plan was fully funded as of December 31, 2005, and the Company froze participation for newly hired salaried and non-union hourly U.S. employees effective December 31, 2003. Based on the current actuarial estimates and as a result of a $68.0 million contribution, the Company anticipates that only minimal contributions to this plan will be required in

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 accounts payable, accrued expenses and taxes payable, partially offset by increases 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. The current ratio was 1.4 at the end of 2005, compared with 1.4 and 1.1 at the end of 2004 and 2003, respectively.

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

		Payments Due In
($ in millions)		Total				2006				2007-2008				2009-2010				Beyond 2010
Debt obligations		$	781.6			$	124.5			$	4.5			$	103.6			$	549.0
Interest payments1			272.3				25.0				50.0				48.2				149.1
Operating leases			132.6				31.3				45.2				26.4				29.7
Environmental remediation (U.S. Mills)			12.5				.5				12.0
Purchase obligations2			149.0				15.3				20.7				19.1				93.9
Total contractual obligations		$	1,348.0			$	196.6			$	132.4			$	197.3			$	821.7

In December 2003, the Company entered into an agreement with the majority shareholders of Demolli Industria Cartaria S.p.A. (“Demolli”), an Italy-based manufacturer of paperboard and tubes and cores, which is currently 25% owned by the Company and reported as an equity 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, based on average adjusted earnings at a predetermined multiplier at the time such shares might be put or called. The Company is in discussion with the majority shareholders of Demolli 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

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.

Debt decreased by $125.4 million to $781.6 million at December 31, 2005, primarily due to funds 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.

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, the Company entered into a new five-year, $350 million credit agreement that also provides the Company with the option to increase its credit line to $450 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, the amount of the Company’s outstanding commercial paper was $30 million, compared to $180 million at December 31, 2004.

Interest expense totaled $51.6 million for the year ended December 31, 2005, compared with $47.5 million and $52.4 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 offset by lower U.S. debt levels and 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).

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 million. Shareholders’ equity increased $138.7 million from December 31, 2003, to $1.15 billion at December 31, 2004. The increase resulted mainly from net income of $151.2 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. 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.

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 $.91 in 2005, $.87 in 2004, and $.84 in 2003.

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

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

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 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.

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, other than 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.

At the end of 2005, the Company had commodity swaps outstanding to fix the costs of a portion of raw materials and energy for 2006 through June 2008. The swaps qualify as cash flow hedges under Statement of Financial Accounting Standards No. 133, ‘Accounting for Derivative Instruments and Hedging Activities’ (“FAS 133”). As of December 31, 2005, the Company had swaps to cover approximately 4.4 million MMBTU’s of natural gas at an average cost of $5.91 per MMBTU. 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 was 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, 2005 and 2004, respectively. Commodity swaps 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 10 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 million (including $12.5 million associated with U.S. Mills) at December 31, 2005, compared with approximately $4.4

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

million at December 31, 2004, with respect to these sites. See Note 14 to the Consolidated Financial Statements for more information on environmental matters.

Operating Revenue

Consolidated 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 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.

Consolidated operating profits, 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 due to higher volumes, the accretive impact of acquisitions and savings resulting from ongoing productivity and purchasing initiatives. Operating profits for 2004 were negatively impacted by higher energy costs, product startup costs associated with the Company’s new multi-line steel easy-open closure operation in Brazil and new rigid plastic container plants in California and Wisconsin, as well as the costs associated with the movement 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 portion of the increased steel costs were offset in the first quarter of 2005, due to contractual pass through provisions. Gross profit as a percentage of net sales was 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.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

During 2004, income before income taxes was negatively impacted by 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 million, and net periodic benefit costs were reduced by approximately $9.1 million for 2004. The market value of U.S. benefit plan assets increased approximately 13% 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 charged to expense were $15.4 million and $14.2 million in 2004 and 2003, respectively. Significant projects in Sonoco’s Tubes and Cores/Paper segment during 2004 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, including composite cans and other forms of shaped packaging during 2004.

