Sonoco Products 10Q 2003 Q2 Quarterly report

Sonoco Products (SON) 10-Q2003 Q2 Quarterly report

Content analysis

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the Quarter Ended June 29, 2003		Commission File No. 0-516

SONOCO PRODUCTS COMPANY


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

One North Second Street

Post Office Box 160

Hartsville, South Carolina 29551-0160

Telephone: 843-383-7000

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 and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock at August 3, 2003:

Common stock, no par value: 96,843,669

SONOCO PRODUCTS COMPANY

INDEX


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements:
		Condensed Consolidated Balance Sheets — June 29, 2003 (unaudited) and December 31, 2002
		Condensed Consolidated Statements of Income — Three Months and Six Months Ended June 29, 2003 (unaudited) and June 30, 2002 (unaudited)
		Condensed Consolidated Statements of Cash Flows — Six Months Ended June 29, 2003 (unaudited) and June 30, 2002 (unaudited)
		Notes to Condensed Consolidated Financial Statements
		Report of Independent Accountants
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATIONS

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Part I. Financial Information

Item 1. Financial Statements

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


				June 29,
				2003			December 31,
				(unaudited)			2002*

Assets
Current Assets
		Cash and cash equivalents		$	43,981		$	31,405
		Trade accounts receivable, net of allowances			359,633			314,429
		Other receivables			44,989			32,724
		Inventories:
			Finished and in process		134,378			118,512
			Materials and supplies		149,163			126,042
		Prepaid expenses and other			54,726			40,155

					786,870			663,267
Property, Plant and Equipment, Net					972,866			975,368
Goodwill					376,807			359,418
Other Assets					432,730			438,386

			Total Assets	$	2,569,273		$	2,436,439

Liabilities and Shareholders’ Equity
Current Liabilities
		Payable to suppliers		$	268,229		$	248,640
		Accrued expenses and other			171,000			169,817
		Notes payable and current portion of long-term debt			150,332			134,500
		Taxes on income			17,744			5,639

					607,305			558,596
Long-Term Debt					696,830			699,346
Pension and Other Postretirement Benefits					133,838			121,176
Deferred Income Taxes and Other					198,299			189,896
Shareholders’ Equity
	Common stock, no par value
		Authorized 300,000 shares
		96,746 and 96,640 shares outstanding, of which 96,513 and 96,380 are issued at June 29, 2003 and December 31, 2002, respectively			7,175			7,175
	Capital in excess of stated value				326,004			324,295
	Accumulated other comprehensive loss				(159,614	)		(212,164	)
	Retained earnings				759,436			748,119

			Total Shareholders’ Equity		933,001			867,425

			Total Liabilities and Shareholders’ Equity	$	2,569,273		$	2,436,439

The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles.

See accompanying Notes to Condensed Consolidated Financial Statements

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


			Three Months Ended						Six Months Ended

			June 29,			June 30,			June 29,			June 30,
			2003			2002			2003			2002

Net sales			$	730,847		$	732,471		$	1,432,611		$	1,405,158
Cost of sales				601,649			587,181			1,173,447			1,124,659
Selling, general and administrative expenses				71,449			74,842			145,053			145,455
Restructuring charges (see Note 5)				7,828			1,715			9,165			3,154

Income before interest and taxes				49,921			68,733			104,946			131,890
Interest expense				13,979			13,154			26,709			26,661
Interest income				(509	)		(258	)		(956	)		(685	)

Income before income taxes				36,451			55,837			79,193			105,914
Provision for income taxes				15,299			20,090			30,686			38,097

Income before equity in earnings of affiliates/Minority interest in subsidiaries				21,152			35,747			48,507			67,817
Equity in earnings of affiliates/Minority interest in subsidiaries				1,681			1,980			3,324			3,457

Net income			$	22,833		$	37,727		$	51,831		$	71,274

Average common shares outstanding:
	Basic			96,696			96,409			96,684			96,179

	Diluted			96,956			97,775			96,957			97,298

Per common share
	Net income:
		Basic	$	0.24		$	0.39		$	0.54		$	0.74

		Diluted	$	0.24		$	0.39		$	0.53		$	0.73

	Cash dividends		$	0.21		$	0.21		$	0.42		$	0.41

See accompanying Notes to Condensed Consolidated Financial Statements

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


			Six Months Ended

			June 29,			June 30,
			2003			2002

Cash Flows from Operating Activities:
Net income			$	51,831		$	71,274
Adjustments to reconcile net income to net cash provided by operating activities:
	Restructuring reserve (noncash)			729			1,018
	Depreciation, depletion and amortization			79,149			79,004
	Equity in earnings of affiliates/Minority interest in subsidiaries			(3,324	)		(3,457	)
	Cash dividends from affiliated companies			1,325			2,031
	(Gain) loss on disposition of assets			(502	)		653
	Deferred taxes			5,587			3,009
	Changes in assets and liabilities, net of effects from acquisitions, dispositions, and foreign currency adjustments
		Receivables		(43,846	)		(46,934	)
		Inventories		(29,002	)		11,236
		Prepaid expenses		(12,476	)		(3,001	)
		Payables and taxes		8,783			17,325
		Other assets and liabilities		26,196			(16,898	)

