Sonoco - 10-Q quarterly report FY

 

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes þ No 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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock at September 25, 2005:

Common stock, no par value: 99,110,025

INDEX

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

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

See accompanying Notes to Condensed Consolidated Financial Statements

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

See accompanying Notes to Condensed Consolidated Financial Statements

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

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

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

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

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

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

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

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

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

The Company is a party to various legal proceedings incidental to its business and is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which it operates. As is the case with other companies in similar industries, the Company faces exposure from actual or potential claims and legal proceedings. The Company cannot currently determine the final outcome of the proceedings described below or the ultimate amount of potential losses. Pursuant to Statement of Financial Accounting Standards No. 5, ‘Accounting for Contingencies’ (FAS 5), management records accruals for estimated losses at the time that information becomes available indicating that losses are probable and that the amounts are reasonably estimable. Accrued amounts are not discounted. Although the level of future expenditures for legal and environmental matters is impossible to determine with any degree of probability, it is management’s opinion that such costs, when finally determined, will not have a material adverse effect on the consolidated financial position of the Company.

Environmental Matters

The Company has been named as a potentially responsible party at several environmentally contaminated sites not owned by the Company. These regulatory actions and a small number of private party lawsuits represent the Company’s largest potential environmental liabilities. All of the sites are also the responsibility of other parties. The Company’s liability, if any, is shared with such other parties, but the Company’s share has not been finally determined in most cases. In some cases, the Company has cost-sharing agreements with other potentially responsible parties with respect to a particular site. Such agreements relate to the sharing of legal defense costs or clean-up costs or both. The Company has assumed, for purposes of estimating amounts to be accrued, that the other parties to such cost-sharing agreements will perform as agreed. It appears that final resolution of some of the sites is years away. Accordingly, the ultimate cost to the Company with respect to such sites cannot be determined. As of September 25, 2005 and December 31, 2004, the Company had accrued $4,831 and $4,440, respectively, related to environmental contingencies. Actual costs to be incurred for these environmental matters in future periods will likely vary from current estimates because of the inherent uncertainties in evaluating environmental exposures.

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

On October 21, 2005 the United States Environmental Protection Agency (“EPA”) orally notified Sonoco U. S. Mills, Inc. (“U. S. Mills”), a wholly-owned subsidiary of the Company, that EPA may issue a Unilateral Order under Section 106 of the Comprehensive Environmental Response, Compensation and Liability Act requiring U. S. Mills and another unrelated party to undertake a program to remove and dispose of PCB contaminated sediments in a portion of the lower Fox River in Wisconsin, unless U. S. Mills voluntarily agrees to play a primary role in the cleanup of that portion of the river. The EPA representative stated that the cost of the program was estimated at between $25,000 and $30,000. Because no such order against U. S. Mills has yet been issued and because of uncertainty regarding the role and future actions of the other party, the Company cannot presently estimate the costs U. S. Mills may incur as a result of EPA’s actions, if any. Some or all of any costs incurred may be covered by insurance or be subject to recoupment from third parties. 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. Although U.S. Mills intends to continue to seek a resolution of these issues with EPA and the other party, should EPA proceed as threatened, U. S. Mills intends to vigorously protect its interests.

Income Taxes

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

On October 1, 2005, The Procter & Gamble Company’s (“P&G”) previously announced acquisition of The Gillette Company (“Gillette”) became effective, and Gillette became a wholly-owned subsidiary of P&G. As of the effective date of this acquisition, sales to P&G could potentially exceed 10% of the Company’s consolidated revenues.

To the Shareholders and Directors of Sonoco Products Company:

We have reviewed the accompanying condensed consolidated balance sheet of Sonoco Products Company as of September 25, 2005, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 25, 2005, and September 26, 2004 and the condensed consolidated statements of cash flows for the nine-month periods ended September 25, 2005 and September 26, 2004. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2004, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the year then ended (not present herein), and in our report dated March 1, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

Charlotte, North Carolina
October 26, 2005

Net sales for the third quarter of 2005 were $881 million, compared with $811 million for the third quarter of 2004.

