UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 2006

Commission File Number 1-5277

BEMIS COMPANY, INC.

(Exact name of Registrant as specified in its charter)

Missouri

 

43-0178130

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

One Neenah Center, 4th Floor, P.O. Box 669, Neenah, Wisconsin 54956-0669

(Address of principal executive offices)

 

(920) 727-4100

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, par value $.10 per share

 

New York Stock Exchange

Preferred Share Purchase Rights

 

New York Stock Exchange

 

Securities registered pursuant to section 12(g) of the Act:   None

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

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

Indicate by check mark whether the Registrant 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 has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large Accelerated Filer  x    Accelerated Filer  o    Non-Accelerated Filer  o

Indicate by check mark whether the Registrant is a shell company.    Yeso    No  x

The aggregate market value of the voting stock held by nonaffiliates of the Registrant on June 30, 2006, based on a closing price of $30.62 per share as reported on the New York Stock Exchange, was $3,210,079,000.

As of February 28, 2007, the Registrant had 104,591,366 shares of Common Stock issued and outstanding.

Documents Incorporated by Reference

Portions of the Proxy Statement - Annual Meeting of Stockholders May 3, 2007 - Part III

 




BEMIS COMPANY, INC. AND SUBSIDIARIES

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

Part I

 

 

 

Item 1.

Business

 

3

Item 1A.

Risk Factors

 

5

Item 1B.

Unresolved Staff Comments

 

7

 

 

 

 

Item 2.

Properties

 

7

Item 3.

Legal Proceedings

 

7

Item 4.

Submission of Matters to a Vote of Security Holders

 

8

 

 

 

 

Part II

 

 

 

Item 5.

Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

8

Item 6.

Selected Financial Data

 

9

 

 

 

 

Item 7.

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

 

9

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

18

 

 

 

 

Item 8.

Financial Statements and Supplementary Data

 

18

 

Management’s Responsibility Statement

 

18

 

Report of Independent Registered Public Accounting Firm

 

19

 

Consolidated Statement of Income

 

20

 

Consolidated Balance Sheet

 

21

 

Consolidated Statement of Cash Flows

 

22

 

Consolidated Statement of Stockholders’ Equity

 

23

 

Notes to Consolidated Financial Statements

 

24

 

 

 

 

Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

 

41

Item 9A.

Controls and Procedures

 

41

Item 9B.

Other Information

 

42

 

 

 

 

Part III

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

42

Item 11.

Executive Compensation

 

43

 

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

43

 

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

43

Item 14.

Principal Accountant Fees and Services

 

43

 

 

 

 

Part IV

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

 

43

 

 

 

 

 

Signatures

 

44

 

Exhibit Index

 

45

 

 

 

 

 

Schedule II — Valuation and Qualifying Accounts and Reserves

 

46

 

Report of Independent Registered Public Accounting Firm on Financial Statement Schedule

 

46

 

 

 

 

 

Exhibit 10(e) — Bemis Supplemental Retirement Plan

 

47

 

Exhibit 10(f) — Bemis Supplemental Retirement Plan for Senior Officers

 

52

 

 

 

 

 

Exhibit 21 — Subsidiaries of the Registrant

 

59

 

Exhibit 23 — Consent of PricewaterhouseCoopers LLP

 

61

 

 

 

 

 

Exhibit 31.1 — Certification of Jeffrey H. Curler, Chief Executive Officer of the Company, pursuant to Rule 13a-14(a)/15d-14(a), dated February 28, 2007

 

62

 

 

 

 

 

Exhibit 31.2 — Certification of Gene C. Wulf, Chief Financial Officer of the Company, pursuant to Rule 13a-14(a)/15d-14(a), dated February 28, 2007

 

63

 

 

 

 

 

Exhibit 32 — Certification of Jeffrey H. Curler, Chief Executive Officer of the Company, and Gene C. Wulf, Chief Financial Officer of the Company, pursuant to Section 1350, dated February 28, 2007

 

64

 

2




PART I - ITEMS 1, 2, 3, and 4

ITEM 1 - BUSINESS

Bemis Company, Inc., a Missouri corporation (the “Registrant” or “Company”), continues a business formed in 1858.  The Company was incorporated in 1885 as Bemis Bro. Bag Company with the name changed to Bemis Company, Inc. in 1965.  The Company is a principal manufacturer of flexible packaging products and pressure sensitive materials, selling to customers throughout the United States, Canada, South America, and Europe with a growing presence in Asia Pacific and Mexico.  In 2006, approximately 82 percent of the Company’s sales were derived from the Flexible Packaging segment and approximately 18 percent were derived from the Pressure Sensitive Materials segment.

The Company’s products are sold to customers primarily in the food industry.  Other customers include companies in the following types of businesses: chemical, agribusiness, medical, pharmaceutical, personal care, electronics, automotive, construction, graphic industries, and other consumer goods.  Further information about the Company’s operations in its business segments is available at Note 12 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

As of December 31, 2006, the Company had approximately 15,700 employees, about 10,400 of whom were classified as production employees.  Many of the North American production employees are covered by collective bargaining contracts involving three different international unions, one independent union, and 15 individual contracts with terms ranging from one to six years.  During 2006, two contracts covering approximately 300 employees at two different locations in the United States were successfully negotiated.  Four domestic labor agreements covering approximately 300 employees are scheduled to expire in 2007.  Many of the non-North American production employees as well as some of the non-North American salaried workforce are covered by collective bargaining contracts involving nine different unions with terms ranging from one to two years.

Working capital elements fluctuate throughout the year in relation to the level of customer volume and other marketplace conditions.  Inventory levels reflect a reasonable balance between raw material pricing and availability, and the Company’s commitment to promptly fill customer orders.  Manufacturing backlogs are not a significant factor in the industries in which the Company operates.  The business of each of the segments is not seasonal to any significant extent.

The Company is the owner or licensee of a number of United States and foreign patents and patent applications that relate to certain of its products, manufacturing processes, and equipment.  The Company also has a number of trademarks and trademark registrations in the United States and in foreign countries.  The Company’s patents, licenses, and trademarks collectively provide a competitive advantage.  However, the loss of any single patent or license alone would not have a material adverse effect on the Company’s results as a whole or those of either of its segments.

The Company’s business activities are organized around its two business segments, Flexible Packaging and Pressure Sensitive Materials.  Both internal and external reporting conform to this organizational structure.  A summary of the Company’s business activities reported by its two business segments follows.

Flexible Packaging Segment

The flexible packaging segment manufactures a broad range of consumer and industrial packaging.  Multilayer flexible polymer film structures and laminates are sold for food, medical, and personal care products as well as non-food applications utilizing vacuum or modified atmosphere packaging.  Additional products include blown and cast stretchfilm products, carton sealing tapes and application equipment, custom thermoformed plastic packaging, multiwall and single-ply paper bags, printed paper roll stock, and bag closing materials.  Markets for our products include processed and fresh meat, liquids, frozen foods, cereals, snacks, cheese, coffee, condiments, candy, pet food, bakery, seed, lawn and garden, tissue, fresh produce, personal care and hygiene, disposable diapers, printed shrink overwrap for the food and beverage industry, agribusiness, pharmaceutical, minerals, and medical device packaging.

Pressure Sensitive Materials Segment

The pressure sensitive materials segment manufactures pressure sensitive materials that are sold into label markets, graphic markets, and technical markets.

Products for label markets include narrow-web rolls of pressure sensitive paper, film, and metalized film printing stocks used in high-speed printing and die-cutting of primary package labeling, secondary or promotional decoration, and for high-speed, high-volume data processing (EDP) stocks, bar code labels, and numerous laser printing applications.  Primary markets include food and consumer goods, inventory control labeling, shipping labels, postage stamps, and laser/ink jet printed labels.

Products for graphic markets include pressure sensitive papers and films used for decorative signage through computer-aided plotters, digital and screen printers, and photographic overlaminate and mounting materials including optically clear films with built-in UV inhibitors.  Offset printers, sign makers, and photo labs use these products on short-run and/or digital printing technology to create signs or vehicle graphics.  Primary markets are indoor and outdoor signage, photograph and digital print overlaminates, and vehicle graphics.

Products for technical markets are pressure sensitive materials that are technically engineered for performance in varied industrial applications.  They include micro-thin film adhesives used in delicate electronic parts assembly and pressure sensitives utilizing foam and tape based stocks to perform fastening and mounting functions.  Tapes sold to medical markets feature medical-grade adhesives suitable for direct skin contact.  Primary markets are electronics, automotive, construction, medical, and pharmaceuticals.

3




Marketing, Distribution, and Competition

While the Company’s sales are made through a variety of distribution methods, more than 90 percent of each segment’s sales are made by the Company’s direct sales force.  Sales offices and plants are located throughout the United States, Canada, United Kingdom, Continental Europe, Scandinavia, Asia Pacific, South America, and Mexico to provide prompt and economical service to more than 30,000 customers.  The Company’s technically trained sales force is supported by product development engineers, design technicians, and a customer service organization.

No single customer accounts for ten percent or more of the Company’s total sales.  Furthermore, the loss of one or a few major customers would not have a material adverse effect on the Company’s operating results.  Nevertheless, business arrangements with large customers require a large portion of the manufacturing capacity at a few individual manufacturing sites.  Any change in the business arrangement would typically occur over a period of time, which would allow for an orderly transition for both the Company’s manufacturing site and the customer.