Net cash provided by operating activities				84,450			115,260

Cash Flows From Investing Activities:
Purchase of property, plant and equipment				(52,787	)		(51,913	)
Cost of acquisitions, exclusive of cash acquired				(1,275	)		—
Proceeds from the sale of assets				1,372			1,136

Net cash used by investing activities				(52,690	)		(50,777	)

Cash Flows From Financing Activities:
Proceeds from issuance of debt				20,938			25,138
Principal repayment of debt				(10,199	)		(11,244	)
Net (decrease) in commercial paper borrowings				(1,500	)		(46,500	)
Net increase (decrease) in bank overdrafts				10,469			(5,359	)
Cash dividends				(40,514	)		(39,326	)
Common shares issued				1,070			16,691

Net cash used by financing activities				(19,736	)		(60,600	)

Effects of Exchange Rate Changes on Cash				552			313

Net Increase in Cash and Cash Equivalents				12,576			4,196
Cash and cash equivalents at beginning of period				31,405			36,130

Cash and cash equivalents at end of period			$	43,981		$	40,326

See accompanying Notes to Condensed Consolidated Financial Statements

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

Note 1: Basis of Interim Presentation

In the opinion of the management of Sonoco Products Company (the “Company”), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows for the interim periods reported herein. Operating results for the three and six months ended June 29, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s annual report for the fiscal year ended December 31, 2002.

Certain prior year amounts in the Condensed Consolidated Balance Sheet at December 31, 2002 have been reclassified to conform with the current period presentation. Additionally, in the second quarter of 2003, the Company reclassified shipping and handling costs related to third-party shipments from net sales to cost of sales on the Consolidated Statements of Income in all periods presented. Although these reclassifications increased net sales and cost of sales by the same amount, they did not affect reported net income.

Note 2: Earnings Per Share

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


			Three Months Ended				Six Months Ended

			June 29,		June 30,		June 29,		June 30,
			2003		2002		2003		2002

Numerator:
	Net income		$	22,833	$	37,727	$	51,831	$	71,274

Denominator:
	Average common shares outstanding			96,696,000		96,409,000		96,684,000		96,179,000
	Dilutive effect of:
		Employee stock options		201,000		931,000		163,000		849,000
		Contingent employee share awards		59,000		435,000		110,000		270,000

	Diluted outstanding shares			96,956,000		97,775,000		96,957,000		97,298,000

Reported net income per common share:
	Basic		$	0.24	$	0.39	$	0.54	$	0.74
	Diluted		$	0.24	$	0.39	$	0.53	$	0.73

Stock options to purchase approximately 8,119,950 and 2,212,000 shares at June 29, 2003 and June 30, 2002, respectively, were not dilutive and therefore are not included in the computations of diluted income per common share amounts. The increase in stock options that were not dilutive was primarily due to lower average stock prices in this year’s second quarter compared with last year’s second quarter. No adjustments were made to reported net income in the computations of earnings per share.

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

Note 3: Comprehensive Income

The following table reconciles net income to comprehensive income:


		Three Months Ended					Six Months Ended

		June 29,			June 30,		June 29,		June 30,
		2003			2002		2003		2002

Net income		$	22,833		$	37,727	$	51,831	$	71,274
Other comprehensive income (loss):
	Foreign currency translation adjustments		37,487			14,535		51,584		9,560
	Other adjustments, net of tax		(228	)		505		966		1,165

Comprehensive income		$	60,092		$	52,767	$	104,381	$	81,999

The following table summarizes the components of the current period change in the accumulated other comprehensive loss balance:


	Foreign			Minimum					Accumulated
	Currency			Pension					Other
	Translation			Liability					Comprehensive
	Adjustments			Adjustment			Other		Loss

Balance at December 31, 2002	$	(161,809	)	$	(50,423	)	$	68	$	(212,164	)
Year to date change		51,584			—			966		52,550

Balance at June 29, 2003	$	(110,225	)	$	(50,423	)	$	1,034	$	(159,614	)

The Minimum Pension Liability Adjustment and Other Items presented above are shown net of tax. The cumulative deferred tax benefit of the Minimum Pension Liability Adjustment was $22,548 at June 29, 2003 and December 31, 2002. Additionally, the deferred tax liability of Other Items was $543 and $148 as of June 29, 2003 and December 31, 2002, respectively.