Net interest expense decreased by approximately $8.2 million from 2003. The decrease in net-interest expense resulted primarily from lower average interest rates and increased interest income.

The effective tax rate for continuing operations in 2004 was 29.8%, compared with 34.8% in 2003. Included in the effective tax rate for 2004 was the impact of the recognition of certain tax benefits. These tax benefits totaled approximately $9.3 million and resulted from the IRS closing its examination of the Company’s 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

Consumer Packaging Segment – Results for this segment are presented below:

($ in millions)		2004				2003				% Change
Trade sales		$	1,132.1			$	1,044.4				8.4	%
Operating profits			83.1				78.7				5.6	%
Depreciation, depletion and amortization			59.4				52.5				13.1	%
Capital spending			50.7				51.0				(0.6	)%

Sales for the segment increased due to higher volume, price increases and the favorable impact of foreign exchange translation. Overall, volumes in this segment, excluding the impact of acquisitions, increased approximately 5%. Domestic sales were approximately $839 million, up 4.8% from 2003, and international sales were approximately $293 million, up 20.4% from 2003.

Earnings in this segment were favorably impacted by increased volumes, as well as productivity and purchasing initiatives, partially offset by inflation and product start-up costs associated with the Company’s new multi-line steel easy-open closure operation in Brazil and new rigid plastic container plants in California and Wisconsin, as well as the costs associated with the movement of production between plants. Earnings in this segment were negatively impacted by an unfavorable price/cost relationship, as material costs, primarily steel, increased significantly. In response to those cost increases, the Company began raising prices in the second half of 2004, and continued to raise prices in 2005, as allowed by contractual pass-through provisions.

Significant spending in 2004 included building two new plants in the United States and 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 (formerly known as Engineered Carriers and Paper) – Results for this segment are presented below:

($ in millions)		2004				2003				% Change
Trade sales		$	1,388.5			$	1,259.8				10.2	%
Operating profits			113.0				103.0				9.8	%
Depreciation, depletion and amortization			85.2				83.6				1.9	%
Capital spending			59.4				48.6				22.2	%

The increase in sales was due primarily to the impact of favorable exchange rates, as the dollar weakened against foreign currencies, higher average selling prices, increased volume and the impact of two months of sales resulting from the formation of Sonoco-Alcore. Overall, volumes in this segment, excluding the impact of acquisitions and the formation of Sonoco-Alcore, increased approximately 2%. Domestic sales increased approximately $45 million, or 6.2%, and international sales increased approximately $84 million, or 15.5%.

Earnings in this segment were favorably impacted by increased volumes and by productivity and purchasing initiatives, partially offset by higher energy costs, the impact of inflation and an adjustment in expenses at the Company’s subsidiary in Spain. This segment also experienced higher OCC costs, as the domestic price of OCC increased by an average of approximately 28% from 2003 to 2004. These increased costs were largely offset through price increases for tubes and cores and for trade sales of recovered paper.

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.

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Packaging Services Segment – Results for this segment are presented below:

($ in millions)		2004				2003				% Change
Trade sales		$	321.0			$	184.6				73.9	%
Operating profits			30.3				7.9				>100	%
Depreciation, depletion and amortization			8.2				3.5				>100	%
Capital spending			3.3				5.1				(35.3	)%

Sales in this segment increased primarily due to the acquisition of CorrFlex in May 2004. See Note 2 to the Company’s Consolidated Financial Statements for further information about the impact of this acquisition. Sales in pre-existing operations in this segment increased due to volume and mix changes. Overall, volumes in this segment, excluding the impact of acquisitions, were up approximately 8%. Domestic sales were $248 million, up over 100% from 2003, and international sales were $73 million, up 16.7% from 2003.

Although the increase in earnings in this segment is primarily attributable to the acquisition of CorrFlex, productivity and purchasing initiatives in pre-existing operations also contributed to the improvement. A slight volume improvement was offset by the impact of inflation.