The major markets in which the Company sells its products are highly competitive.  Areas of competition include service, innovation, quality, and price.  This competition is significant as to both the size and the number of competing firms.  Major competitors in the Flexible Packaging segment include Alcan Packaging, Amcor Limited, Exopack Company, Hood Packaging Corporation, Intertape Polymer Group Inc., Pliant Corporation, Printpack, Inc., Sealed Air Corporation, Smurfit-Stone Container Corporation, Sonoco Products Company, and Wihuri OY.  In the Pressure Sensitive Materials segment major competitors include 3M, Acucote, Inc., Avery Dennison Corporation, Flexcon Co., Inc., Green Bay Packaging Inc., Ricoh Company, Ltd., Ritrama Inc., Spinnaker Industries, Inc., Technicote Inc., UPM-Kymmene Corporation, and Wausau Coated Products Inc.

The Company considers itself to be a significant factor in the market niches it serves; however, due to the diversity of the Flexible Packaging and Pressure Sensitive Materials segments, the Company’s precise competitive position in these markets is not reasonably determinable.  Advertising is limited primarily to business and trade publications emphasizing the Company’s product features and related technical capabilities and the individual problem-solving approach to customer problems.

Raw Materials

Plastic resins and films, paper, inks, adhesives, and chemicals constitute the basic major raw materials.  These are purchased from a variety of industry sources and the Company is not dependent on any one supplier for its raw materials.  While temporary industry-wide shortages of raw materials may occur, the Company expects to continue to successfully manage raw material supplies without significant supply interruptions, as demonstrated during the 2005 hurricane season.  Currently, raw materials are readily available.

Research and Development Expense

Research and development expenditures were as follows:

(in thousands)

 

2006

 

2005

 

2004

 

Flexible Packaging

 

$

20,036

 

$

18,920

 

$

16,923

 

Pressure Sensitive Materials

 

4,988

 

4,608

 

4,215

 

Total

 

$

25,024

 

$

23,528

 

$

21,138

 

 

Environmental Control

Compliance with federal, state, and local provisions which have been enacted or adopted regulating discharges of materials into the environment or otherwise relating to the protection of the environment, is not expected to have a material effect upon the capital expenditures, earnings, or competitive position of the Company and its subsidiaries.

Available Information

The Company is a large accelerated filer (as defined in Exchange Act Rule 12b-2) and is also an electronic filer.  Electronically filed reports (Forms 4, 8-K, 10-K, 10-Q, S-3, S-8, etc.) can be accessed at the Securities and Exchange Commission (SEC) website (http://www.sec.gov) or by visiting the SEC’s Public Reference Room located at 100 F St., N.E., Washington, DC 20549 (call 1-202-551-8090 or 1-800-732-0330 for hours of operation). Electronically filed reports can also be accessed through the Company’s own website (http://www.bemis.com), under Investor Relations/SEC Filings or by writing for free information, including SEC filings, to Investor Relations, Bemis Company, Inc., One Neenah Center, 4th Floor, P.O. Box 669, Neenah, Wisconsin 54957-0669, or calling (920) 727-4100.  In addition, the Company’s Board Committee charters, Principles of Corporate Governance, and the Company’s code of business conduct and ethics can be electronically accessed at the Company’s website under Company Overview or, free of charge, by writing directly to the Company, Attention:  Corporate Secretary.  The Company has adopted a Financial Code of Ethics which is filed as an exhibit to this Annual Report on Form 10-K, and is also posted on the Company’s website.  The Company intends to post any amendment to, or waiver from, a provision of the Financial Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller and other persons performing similar functions on the Investor Relations section of its website (www.bemis.com) promptly following the date of such amendment or waiver.

Explanation of Terms Describing the Company’s Products

Barrier laminate — A multilayer plastic film made by laminating two or more films together with the use of glue or a molten plastic to achieve a barrier for the planned package contents.

Barrier products — Products that provide protection and extend the shelf life of the contents of the package.  These products provide this protection by combining different types of plastics and chemicals into a multilayered plastic package.  These products protect the contents from such things as moisture, sunlight, odor, or other elements.

4




Blown film — A plastic film that is extruded through a round die in the form of a tube and then expanded by a column of air in the manufacturing process.

Cast film — A plastic film that is extruded through a straight slot die as a flat sheet during its manufacturing process.

Coextruded film — A multiple layer extruded plastic film.

Controlled atmosphere packaging — A package which limits the flow of elements, such as oxygen or moisture, into or out of the package.

Decorative products — Pressure sensitive materials used for decorative signage, promotional items, and displays and advertisements.

Flexible polymer film — A non-rigid plastic film.

Flexographic printing — The most common flexible packaging printing process in North America using a raised rubber or alternative material image mounted on a printing cylinder.

In-line overlaminating capability — The ability to add a protective coating to a printed material during the printing process.

Label products — Pressure sensitive materials made up and sold in roll form.

Labelstock — Base material for pressure sensitive labels.

Modified atmosphere packaging — A package in which the atmosphere inside the package has been modified by a gas such as nitrogen.

Monolayer film — A single layer extruded plastic film.

Multiwall paper bag — A package made from two or more layers of paper.

Polyolefin shrink film — A packaging film consisting of polyethylene and/or polypropylene resins extruded via the blown process.  The film can be irradiated in a second process to cross link the molecules for added strength, durability, and toughness.  The product is characterized by thin gauge, high gloss, sparkle, transparency, and good sealing properties.

Pressure sensitive material — A material with adhesive such that upon contact with another material it will stick.

Rotogravure printing — A high quality, long run printing process utilizing a metal cylinder.

Sheet products — Pressure sensitive materials cut into sheets and sold in sheet form.

Stretch film — A plastic film used to wrap pallets in the shipping process, which has significant ability to stretch.

Technical products — Technically engineered pressure sensitive materials used primarily for fastening and mounting functions.

Thermoformed plastic packaging — A package formed by applying heat to a film to shape it into a tray or cavity and then placing a flat film on top of the package after it has been filled.

UV inhibitors — Chemicals which protect against ultraviolet rays.

ITEM 1A - RISK FACTORS

Funded status of pension plans—Recognition of pension liabilities may cause a significant reduction in stockholders’ equity.

Statement of Financial Accounting Standards (FAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, requires balance sheet recognition of the funded status of our defined benefit pension and postretirement benefit plans.  If the fair value of our pension plans’ assets at a future reporting date decreases or if the discount rate used to calculate the projected benefit obligation (PBO) as of that date decreases, we will be required to record the incremental change in the excess of PBO over the fair value of the assets as a reduction of stockholders’ equity.  The resulting non-cash after-tax charge would not reduce reported earnings.  It would be recorded directly as a decrease in the Accumulated Other Comprehensive Income component of stockholders’ equity.  While we cannot estimate the future funded status of our pension liability with any certainty at this time, we believe that if the market value of assets or the discount rate used to calculate our pension liability decreases, the adjustment could significantly reduce our stockholders’ equity.  A significant reduction in stockholders’ equity may impact our compliance with debt covenants or could cause a downgrade in our credit ratings that could also adversely impact our future cost and speed of borrowing and have an adverse affect on our financial condition, results of operations and liquidity.  We have identified pension assumptions as critical accounting estimates.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Judgments—Accounting for annual pension costs” and “—Pension assumptions sensitivity analysis” included in Item 7 of this Annual Report on Form 10-K.

Goodwill and other intangible assets—A significant write down of goodwill and/or other intangible assets would have a material adverse effect on our reported results of operations and net worth.

On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS No. 142).  We no longer amortize goodwill, but we review our goodwill balance for impairment at least once a year using the business valuation methods required by FAS No. 142.  These methods include the use of a weighted-average cost of capital to calculate the present value of the expected future cash flows of our reporting units.  Future changes in the cost of capital, expected cash flows, or other factors may cause our goodwill and/or other intangible assets to be impaired, resulting in a non-cash charge against results of operations to write down these assets for the amount of the impairment.  If a significant write down is required, the charge would have a material adverse effect on our reported results of operations and net worth.  We have identified the valuation of intangibles as a critical accounting estimate.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Judgments—Intangible assets and goodwill” included in Item 7 of this Annual Report on Form 10-K.

Foreign operations—Conditions in foreign countries and changes in foreign exchange rates may reduce our reported results of operations.

We have operations in North America, South America, Europe, and Asia.  In 2006, approximately 34 percent of our sales were generated by entities operating outside of the United States.  Fluctuations in currencies can cause transaction and translation losses.  In addition, our revenues and net income may be adversely affected by economic conditions, political situations, and changing laws and regulations in foreign countries, as to which we have no control.

Interest rates—An increase in interest rates could reduce our reported results of operations.

At December 31, 2006, our variable rate borrowings approximated $467.0 million.  Fluctuations in interest rates can increase borrowing costs and have an adverse impact on results of operations.  In September 2001, we entered into interest rate swap agreements with three U.S. banks, which increased our exposure to variable rates.  Accordingly, increases in short-term interest rates will directly

5




impact the amount of interest we pay.  For each one percent increase in variable interest rates, our annual interest expense on $789.8 million of total debt ($467.0 million of which is variable) outstanding as of December 31, 2006 would increase by $4.7 million.

