Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Statements included in this report that are not historical in nature, are intended to be, and are hereby identified as "forward-looking statements" for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended. The words "estimate," "project," "intend," "expect," "believe," "consider," "plan," "anticipate," "objective," "goal," "guidance," "outlook," "forecasts," "future," "will," "would" 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; producing improvements in earnings, financial results for future periods, and creation of long-term value for shareholders. Such forward-looking statements are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management. Such information includes, without limitation, discussions as to guidance and other estimates, expectations, beliefs, plans, strategies and objectives concerning our future financial and operating performance. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed or forecasted in such forward-looking statements. The risks and uncertainties include, without limitation:
• Availability and pricing of raw materials;

• Success of new product development and introduction;

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

• International, national and local economic and market conditions;

• Availability of credit to us, our customers and/or our suppliers in needed amounts and/or on reasonable terms;

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

• Ability to maintain market share;

• Pricing pressures and demand for products;

• 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;

• Rate of growth in foreign markets;

• Foreign currency, interest rate and commodity price risk and the effectiveness of related hedges;

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

• Liability for and anticipated costs of environmental remediation actions;

• Ability to weather the current economic downturn;

• Loss of consumer or investor confidence; and

• Economic disruptions resulting from terrorist activities.

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

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SONOCO PRODUCTS COMPANY COMPANY OVERVIEW
Sonoco is a leading manufacturer of industrial and consumer packaging products and provider of packaging services, with 327 locations in 35 countries. Sonoco competes in multiple product categories with the majority of its operations organized and reported in three segments: Consumer Packaging, Tubes and Cores/Paper and Packaging Services. Various other operations are reported as "All Other Sonoco." The majority of the Company's revenues are from products and services sold to consumer and industrial products companies for use in the packaging of their products for sale or shipment. The Company also manufactures paperboard, primarily from recycled materials, for both internal use and open market sale. Each of the Company's operating units has its own sales staff and maintains direct sales relationships with its customers. First Quarter 2009 Compared with First Quarter 2008
RESULTS OF OPERATIONS
The following discussion provides a review of results for the three months ended March 29, 2009 versus the three months ended March 30, 2008.
OVERVIEW
Sales for the first quarter were 23% below last year's levels primarily due to lower volumes companywide. Despite the substantial drop in sales and a significant increase in pension costs, gross profit margins for the first quarter only declined to 17.6% compared to last year's 18.0%. Margins were favorably impacted by certain selling price increases and reduced costs for recovered paper, film and resins, as well as cost containment actions and productivity initiatives. Net income attributable to Sonoco for the first quarter of 2009 was $23.1 million, up from $13.3 million reported for the same period of 2008. 2009 earnings include $9.3 million of higher after-tax pension expenses as well as after-tax restructuring charges of $6.1 million. First quarter 2008 results were significantly impacted by after-tax charges for the impairment of financial assets and restructuring of $31 million and $9.8 million, respectively.
As stated above, the Company has experienced significant volume shortfalls as a result of global economic conditions, primarily in the Tubes and Cores/Paper and Packaging Services segments. In order to manage the impact of these shortfalls until economic conditions improve, the Company has initiated restructuring activities to eliminate excess capacity and taken other cost containment actions to manage fixed costs. It is uncertain when and to what degree volumes will improve. Given its strong cash flow, liquidity position and competitive cost structure, Sonoco is well positioned to manage any further economic weakness and take advantage as markets recover.

OPERATING REVENUE Net sales for the first quarter of 2009 were $801 million, compared to $1,038 million for the first quarter of 2008, a decrease of $237 million. The components of the sales change were: ($ in millions) Volume/Mix ($158 ) Foreign Currency Translation (75 ) Selling Prices (8 ) Other 4 Total Sales Decrease ($237 )

Volume/mix accounted for a 15% decrease in sales from 2008 levels as each of the Company's reporting segments experienced volume declines across all geographic regions, with the greatest volume declines occurring in businesses serving industrial markets, which tend to be more economically sensitive. Although average selling prices were higher in several businesses due to increases initiated in response to higher metal and converting costs, they were more than offset by significantly lower recovered paper prices. The strong dollar, relative to last year's levels, also contributed significantly to the sales decline.