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

Note 4: Financial Segment Information

Sonoco reports its results in two primary segments, Industrial Packaging and Consumer Packaging. The Industrial Packaging segment includes the following products: high performance paper, plastic and composite engineered carriers; paperboard; wooden, metal and composite reels for wire and cable packaging; fiber-based construction tubes and forms; custom designed protective packaging; and supply chain management capabilities. The Consumer Packaging segment includes the following products and services: round and shaped rigid packaging, both composite and plastic; printed flexible packaging; metal and plastic ends and closures; high density film products; specialty packaging; and packaging services.

FINANCIAL SEGMENT INFORMATION (Unaudited)


			Three Months Ended						Six Months Ended

			June 29,			June 30,			June 29,			June 30,
			2003			2002			2003			2002

Net Sales
	Industrial Packaging		$	381,523		$	377,636		$	738,569		$	716,610
	Consumer Packaging			349,324			354,835			694,042			688,548

		Consolidated	$	730,847		$	732,471		$	1,432,611		$	1,405,158

Operating Profit
	Industrial Packaging		$	32,673		$	41,775		$	63,378		$	78,768
	Consumer Packaging			25,076			28,673			50,733			56,276
	Restructuring charges			(7,828	)		(1,715	)		(9,165	)		(3,154	)
	Interest, net			(13,470	)		(12,896	)		(25,753	)		(25,976	)

		Consolidated	$	36,451		$	55,837		$	79,193		$	105,914

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

Note 5: Restructuring Charges

Effective January 1, 2003, the Company adopted Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (FAS 146), which nullifies Emerging Issues Task Force Issue No. 94-3 (Issue 94-3), ‘Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).’ FAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. The provisions of FAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of FAS 146 is not expected to have a material effect on the Company’s financial statements except for the timing of the recognition of costs associated with future exit or disposal activities.

During the first six months of 2003, the Company recognized restructuring charges, net of adjustments, of $9,165 ($8,750 after tax). Of these charges, the Industrial Packaging segment recorded $8,465, primarily related to the Company’s recently initiated plant closing in Europe and the Consumer Packaging segment recorded adjustments of $700 related to additional lease termination and restoration costs associated with prior plant closings. These restructuring charges, net of adjustments, consisted of severance and termination benefits of $7,621, asset impairment charges of $729, and other exit costs of $815. The Company anticipates restructuring charges associated with the recently initiated 2003 activities in the Industrial Packaging segment to approximate a total of $13,000, including charges recorded in the second quarter of 2003, primarily attributed to approximately $11,000 in severance charges, $1,000 in asset impairment charges, and $1,000 in other miscellaneous charges. Remaining charges associated with the 2003 activities will be recorded in future periods in accordance with the guidelines of FAS 146. During 2002, the Company recognized restructuring charges of $12,647 ($8,095 after tax) as a result of restructuring actions announced during the year. Of this amount, charges of $3,154 ($2,019 after tax) were recognized during the first six months of 2002. At December 31, 2002, $14,376 remained accrued on the Condensed Consolidated Balance Sheet related to plans announced during 2001 and 2002. The Company’s restructuring plans from 2001 through 2003 to-date include a global reduction of approximately 510 salaried positions (approximately 260 in the United States) and approximately 1,000 hourly positions (approximately 700 in the United States), including the closure of 20 plant locations. As of June 29, 2003, 18 plant locations have been closed, and approximately 1,370 employees have been terminated (approximately 460 salaried and 910 hourly).

The following table sets forth the activity in the restructuring accrual included in “Accrued expenses and other” on the Condensed Consolidated Balance Sheets. These costs are included in “Restructuring charges” on the Condensed Consolidated Statements of Income.

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

Note 5: Restructuring Charges continued,


	Severance and
	Termination			Asset			Other
	Benefits			Impairment			Exit Costs			Total

Beginning liability
December 31, 2002	$	9,162					$	5,214		$	14,376
New charges		8,686		$	729			58			9,473
Cash payments		(6,734	)		—			(1,359	)		(8,093	)
Asset Impairment		—			(729	)		—			(729	)
Adjustments		(1,065	)		—			757			(308	)

Ending liability June 29, 2003	$	10,049		$	—		$	4,670		$	14,719

The Company expects to pay the remaining restructuring costs, with the exception of on-going pension subsidies and certain building lease termination expenses, by the end of the second quarter of 2004 using cash generated from operations.

