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;

• 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;

• 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 more than 300 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. Third Quarter 2009 Compared with Third Quarter 2008
RESULTS OF OPERATIONS
The following discussion provides a review of results for the three months ended September 27, 2009 versus the three months ended September 28, 2008.
OVERVIEW
Sales for the third quarter were 12% below last year's levels primarily due to lower volumes companywide, most significantly in the industrial-focused businesses, along with mostly lower selling prices, where the largest impact came from the pass-through of lower recovered paper costs. Although lower volumes and a significant increase in pension costs led to reduced overall gross profit, gross profit margins for the third quarter increased to 18.6% compared to last year's 17.4%. Margins were favorably impacted by a net positive selling price/material cost relationship, as well as cost containment actions and productivity initiatives. Net income attributable to Sonoco for the third quarter of 2009 was $47.7 million compared to $57.4 million reported for the same period of 2008. 2009 earnings include $8.3 million of higher after-tax pension expenses as well as after-tax restructuring charges of $3.2 million. Third quarter 2008 results were impacted by after-tax restructuring charges of $3.3 million.
As stated above, the Company continued to experience significant volume declines from the previous year, largely a result of the recessionary economic environment. The lower volumes resulted mostly from lower sales activity on the part of the Company's customers in their served markets and, in management's opinion, do not represent any significant loss of market share. The largest volume declines were seen in the Company's more economically-sensitive Tubes and Cores/Paper and Packaging Services segments. In order to manage the impact of these reduced volumes, the Company continues to focus on managing the selling price/material cost relationship, controlling its costs by implementing additional initiatives aimed at simplifying its business structure and creating sustainable operating efficiencies. Given the current economic environment, it is uncertain when and at what rate volume will begin to significantly recover. However, management believes that because of the Company's efforts to adjust its manufacturing footprint and drive sustainable operating efficiencies, it is positioned to effectively leverage any improvement in volumes with greater impact to its profitability. Further, due to its strong cash flow and liquidity position, the Company believes it is well situated to capitalize on any opportunities for growth.

OPERATING REVENUE Net sales for the third quarter of 2009 were $931 million, compared to $1,063 million for the third quarter of 2008, a decrease of $133 million. The components of the sales change were: ($ in millions) Volume/Mix $ (73 ) Foreign Currency Translation/Other (38 ) Selling Prices (22 ) Total Sales Decrease $ (133 )

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SONOCO PRODUCTS COMPANY Volume/mix accounted for a 7% decrease in sales from 2008 levels as each of the Company's reporting segments experienced volume declines across nearly every geographic region, 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 within the Consumer Packaging segment, they were more than offset by significantly lower selling prices within the Tubes and Cores/Paper segment. The higher selling prices in the Consumer Packaging segment were initiated in response to higher metal and converting costs while the lower selling prices in the Tubes and Cores/Paper segment were in response to significantly lower recovered paper costs. A stronger dollar, relative to last year's levels, also contributed significantly to the sales decline.
COSTS AND EXPENSES
Cost of sales in the third quarter of 2009 was lower year over year primarily due to the declines in volume discussed above. Last year's decline in the value of pension plan assets resulted in a significant year-over-year increase in pension and retirement plan costs. In total, these costs were up approximately $14 million in the third quarter, most of which is reflected in cost of sales. Lower prices paid for recovered paper reduced costs in our converted paper operations. However, other cost components, including metal, labor and other converting costs, experienced price increases over last year's third quarter. Productivity initiatives and cost containment activities were able to offset some of the above cost increases. In an attempt to partially offset the negative impact of lower volume and rising costs, the Company initiated several contingency actions, including freezing salaries, temporarily suspending 401(k) matches and restricting discretionary spending.
Selling, general and administrative costs were higher primarily due to higher pension and incentive compensation expenses. Incentive compensation costs booked in the current quarter reflect the year-to-date impact of better than expected operating results.
Restructuring and restructuring-related asset impairment charges totaled $0.2 million and $5.5 million for the third quarters of 2009 and 2008, respectively. Additional information regarding restructuring actions and impairments is provided in Note 3 to the Company's Condensed Consolidated Financial Statements.
Net interest expense for the third quarter of 2009 decreased to $9.4 million, compared with $10.6 million during the same period in 2008. The decrease was due to lower debt levels and lower interest rates.
This year's third quarter effective tax rate of 25.1% was lower than the 28.8% rate recorded in the 2008 quarter. The lower tax rate was primarily a result of favorable tax adjustments recorded in the quarter related to expirations of statutes of limitation and changes in the geographic distribution of earnings.