Significant spending included numerous productivity and customer development projects in the United States and Europe.

All Other Sonoco – Results for all other businesses not included in the segments above are presented below:

($ in millions)		2004				2003				% Change
Trade sales		$	313.8			$	269.5				16.4	%
Operating profits			32.0				19.0				68.4	%
Depreciation, depletion and amortization			11.1				13.0				(14.6	%)
Capital spending			6.4				3.8				68.4	%

Sales for All Other Sonoco increased due to volume and price increases in molded and extruded plastics, wire and cable reels, and protective packaging. In addition, the impact of favorable foreign exchange translation, along with the impact of a small acquisition, increased sales in All Other Sonoco. Domestic sales were approximately $253 million, up 15.6% from 2003, and international sales were approximately $60 million, up 20.2% from 2003.

Operating profits in All Other Sonoco increased due to volume improvements, along with manufacturing productivity and purchasing initiatives. All Other Sonoco also recognized a slightly positive price/cost relationship, as the Company was able to recover increases in raw material costs, including lumber, resin and paper, via price increases to the customers as well as material purchasing initiatives.

Significant spending included investing in customer development projects in the United States and Europe for molded and extruded plastics.

The Company’s analysis and discussion of its financial condition and results of operations are based upon its Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”). The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The Company evaluates these estimates and assumptions on an ongoing basis, including but not limited to those related to inventories, bad debts, derivatives, income taxes, intangible assets, restructuring, pension and other postretirement benefits, environmental liabilities and contingencies and litigation. Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. The results of these

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 are critical to its business operations, and the understanding of results of operations. The following represents those policies which most involve the more significant judgments and estimates used in the preparation of its Consolidated Financial Statements.

The Company evaluates its long-lived assets (property, plant and equipment) and definite-lived intangible assets for impairment whenever indicators of impairment exist, or when it commits to sell the asset. The accounting standards require that 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 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 the impairment of long-lived assets and definite-lived intangible assets. Therefore, assumptions and estimates used 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.

In accordance with Statement of Financial Accounting Standards No. 142, ‘Goodwill and Other Intangible Assets’ (“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).

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 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, 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

The Company uses a discounted cash flow model to estimate the fair value of each reporting unit. The Company considers historical experience and all available information at the time the fair values of its businesses are estimated. However, fair values that could be realized in an actual transaction may differ from those used to evaluate the impairment of goodwill. Therefore, assumptions and estimates used in the determination of impairment losses may affect the carrying value and possible impairment expense in the Company’s Consolidated Financial Statements. The annual evaluation of goodwill impairment that was completed during 2005, used forward-looking projections, including 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. 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 impairment charge would be required.

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 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.

As permitted by Statement of Financial Accounting Standards No. 123, ‘Accounting for Stock-Based Compensation’ (“FAS 123”), the Company has chosen to continue to account for stock-based compensation 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 market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. Compensation cost for performance stock options is recognized over the vesting period and is recorded based on the quoted market price of the Company’s stock at the end of the period.

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

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 actuarial assumptions used in determining the projected benefit obligation, 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% to determine benefit obligations, a discount rate of 5.75% 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.

The Company adjusts its discount rate annually in relationship to movements in high-quality debt instruments. The long-term rate of return assumption is based on the Company’s historical plan return performance. The rate of compensation assumption is generally based on salary and incentive increases. A key assumption for the U.S. health and life insurance plan is a medical trend rate beginning at 13.3% and trending down to an ultimate rate of 6.0% in 2014. The ultimate trend rate of 6.0% represents the Company’s best estimate of the long-term

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 level.