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SONOCO PRODUCTS COMPANY COSTS AND EXPENSES
Cost of sales in the first quarter of 2009 was lower year over year due to the significant declines in volume discussed above. Total pension and retirement plan costs increased approximately $15 million, most of which is reflected in cost of sales. This increase resulted primarily from the decline in the value of plan assets during 2008. Lower recovered paper prices had the corresponding effect of lowering costs in our converted paper operations. In addition, manufacturing productivity improvements and cost containment activities offset a portion of these increases. However, other cost components experienced price increases since last year's first quarter including metal, energy, labor and other converting costs.
Selling, general and administrative costs are down primarily due to lower management incentive expenses, the impact of foreign currency translation and lower volumes. These reductions were partially offset by higher pension costs. Restructuring and related asset impairment charges totaled $7.2 million and $18.9 million for the first quarters of 2009 and 2008, respectively. The first quarter of 2008 also included charges of $42.7 million for the impairment of the Company's remaining financial interest in the 2003 sale of its high-density film business. Additional information regarding restructuring and impairment actions is provided in Note 3 to the Consolidated Financial Statements.
Net interest expense for the first quarter of 2009 decreased to $9.6 million, compared with $13.2 million during the same period in 2008. The decrease was due to lower debt levels and lower interest rates.
This year's first quarter effective tax rate of 32.5% was significantly lower than the 47.8% rate recorded in the 2008 quarter. Last year's rate reflected a valuation reserve against the capital loss carryforward generated by the impairment of financial assets and tax benefits that could not be recognized on certain restructuring charges.

REPORTABLE SEGMENTS The following table recaps net sales for the first quarters of 2009 and 2008 ($ in thousands): Three Months Ended March 29, 2009 March 30, 2008 Net Sales: Consumer Packaging $ 351,934 $ 387,370 Tubes and Cores/ Paper 288,340 436,187 Packaging Services 95,835 124,431 All Other Sonoco 64,520 90,008 Consolidated $ 800,629 $ 1,037,996

Consolidated operating profits, also referred to as "Income before income taxes" on the Condensed Consolidated Statements of Income, are comprised of the following ($ in thousands):

Three Months Ended March 29, 2009 March 30, 2008 Income before income taxes: Segment Operating Profit Consumer Packaging $ 39,397 $ 36,277 Tubes and Cores/ Paper 6,746 34,564 Packaging Services 635 5,979 All Other Sonoco 5,136 11,433 Restructuring & Impairment Charges (7,210 ) (61,538 ) Interest, net (9,631 ) (13,228 ) Consolidated $ 35,073 $ 13,487

Segment results are used by Company management to evaluate segment performance and do not include restructuring, impairment and net interest charges. Accordingly, the term "segment operating profit" is defined as the segment's portion of "Income before income taxes" excluding those items. All other general corporate expenses have been allocated as operating costs to each of the Company's reportable segments and All Other Sonoco.

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SONOCO PRODUCTS COMPANY Consumer Packaging
Sonoco's Consumer Packaging segment includes the following products: round and shaped rigid packaging (both composite and plastic); printed flexible packaging; and metal and peelable membrane ends and closures.
Sales in the Consumer Packaging segment during the first quarter of 2009 decreased $35 million, or 9% compared with the first quarter of 2008. This was primarily due to an overall volume decline of 10%. In addition, an unfavorable $20.5 million effect of foreign currency translation more than offset the favorable impact of selling price increases.
Segment operating profit was up 9% in the first quarter as selling price increases were implemented to offset rising metal and other costs, the negative impact of which was not fully realized in the first quarter. This delay in the flow through of higher metal costs, along with productivity improvements and lower resin and film costs, were the major factors in the increase in operating profit. It is management's expectation that the price/cost benefit seen this quarter will not be sustained in future periods as the full effect of higher metal costs is realized. Higher pension costs partially offset this favorable price/cost relationship.
Tubes and Cores/Paper
The Tubes and Cores/Paper segment includes the following products:
high-performance paper and composite paperboard tubes and cores; fiber-based construction tubes and forms; recycled paperboard, linerboard, recovered paper and other recycled materials.
First quarter 2009 sales for the segment dropped $148 million, or 34%, compared with the same period in 2008, as a result of significantly lower demand around the globe and the $41 million unfavorable effect of foreign currency translation. Volume accounted for slightly more than half of the total sales decline. In addition, selling prices, particularly those of recovered paper, declined year over year.
Segment operating profit fell over 80% from last year's levels due to lower volume and higher energy, labor and pension costs. The benefit of material cost savings in excess of related sales price declines, and lower fixed costs from recent restructuring actions, offset a portion of the volume decline. Packaging Services
The Packaging Services segment includes the following products and services:
designing, manufacturing, assembling, packing and distributing temporary, semipermanent and permanent point-of-purchase displays; brand artwork management; and supply chain management services, including contract packing, fulfillment and scalable service centers.
First quarter 2009 sales for the segment decreased 23% or $29 million from first quarter 2008 levels. This decrease was due to the cumulative impact of lower volume throughout the segment, lower selling prices in the pack centers and an $11.9 million unfavorable effect of foreign currency translation. Segment operating profit declined 89% in the first quarter, compared with the same period in 2008. Lower volume in point-of-purchase displays, fulfillment and contract packing were the primary reasons for the steep decline in earnings, but lower selling prices in the pack centers also contributed. All Other Sonoco
All Other Sonoco includes businesses that are not aggregated in a reportable segment and includes the following products: wooden, metal and composite wire and cable reels, molded and extruded plastics, custom-designed protective packaging and paper amenities such as coasters and glass covers.
First quarter 2009 sales in All Other Sonoco dropped nearly 29% from the same period in 2008. Continued slowness in the housing market resulted in lower volumes in wire and cable reels, protective packaging and molded plastics. Prices were flat compared to last year, but reported sales were negatively impacted by foreign currency translation.
Operating profit was down 55% from last year's first quarter due to lower volumes and higher pension costs, partially offset by productivity improvements.