Credit Rating— A downgrade in our credit rating could increase our borrowing costs and negatively affect our financial condition and results of operations.

In addition to using cash provided by operations, we regularly issue commercial paper to meet our short-term liquidity needs.  Our credit ratings are important to our ability to issue commercial paper at favorable rates of interest.  A downgrade in our credit rating could increase the cost of borrowing by increasing the spread over prevailing market rates that we pay for our commercial paper or the fees associated with our bank credit facility.  In addition, our bank credit facility has covenants that include limits on the sale of businesses, minimum net worth calculations, and a maximum ratio of debt to total capitalization.  If for any reason our existing credit arrangements were no longer available to us we would be required to seek alternative sources of financing.  We would expect to meet our financial liquidity needs by accessing the bank market, which would further increase our borrowing costs.

Raw materials—Raw material cost increases or shortages could adversely affect our results of operations.

As a manufacturer, our sales and profitability are dependent upon the availability and cost of raw materials, which are subject to price fluctuations.  Inflationary and other increases in the costs of raw materials have occurred in the past and are expected to recur, and our performance depends in part on our ability to reflect changes in costs in selling prices for our products.  For example, operating profit during the first quarter of 2005 was negatively impacted as our selling prices did not keep pace with the rapidly increasing cost of polymer resins, adhesives, and coatings that occurred during the latter part of the fourth quarter of 2004 and the early part of the first quarter of 2005.  In the past, we have been generally successful in managing increased raw material costs and increasing selling prices when necessary.  Past performance may or may not be replicable in the future.  Natural disasters such as hurricanes, in addition to terrorist activity and government regulation of environmental emissions, may negatively impact the production or delivery capacity of our raw material suppliers in the chemical and paper industries.  This could result in increased raw material costs or supply shortages, which may have a negative impact on our profitability if we are unable to pass along the increased costs in our selling prices or, in the case of a shortage, secure raw materials from alternative sources.

Patents and proprietary technology—Our success is dependent on our ability to develop and successfully introduce new products and to acquire and retain intellectual property rights.

Our ability to develop and successfully market new products and to develop, acquire, and retain necessary intellectual property rights is essential to our continued success, which ability cannot be assured.

Industry investigations—Several lawsuits have been filed against us related to alleged unlawful competitive activities in the industry in connection with now-concluded investigations of the labelstock industry by the U.S. Department of Justice and of the paper and forest products sector by the European Commission.

In April 2003, we were notified by the U.S. Department of Justice’s Antitrust Division that it expected to initiate a criminal investigation into competitive practices in the labelstock industry, and in August 2003, the U.S. Department of Justice issued a subpoena to us in connection with the investigation.  In May 2004, the European Commission, seeking evidence of unlawful anticompetitive activities, initiated inspections and obtained documents from our pressure sensitive materials facility in Belgium.  We cooperated fully with these investigations, and both investigations          were closed by each agency without further action.  We and one of our subsidiaries are named defendants in lawsuits in the United States seeking treble damages and other relief for alleged unlawful competitive practices, which were filed after the announcement of the U.S. Department of Justice investigation.  We are unable to predict the outcome of these matters although the effect could be material to the results of operations and/or cash flows of the period in which the matter is resolved.

Acquisitions—We may not be able to successfully integrate the businesses that we acquire.

We have made numerous acquisitions in the past and are actively seeking new acquisitions that we believe will provide meaningful opportunities to grow our business and improve profitability.  Since the beginning of 2003, we have completed three acquisitions to enhance the breadth of our product offerings and expand the market and geographic participation of our business segments, which included our acquisition on January 5, 2005 of majority ownership of Dixie Toga S.A., one of the largest packaging companies in South America.  Acquired businesses may not achieve the levels of revenue, profit, productivity, or otherwise perform as we expect.  Acquisitions involve special risks, including, without limitation, the potential assumption of unanticipated liabilities and contingencies as well as difficulties in integrating acquired businesses.  While we believe that our acquisitions will improve our competitiveness and profitability, we can give no assurance that acquisitions will be successful or accretive to earnings.

Information technology—A failure in our information technology infrastructure or applications could negatively affect our business.

We depend on information technology to record and process customer’s orders, manufacture and ship products in a timely manner, and maintain the financial accuracy of our business records.  We are in the process of developing a global Enterprise Resource Planning (ERP) system that will redesign and deploy new processes and a common information system across our plants over a period of several years.  The first plant is scheduled to implement the new system during the fourth quarter of 2007, with the majority of our United States manufacturing operations expected to be using the new system by the end of 2009.  There can be no certainty that this system will deliver the expected benefits.  The failure to achieve our goals may impact our ability to (1) process transactions accurately and efficiently and (2) remain in step with the changing needs of the trade, which could result in the loss of customers.  In addition, the failure to either deliver the application on time, or anticipate the necessary readiness and training needs, could lead to business disruption and loss of customers and revenue.

Our information systems could also be penetrated by outside parties intent on extracting information, corrupting information or disrupting business processes.  Such unauthorized access could disrupt our business and could result in the loss of assets.

6




Numerous other factors over which we may have limited or no control may affect our performance and profitability.

Other factors that may influence our earnings include:  legal and administrative cases and proceedings (whether civil, such as environmental and product related, or criminal), settlements, judgments, and investigations; developments or assertions by or against us relating to intellectual property rights and intellectual property licenses; adoption of new, or change in, accounting policies or practices and the application of such policies and practices; changes in business mix; customer and supplier business reorganizations or combinations; increase in cost of debt; ability to retain adequate levels of insurance coverage at acceptable rates; fluctuations in pension and employee benefit costs; loss of significant contract(s); risks and uncertainties relating to investment in development activities and new facilities; timely development and successful market acceptance of new products; pricing of competitive products; disruptions in transportation networks; increased participation in potentially less stable emerging markets; reliability of utility services; impact of computer viruses; general or specific economic conditions and the ability and willingness of purchasers to substitute other products for the products that we manufacture; financial condition and inventory strategies of customers and suppliers; credit risks; changes in customer order patterns; employee work stoppages at plants; increased competition; changes in government regulations and the impact of changes in the world political environment, including the ability to estimate the impact of foreign currency exchange rates on financial results; the impact of epidemiological events on the economy and on our customers and suppliers; and acts of war, terrorism, weather, and other natural disasters.

ITEM 1B - UNRESOLVED STAFF COMMENTS

None.

ITEM 2 - PROPERTIES

Properties utilized by the Company at December 31, 2006, were as follows:

Flexible Packaging Segment

This segment has 48 manufacturing plants located in 13 states and nine non-USA countries, of which 43 are owned directly by the Company or its subsidiaries and five are leased from outside parties.  Initial lease terms generally provide for minimum terms of five to 25 years and have one or more renewal options.  The initial term of leases in effect at December 31, 2006, expire between 2008 and 2014.  In addition a flexible packaging operating location leased adjacent vacant land in 1999 for an initial lease term of 42 years.

Pressure Sensitive Materials Segment

This segment has seven manufacturing plants located in three states and two non-USA countries, all of which are owned directly by the Company or its subsidiaries.

Corporate and General

The Company considers its plants and other physical properties to be suitable, adequate, and of sufficient productive capacity to meet the requirements of its business.  The manufacturing plants operate at varying levels of utilization depending on the type of operation and market conditions.  The executive offices of the Company, which are leased, are located in Neenah, Wisconsin.

ITEM 3 - LEGAL PROCEEDINGS

The Company is involved in a number of lawsuits incidental to its business, including environmental related litigation.  Although it is difficult to predict the ultimate outcome of these cases, management believes, except as discussed below, that any ultimate liability would not have a material adverse effect upon the Company’s financial condition or results of operations.

The Company is a potentially responsible party (PRP) in twelve superfund sites around the United States.  The Company expects its future liability relative to these sites to be insignificant, individually and in the aggregate.  The Company has reserved an amount that it believes to be adequate to cover its exposure.

Dixie Toga S.A., acquired by the Company on January 5, 2005, is involved in a tax dispute with the City of São Paulo, Brazil.  The City imposes a tax on the rendering of printing services.  The City has assessed this city services tax on the production and sale of printed labels and packaging products.  Dixie Toga, along with a number of other packaging companies, disagree and contend that the city services tax is not applicable to its products and that the products are subject only to the state value added tax (VAT).  Under Brazilian law, state VAT and city services tax are mutually exclusive and the same transaction can be subject to only one of those taxes.  Based on a ruling from the State of São Paulo, advice from legal counsel, and long standing business practice, Dixie Toga appealed the city services tax and instead continued to collect and pay only the state VAT.

The City of São Paulo disagreed and assessed Dixie Toga the city services tax for the years 1991-1995.  The assessments for those years are estimated to be approximately $51.3 million at the date the Company acquired Dixie Toga, translated to U.S. dollars at the 2006 year end exchange rate.  Dixie Toga challenged the assessments and ultimately litigated the issue.  A lower court decision in 2002 cancelled all of the assessments for 1991-1995.  The City of São Paulo, the State of São Paulo, and Dixie Toga have each appealed parts of the lower court decision.  The City continues to assert the applicability of the city services tax and has issued assessments for the subsequent years 1996-2001.  The assessments for those years for tax and penalties (exclusive of interest) are estimated to be approximately $32.6 million at the date of acquisition, translated to U.S. dollars at the 2006 year end exchange rate.  In the event of an adverse resolution, these estimated amounts for all assessments could be substantially increased for interest, monetary adjustments, and corrections.