During 2005, the Company incurred total pension and postretirement benefit expenses of approximately $43.0 million, compared with $45.8 million during 2004. 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, the Company made contributions to pension plans of $77.0 million and postretirement plans of approximately $8.1 million. The contribution amount varies from year to year depending on factors including market asset 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 net actuarial losses were approximately $496.8 million at December 31, 2005, 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 projected liability of these plans will be affected by assumptions regarding inflation, investment returns, market interest rates, changes in the number of plan participants and changes in the benefit obligations, and laws and regulations pertaining to benefit obligations. 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 assets and liabilities and pension and postretirement plan expenses in the Company’s Consolidated Financial Statements. The effect of lowering the selected assumptions, excluding any changes to the investment base, is shown below for the year ended December 31, 2005, for U.S. plans, assuming no changes in benefit levels in 2005:

December 31, 2005

Projected Benefit

Assumption

Percentage Point

Obligation

2005 Expense

($ in millions)

Change

Higher (Lower)

Higher (Lower)

Discount rate

-.25 pts

$

33.7

$

3.3

Expected return on assets

-.25 pts

N/A

$

1.8

See Note 12 to the Consolidated Financial Statements for additional information on the Company’s pension and postretirement plans.

Information regarding recent accounting pronouncements is provided in Note 18 of the Consolidated Financial Statements on page F-36.

Information regarding market risk is provided under the caption “Conditions in foreign countries where the Company operates may reduce earnings;” and “Foreign exchange rate fluctuations may reduce the Company’s earnings” in Item 1A – Risk Factors, and under the caption “Risk Management” in Item 7 - 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.

The Consolidated Financial Statements and Notes to the Consolidated Financial Statements are provided on pages F-1 through F-39 of this report. Selected quarterly financial data is provided in Note 19 to the Consolidated Financial Statements included in this report.

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 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 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 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.

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 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“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, based on criteria established in Internal Control — Integrated Framework issued 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.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting

includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
February 27, 2006

CONSOLIDATED BALANCE SHEETS
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

(Dollars and shares in thousands)
At December 31		2005				2004
Assets
Current Assets
Cash and cash equivalents		$	59,608			$	117,725
Trade accounts receivable, net of allowances of $8,325 in 2005 and $8,286 in 2004			413,209				390,024
Other receivables			45,225				37,457
Inventories
Finished and in process			124,891				123,924
Materials and supplies			193,425				191,087
Prepaid expenses			23,068				36,386
Deferred income taxes			26,074				25,509
			885,500				922,112
Property, Plant and Equipment, Net			943,951				1,007,295
Goodwill			573,903				570,508
Other Intangible Assets			73,037				88,790
Prepaid Pension Costs			281,904				237,200
Other Assets			223,445				215,414
Total Assets		$	2,981,740			$	3,041,319
Liabilities and Shareholders’ Equity
Current Liabilities
Payable to suppliers		$	265,219			$	274,224
Accrued expenses and other			186,559				219,123
Accrued wages and other compensation			44,082				36,850
Notes payable and current portion of long-term debt			124,530				93,754
Accrued taxes			96				15,935
			620,486				639,886
Long-term Debt			657,075				813,207
Pension and Other Postretirement Benefits			173,939				148,214
Deferred Income Taxes			146,981				168,776
Other Liabilities			119,945				118,357
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
Capital in excess of stated value			418,668				376,750
Accumulated other comprehensive loss			(106,389	)			(103,155	)
Retained earnings			943,860				872,109
Total Shareholders’ Equity			1,263,314				1,152,879
Total Liabilities and Shareholders’ Equity		$	2,981,740			$	3,041,319

The Notes beginning on page F-7 are an integral part of these financial statements.

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
Net sales		$	3,528,574			$	3,155,433			$	2,758,326
Cost of sales			2,867,623				2,580,643				2,259,887
Selling, general and administrative expenses			364,967				316,403				289,839
Restructuring charges			21,237				18,982				50,056
Income before interest and taxes			274,747				239,405				158,544
Interest expense			51,559				47,463				52,399
Interest income			(7,938	)			(5,400	)			(2,188	)
Income before income taxes			231,126				197,342				108,333
Provision for income taxes			84,174				58,858				37,698
Income before equity in earnings of affiliates/minority interest in subsidiaries			146,952				138,484				70,635
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
Net income		$	161,877			$	151,229			$	138,949
Average common shares outstanding:
Basic			99,336				98,018				96,819
Assuming exercise of options			1,082				929				310
Diluted			100,418				98,947				97,129
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
Cash dividends — common		$	.91			$	.87			$	.84

The Notes beginning on page F-7 are an integral part of these financial statements.