The components of the sales change were approximately:

The increase related to acquisitions was primarily due to the formation of the joint venture between the European engineered carriers and coreboard operations of Sonoco and Ahlstrom Corporation (“Ahlstrom”), which is known as Sonoco-Alcore S.a.r.l. (“Sonoco-Alcore”) in October 2004. Average selling prices in the majority of the Company’s businesses were up in the third quarter of 2005, compared with the same period in 2004. Company-wide sales volumes during the third quarter of 2005 were up approximately 5% over the same period in 2004. The sales volumes for the third quarter of 2005 include those from Sonoco-Alcore. Excluding volumes from Sonoco-Alcore, company-wide sales volumes for the third quarter of 2005 were up approximately 2% over the third quarter of 2004.

Income before income taxes increased to approximately $62 million for the third quarter of 2005, compared with approximately $56 million for the third quarters of 2004. The Company continues to manage the relationship between the year-over-year change in selling prices and the year-over-year change in material costs (“price/cost relationship”). Despite higher year-over-year raw material costs, the Company was able to produce a positive price/cost relationship during the third quarter of 2005 by implementing price increases and surcharges. In addition to the positive price/cost relationship, reduced costs, which resulted from ongoing productivity and purchasing initiatives, had a positive impact on income before income taxes. These positive factors were offset by weaker demand for engineered carriers and paper

in most geographies, higher energy, freight and labor costs, continued difficult business conditions in Europe, and though improved, startup costs associated with the Company’s new rigid plastic container plant in Wisconsin. Income before income taxes included pretax charges in connection with the Company’s previously announced restructuring actions of approximately $4 million and $1 million for the third quarter of 2005 and 2004, respectively. These restructuring charges were not allocated to the operating segments.

The Company does not expect a material change in net sales or net income during the fourth quarter of 2005. The Company anticipates that the price/cost relationship will remain relatively neutral and that productivity improvements will be partially offset by year-over-year increases in the cost of labor, freight and energy.

The effective tax rate for the quarter ended September 25, 2005 was 30.9%, compared with 31.6% for the quarter ended September 26, 2004. The effective tax rates for the third quarters of both 2005 and 2004 include normal adjustments resulting from the filing of tax returns and the closing of examination statutes.

Equity in earnings of affiliates/minority interest in subsidiaries for the third quarter of 2005 totaled approximately $3.1 million, compared with approximately $2.9 million for the third quarter of 2004. This increase was due primarily to minority interest associated with the Sonoco-Alcore business combination, which was completed during the fourth quarter of 2004.

The Company reports results in three segments, Consumer Packaging, Engineered Carriers and Paper and Packaging Services. All Other Sonoco represents the activities and businesses of the Company’s consolidated subsidiaries that do not meet the aggregation criteria outlined in Statement of Financial Accounting Standards No. 131, ‘Disclosures about Segments of an Enterprise and Related Information’ (FAS 131) and therefore cannot be combined with other operating segments into a reportable segment.

Operating profit at the segmental level is defined as the segments’ portion of “Income before income taxes” on the Company’s Condensed Consolidated Statements of Income, adjusted for restructuring charges 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 profit. 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 10 to the Company’s Condensed Consolidated Financial Statements for more information on reportable segments.

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

Net sales of the Consumer Packaging segment for the third quarter of 2005 totaled approximately $315 million, compared with approximately $291 million in the third quarter of 2004. This increase was due primarily to increased selling prices in composite cans, rigid plastic containers, closures and flexible packaging, increased volumes in flexible packaging and the favorable impact of foreign exchange rates.

Operating profit, as defined above, for the Consumer Packaging segment was approximately $25 million in the third quarter of 2005, up from approximately $21 million for the same period in 2004. This increase resulted primarily from reduced costs related to on-going productivity initiatives as well as higher volume in flexible packaging. These favorable impacts were partially offset by a slightly negative price/cost relationship as well as rising costs for energy, freight and labor.

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

Net sales of the Engineered Carriers and Paper segment for the third quarter of 2005 totaled approximately $368 million, compared with approximately $343 million in the third quarter of 2004. This increase was due primarily to Sonoco-Alcore, which produced an increase in net sales of approximately $23 million in the third quarter of 2005, compared with the same period in 2004. Higher selling prices of domestic engineered carriers and paperboard and the favorable impact of foreign exchange rates also contributed to the increase in net sales in this segment. These positive factors were partially offset by lower volume in North America.