During the first six months of 2003, the Company recognized write-offs of impaired facilities of $729 associated with one plant closing in Europe in the Industrial Packaging segment. The impaired facility was written down to estimated fair value. The facility impacted by the restructuring ceased operations during the period ended June 29, 2003 and is anticipated to be disposed of during the fourth quarter of 2003. The effect of suspending depreciation on assets held for disposition was not material to the Consolidated Statement of Income for the period ended June 29, 2003.

Note 6: Dividend Declarations

On April 16, 2003, the Board of Directors declared a regular quarterly dividend of $0.21 per share. This dividend was paid June 10, 2003, to all shareholders of record as of May 16, 2003.

On July 16, 2003, the Board of Directors declared a regular quarterly dividend of $0.21 per share, payable September 10, 2003 to all shareholders of record August 15, 2003.

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

Note 7: Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the six months ended June 29, 2003, are as follows:


	Industrial		Consumer
	Packaging		Packaging
	Segment		Segment		Total

Balance as of January 1, 2003	$	211,325	$	148,093	$	359,418
2003 acquisitions		975		1,602		2,577
Goodwill purchase price adjustment		363		—		363
Foreign currency translation		6,412		8,037		14,449

Balance as of June 29, 2003	$	219,075	$	157,732	$	376,807

The gross carrying amount and accumulated amortization of intangible assets for the period ended June 29, 2003, are as follows:


	For the Period ended June 29, 2003

	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount

Amortizable intangibles
Patents	$	3,268	$	(2,414	)	$	854
Customer lists		38,024		(3,213	)		34,811
Land use rights		5,873		(1,890	)		3,983
Supply agreements		4,761		(3,265	)		1,496
Other		3,275		(2,172	)		1,103

Total	$	55,201	$	(12,954	)	$	42,247

Aggregate amortization expense on intangible assets was $1,058 and $2,029 for the three-month and six-month periods ended June 29, 2003, respectively. Amortization expense is expected to approximate $4,000 in 2003 and 2004, $3,000 in 2005, and $2,000 in 2006 and 2007. Intangible assets are included in “Other Assets” on the Company’s Consolidated Balance Sheets.

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

Note 8: Stock Plans

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 (APB) 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 recorded based on the quoted market price of the Company’s stock at the end of the period.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation.


		Three Months Ended						Six Months Ended

		June 29,			June 30,			June 29,			June 30,
		2003			2002			2003			2002

Net income, as reported		$	22,833		$	37,727		$	51,831		$	71,274
	Add: Stock-based employee compensation cost, net of related tax effects included in net income, as reported		174			173			282			304
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,319	)		(1,776	)		(2,628	)		(3,552	)

Proforma net income		$	21,688		$	36,124		$	49,485		$	68,026
Earnings per share:
	Basic – as reported	$	0.24		$	0.39		$	0.54		$	0.74
	Basic – proforma	$	0.22		$	0.37		$	0.51		$	0.71
	Diluted – as reported	$	0.24		$	0.39		$	0.53		$	0.73
	Diluted – proforma	$	0.22		$	0.37		$	0.51		$	0.70

Note 9: New Accounting Pronouncements

Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, ‘Accounting for Asset Retirement Obligations’ (FAS 143), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of FAS 143 did not have a material effect on the Company’s financial statements.

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

Note 9: New Accounting Pronouncements, continued

In April 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No.149, ‘Amendment of Statement 133 on Derivative Instruments and Hedging Activities’ (FAS 149). FAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under Statement of Financial Accounting Standards 133, ‘Accounting for Derivative Instruments and Hedging Activities’ (FAS 133). FAS 149 also amends certain other existing pronouncements. FAS 149 is effective for contracts entered into or modified after June 30, 2003, (except that provisions of FAS 149 that relate to FAS 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates) with certain exceptions and for hedging relationships designated after June 30, 2003. The Company does not expect the adoption of FAS 149 to have a material effect on its financial statements.

In May 2003, the FASB issued Statement of Financial Accounting Standards No.150, ‘Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity’ (FAS 150). FAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope of FAS 150 as a liability, which previously may have been classified as equity, consistent with the current definition of liabilities in FASB Concepts Statement No. 6, ‘Elements of Financial Statements’. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the adoption of FAS 150 to have a material effect on its financial statements.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), ‘Consolidation of Variable Interest Entities’. FIN 46 addresses when a company should include in its financial statements the assets, liabilities and activities of a variable interest entity. It defines variable interest entities as those entities with a business purpose that either do not have any equity investors with voting rights, or have equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. FIN 46 consolidation requirements are effective for all variable interest entities created after January 31, 2003, and to pre-existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain disclosure requirements are effective for financial statements issued after January 31, 2003. The Company does not expect the adoption of FIN 46 to have a material effect on its financial statements.