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

																		Accumulated
														Capital in				Other
		Comprehensive				Common Shares								Excess of				Comprehensive				Retained
(Dollars and shares in thousands)		Income				Outstanding				Amount				Stated Value				Loss				Earnings
January 1, 2003							96,380			$	7,175			$	324,295			$	(212,164	)		$	748,119
Net income		$	138,949																				138,949
Other comprehensive income (loss):
Translation gain			77,903
Minimum pension liability adjustment, net of tax			(3,403	)
Derivative financial instruments, net of tax			1,573
Other comprehensive income			76,073																76,073
Comprehensive income		$	215,022
Cash dividends																							(81,128	)
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
Stock-based compensation															5,151
December 31, 2004							98,500				7,175				376,750				(103,155	)			872,109
Net income		$	161,877																				161,877
Other comprehensive income (loss):
Translation loss			(12,844	)
Minimum pension liability adjustment, net of tax			568
Derivative financial instruments, net of tax			9,042
Other comprehensive loss			(3,234	)															(3,234	)
Comprehensive income		$	158,643
Cash dividends																							(90,126	)
Exercise of stock options							1,488								37,370
Stock-based compensation															4,548
December 31, 2005							99,988			$	7,175			$	418,668			$	(106,389	)		$	943,860

The Notes beginning on page F-7 are an integral part of these financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

(Dollars in thousands)
Years ended December 31		2005				2004				2003
Cash Flows from Operating Activities
Net income		$	161,877			$	151,229			$	138,949
Adjustments to reconcile net income to net cash provided by operating activities
Asset impairment			9,515				6,153				8,381
Depreciation, depletion and amortization			163,074				163,928				163,234
Equity in earnings of affiliates/minority interest in subsidiaries			(14,925	)			(12,745	)			(7,543	)
Cash dividends from affiliated companies			6,758				7,114				11,327
(Gain) loss on disposition of assets			(555	)			2,460				1,228
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
Deferred taxes			(24,722	)			5,310				11,175
Change in assets and liabilities, net of effects from acquisitions, dispositions, assets held for sale and foreign currency adjustments
Receivables			(24,026	)			(23,893	)			5,324
Inventories			(6,447	)			(38,395	)			(10,117	)
Prepaid expenses			2,298				1,272				(7,955	)
Payables and taxes			(10,554	)			12,082				70,727
Cash contribution to pension plans			(77,024	)			(33,360	)			(22,946	)
Other assets and liabilities			39,341				8,020				19,487
Net cash provided by operating activities			227,363				252,188				332,248
Cash Flows from Investing Activities
Purchase of property, plant and equipment			(129,112	)			(119,800	)			(113,574	)
Cost of acquisitions, net of cash acquired			(3,566	)			(267,016	)			(6,232	)
Proceeds from the sale of assets			13,377				8,638				2,709
Proceeds from sale of High Density Film business			¾				¾				81,177
Net cash used by investing activities			(119,301	)			(378,178	)			(35,920	)
Cash Flows from Financing Activities
Proceeds from issuance of debt			43,859				206,157				20,715
Principal repayment of debt			(11,699	)			(168,528	)			(120,287	)
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	)
Common shares issued			34,617				31,450				8,342
Net cash (used) provided by financing activities			(165,584	)			156,043				(245,933	)
Effects of Exchange Rate Changes on Cash			(595	)			2,818				3,054
(Decrease) Increase in Cash and Cash Equivalents			(58,117	)			32,871				53,449
Cash and cash equivalents at beginning of year			117,725				84,854				31,405
Cash and cash equivalents at end of year		$	59,608			$	117,725			$	84,854
Supplemental Cash Flow Disclosures
Interest paid, net of amounts capitalized		$	46,650			$	41,530			$	50,079
Income taxes paid, net of refunds		$	115,253			$	72,647			$	27,182
Value of stock issued for acquisition		$	¾			$	¾			$	2,700

Prior year data has been reclassified to conform to the current presentation.
The Notes beginning on page F-7 are an integral part of these financial statements.