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SONOCO PRODUCTS COMPANY Financial Position, Liquidity and Capital Resources The Company's financial position remained strong during the first quarter of 2009. Cash flows from operations totaled $75.5 million in the first quarter of 2009, compared with $64.0 million in the same quarter last year. Increases in long-term accrued expenses together with a decline in the use of cash needed to fund changes in working capital and other items in the first quarter of 2009, compared to last year's first quarter, contributed to the change in operating cash flow.
During the first quarter of 2009, the Company funded capital expenditures of $34.6 million, paid dividends of $26.9 million, and reduced its outstanding debt by a net $22.5 million to $667.3 million at March 29, 2009. These activities utilized cash generated from operations as well as existing cash on hand, which decreased from $101.7 million at December 31, 2008, to $78.6 million at March 29, 2009.
During the latter part of 2008, the Internal Revenue Service issued a temporary rule extending to 60 days the period that U.S. Corporations may borrow funds from foreign subsidiaries without unfavorable tax consequences. The Company utilized this rule during the final two months of 2008 to access approximately $72 million of offshore cash on hand, which was used to reduce outstanding commercial paper. These short-term lending arrangements were settled early in 2009. In March, the Company again utilized this rule to access approximately $65 million of offshore cash on hand, which was used to reduce outstanding commercial paper. This short-term lending arrangement will be settled during the second quarter resulting in equivalent increases in commercial paper and cash on hand. Depending on its immediate offshore cash needs, the Company may choose to again access such funds in the future as allowed by the temporary rule. Commercial paper, a component of the Company's long-term debt, had a balance of $74.0 million at March 29, 2009.
Certain of the Company's debt agreements impose restrictions with respect to the maintenance of financial ratios and the disposition of assets. The most restrictive covenant currently requires the Company to maintain a minimum level of net worth, as defined. As of March 29, 2009, the Company's defined net worth was approximately $410 million above the minimum level required under this covenant.
Certain assets and liabilities are reported in the Company's financial statements at fair value, the fluctuation of which can impact the Company's financial position and results of operations. Items reported by the Company on a recurring basis at fair value include derivative contracts and pension and deferred compensation related assets. The valuation of the vast majority of these items is based either on quoted prices in active and accessible markets or on other observable inputs. Approximately five percent of the fair value of the Company's pension plan assets is measured using unobservable inputs. At March 29, 2009, the Company had commodity swaps outstanding to fix the cost of a portion of anticipated raw materials and natural gas purchases. The total net fair market value of these instruments was an unfavorable position of $26.8 million at March 29, 2009, and an unfavorable position of $20.5 million at December 31, 2008. Natural gas and aluminum contracts covering an equivalent of 7.3 million MMBtu and 7,065 metric tons, respectively, were outstanding at March 29, 2009. Additionally, the Company had various currency swaps outstanding to fix the exchange rate on certain anticipated foreign currency cash flows. These swaps, which have maturities ranging from April 2009 to June 2012, qualify as cash flow hedges under FAS 133.
In addition, at March 29, 2009, the Company had various currency swaps outstanding to fix the exchange rate on certain foreign currency cash flows. Although placed as an economic hedge, the Company has chosen not to apply hedge accounting to these swaps. The fair value of these currency swaps, all of which mature in 2009, was a net favorable position of $0.2 million at the end of the quarter.

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SONOCO PRODUCTS COMPANY Restructuring and Impairment Information regarding restructuring charges and restructuring-related asset impairment charges is provided in Note 3 to the Company's Condensed Consolidated Financial Statements.
New Accounting Pronouncements Information regarding new accounting pronouncements is provided in Note 11 to the Company's Condensed Consolidated Financial Statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Information about the Company's exposure to market risk is discussed under Part I, Item 2 in this report and was disclosed in its Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the Securities and Exchange Commission on February 27, 2009. There have been no other material quantitative or qualitative changes in market risk exposure since the date of that filing.
Item 4. Controls and Procedures.
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.