The Company strongly disagrees with the City’s position and intends to vigorously challenge any assessments by the City of São Paulo.  The Company is unable at this time to predict the ultimate outcome of the controversy and as such has not recorded any liability

7




related to this matter.  An adverse resolution could be material to the results of operations and/or cash flows of the period in which the matter is resolved.

The Company first disclosed in a Form 8-K filed with the Securities and Exchange Commission on April 23, 2003, that the Department of Justice expected to initiate a criminal investigation into competitive practices in the labelstock industry and the Company further discussed the investigation and disclosed that it expected to receive a subpoena in its Form 10-Q filed for the quarter ended June 30, 2003.  In a Form 8-K filed with the Securities and Exchange Commission on August 15, 2003, the Company disclosed that it had received a subpoena from the U.S. Department of Justice in connection with the Department’s criminal investigation into competitive practices in the labelstock industry.  The Company responded to the subpoena and cooperated fully with the requests of the U.S. Department of Justice.  On October 20, 2006, the Department of Justice informed the Company that it was closing the investigation without any further action.

The Company and its wholly-owned subsidiary, Morgan Adhesives Company, have been named as defendants in fifteen civil lawsuits.  Five of these lawsuits purport to represent a nationwide class of labelstock purchasers, and each alleges a conspiracy to fix prices within the self-adhesive labelstock industry.  On November 5, 2003, the Judicial Panel on MultiDistrict Litigation issued a decision consolidating all of the federal class actions for pretrial purposes in the United States District Court for the Middle District of Pennsylvania, before the Honorable Chief Judge Vanaskie.  Judge Vanaskie entered an order which called for discovery to be taken on the issues relating to class certification and briefing on plaintiffs’ motion for class certification to be completed by March 1, 2007.  At this time, a discovery cut-off and a trial date have not been set.  The Company has also been named in four lawsuits filed in the California Superior Court in San Francisco. Three of these lawsuits seek to represent a class of all California indirect purchasers of labelstock and each alleged a conspiracy to fix prices within the self-adhesive labelstock industry.  These three lawsuits have been consolidated.  The fourth lawsuit seeks to represent a class of California direct purchasers of labelstock and alleges a conspiracy to fix prices within the self-adhesive labelstock industry.  Finally, the Company has been named in one lawsuit in Vermont, seeking to represent a class of all Vermont indirect purchasers of labelstock, one lawsuit in Ohio, seeking to represent a class of all Ohio indirect purchasers of labelstock, one lawsuit in Nebraska seeking to represent a class of all Nebraska indirect purchasers of labelstock, one lawsuit in Kansas seeking to represent a class of all Kansas indirect purchasers of labelstock, one lawsuit in Tennessee, seeking to represent a class of purchasers of labelstock in various jurisdictions, and one lawsuit in Arizona seeking to represent a class of Arizona indirect purchasers of labelstock, all alleging a conspiracy to fix prices within the self-adhesive labelstock industry.  The Company intends to vigorously defend these lawsuits.

In a Form 8-K filed with the Securities and Exchange Commission on May 25, 2004, the Company disclosed that representatives from the European Commission had commenced a search of business records and interviews of certain Company personnel at its self-adhesive labelstock operation in Soignies, Belgium to investigate possible violations of European competition law in connection with an investigation of potential anticompetitive activities in the European paper and forestry products sector.  The Company cooperated fully with the requests of the European Commission.  On November 16, 2006, the European Commission informed the Company that it was closing the investigation without any further action.

Given the ongoing status of the class-action civil lawsuits, the Company is unable to predict the outcome of these matters although the effect could be material to the results of operations and/or cash flows of the period in which the matter is resolved.  The Company is currently not otherwise subject to any pending litigation other than routine litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on the business, results of operations, financial position, or liquidity of the Company.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of 2006.

PART II - ITEMS 5, 6, 7, 7A, 8, 9, 9A, and 9B

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock is traded on the New York Stock Exchange under the symbol BMS.  On December 31, 2006, there were 4,192 registered holders of record of our common stock.  Dividends paid and the high and low common stock prices per share were as follows:

For the Quarterly Periods Ended:

 

March 31

 

June 30

 

September 30

 

December 31

 

2006

 

 

 

 

 

 

 

 

 

Dividend paid per common share

 

$

0.19

 

$

0.19

 

$

0.19

 

$

0.19

 

Common stock price per share

 

 

 

 

 

 

 

 

 

High

 

$

34.25

 

$

33.10

 

$

33.28

 

$

34.99

 

Low

 

$

27.86

 

$

28.84

 

$

28.54

 

$

32.45

 

2005

 

 

 

 

 

 

 

 

 

Dividend paid per common share

 

$

0.18

 

$

0.18

 

$

0.18

 

$

0.18

 

Common stock price per share

 

 

 

 

 

 

 

 

 

High

 

$

32.50

 

$

31.99

 

$

28.34

 

$

28.20

 

Low

 

$

27.98

 

$

25.99

 

$

24.01

 

$

23.20

 

2004

 

 

 

 

 

 

 

 

 

Dividend paid per common share

 

$

0.16

 

$

0.16

 

$

0.16

 

$

0.16

 

Common stock price per share

 

 

 

 

 

 

 

 

 

High

 

$

26.42

 

$

28.65

 

$

28.45

 

$

29.49

 

Low

 

$

23.24

 

$

25.22

 

$

24.83

 

$

24.74

 

 

8




ITEM 6 - SELECTED FINANCIAL DATA

FIVE-YEAR CONSOLIDATED REVIEW

(dollars in millions, except per share amounts)

Years Ended December 31,

 

2006

 

2005

 

2004

 

2003

 

2002

 

Operating Data

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

3,639.4

 

$

3,474.0

 

$

2,834.4

 

$

2,635.0

 

$

2,369.0

 

Cost of products sold and other expenses

 

3,304.3

 

3,158.9

 

2,525.2

 

2,383.2

 

2,086.5

 

Interest expense

 

49.3

 

38.7

 

15.5

 

12.6

 

15.5

 

Income before income taxes

 

285.8

 

276.4

 

293.7

 

239.2

 

267.0

 

Provision for income taxes

 

109.5

 

113.9

 

113.7

 

92.1

 

101.5

 

Net income

 

176.3

 

162.5

 

180.0

 

147.1

 

165.5

 

Net income as a percent of net sales

 

4.8

%

4.7

%

6.3

%

5.6

%

7.0

%

 

 

 

 

 

 

 

 

 

 

 

 

Common Share Data

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.68

 

$

1.53

 

$

1.68

 

$

1.39

 

$

1.56

 

Diluted earnings per share

 

1.65

 

1.51

 

1.67

 

1.37

 

1.54

 

Dividends per share

 

0.76

 

0.72

 

0.64

 

0.56

 

0.52

 

Book value per share

 

14.04

 

12.81

 

12.23

 

10.72

 

9.06

 

Stock price/earnings ratio range

 

17-21x

 

16-21x

 

14-18x

 

15-19x

 

13-19x

 

Weighted-average shares outstanding for computation of diluted earnings per share

 

106,767,114

 

107,818,708

 

107,941,738

 

107,733,383

 

107,492,974

 

Common shares outstanding at December 31,

 

104,841,576

 

105,305,975

 

106,947,128

 

106,242,046

 

105,887,476

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Structure and Other Data

 

 

 

 

 

 

 

 

 

 

 

Current ratio

 

2.0x

 

2.1x

 

2.3x

 

2.4x

 

2.2x

 

Working capital

 

$

538.3

 

$

513.5

 

$

498.6

 

$

436.3

 

$

395.8

 

Total assets

 

3,039.0

 

2,964.6

 

2,486.7

 

2,292.9

 

2,256.7

 

Short-term debt

 

67.6

 

54.0

 

5.7

 

6.5

 

5.2

 

Long-term debt

 

722.2

 

790.1

 

533.9

 

583.4

 

718.3

 

Stockholders’ equity

 

1,472.0

 

1,349.4

 

1,307.9

 

1,138.7

 

959.0

 

Return on average stockholders’ equity

 

12.5

%

12.2

%

14.7

%

14.0

%

17.9

%

Return on average total capital

 

8.7

%

8.5

%

9.7

%

8.4

%

10.3

%

Depreciation and amortization

 

$

152.4

 

$

150.8

 

$

130.8

 

$

128.2

 

$

119.2

 

Capital expenditures

 

158.8

 

187.0

 

134.5

 

106.5

 

91.0

 

Number of common stockholders

 

4,192

 

4,359

 

4,465

 

4,484

 

4,542

 

Number of employees

 

15,736

 

15,903

 

11,907

 

11,505

 

11,837

 

 

ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis

Three Years Ended December 31, 2006

Management’s Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8 of this Annual Report on Form 10-K.