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

Note 10: Third Party Debt Guarantees

At June 29, 2003, the Company had third party debt guarantees, not included in the Company’s Consolidated Financial Statements, of approximately $4,000 related to debt of independent contractors supporting the Company’s forest operations and debt of equity affiliates.

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Report of Independent Auditors

To the Shareholders and Directors of Sonoco Products Company

We have reviewed the accompanying condensed consolidated balance sheet of Sonoco Products Company as of June 29, 2003, and the related condensed consolidated statements of income for each of the three-month and six-month periods ended June 29, 2003 and June 30, 2002, and the condensed consolidated statements of cash flows for the six-month periods ended June 29, 2003 and June 30, 2002. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, 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 auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated January 29, 2003, 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, 2002, is fairly stated in all material respects, in relation to the consolidated balance sheet from which it has been derived.


		/s/ PricewaterhouseCoopers LLP

		PricewaterhouseCoopers LLP

Charlotte, North Carolina

July 16, 2003

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SONOCO PRODUCTS COMPANY

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Statements included in Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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,” “plan,” “anticipate,” “objective,” “goal,” and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding offsetting high raw material costs, adequacy of income tax provisions, refinancing of debt, adequacy of cash flows, effects of acquisitions and dispositions, adequacy of provisions for environmental liabilities, financial strategies and the results expected from them, and producing improvements in earnings. 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 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; 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 engineered carrier 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 exchange, interest rate and commodity price risk; actions of government agencies; loss of consumer confidence; and economic disruptions resulting from terrorist activities.

Second Quarter 2003 Compared with Second Quarter 2002

Results of Operations

Consolidated net sales for the second quarter of 2003 were $730.8 million, versus $732.5 million in the second quarter of 2002. Sales for the second quarter were basically flat, compared with the same period in 2002, primarily reflecting lower volumes in most of the Company’s businesses totaling approximately $36.0 million, partially offset by higher average selling prices of approximately $17.0 million, mainly attributed to the Company’s engineered carriers/paper operations and high density film business. Sales for the quarter were also impacted by favorable exchange rates of approximately $16.0 million as the dollar weakened against foreign currencies. Overall, volume was down approximately five percent during the second quarter of 2003 driven principally by weaker customer demand in served markets.

Net income for the second quarter of 2003 was $22.8 million, versus $37.7 million in the second quarter of 2002. Net income for the second quarter of 2003 included restructuring charges, primarily related to the Company’s recently initiated plant closing in Europe, of approximately $7.8 million (before and after tax).

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SONOCO PRODUCTS COMPANY

Management’s Discussion and Analysis of Financial Condition and Results of Operations
continued

Second Quarter 2003 Compared with Second Quarter 2002

Results of Operations continued,

For the second quarter of 2002, net income included restructuring charges of $1.7 million ($1.1 million after tax). Second quarter 2003 results were adversely impacted by lower volumes of approximately $10.0 million and a negative price/cost relationship of approximately $4.0 million, primarily associated with higher resin costs in the Company’s high density film business. Additionally, higher pension and postretirement expense lowered pretax earnings approximately $6.0 million in the second quarter of 2003 when compared with 2002. Full year results for 2003 are expected to be impacted by an incremental increase in pension and postretirement expense of approximately $29.0 million when compared with 2002. Second quarter 2003 results were also favorably impacted by on-going productivity initiatives of approximately $7.0 million, partially offset by higher energy costs of approximately $3.0 million.

The Company reported earnings per diluted share of $0.24 and $0.39 in the second quarter of 2003 and 2002, respectively. Earnings for the second quarter included restructuring charges of $0.08 per share in 2003, compared with $0.01 in the second quarter of 2002.

Consumer Packaging Segment

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

Second quarter 2003 sales were $349.3 million, compared with $354.8 million in the same quarter of 2002. Operating profit in the second quarter of 2003 for this segment was $25.1 million, versus $28.7 million in the second quarter of 2002.

The decrease in second quarter 2003 sales was primarily due to decreased volume of approximately $16.0 million mainly associated with rigid paper and plastic packaging, high density film, and flexible packaging, partially offset by higher average selling prices of approximately $4.0 million and favorable exchange rates of approximately $5.0 million as the dollar weakened against foreign currencies. Overall, volumes in the Consumer Packaging segment were down approximately five percent, compared with last year’s second quarter.