Operating profit, as defined above, for the Engineered Carriers and Paper segment was approximately $32 million in the third quarter of 2005, compared with approximately $31 million for the same period in 2004. The increase in operating profit was primarily due to a favorable price/cost relationship in North America and productivity improvements and cost reductions resulting from restructuring actions. These positive factors were partially offset by lower volumes and the mix of business, continued difficult business conditions in Europe and the impact of higher costs for energy and freight.

The Packaging Services segment provides the following products and services: point-of-purchase displays, folding cartons, packaging fulfillment, product handling, brand management, and supply chain management.

Net sales of the Packaging Services segment for the third quarter of 2005 totaled approximately $115 million, compared with approximately $98 million in the third quarter of 2004. This increase was due primarily to higher volumes at CorrFlex.

Operating profit, as defined above, for the Packaging Services segment was approximately $12 million in the third quarter of 2005, compared with approximately $9 million for the same period in 2004. This increase resulted primarily from increased volume and productivity improvements.

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

Net sales of All Other Sonoco for the third quarter of 2005 totaled approximately $83 million, compared with approximately $79 million in the third quarter of 2004. This increase was primarily due to increased volume in wire and cable reels and higher prices in molded plastics, which resulted from the pass through of increased resin costs.

Operating profit, as defined above, for All Other Sonoco was approximately $9 million in the third quarter of 2005, compared with approximately $7 million for the same period in 2004. This increase resulted primarily from increased volume in wire and cable reels as well as on-going productivity initiatives and cost reductions resulting from restructuring actions. These positive factors were partially offset by higher costs for energy and freight.

Net sales for the first nine months of 2005 were $2,574 million, compared with $2,270 million for the first nine months of 2004.

The components of the sales change were approximately:

The increase related to acquisitions was primarily due to the purchase of CorrFlex in May 2004 and the formation of the joint venture between the European engineered carriers and coreboard operations of Sonoco and Ahlstrom, which is known as Sonoco-Alcore. Average selling prices in the majority of the Company’s businesses were up in the first nine months of 2005, compared with the same period in 2004. Company-wide sales volumes during the first nine months of 2005 were up approximately 9% over the same period in 2004. The sales volumes for the first nine months of 2005 include those from Sonoco-Alcore and Sonoco CorrFlex. Excluding volumes from these newly acquired businesses, company-wide sales volumes for the first nine months of 2005 were up approximately 2% over the first nine months of 2004.

Income before income taxes totaled approximately $167 million in the first nine months of 2005, compared with approximately $151 million for the same period in 2004. This increase was due to the acquisition of CorrFlex as well as reduced costs, which resulted from ongoing productivity and purchasing initiatives. Also contributing to this increase was a favorable price/cost relationship. These increases were partially offset by costs associated with the integration of the European paper-based tube/core and coreboard operations of Sonoco and Ahlstrom in conjunction with the formation of Sonoco-Alcore, continued difficult business conditions in Europe, lower volumes and the mix of business in the Engineered Carriers and Paper segment, and startup costs associated with the Company’s new rigid plastic container plant in Wisconsin. Income before income taxes included pretax charges in connection with the Company’s previously announced restructuring actions of approximately $18 million and $8 million for the first nine months of 2005 and 2004, respectively. These restructuring charges were not allocated to the operating segments. Income before income taxes for the first nine months of 2004 also included the impact of pretax charges of approximately $5 million, which was associated with an unfavorable legal judgment that was entered against the Company, and approximately $6 million, which was associated with replacing certain executive life insurance benefits.

The effective tax rate for the nine months ended September 25, 2005 was 32.7%, compared with 27.6% for the nine months ended September 26, 2004. Included in the effective tax rate for the nine months ended September 26, 2004 was the impact of the recognition of certain tax benefits, the majority of which (approximately $9 million) resulted from the Internal Revenue Service closing its examination of the Company’s tax returns for years 1999 through 2001.

Equity in earnings of affiliates/minority interest in subsidiaries for the first nine months of 2005 totaled approximately $10.7 million, compared with approximately $6.8 million for the first nine months of 2004. This increase was due primarily to minority interest associated with the Sonoco-Alcore business combination, which was completed during the fourth quarter of 2004.