Three-year review of results

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in millions)

 

2006

 

2005

 

2004

 

Net sales

 

$

3,639.4

 

100.0

%

$

3,474.0

 

100.0

%

$

2,834.4

 

100.0

%

Cost of products sold

 

2,942.7

 

80.9

 

2,798.3

 

80.6

 

2,238.7

 

79.0

 

Gross margin

 

696.7

 

19.1

 

675.7

 

19.4

 

595.7

 

21.0

 

Selling, general, and administrative expenses

 

336.4

 

9.2

 

330.9

 

9.5

 

285.0

 

10.1

 

All other expenses

 

74.5

 

2.0

 

68.4

 

1.9

 

17.0

 

0.6

 

Income before income taxes

 

285.8

 

7.9

 

276.4

 

8.0

 

293.7

 

10.3

 

Provision for income taxes

 

109.5

 

3.1

 

113.9

 

3.3

 

113.7

 

4.0

 

Net income

 

$

176.3

 

4.8

%

$

162.5

 

4.7

%

180.0

 

6.3

%

Effective income tax rate

 

 

 

38.3

%

 

 

41.2

%

 

 

38.7

%

 

9




Overview

Bemis Company, Inc. is a leading global manufacturer of flexible packaging and pressure sensitive materials supplying a variety of markets.  Generally about 60 percent of our total company net sales are to customers in the food industry.  Sales of our flexible packaging products are widely diversified among food categories and can be found in nearly every aisle of the grocery store.  Other markets into which we sell our flexible packaging products include medical devices, personal care, and lawn and garden.  Our emphasis on supplying packaging to the food industry provides a more stable market environment for our flexible packaging business segment, which accounts for about 82 percent of our net sales. The remaining 18 percent of our net sales is from the pressure sensitive materials business segment which, while diversified in end use products, is less focused on food industry applications and more exposed to economically sensitive end markets.

Market Conditions

The markets into which our products are sold are highly competitive.  Our leading flexible packaging market positions in North and South America reflect our focus on value-added, proprietary products that are not available from most of our competitors.  During 2006, many of our large customers announced sales growth strategies that were supported by new product introductions.  This provides opportunities for future growth at Bemis since new customer products often require innovative new packaging.  In Europe and Asia, where our market position is smaller, we continue to introduce our proprietary products to the market, and we are encouraged by the strengthening economies in those regions.  The stronger European economy has also benefited our pressure sensitive graphic product line which is predominately sold in Europe.  The primary raw materials for our business segments are polymer resins and adhesives.  The cost of raw materials moderated during 2006 after experiencing a period of significant volatility during late 2004 and 2005.  Raw material costs have been impacted in recent years by higher energy prices in addition to production disruptions related to the 2005 Gulf Coast hurricanes.

Restructuring and Related Charges

On January 25, 2006, we announced a facility consolidation project intended to reduce fixed costs and shift production to lower cost facilities.  These cost reduction efforts included the closure of five flexible packaging facilities and one pressure sensitive materials facility during 2006 and was substantially complete as of December 31, 2006.  Restructuring and related charges incurred in 2006 totaled $31.2 million, of which $12.3 million primarily reflected accelerated depreciation and was recorded as a component of cost of products sold.  The remaining $18.9 million primarily reflects employee-related costs and was recorded as a component of other costs (income).

During 2003, we initiated a restructuring program in which five facilities were closed.  While most of the restructuring activities were completed as of December 31, 2003, gains and losses related to the sale of these closed facilities resulted in a net charge of $2.4 million in 2004 and a net gain of $0.9 million in 2005.

Acquisitions

On January 5, 2005, we acquired majority ownership of Dixie Toga S.A., one of the largest packaging companies in South America with 2004 annual revenues totaling about $325 million.  The acquisition included the outstanding voting common stock of Dixie Toga in addition to 43 percent of the outstanding nonvoting preferred stock.  The initial cash purchase price, paid in 2005, was approximately $235 million increased by $4.2 million in 2006 related to post close adjustments.  This acquisition significantly increased our exposure to the growing South American packaging market and provides a strong platform from which to introduce our propriety film products to a new region.  Subsequently, our South American subsidiary has repurchased additional shares of its outstanding preferred stock in the open market, reducing the total minority interest in our subsidiary to 14 percent as of December 31, 2006.  In April 2006, we also acquired the remaining shares of our three majority-owned joint ventures in Mexico for $6.8 million.

Results of Operations

 

 

 

 

 

 

 

Consolidated Overview

 

 

 

 

 

 

 

(in millions, except per share amounts)

 

2006

 

2005

 

2004

 

Net sales

 

$

3,639.4

 

$

3,474.0

 

$

2,834.4

 

Net income

 

176.3

 

162.5

 

180.0

 

Diluted earnings per share

 

1.65

 

1.51

 

1.67

 

 

2006 versus 2005

For the year ended December 31, 2006, net sales increased 4.8 percent.  Currency translation was a benefit to net sales growth of 1.8 percent.  The remaining 3.0 percent increase in net sales reflects increased sales of higher priced, value-added products in each of the two business segments.

Diluted earnings per share were $1.65 for 2006, including $0.18 per share of restructuring and related charges.  For 2005, diluted earnings per share totaled $1.51, including approximately $0.06 per share of tax charges related to the repatriation of international subsidiary earnings under The American Jobs Creation Act of 2004.  The improvement in 2006 resulted from a more profitable sales mix, a moderating raw material cost environment, and successful cost management efforts.

2005 versus 2004

For the year ended December 31, 2005, net sales increased 22.6 percent.  The 2005 Dixie Toga acquisition accounted for 16.5 percent of the increase in sales while currency translation was insignificant to net sales growth in 2005.  The remaining 6.1 percent increase in net sales reflects the impact of increased price and mix in all market categories.  Price increases during 2005 were driven by increased raw material costs.  Unit volume was flat compared to 2004.

 

10




Diluted earnings per share were $1.51 for 2005, including $0.06 per share of tax charges related to the repatriation of international subsidiary earnings under The American Jobs Creation Act of 2004.  For 2004, diluted earnings per share totaled $1.67, including a net gain of $0.02 per share on the sale of certain plant assets.  Results for 2005 were negatively impacted by significant increases in raw material costs during the year.

Flexible Packaging Business Segment

Our flexible packaging business segment provides packaging to a variety of end markets, including meat and cheese, confectionery and snack, frozen foods, lawn and garden, health and hygiene, beverages, medical devices, bakery, and dry foods.  These markets are generally less affected by economic cycles and grow through product innovation and geographical expansion.

The most significant raw materials used in this business segment are polymer resins, which we use to develop and manufacture single layer and multilayer film products.  During periods of unusual raw material cost volatility, selling price changes may lag behind changes in our raw material costs.  During both 2004 and 2005, resin costs dramatically increased resulting in double-digit percentage increases for each year.  These raw material costs were reflected in increased selling prices throughout each year; however the magnitude and frequency of the cost increases negatively impacted operating profit.  The impact of raw material cost changes in 2006 was more moderate.

In January of 2006, we announced a restructuring plan to close five flexible packaging plants in order to consolidate production capacity and improve overall cost structure and efficiency throughout this business segment.  These efforts were substantially completed by December 31, 2006.  Restructuring and related charges for the flexible packaging business segment totaled $29.0 million in 2006.  The disposal of facilities closed during the 2003 restructuring program resulted in a charge of $0.6 million in 2005 and a gain of $0.7 million in 2004.

 

(dollars in millions)

 

2006

 

2005

 

2004

 

Net sales

 

$

3,000.1

 

$

2,855.8

 

$

2,249.6

 

Operating profit (See Note 12 to the Consolidated Financial Statements)

 

335.1

 

332.7

 

308.3

 

Operating profit as a percentage of net sales

 

11.2

%

11.7

%

13.7

%

 

2006 versus 2005

Our flexible packaging business segment recorded a 5.1 percent increase in net sales in 2006.  Currency translation was a benefit of 2.1 percent.  The remaining 3.0 percent increase is attributable to increased net sales for packaging in markets such as meat and cheese, health and hygiene, coffee, unitizing films for cans and bottles, and medical devices.  This was partially offset by lower net sales for markets such as confectionery, snack and frozen foods.

Operating profit as a percentage of net sales decreased to 11.2 percent in 2006 from 11.7 percent in 2005.  During 2006, restructuring and related charges totaling $29.0 million were recorded as a reduction of operating profit.  Operating profit in 2006 benefited from stronger sales of value-added flexible packaging products.  During 2005, operating profit includes the impact of restructuring and related charges totaling $0.6 million.

2005 versus 2004

Our flexible packaging business segment recorded a 27.0 percent increase in net sales in 2005.  The acquisition of Dixie Toga increased 2005 sales by 20.8 percent.  The remaining 6.2 percent increase is attributable to price and mix across all market categories.  Increases in demand for packaging in markets such as meat and cheese, health and hygiene, cereal and other dry foods, coffee, unitizing films for cans and bottles, and medical devices were offset by lower unit sales for markets such as confectionery and snack, frozen foods, bakery, and pet products.

Operating profit as a percentage of net sales decreased in 2005.  During the fourth quarter of 2004, we recorded a gain of $5.6 million from the sale of a manufacturing facility in Florence, Kentucky.  During 2005, raw material cost increases outpaced increases in selling prices, negatively impacting operating profit.

Pressure Sensitive Materials Business Segment

The pressure sensitive materials business segment offers adhesive products to three markets:  prime and variable information labels, which include roll label stock used in a wide variety of label markets; graphic design, used to create signage and decorations; and technical components, which represent pressure sensitive components for industries such as the electronics, automotive, construction and medical industries.