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SONOCO PRODUCTS COMPANY

Management’s Discussion and Analysis of Financial Condition and Results of Operations
continued

Second Quarter 2003 Compared with Second Quarter 2002

Consumer Packaging Segment continued,

Second quarter 2003 operating profit in this segment was adversely impacted by lower volume of approximately $6.0 million and a negative price/cost relationship of approximately $3.0 million, primarily associated with higher resin costs in the Company’s high density film business. Additionally, higher pension and postretirement expense of approximately $3.0 million impacted second quarter 2003 profits. These costs were partially offset by on-going productivity initiatives of approximately $7.0 million.

Industrial Packaging Segment

The Industrial Packaging segment includes the following products: high performance paper, plastic and composite engineered carriers; paperboard; wooden, metal and composite reels for wire and cable packaging; fiber-based construction tubes and forms; custom designed protective packaging; and supply chain management capabilities.

Second quarter 2003 sales for the Industrial Packaging segment were $381.5 million, versus $377.7 million in the same period last year. Operating profit in the second quarter of 2003 for the segment was $32.7 million, versus $41.8 million in the second quarter of 2002.

The higher sales, compared to last year’s second quarter, were due primarily to higher average selling prices of approximately $13.0 million, primarily in the Company’s engineered carriers/paper operations, and favorable exchange rates of approximately $11.0 million as the dollar weakened against foreign currencies, partially offset by lower volume across the segment of approximately $20.0 million. Volumes in this segment were down approximately six percent, compared with last year’s second quarter.

Second quarter 2003 operating profit in this segment was adversely impacted by approximately $4.0 million due to the lower volume as discussed above. Increased old corrugated containers (OCC) prices negatively impacted the Company’s engineered carriers/paper operations but were virtually offset by higher average selling prices. Additionally, higher pension and postretirement expenses of approximately $3.0 million and higher energy costs of approximately $3.0 million were partially offset by lower fixed costs of approximately $2.0 million.

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SONOCO PRODUCTS COMPANY

Management’s Discussion and Analysis of Financial Condition and Results of Operations
continued

Second Quarter 2003 Compared with Second Quarter 2002

Industrial Packaging Segment continued,

Restructuring charges of $7.8 million, recorded in the second quarter of 2003, included severance charges of $7.0 million, asset impairment charges of $0.7 million, and other charges of $0.1 million. The restructuring charges were primarily associated with a plant closing in Europe.

June 2003 Year-to-Date Compared with June 2002 Year-to-Date

Results of Operations

Consolidated net sales for the first six months of 2003 were $1.43 billion, versus $1.41 billion in the first six months of 2002. Sales for the period were higher than the same period in 2002, primarily reflecting higher average selling prices of approximately $23.0 million, mainly attributed to the Company’s engineered carriers/paper operations and high density film business, and favorable exchange rates of approximately $24.0 million as the dollar weakened against foreign currencies. Partially offsetting the revenue were lower volumes in most of the Company’s businesses of approximately $25.0 million. Overall, sales were up approximately two percent while volume was down approximately two percent during the period.

Net income for the first six months of 2003 was $51.8 million, versus $71.3 million during the first six months of 2002. Net income for the first six months of 2003 included restructuring charges of $9.2 million ($8.8 million after tax), compared with $3.2 million ($2.0 million after tax) in 2002. Results for the first six months were adversely impacted by a negative price/cost relationship of approximately $13.0 million, primarily associated with higher costs for OCC, the Company’s primary raw material; higher resin costs in the Company’s high density film business; and higher raw material costs in the Company’s rigid paper and plastic packaging operations. Additionally, higher pension and postretirement expense of approximately $14.0 million, lower volumes of approximately $5.0 million, and higher energy costs of approximately $6.0 million were partially offset by on-going productivity initiatives of approximately $17.0 million.

The Company reported earnings per diluted share of $0.53 and $0.73 in the first six months of 2003 and 2002, respectively. Earnings for the first six months included restructuring charges of $0.09 per share and $0.02 per share in 2003 and 2002, respectively.

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SONOCO PRODUCTS COMPANY

Management’s Discussion and Analysis of Financial Condition and Results of Operations
continued

June 2003 Year-to-Date Compared with June 2002 Year-to-Date

Consumer Packaging Segment

Sales for the first six months of 2003 were $694.0 million, compared with $688.5 million in the same period of 2002. Operating profit during the first six months of 2003 for this segment was $50.7 million, versus $56.3 million in the first six months of 2002.

The slight increase in sales for the first six months of 2003 sales was primarily due to higher average selling prices of approximately $4.0 million and favorable exchange rates of approximately $7.0 million as the dollar weakened against foreign currencies, partially offset by decreased volume of approximately $8.0 million, mainly associated with rigid paper and plastic packaging, high density film, and flexible packaging. Overall, volumes in the Consumer Packaging segment were down approximately one percent, compared with last year’s first six months.