Net sales of the Consumer Packaging segment for the first nine months of 2005 totaled approximately $904 million, compared with approximately $820 million in the first nine months of 2004. This increase was due primarily to increased volumes and selling prices in composite cans, rigid plastic containers, closures and flexible packaging. The favorable impact of foreign exchange rates also contributed to the increase in net sales in this segment.

Operating profit, as defined above, for the Consumer Packaging segment in the first nine months of 2005 was approximately $72 million, up from approximately $58 million for the same period in 2004. This increase resulted primarily from higher volume and the mix of business in flexible packaging as well as reduced costs related to on-going productivity initiatives. These favorable impacts were partially offset by a slightly negative price/cost relationship, startup costs at a new facility and increased costs for energy, freight and labor.

Net sales of the Engineered Carriers and Paper segment for the first nine months of 2005 totaled approximately $1,089 million, compared with approximately $999 million in the first nine months of 2004. This increase was due primarily to the formation of Sonoco-Alcore, which resulted in an increase in net sales of approximately $76 million in the first nine months of 2005, compared with the same period in 2004. Higher average selling prices and the favorable impact of foreign exchange rates also contributed to the increase in net sales in this segment. These positive factors were partially offset by lower volume in North America.

Operating profit, as defined above, for the Engineered Carriers and Paper segment in the first nine months of 2005 was approximately $84 million, compared with approximately $89 million for the same period in 2004. This decrease resulted primarily from costs associated with the integration of Sonoco and Ahlstrom operations in Europe, lower volumes in North America and increased costs for energy, freight and labor. These negative factors were partially offset by a favorable price/cost relationship in North America and productivity improvements and cost reductions resulting from restructuring actions. Operating profit for the first nine months of 2004 included the impact of a pretax charge of approximately $5 million, which related to an unfavorable legal judgment against the Company.

Packaging Services Segment

Net sales of the Packaging Services segment for the first nine months of 2005 totaled approximately $331 million, compared with approximately $221 million in the first nine months of 2004. This increase was primarily due to the acquisition of CorrFlex as well as higher volumes.

Operating profit, as defined above, for the Packaging Services segment was approximately $33 million in the first nine months of 2005, compared with approximately $19 million for the same period in 2004. This increase also resulted primarily from the acquisition of CorrFlex. Productivity initiatives and higher volumes also positively impacted operating profit for this segment.

All Other Sonoco

Net sales of All Other Sonoco for the first nine months of 2005 totaled approximately $249 million, compared with approximately $230 million in the first nine months of 2004. This increase was primarily due to higher selling prices in molded and extruded plastics, wire and cable reels, and protective packaging. Higher volumes in wire and cable reels and protective packaging also contributed to the increase in net sales in All Other Sonoco.

Operating profit, as defined above, for All Other Sonoco was approximately $29 million in the first nine months of 2005, compared with approximately $24 million for the same period in 2004. This increase resulted primarily from on-going productivity initiatives and a favorable price/cost relationship, partially offset by increased costs for energy, freight and labor.

The Company’s financial position remained strong during the first nine months of 2005. Total debt decreased by approximately $9 million to $898 million from $907 million at December 31, 2004. This decrease consisted primarily of a reduction in commercial paper borrowings. This decrease was partially offset by higher debt levels at Sonoco-Alcore, which, for the most part, resulted from the completion, in accordance with the terms of the joint venture agreement, of replacing certain intercompany foreign loan obligations with external debt. As a result of the repayment of these intercompany loan obligations, cash levels increased at the Company’s other European operations.

For the first nine months of 2005, cash flows from operations totaled approximately $161 million, compared with approximately $137 million for the same period in 2004. This increase of approximately $24 million was primarily a result of improved profitability and lower contributions to the Company’s pension plan. Cash flows from operations for the first nine months of 2005 included the impact of approximately $11 million for funding the Company’s benefit plans, compared with approximately $16 million for the first nine months of 2004. Cash generated from operations was used to fund capital expenditures of approximately $92 million and to pay dividends of approximately $67 million in the first nine months of 2005.