REPORTABLE SEGMENTS The following table recaps net sales for the third quarter of 2009 and 2008 ($ in thousands): Three Months Ended September 27, 2009 September 28, 2008 Net sales: Consumer Packaging $ 394,906 $ 398,825 Tubes and Cores/ Paper 346,360 435,685 Packaging Services 117,211 135,122 All Other Sonoco 72,083 93,618 Consolidated $ 930,560 $ 1,063,250

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SONOCO PRODUCTS COMPANY Consolidated operating profits, also referred to as "Income before income taxes" on the Company's Condensed Consolidated Statements of Income, are comprised of the following ($ in thousands): Three Months Ended September 27, 2009 September 28, 2008 Income before income taxes: Segment operating profit Consumer Packaging $ 42,049 $ 28,899 Tubes and Cores/ Paper 21,448 41,991 Packaging Services 6,029 9,074 All Other Sonoco 5,445 11,783 Restructuring/Asset impairment charges (158 ) (5,530 ) Interest, net (9,401 ) (10,629 ) Consolidated $ 65,412 $ 75,588

Segment results are used by Company management to evaluate segment performance and do not include restructuring/asset impairments charges or 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. 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 third quarter of 2009 were basically flat when compared with the third quarter of 2008. Overall volume declines of 3% and an unfavorable $2 million effect of foreign currency translation were largely offset by higher selling prices.
Segment operating profit was up 46% in the third quarter due to productivity improvements and a favorable price/cost relationship. Partially offsetting these favorable variances were higher pension costs and the impact of lower volume. 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.
Third quarter 2009 sales for the segment dropped $89 million, or 20%, compared with the same period in 2008, due to a 9% decline in volume resulting from significantly lower global demand and a $22 million unfavorable effect from foreign currency translation. In addition, selling prices declined year over year, particularly those associated with recovered paper.
Segment operating profit fell 49% from last year's levels due to lower volume, higher pension and incentive costs, and an unfavorable price/cost relationship. The benefit of lower recovered paper costs was more than offset by reduced selling prices for those products associated with recovered paper. Lower fixed costs resulting from restructuring and other cost containment actions offset some of the 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.
Third quarter 2009 sales for the segment decreased 13%, or $18 million, from the third quarter of 2008. The decrease was due to lower volumes in contract packing operations and a $13 million unfavorable effect of foreign currency translation.

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SONOCO PRODUCTS COMPANY Segment operating profit declined 34% in the third quarter, compared with the same period in 2008. An unfavorable shift in the mix of business and higher pension costs were the primary reasons for the decline in earnings. 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.
Third quarter 2009 sales in All Other Sonoco dropped 23% from the same period in 2008. Continued weak volumes in wire and cable reels, protective packaging and molded plastics was the primary reason for the decline, although lower prices also contributed.
Operating profit was down 54% from last year's third quarter due to lower volumes and higher pension costs, partially offset by productivity improvements and a favorable price/cost relationship.
Nine Months Ended September 27, 2009 Compared with Nine Months Ended September 28, 2008
RESULTS OF OPERATIONS
The following discussion provides a review of results for the nine months ended September 27, 2009 versus the nine months ended September 28, 2008.
OVERVIEW
Results for the first nine months of 2009 were affected by many of the same factors impacting the third quarter. Lower volumes companywide drove sales 19% below last year's levels, most significantly in the industrial-focused businesses. Despite these volume declines and a $40 million increase in pension costs, of which approximately 75% is included in cost of sales, gross profit margins increased to 18.2% from 17.7% in 2008. Net income attributable to Sonoco for the first nine months of 2009 was $104.4 million compared to $128.6 million reported for the same period of 2008. 2009 earnings include after-tax restructuring charges of $16.6 million. 2008 results were impacted by a $31.0 million after-tax non-cash impairment charge for the Company's remaining financial interest related to the 2003 sale of its high density film business, as well as after-tax restructuring charges of $17.7 million.

OPERATING REVENUE Net sales for the first nine months of 2009 were $2,595 million, compared to $3,188 million for the first nine months of 2008, a decrease of $592 million. The components of the sales change were: ($ in millions) Volume/Mix $ (366 ) Foreign Currency Translation/Other (177 ) Selling Prices (49 ) Total Sales Decrease $ (592 )

As discussed earlier, volume/mix and the impact of unfavorable foreign exchange translation were the major drivers in the decrease in sales from 2008 levels. Lower selling prices due to the pass-through of reduced recovered paper costs in industrial businesses were only partially offset by higher average selling prices in several consumer businesses initiated in response to higher metal and converting costs.
COSTS AND EXPENSES
Restructuring related charges totaled $17.8 million and $35.2 million for the first nine months of 2009 and 2008, respectively. In addition, 2008 results included a non-cash impairment charge of $42.7 million for the Company's remaining financial interest related to the 2003 sale of its high density film business. Additional information regarding restructuring actions is provided in Note 3 to the Company's Condensed Consolidated Financial Statements. None of these charges are allocated to the reporting segments.