Paper and adhesive are the primary raw materials used in our pressure sensitive materials business segment.  For the last several years, general economic conditions have had a greater influence on selling prices and operating performance than raw material costs.

In January of 2006, we announced a restructuring plan which included the closure of one pressure sensitive materials plant in order to consolidate production capacity and improve overall cost structure and efficiency.  This effort was completed by December 31, 2006.  Restructuring and related charges incurred and related to the pressure sensitive materials business segment totaled $1.0 million in 2006.  These costs were primarily employee-related costs and were recorded as a component of other costs (income), net.

11




In 2003, we announced the restructuring of our label products capacity, closing two facilities to reduce fixed costs and improve capacity utilization.  During 2004, restructuring and related charges totaling $3.1 million related primarily to the cost of closing a label products plant in Nevada.  Of this total, $1.8 million represented equipment relocation and was recorded as other costs (income), net, with the remaining costs associated with accelerated depreciation charged to costs of products sold.  During 2005, a net gain of $1.5 million was recorded for the sale of previously closed facilities and property.

During 2005, we changed the year-end of our pressure sensitive materials European subsidiary from November 30 to December 31.  This resulted in a 13-month reporting period in 2005 for this subsidiary, increasing 2005 net sales by $17.2 million.  The impact on operating profit was insignificant.

(dollars in millions)

 

2006

 

2005

 

2004

 

Net sales

 

$

639.3

 

$

618.1

 

$

584.8

 

Operating profit (See Note 12 to the Consolidated Financial Statements)

 

50.1

 

41.3

 

33.9

 

Operating profit as a percentage of net sales

 

7.8

%

6.7

%

5.8

%

 

2006 versus 2005

Our pressure sensitive materials business segment reported a net sales increase of 3.4 percent in 2006.  Net sales in 2005 include the impact of the thirteenth month of net sales from the European subsidiary.  The increase in net sales in 2006 was driven by unit sales volume growth in each of the pressure sensitive materials product lines during the year.  Currency benefits provided less than one percent net sales growth in 2006.

Operating profit as a percent of sales improved in 2006 compared to 2005, reflecting increased sales of value-added graphic and technical products.  In addition, the profitability of the label product line increased with continued improvements in cost management and production efficiency.  Currency translation did not impact operating profit in 2006.

2005 versus 2004

Our pressure sensitive materials business segment reported a net sales increase of 5.7 percent in 2005.  The thirteenth month of net sales from the European subsidiary accounted for about 3.0 percent sales growth compared to 2004.  The remaining 2.7 percent increase was driven by unit sales volume growth in label products during the year, partially offset by unit sales volume decreases in the other product categories.  Price increases were offset by increased unit sales of lower priced label products in 2005, and currency had no impact on net sales for the year.

Improved profit levels in 2005 reflect improved profit from label products and focused cost control measures.   Currency translation did not impact operating profit in 2005 and contributed $2.2 million in 2004.

Consolidated Gross Margin

(dollars in millions)

 

2006

 

2005

 

2004

 

Gross margin

 

$

696.7

 

$

675.6

 

$

595.7

 

Gross margin as a percentage of net sales

 

19.1

%

19.4

%

21.0

%

 

Restructuring and related charges reduced gross margins by $12.9 million in 2006 and $1.1 million in 2004.  The time lag between the implementation of selling price increases and increases in raw material costs reduced gross margins as a percent of net sales in each of the years presented.  This reduction in gross margin as a percentage of net sales was partially offset by ongoing improvements in production efficiency, sales mix and cost management during the same timeframe.

Consolidated Selling, General and Administrative Expenses

(dollars in millions)

 

2006

 

2005

 

2004

 

Selling, general and administrative expenses (SG&A)

 

$

336.4

 

$

330.9

 

$

285.0

 

SG&A as a percentage of net sales

 

9.2

%

9.5

%

10.1

%

 

In 2006, the lower ratio of expenses to net sales reflects the benefits of cost management programs, and the impact of higher selling prices on consolidated net sales.  In 2005, the lower ratio compared to 2004 reflects lower costs associated with the South American operations purchased in January 2005, and the impact of higher selling prices on consolidated net sales.

Other Expenses

(dollars in millions)

 

2006

 

2005

 

2004

 

Research and development (R&D)

 

$

25.0

 

$

23.5

 

$

21.1

 

R&D as a percentage of net sales

 

0.7

%

0.7

%

0.7

%

Interest expense

 

$

49.3

 

$

38.7

 

$

15.5

 

Other costs (income), net

 

(3.3

)

0.1

 

(20.1

)

Minority interest in net income

 

3.5

 

5.9

 

0.5

 

Income taxes

 

109.5

 

113.9

 

113.7

 

Effective tax rate

 

38.3

%

41.2

%

38.7

%

 

Research and Development

Our efforts to introduce new products continue at a steady pace and are an integral part of our daily plant operations.  Our research and development engineers work directly on commercial production equipment, bringing new products to market without the use

12




of pilot equipment.  We believe this approach significantly improves the efficiency, effectiveness and relevance of our research and developments activities and results in earlier commercialization of new products.  Expenditures that are not distinctly identifiable as research and development costs are included in costs of products sold.

Interest Expense

The increase in interest expense in 2006 reflects higher interest rates in 2006 compared to 2005 and 2004.  In addition, debt levels increased in 2005 as a result of the January 2005 acquisition of Dixie Toga.  Prior to 2005, substantially all of our outstanding debt was subject to variable interest rates.  In 2005, we issued $300 million of fixed rate public bonds at a 4.875 percent interest rate.  This effectively reduced our percentage of variable rate debt to about 59 percent in 2006 and 62 percent in 2005.  The effective interest rate was 5.9 percent in 2006, 4.9 percent in 2005, and 2.7 percent in 2004.

Other Costs (Income), Net

In 2006, other costs (income) included $18.3 million of restructuring and related charges, which were more than offset by financial income of $18.0 million and a $4.5 million favorable resolution of a litigated foreign excise tax liability.  About half of the financial income relates to interest income on cash held at non-U.S. locations.  The remainder of the financial income is generated from fiscal incentives for certain locations and is considered as a part of flexible packaging operating profit.  In 2005, net other expenses primarily reflect interest income offset by currency exchange losses.  Net other income in 2004 includes a $5.6 million gain on the sale of a rotogravure facility partially offset by restructuring and related charges of $1.2 million.  Equity income from our Brazilian joint venture was $11.7 million in 2004.  Since the January 2005 acquisition of Dixie Toga, the Brazilian joint venture has been accounted for on a consolidated basis and the related operating results are included with the flexible packaging segment. The remainder of other income in 2004 is primarily interest income.

Minority Interest in Net Income

In connection with the January 2005 acquisition of Dixie Toga, we acquired approximately 80 percent of the total outstanding shares of Dixie Toga.  As of December 31, 2006, our ownership had increased to approximately 86 percent of the total outstanding shares.  The increase in minority interest in net income in 2005 is primarily due to the accounting for the shares of Dixie Toga that were not acquired.  In April 2006, we acquired the remaining minority interest in our three Mexican joint ventures which reduced minority interest in net income.

Income Taxes

The difference between our overall tax rate and the U. S. statutory tax rate of 35 percent in each of the three years presented principally relates to state and local income taxes net of federal income tax benefits.  During 2005, an additional $6.0 million of tax expense was recorded as a result of the repatriation of international subsidiary earnings under The American Jobs Creation Act of 2004 (The Jobs Act), increasing the effective tax rate for 2005 from 39.0 percent to 41.2 percent.  For the total year 2006, the effective tax rate was 38.3 percent, reflecting the final determination of the benefits provided under The Jobs Act.

Liquidity and Capital Resources

Debt to Total Capitalization

Debt to total capitalization (which includes total debt, long-term deferred tax liabilities and equity) was 33.0 percent at December 31, 2006, compared to 35.7 percent at December 31, 2005 and 26.7 percent at December 31, 2004.  Total debt was $789.8 million, $844.1 million, and $539.6 million at year-end 2006, 2005 and 2004, respectively.   The increase in 2005 primarily reflects the impact of the Dixie Toga acquisition in January 2005.

Credit Rating

Our capital structure and financial practices have earned Bemis Company long-term credit ratings of “A” from Standard & Poor’s and “Baa1” from Moody’s Investors Service, and a credit rating of “A-1” and “Prime-2” for our commercial paper program from Standard & Poor’s and Moody’s Investor Service, respectively.  Our strong financial positions and credit ratings are important to our ability to issue commercial paper at favorable rates of interest.

Sources of Liquidity

Cash provided by operations was $349.0 million for the year ended December 31, 2006, compared to $280.4 million in 2005 and $271.5 million in 2004.  Cash provided by operations in each of the years ended December 31, 2006, 2005 and 2004 was reduced by voluntary pension contributions to our U.S. pension plans of $24.0 million, $35.0 million, and $50.0 million, respectively.  While no contributions are required for our U.S. pension plans in 2007, we continue to monitor the funded status of all pension plans and will evaluate the benefits of future voluntary contributions subject to available liquidity.  Increasing raw material costs during the three-year period resulted in increased levels of working capital, which had a negative impact on cash provided by operations during each of the three years presented.