Although it is not required to make any mandatory contributions to its domestic pension plan under ERISA, the Company is currently evaluating its pension funding strategy to determine the amount, if any, of additional contributions to be made during 2005. The results of this evaluation are primarily dependent upon the final determination of the year-end discount rate to be used in calculating the accumulated benefit obligation as well as performance of plan assets through the balance of 2005. Based on current market conditions, if it chose to do so, the Company would need to make a discretionary contribution of approximately $80 million to its domestic pension plan in order to ensure that the accumulated benefit obligation does not exceed the fair value of the plan assets.

The Company is currently a party to two interest rate swap agreements that effectively swap the interest rate on $250 million of fixed rate debt to a floating rate. All interest rate swaps qualified as fair value hedges under Statement of Financial Accounting Standards No. 133, ‘Accounting for Derivative Instruments and Hedging Activities’ (FAS 133). The fair market value of these interest rate swaps was a favorable position of $9.5 million and $9.7 million as of September 25, 2005 and December 31, 2004, respectively.

At September 25, 2005, the Company had commodity swaps outstanding to fix the costs of a portion of raw materials and energy for 2005 through 2007 in some cases. The swaps qualify as cash flow hedges under FAS 133. The fair market value of these commodity swaps was a favorable position of $25.2 million ($16.1 million after tax) and $3.4 million ($2.2 million after tax) at September 25, 2005 and December 31, 2004, respectively.

In August 2003, the Company announced general plans to reduce its overall cost structure by an annual amount of $54 million pretax by realigning and centralizing a number of staff functions and eliminating excess plant capacity. Pursuant to these plans, the Company has initiated or completed 19 plant closings and has terminated approximately 990 employees. As of September 25, 2005, the Company had incurred cumulative charges, net of adjustments, of approximately $91.6 million pretax associated with these activities. The Company expects to recognize an additional cost of approximately $4.3 million pretax in the future associated with these charges, which is comprised of approximately $1.2 million in severance and termination benefits, $0.2 million in asset impairment and $2.9 million in other exit costs. Of this amount, approximately $3.9 million is related to the Engineered Carriers and Paper segment, approximately $0.3 million is related to the Consumer Packaging segment and approximately $0.1 million is related to All Other Sonoco. As part of the target to reduce its cost structure by $54 million, the Company also expects to announce the closing of up to two additional plants in furtherance of these plans. The costs associated with these future plant closings have not yet been determined. The Company expects to pay the majority of the remaining restructuring costs, with the exception of ongoing pension subsidies and certain building lease termination expenses, by the end of the second quarter of 2006, using cash generated from operations.

During the three months ended September 25, 2005, the Company recognized restructuring charges, net of adjustments, of $4.3 million ($2.6 million after tax), primarily associated with previously announced plant closings. These restructuring charges, net of adjustments, consisted of severance and termination benefits of $1.4 million, asset impairment charges of $0.5 million and other exit costs of $2.4 million.

During the three months ended September 26, 2004, the Company recognized restructuring charges of $1.1 million ($1.9 million after tax), primarily associated with previously announced plant closings. These restructuring charges, net of adjustments, consisted primarily of severance and termination benefits of $0.4 million, asset impairment charges of $0.4 million and other exit costs of $0.3 million.

During the nine months ended September 25, 2005, the Company recognized restructuring charges, net of adjustments, of $18.5 million ($12.4 million after tax), primarily associated with previously announced plant closings. These restructuring charges, net of adjustments, consisted of severance and termination benefits of $5.3 million, asset impairment charges of $6.6 million and other exit costs of $6.6 million.

During the nine months ended September 26, 2004, the Company recognized restructuring charges, net of adjustments, of $8.2 million ($6.5 million after tax), primarily associated with previously announced plant closings. These restructuring charges, net of adjustments, consisted of severance and termination benefits of $4.6 million, asset impairment charges of $2.1 million and other exit costs of $1.5 million.

During the three and nine months ended September 25, 2005, the Company also recorded non-cash income in the amount of $0.1 million after tax and $1.2 million after tax, respectively, to reflect Ahlstrom’s portion of restructuring costs that were charged to expense. This income, which resulted from the expected 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 Condensed Consolidated Statements of Income.

See Note 3 to the Company’s Condensed Consolidated Financial Statements for more information on the Company’s restructuring programs.