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 and $110,829 at December 31, 2005 and 2004, 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 as follows:

		Ownership Interest
Entity		Percentage
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	%

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 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 10% of the consolidated trade accounts receivable exists at December 31, 2005.

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 the level of detail reviewed by the Chief Operating Decision Maker, gross profit margins, nature of products sold, nature of the production processes, type and class of customer, methods to distribute product and nature of regulatory environment. While all of these factors were reviewed, the Company feels 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, 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.

2. Acquisitions/Dispositions/Joint Ventures

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, 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 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 cash, assumption of debt and 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 and net tangible assets of approximately $138,000. In May 2004, the Company acquired CorrFlex Graphics, LLC (“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”), 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 S.a.r.l. (“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 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

F-8

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

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. 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 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.

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”), whereby the liability is recognized when exit costs are incurred. If, as a result of the 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 of these techniques. 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 assets to be divested may differ from the estimated fair values reflected in the Company’s Consolidated Financial Statements.

In August 2003, the Company announced general plans to reduce its overall annual 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 employees. As of December 31, 2005, the Company had incurred cumulative charges, net of adjustments, of approximately $94,536 pretax associated with these activities. The following table provides additional details of these net charges:

		Severance				Asset
		and				Impairment/				Other
		Termination				Disposal				Exit
		Benefits				of Assets				Costs				Total
Tubes and Cores/Paper Segment		$	35,982			$	16,012			$	12,415			$	64,409
Consumer Packaging Segment			10,334				4,586				6,154				21,074
Packaging Services Segment			333				¾				¾				333
All Other Sonoco			2,995				326				92				3,413
Corporate			5,094				¾				213				5,307
Cumulative Restructuring Charges, net of adjustments		$	54,738			$	20,924			$	18,874			$	94,536

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 is 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, net of adjustments, of $21,237 ($14,343 after tax). The following table provides additional details of these net charges:

		Severance				Asset
		and				Impairment/				Other
		Termination				Disposal				Exit
		Benefits				of Assets				Costs				Total
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	)			¾				599
Total		$	6,207			$	6,515			$	8,515			$	21,237

The net charges for 2005 relate primarily to the closure of tube and core plants in the United States and Europe, flexible packaging plants in the United States and Canada, and a paper mill in the United States.

During 2005, the Company also recorded non-cash income in the amount of $1,260 after tax in order 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, is included in “Equity in earnings of affiliates/minority interest in subsidiaries” in the Company’s Consolidated Statements of Income.

During 2004, the Company recognized restructuring charges, net of adjustments, of $18,982 ($16,154 after tax). Included in this amount, is $2,200 in restructuring charges, which resulted from a correction to previously reported financial statements at the Company’s wholly owned subsidiary in Spain. The following table provides additional details of these net charges:

		Severance				Asset
		and				Impairment/				Other
		Termination				Disposal				Exit
		Benefits				of Assets				Costs				Total
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	)			¾				499				(2,049	)
Total		$	6,545			$	6,153			$	6,284			$	18,982

The net charges for 2004 relate primarily to the closure of a flexible packaging plant in Canada, and a tube and core plant, a paper mill and a molded plastics plant in the United States. The consolidation of plants in the Company’s European operations also contributed to the restructuring charges recognized during 2004. Restructuring charges associated with plants contributed to Sonoco-Alcore by Ahlstrom were recorded as an increase in goodwill in accordance with Emerging Issues Task Force Issue No. 95-3, ‘Recognition of Liabilities in Connection with a Business Combination’ (“EITF 95-3”). The Corporate credit is an adjustment in severance relating to the restructuring plan announced in August 2003.