In addition to using cash provided by operations, we issue commercial paper to meet our short-term liquidity needs.  At year-end, our commercial paper debt outstanding was $80.7 million.  Based upon our current credit rating, we enjoy ready access to the commercial paper markets.  While not anticipated, if these markets were to become illiquid or if a credit rating downgrade limited our ability to issue commercial paper, we would draw upon our existing back-up credit facility.  In September 2004, we renegotiated our back-up credit facility to extend the term to September 2009.  This credit facility provides $500 million of available financing supported by a group of major U.S. and international banks.  Covenants imposed by this bank credit facility include limits on the sale of businesses, minimum net worth calculations, and a maximum ratio of debt to total capitalization.  In addition to funds available under this credit facility, we also have the capability of issuing up to approximately $100 million of Extendable Commercial Notes (ECNs), which are short-term instruments whose maturity can be extended to 390 days from the date of issuance.  If these credit facilities and ECNs were no

13




longer available to us, we would expect to meet our financial liquidity needs by accessing the bank market, which would increase our borrowing costs.

The $500 million credit facility includes a $100 million multicurrency limit to support the financing needs of our international subsidiaries.  As of December 31, 2006, outstanding multicurrency borrowings under the credit facility totaled $59.7 million.  Borrowings from the credit agreement mature in September 2009 and are subject to a variable interest rate.

As of December 31, 2006, available capacity on the credit agreement which matures in September 2009 was $351.6 million.

Long-term Debt

Commercial paper outstanding at December 31, 2006, has been classified as long-term debt in accordance with our intention and ability to refinance such obligations on a long-term basis.  The related back-up credit agreement expires in 2009.

Uses of Liquidity

Capital Expenditures

Capital expenditures were $158.8 million during 2006, compared to $187.0 million in 2005, and $134.5 million in 2004.  Higher levels of expenditures in 2005 funded additional capacity for our South American operations to meet strong demand for our shrink bag products and new capacity in our high growth North American production plants.  Capital expenditures for 2007 are estimated to be in the $175 million to $185 million range, which includes about $20 million of costs related to the design of a new enterprise resource planning system.  After 2007, capital expenditures are expected to return to levels approximately equivalent to total annual depreciation and amortization expenses.

Dividends

We increased our quarterly cash dividend by 5.6 percent during the first quarter of 2006 to 19 cents per share from 18 cents per share.  This follows increases of 12.5 percent in 2005 and 14.3 percent in 2004.  In February 2007, the Board of Directors approved the 24th consecutive annual increase in the quarterly cash dividend on common stock to 21 cents per share, a 10.5 percent increase.

Share Repurchases

During 2006, we purchased 600,000 shares of common stock in the open market.  During 2005, we purchased 1.9 million shares of common stock in the open market. We did not make any share repurchases during 2004.  As of December 31, 2006, we were authorized to purchase up to 2.2 million shares of additional common stock for the treasury.  In February 2007, the Board of Directors authorized an additional 3 million shares for repurchase.

Contractual Obligations

The following table provides a summary of contractual obligations including our debt payment obligations, capital lease obligations, operating lease obligations and certain other purchase obligations as of December 31, 2006.

 

 

Contractual Payments Due by Period

 

 

 

 

 

Less than

 

1 to 3

 

3 to 5

 

More than

 

(in millions)

 

Total

 

1 year

 

years

 

years

 

5 years

 

Debt payments (1)

 

$

787.1

 

$

67.4

 

$

396.9

 

$

1.0

 

$

321.8

 

Interest expense (2)

 

143.0

 

44.7

 

56.8

 

33.9

 

7.6

 

Capital leases (3)

 

0.3

 

0.2

 

0.1

 

0.0

 

0.0

 

Operating leases (4)

 

17.8

 

4.3

 

5.2

 

3.2

 

5.1

 

Purchase obligations (5)

 

162.4

 

162.3

 

0.1

 

0.0

 

0.0

 

Postretirement obligations (6)

 

53.1

 

2.9

 

7.5

 

14.6

 

28.1

 


(1)          These amounts are included in our Consolidated Balance Sheet.  A portion of this debt is commercial paper backed by a bank credit facility that expires on September 2, 2009.

(2)          A portion of the interest expense disclosed is subject to variable interest rates.   The amounts disclosed above assume that variable interest rates are equal to rates at December 31, 2006.

(3)          Amount noted also includes estimated interest costs.  The present value of these obligations, excluding interest, is included on our Consolidated Balance Sheet.  See Note 11 to the Consolidated Financial Statements for additional information about our capital lease obligations.

(4)          We enter into operating leases in the normal course of business.  Substantially all lease agreements have fixed payments terms based on the passage of time.  Some lease agreements provide us with the options to renew the lease.  Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease agreements.

(5)          Purchase obligations represent contracts or commitments for the purchase of raw materials, utilities, capital equipment and various other goods and services.

(6)          Postretirement obligations represent contracts or commitments for postretirement healthcare benefits and benefit payments for the unfunded Bemis Supplemental Retirement Plan.

14




Interest Rate Swaps

Our long-term unsecured notes include $250 million due in August 2008.  In September 2001, we entered into interest rate swap agreements with two U.S. banks, which increased our exposure to variable rates.  We generally prefer variable rate debt since it has been our experience that borrowing at variable rates is less expensive than borrowing at fixed rates over the long term.  These interest rate swap agreements, which expire in 2008, reduced the interest cost of the $250 million of long-term debt from 6.5 percent to about 6.0 percent in 2006.  Since these variable rates are based upon six-month London Interbank Offered Rates (LIBOR), calculated in arrears, at the semiannual interest payment dates of the corresponding notes, increases in short-term interest rates will directly impact the amount of interest we pay.

Accounting principles generally accepted in the United States of America require that the fair value of these swaps, which have been designated as hedges of our fixed rate unsecured notes outstanding, be recorded as an asset or liability of the Company.  The fair value of these swaps was recorded as an asset of $2.5 million at December 31, 2006, and an asset of $5.0 million at December 31, 2005.  For each period, an offsetting increase is recorded in the fair value of the related long-term notes outstanding.  These fair value adjustments do not impact the actual balance of outstanding principal on the notes, nor do they impact the income statement or related cash flows.  Credit loss from counterparty nonperformance is not anticipated.

In connection with the issue of seven-year, $300 million notes in March 2005, we entered into a forward starting swap on February 3, 2005, in order to lock in an interest rate in advance of the pricing date for the notes.   On March 14, 2005, in connection with the pricing of the notes, we terminated the swap and recorded the resulting gain of $6.1 million (pre-tax) on the balance sheet as a component of other comprehensive income.  This gain is being amortized as a component of interest expense over the term of the notes.

Market Risks and Foreign Currency Exposures

We enter into contractual arrangements (derivatives) in the ordinary course of business to manage foreign currency exposure and interest rate risks.  We do not enter into derivative transactions for trading purposes.  Our use of derivative instruments is subject to internal policies that provide guidelines for control, counterparty risk, and ongoing reporting.  These derivative instruments are designed to reduce the income statement volatility associated with movement in foreign exchange rates, establish rates for future issuance of public bonds, and to achieve greater exposure to variable interest rates.

Interest expense calculated on our outstanding debt is substantially subject to short-term interest rates.  As such, increases in short-term interest rates will directly impact the amount of interest we pay.  For each one percent increase in variable interest rates, the annual interest expense on $789.8 million of total debt outstanding would increase by $4.7 million.

Our international operations enter into forward foreign currency exchange contracts to manage foreign currency exchange rate exposures associated with certain foreign currency denominated receivables and payables.  At December 31, 2006 and 2005, we had outstanding forward exchange contracts with notional amounts aggregating $3.5 million and $4.4 million, respectively.  Forward exchange contracts generally have maturities of less than nine months.  Counterparties to the forward exchange contracts are major financial institutions.  Credit loss from counterparty nonperformance is not anticipated.  We have not designated these derivative instruments as hedging instruments.  The net settlement amount (fair value) related to the active forward foreign currency exchange contacts is insignificant and recorded on the balance sheet within current liabilities and as an element of other costs (income), net, which offsets the related transactions gains and losses on the related foreign denominated asset or liability.

The operating results of our international operations are recorded in local currency and translated into U.S. dollars for consolidation purposes.  The impact of foreign currency translation on net sales was an increase of $63.3 million in 2006 and $5.4 million in 2005.  Operating profit improved by approximately $7.0 million in 2006 and $0.6 million in 2005 as a result of the positive effect of foreign currency translation.

Long-term Compensation

Our practice of awarding long-term compensation has relied primarily on restricted stock unit programs that are valued at the time of the award and expensed over the vesting period.  Beginning in 2004, we discontinued the awarding of stock options.  Stock options granted prior to 2004 were granted at prices equal to the fair market value on the date of grant and exercisable, upon vesting, over varying periods up to ten years from the date of grant.  Stock options for Directors vested immediately, while options for Company employees generally become vested over three years (one-third per year).  Beginning January 1, 2006, accounting rules require us to follow a fair value based method of recognizing expense for stock options.  The impact to diluted earnings per share for stock options expense in 2006 was insignificant.  If we had followed this fair value method prior to 2006, the impact on diluted earnings per share would have been one cent for each year ended 2005 and 2004.