The American Jobs Creation Act of 2004 provides a tax deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the American Jobs Creation Act also provides for a two-year phase-out of the existing extra-territorial income exclusion (the “ETI”) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. The Company expects the net effect of the phase out of the ETI and the phase in of this new deduction to result in a decrease in the effective tax rate for fiscal years 2005 and 2006 of approximately 0.2 percentage point based on current earnings levels. In the long term, the Company expects that the new deduction will result in a decrease of the annual effective tax rate by approximately one percentage point based on current earnings levels. The American Jobs Creation Act of 2004 also creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations in 2005.

In December 2004, the FASB issued FASB Staff Position 109-1, ‘Application of FASB Statement No. 109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004’ (FSP 109-2). Under the guidance of FSP 109-1, the deduction will be treated as a “special deduction” as described in Statement of Financial Accounting Standards No. 109, ‘Accounting for Income Taxes’ (FAS 109). As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on the Company’s tax return.

In December 2004, the FASB issued FASB Staff Position 109-2, ‘Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004’ (FSP 109-2). Under the guidance of FSP 109-2, an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the American Jobs Creation Act of 2004 on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FAS 109. The deduction is subject to a number of limitations. The Company has not yet decided whether, or to what extent, foreign earnings will be repatriated; however, depending on the source countries involved, withholding tax may be incurred on any distribution. Based on its analysis to date, it is possible that the Company may repatriate some amount between $0 to $100 million with the respective tax liability ranging from $0 to $9 million. The Company will finalize its assessment by December 31, 2005.

In December 2004, the FASB issued a revision to Statement of Financial Accounting Standards No. 123, ‘Share-Based Payment’ (FAS 123R), which requires companies to expense the value of employee stock options and similar awards. Under FAS 123R, share-based payment awards result in a cost that will be measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest. In April 2005, the Securities and Exchange Commission delayed the effective date of FAS 123R to annual periods beginning after June 15, 2005. The Company is planning to use the “modified prospective” transition method, which does not require restating previous periods’ results. No additional compensation expense would be recorded for any vested awards outstanding as of the effective date. Although the Company continues to reevaluate the number of stock options to be granted each year, based on its current expectations, the Company expects that earnings per diluted share will decrease by approximately $.04 in 2006.

In March 2005, the FASB issued Interpretation No. 47, ‘Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143’ (FIN 47), which requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company is currently evaluating the effect that the adoption of FIN 47 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, ‘Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3’ (FAS 154). FAS 154 establishes retrospective application as the required method for reporting a change in accounting principle, unless it is impracticable, in which case the changes should be applied to the latest practicable date presented. FAS 154 also requires that a correction of an error be reported as a prior period adjustment by restating prior period financial statements. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

Information about the Company’s exposure to market risk was disclosed in its Annual Report on Form 10-K for the year ended December 31, 2004, which was filed with the Securities and Exchange Commission on March 2, 2005. There have been no material quantitative or qualitative changes in market risk exposure since the date of that filing.

Evaluation of Disclosure Controls and Procedures

Under the supervision, and with the participation, of our management, including our principal executive officer and principal financial officer, we conducted an evaluation pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our principal executive officer and principal financial officer concluded that such controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective.

Changes in Internal Controls

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

On October 21, 2005 the United States Environmental Protection Agency (“EPA”) orally notified Sonoco U. S. Mills, Inc. (“U. S. Mills”), a wholly-owned subsidiary of the Company, that EPA may issue a Unilateral Order under Section 106 of the Comprehensive Environmental Response, Compensation and Liability Act requiring U. S. Mills and another unrelated party to undertake a program to remove and dispose of PCB contaminated sediments in a portion of the lower Fox River in Wisconsin, unless U. S. Mills voluntarily agrees to play a primary role in the cleanup of that portion of the river. The EPA representative stated that the cost of the program was estimated at between $25 million and $30 million. Because no such order against U. S. Mills has yet been issued and because of uncertainty regarding the role and future actions of the other party, the Company cannot presently estimate the costs U. S. Mills may incur as a result of EPA’s actions, if any. Some or all of any costs incurred may be covered by insurance or be subject to recoupment from third parties. 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. Although U.S. Mills intends to continue to seek a resolution of these issues with EPA and the other party, should EPA proceed as threatened, U. S. Mills intends to vigorously protect its interests.

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.