Operating profit for the first six months of 2003 in this segment was adversely impacted by a negative price/cost relationship of approximately $7.0 million, primarily associated with higher resin costs in the Company’s high density film business and rigid paper and plastic packaging operations, and by lower volume of approximately $4.0 million. Additionally, higher pension and postretirement expense of approximately $7.0 million impacted 2003 profits. These costs were partially offset by on-going productivity initiatives of approximately $14.0 million.

During the first six months of 2003, the segment recorded restructuring adjustments of $0.7 million, primarily attributed to lease termination and plant restoration costs associated with previously announced restructuring plans.

Industrial Packaging Segment

Sales for the first six months of 2003 in the Industrial Packaging segment were $738.6 million, versus $716.6 million in the same period last year. Operating profit in the first six months of 2003 for the segment was $63.4 million, versus $78.8 million in the first six months of 2002.

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SONOCO PRODUCTS COMPANY

Management’s Discussion and Analysis of Financial Condition and Results of Operations
continued

June 2003 Year-to-Date Compared with June 2002 Year-to-Date

Industrial Packaging Segment continued,

The higher sales, compared to last year’s first six months, were due primarily to higher average selling prices of approximately $19.0 million, primarily in the Company’s engineered carriers/paper operations, and favorable exchange rates of approximately $17.0 million as the dollar weakened against foreign currencies, partially offset by lower volume across the segment of approximately $18.0 million. Volumes in this segment were down approximately three percent, compared with last year’s first six months.

Operating profit for the first six months of 2003 in this segment was adversely impacted by a negative price/cost relationship of approximately $6.0 million, primarily associated with higher costs for OCC in the Company’s engineered carrier/paper operations. Additionally, higher pension and postretirement expenses of approximately $7.0 million and higher energy costs of approximately $6.0 million were partially offset by approximately $4.0 million related to lower fixed costs and productivity initiatives.

Restructuring charges of $8.5 million, recorded during the first six months of 2003, included severance charges of $7.6 million, asset impairment charges of $0.7 million, and other charges of $0.2 million. The restructuring charges were primarily associated with a plant closing in Europe.

Corporate

General corporate expenses have been allocated as operating costs to each of the segments. Net interest expense remained flat year-over-year.

The effective tax rate for the three-month and six-month periods ended June 29, 2003, was 42.0 percent and 38.7 percent, respectively, compared with 36.0 percent for the same periods last year. Excluding the impact of certain non-deductible foreign restructuring charges in 2003, the effective tax rate would have been 34.4 percent and 35.2 percent for the three-month and six-month periods ended June 29, 2003, respectively. The drop in the effective tax rate, from 36.0 percent in the first six months of 2002 to 35.2 percent for the same period in 2003, is primarily attributed to the geographic mix of taxable earnings and the impact of favorable permanent book/tax differences on lower earnings.

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SONOCO PRODUCTS COMPANY

Management’s Discussion and Analysis of Financial Condition and Results of Operations
continued

New Accounting Pronouncements

As of January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 146, ‘Accounting for Costs Associated with Exit or Disposal Activities’ (FAS 146), which nullifies Emerging Issues Task Force Issue No. 94-3 (Issue 94-3), ‘Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).’ FAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. The adoption of FAS 146 is not expected to have a material effect on the Company’s financial statements except for the timing of the recognition of costs associated with future exit or disposal activities.

- 22 -

SONOCO PRODUCTS COMPANY

Management’s Discussion and Analysis of Financial Condition and Results of Operations
continued

New Accounting Pronouncements continued,

liabilities in FASB Concepts Statement No. 6, ‘Elements of Financial Statements’. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the adoption of FAS 150 to have a material effect on its financial statements.

Restructuring

During the first six months of 2003, the Company recognized restructuring charges, net of adjustments, of $9.2 million ($8.8 million after tax). These restructuring charges, net of adjustments, consisted of severance and termination benefits of $7.6 million, asset impairment charges of $0.7 million, and other exit costs of $0.9 million. The Company anticipates restructuring charges associated with the recently initiated 2003 activities in the Industrial Packaging segment to approximate a total of $13.0 million, including charges recorded in the second quarter of 2003, primarily attributed to approximately $11.0 million in severance charges, $1.0 million in asset impairment charges, and $1.0 million in other miscellaneous charges. Remaining charges associated with the 2003 activities will be recorded in future periods in accordance with the guidelines of FAS 146. During 2002, the Company recognized restructuring charges of $12.6 million ($8.1 million after tax) as a result of restructuring actions announced during the year. Of this amount, charges of $3.1 million ($2.0 million after tax) were recognized during the first six months of 2002. The objective of the restructuring actions from 2001 through 2003 to-date was to realign and centralize a number of staff functions and to eliminate excess plant capacity, and thereby to remove approximately $61.0 million (pretax) of annualized costs from the Company’s