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SONOCO PRODUCTS COMPANY Volume declines were the largest driver of the year-to-date decrease in cost of sales. Total pension and retirement plan costs increased approximately $40 million, of which approximately 75% is included in cost of sales. As noted above, gross profit margin improved as the benefits of a favorable year-over-year price/cost relationship, most notably in consumer-related businesses, restructuring actions taken over the last 12 months, and productivity improvements were able to offset the negative impacts of lower volume and higher pension costs. The magnitude of the price/cost spread that we have experienced so far this year is not expected to continue in 2010, although management expects that the earnings impact will be more than offset by volume increases, productivity improvements, and other cost management activities. Selling, general and administrative costs were lower than 2008 levels primarily due to aggressive cost containment activities, including freezing salaries and temporarily suspending 401(k) matches, along with the impact of foreign currency translation. These reductions were partially offset by higher pension costs. Net interest expense for the first nine months of 2009 decreased to $29.1 million, compared with $36.0 million during the same period in 2008. The decrease was due to lower debt levels and lower interest rates.
The effective tax rate in the first nine months of 2009 was 29.0%, versus 29.2% recorded in 2008.

REPORTABLE SEGMENTS The following table recaps net sales for the first nine months of 2009 and 2008 ($ in thousands): Nine Months Ended September 27, 2009 September 28, 2008 Net sales: Consumer Packaging $ 1,119,610 $ 1,184,355 Tubes and Cores/ Paper 958,091 1,327,289 Packaging Services 311,577 397,648 All Other Sonoco 206,142 278,521 Consolidated $ 2,595,420 $ 3,187,813

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

Nine Months Ended September 27, 2009 September 28, 2008 Income before income taxes: Segment operating profit Consumer Packaging $ 120,352 $ 97,665 Tubes and Cores/ Paper 48,433 116,601 Packaging Services 7,808 23,945 All Other Sonoco 17,987 35,569 Restructuring/Asset impairment charges (17,754 ) (77,838 ) Interest, net (29,103 ) (35,954 ) Consolidated $ 147,723 $ 159,988

Consumer Packaging
Sales in the Consumer Packaging segment during the first nine months of 2009 decreased $65 million, or 5%, compared with the first nine months of 2008, as a result of a 7% decline in volume and the unfavorable impact of foreign exchange. Increased selling prices partially offset these negative factors. A 23% increase in segment operating profits was the result of a favorable price/cost relationship and productivity improvements that more than offset the impact of volume declines and higher pension costs.

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SONOCO PRODUCTS COMPANY Tubes and Cores/Paper
Year-to-date 2009 sales for the segment dropped $369 million, or 28%, compared with the same period in 2008. A volume decline of approximately 13% was the most significant driver, but the unfavorable effect of foreign currency translation also contributed notably. Lower prices, especially for products related to recovered paper also had a significant negative impact on the year-over-year sales decline.
Segment operating profit fell nearly 58% during the first nine months of 2009, compared to last year's levels. Lower volumes, higher pension costs and the unfavorable impact of foreign currency translation were the major factors in the decline. The benefits of several plant shutdowns along with other fixed cost control measures helped mitigate the impact of the volume shortfall. An unfavorable price/cost relationship in the third quarter offset the positive relationship experienced in the first half of the year. As a result, on a year-to-date basis, the price/cost relationship has been essentially neutral as the benefit of lower recovered paper costs was countered by lower prices received.
Packaging Services
Year-to-date 2009 sales for the segment decreased 22% or $86 million from 2008 levels. This decrease was due to significantly lower volume and the unfavorable effect of foreign currency translation.
Compared to the same period in 2008, segment operating profit declined 67% in the first nine months of 2009. Lower volumes and an unfavorable shift in the mix of business were the most significant factors in this decline, but higher pension costs also contributed. These negative factors were somewhat offset by the benefit of several fixed cost reduction initiatives. All Other Sonoco
First nine months 2009 sales in All Other Sonoco dropped 26% from the same period in 2008. Continued weak volumes in wire and cable reels, protective packaging and molded plastics were the primary reasons for the decline. Operating profit was down 49% from last year's first nine months due to lower volumes and higher pension costs, partially offset by productivity improvements and a favorable price/cost relationship.
Financial Position, Liquidity and Capital Resources The Company's financial position remained strong during the third quarter of 2009. Cash flows from operations totaled $357.8 million in the first nine months of 2009, compared with $310.2 million in the same period last year. Although year-over-year earnings were lower, the impact on operating cash flow was largely buffered by non-cash items, primarily higher non-cash pension and post retirement expenses in the current year. Operating cash flow improvements due to changes in working capital and other assets and liabilities offset a $40 million non-recurring benefit received in 2008 from insurance settlements related to an environmental claim. Operating cash flows are expected to remain strong during the fourth quarter of 2009, but at levels below those generated during the third quarter.
During the first nine months of 2009, the Company utilized cash from operations to fund capital expenditures of $82.8 million, pay dividends of $80.9 million, and reduce outstanding debt by a net $104.2 million to $591.7 million at September 27, 2009. Cash and cash equivalents increased from $101.7 million at December 31, 2008, to $194.1 million at September 27, 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 September, the Company again utilized this rule to access approximately . . .