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SONOCO PRODUCTS COMPANY

Management’s Discussion and Analysis of Financial Condition and Results of Operations
continued

Restructuring continued,

cost structure. With the exception of on-going pension subsidies and certain building lease termination expenses, costs associated with the restructuring actions are expected to be paid by the end of the second quarter 2004 using cash generated by operations. The Company anticipates recording additional restructuring charges during the third quarter of 2003 associated with previously initiated restructuring activities as well as contemplated future actions. The Company recently announced that it is developing plans targeted to eliminate approximately $60.0 million in annualized costs including the closing of additional plants.

Financial Position, Liquidity and Capital Resources

The Company’s financial position remained strong during the first six months of 2003. Total debt increased slightly during the first six months of 2003 to $847.2 million from $833.8 million at December 31, 2002. Net working capital (current assets less current liabilities) increased $74.9 million to $179.6 million during the first six months of 2003, driven by an increase in trade accounts receivable and inventory partially offset by an increase in trade accounts payable. The increase in accounts receivable is mainly attributed to the timing of certain customer remittances (despite an overall improved aging) and some extended customer terms. The inventory increase is primarily related to lower than expected sales in May and June 2003 resulting in higher inventory levels at the end of the period.

For the first six months of 2003, cash generated from operations totaled $84.5 million compared with $115.3 million for the same period in 2002. Cash flows were lower in 2003 primarily as a result of higher working capital as described above and lower net income. Cash generated from operations in the first six months of 2003 was used to partially fund capital expenditures of $52.8 million and to pay dividends of $40.5 million. The Company expects internally generated cash flows to be sufficient to meet operating and normal capital expenditure requirements on a short-term and long-term basis.

In July 2003, the Company renewed its $450.0 million backstop credit line for commercial paper, short-term borrowing under uncommitted facilities and future liquidity needs. The credit agreement matures in July 2004 unless the Company exercises a one-year term-out option.

Also, in July 2003, the Company entered into a swap to match the terms of a $150.0 million bond maturing in 2004. The swap qualified as a fair value hedge under FAS 133 and swapped fixed interest for floating.

- 24 -

SONOCO PRODUCTS COMPANY
PART I. FINANCIAL INFORMATION

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information about the Company’s exposure to market risk was disclosed in its 2002 Annual Report on Form 10-K which was filed with the Securities and Exchange Commission on March 7, 2003. There have been no material quantitative or qualitative changes in market risk exposures since the date of that filing.

Item 4. Controls and Procedures

(a) Based on their evaluation of the Company’s disclosure controls and procedures (as defined in 17 C.F.R. Sections 240.13a-14(c) and 240.15d-14(c)) as of a date within 90 days prior to the filing of this quarterly report, the Company’s chief executive officer and chief financial officer concluded that the effectiveness of such controls and procedures was adequate.

(b) There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

See Certifications provided at the end of this 10-Q pursuant to SEC Rules 13a-14, 15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

PART II. OTHER INFORMATION

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

Incorporated by reference to the information set forth under Part II, Item 4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2003.

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SONOCO PRODUCTS COMPANY
PART II. OTHER INFORMATION

Item 5. Other Information

In July 2003, it was announced that the Company’s Board of Directors unanimously elected James M. Micali, chairman and president of Michelin North America, Inc., Greenville, South Carolina, to serve on the Company’s Board of Directors effective July 16, 2003, until the 2004 Annual Meeting of Shareholders.

Item 6. Exhibits and Reports on Form 8-K


(a)		Exhibit 10 — Credit Agreement
		Exhibit 15 — Letter re unaudited interim financial information.
		Exhibit 99 — Certification of Principal Executive Officer and Principal Financial Officer
		Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.

(b)		Form 8-K filed April 16, 2003, pursuant to Item 9 of that form with respect to information provided pursuant to Item 12 of that form.

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SONOCO PRODUCTS COMPANY

SIGNATURE

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.


	SONOCO PRODUCTS COMPANY

	(Registrant)

- 27 -

CERTIFICATIONS

I, Harris E. DeLoach, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sonoco Products Company;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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CERTIFICATIONS

I, Charles J. Hupfer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sonoco Products Company;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

- 29 -

SONOCO PRODUCTS COMPANY
EXHIBIT INDEX


Exhibit
Number		Description

10		Credit Agreement

15		Letter re: unaudited interim financial information.

99		Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

- 30 -

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	7th grade Avg

August 5, 2003

/s/ C. J. Hupfer

C. J. Hupfer

Vice President and

Chief Financial Officer