Critical Accounting Estimates and Judgments

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.  On an ongoing basis, management evaluates its estimates and judgments, including those related to retirement benefits, intangible assets, goodwill, and expected future performance of operations.  Our estimates and judgments are based upon historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

15




We believe the following are critical accounting estimates used in the preparation of our consolidated financial statements.

·                  The calculation of annual pension costs and related assets and liabilities; and

·                  The valuation and useful lives of intangible assets and goodwill.

Accounting for annual pension costs

We account for our defined benefit pension plans in accordance with FAS No. 87, Employers’ Accounting for Pensions, as amended by FAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, which requires that amounts recognized in financial statements be determined on an actuarial basis.  FAS No. 158 requires us to recognize the overfunded or underfunded status of the pension plans on our balance sheet.  A substantial portion of our pension amounts relate to our defined benefit plans in the United States.

Pension expense recorded in 2006 was $16.1 million, compared to pension expense of $27.7 million in 2005 and $22.6 million in 2004.  Effective January 1, 2006, our U.S. defined benefit pension plans were amended for approximately two-thirds of the participant population.  For those employees impacted, future pension benefits were replaced with a defined contribution plan which is subject to achievement of certain financial performance goals of the Company.

One element used in determining annual pension income and expense in accordance with accounting rules is the expected return on plan assets.  As of January 1, 2007, for our U.S. defined benefit pension plans, we have assumed that the expected long-term rate of return on plan assets will be 8.75 percent.  This is consistent with the rate assumed for 2006 and 2005.

To develop the expected long-term rate of return on assets assumption, we considered compound historical returns and future expectations based upon our target asset allocation.  Using historical long-term investment periods of 10, 15 and 20 years, our pension plan assets have earned rates of return of 7.8 percent, 8.7 percent and 9.4 percent, respectively.  Considering these long-term results, we selected an 8.75 percent long-term rate of return on assets assumption as of January 1, 2007.  Using our target asset allocation of plan assets of 80 percent equity securities and 20 percent fixed income securities, our outside actuaries have used their independent economic model to calculate a range of expected long-term rates of return and have determined our assumptions to be reasonable.

This assumed long-term rate of return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over approximately three years.  This process calculates the expected return on plan assets that is included in pension income or expense.  The difference between this expected return and the actual return on plan assets is generally deferred and recognized over subsequent periods.  The net deferral of asset gains and losses affects the calculated value of pension plan assets and, ultimately, future pension income and expense.

At the end of each year, we determine the discount rate to be used to calculate the present value of pension plan liabilities.  This discount rate is an estimate of the current interest rate at which the pension liabilities could be effectively settled at the end of the year.  In estimating this rate, we look to changes in rates of return on high quality, fixed income investments that receive one of the two highest ratings given by a recognized ratings agency.  At December 31, 2006, for our U.S. defined benefit pension plans we determined this rate to be 5.75 percent, an increase of one quarter of one percent from the 5.50 percent rate used at December 31, 2005.

Pension assumptions sensitivity analysis

Based upon current assumptions of 5.75 percent for the discount rate and 8.75 percent for the expected rate of return on pension plan assets, we expect pension expense before the effect of income taxes for 2007 to be in a range of $15 million to $20 million.  The following charts depict the sensitivity of estimated 2007 pension expense to incremental changes in the discount rate and the expected long-term rate of return on assets.

 

 

Total increase (decrease)

 

 

 

Total increase (decrease)

 

 

 

to pension expense

 

 

 

to pension expense

 

(dollars in millions)

 

from current assumptions

 

 

 

from current assumptions

 

Discount rate

 

 

 

 

Rate of Return on Plan Assets

 

 

 

 

5.00 percent

 

$

4.9

 

8.00 percent

 

$

3.6

 

5.25 percent

 

3.2

 

8.25 percent

 

2.4

 

5.50 percent

 

1.6

 

8.50 percent

 

1.2

 

5.75 percent — Current Assumption

 

0.0

 

8.75 percent — Current
Assumption

 

0.0

 

6.00 percent

 

(1.6

)

9.00 percent

 

(1.2

)

6.25 percent

 

(3.1

)

9.25 percent

 

(2.4

)

6.50 percent

 

(4.6

)

9.50 percent

 

(3.6

)

 

In accordance with FAS No. 158, the amount by which the fair value of plan assets differs from the projected benefit obligation of a pension plan must be recorded on the Consolidated Balance Sheet as an asset, in the case of an overfunded plan, or as a liability, in the case of an underfunded plan.  The gains or losses and prior service costs or credits that arise but are not recognized as components of pension cost are recorded as a component of other comprehensive income.  The following chart depicts the sensitivity of the total pension adjustment to other comprehensive income to changes in the assumed discount rate.

 

Total increase (decrease) in Accumulated Other Comprehensive

 

(dollars in millions)

 

Income, net of taxes, from current assumptions

 

Discount rate

 

 

 

 

5.00 percent

 

$

(32.8

)

5.25 percent

 

(21.3

)

5.50 percent

 

(10.4

)

5.75 percent — Current Assumption

 

0.0

 

6.00 percent

 

9.8

 

6.25 percent

 

19.1

 

6.50 percent

 

27.9

 

16




Intangible assets and goodwill

The purchase price of each new acquisition is allocated to tangible assets, identifiable intangible assets, liabilities assumed, and goodwill.  Determining the portion of the purchase price allocated to identifiable intangible assets and goodwill requires us to make significant estimates.  The amount of the purchase price allocated to intangible assets is generally determined by estimating the future cash flows of each asset and discounting the net cash flows back to their present values.  The discount rate used is determined at the time of the acquisition in accordance with accepted valuation methods.

Goodwill represents the excess of the aggregate purchase price over the fair value of net assets acquired, including intangible assets.  We review our goodwill for impairment annually and assess whether significant events or changes in the business circumstances indicate that the carrying value of the goodwill may not be recoverable. The test for impairment requires us to make estimates about fair value, most of which are based on projected future cash flows.  Our estimates associated with the goodwill impairment tests are considered critical due to the amount of goodwill recorded on our consolidated balance sheet and the judgment required in determining fair value amounts, including projected future cash flows.  Goodwill was $603.7 million as of December 31, 2006.

Intangible assets consist primarily of purchased technology, customer relationships, patents, trademarks, and tradenames and are amortized using the straight-line method over their estimated useful lives, which range from one to 30 years, when purchased.  We review these intangible assets for impairment as changes in circumstances or the occurrence of events suggest that the remaining value is not recoverable.  The test for impairment requires us to make estimates about fair value, most of which are based on projected future cash flows.  These estimates and projections require judgments as to future events, condition and amounts of future cash flows.

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements.  FAS No. 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value.  The standard does not expand the use of fair value to any new circumstances, and is effective beginning after December 31, 2007.  We are currently evaluating the impact of adopting FAS No. 157 on our financial position and results of operations.

In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48).  FIN 48 clarifies the accounting for uncertain tax positions in accordance with FAS No. 109,  Accounting for Income Taxes.  We will be required to recognize, in our financial statements, the largest tax benefit of a tax position that is “more-likely-than-not” to be sustained on audit based solely on the technical merits of the position as of the reporting date.  In addition, FIN 48 provides guidance on new disclosure requirements, reporting and accrual of interest and penalties, accounting in interim periods, and transition.  FIN 48 is effective beginning January 1, 2007, with the cumulative effect of initially applying FIN 48 recognized as a change in accounting principle recorded as an adjustment to opening retained earnings.  We are currently evaluating the impact of adopting this standard and upon implementation do not expect a material impact to the financial statements.

Forward-looking Statements

This Annual Report contains certain estimates, predictions, and other “forward-looking statements” (as defined in the Private Securities Litigation Reform Act of 1995, and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended).  Forward-looking statements are generally identified with the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “target,” “may,” “will,” “plan,” “project,” “should,” “continue,” or the negative thereof or other similar expressions, or discussion of future goals or aspirations, which are predictions of or indicate future events and trends and which do not relate to historical matters.  Such statements are based on information available to management as of the time of such statements and relate to, among other things, expectations of the business environment in which we operate, projections of future performance (financial and otherwise), including those of acquired companies, perceived opportunities in the market and statements regarding our mission and vision.  Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements.  We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

Factors that could cause actual results to differ from those expected include, but are not limited to, general economic conditions caused by inflation, interest rates, consumer confidence, rates of unemployment and foreign currency exchange rates; investment performance of assets in our pension plans; operating results and cash flows from acquisitions may differ from what we anticipate; competitive conditions within our markets, including the acceptance of our new and existing products; threats or challenges to our patented or proprietary technologies; raw material costs, availability, and terms, particularly for polymer resins and adhesives; price changes for raw materials and our ability to pass these price changes on to our customers or otherwise manage commodity price fluctuation risks; the presence of adequate cash available for investment in our business in order to maintain desired debt levels; unexpected costs or manufacturing issues related to the implementation of a new enterprise resource system; changes in governmental regulation, especially in the areas of environmental, health and safety matters, and foreign investment; unexpected outcomes in our current and future litigation proceedings and any related proceedings or civil lawsuits; unexpected outcomes in our current and future domestic and international tax proceedings; changes in our labor relations; and the impact of changes in the world political environment including threatened or actual armed conflict.  These and other risks, uncertainties, and assumptions identified from time to time in our filings with

17




the Securities and Exchange Commission, including without limitation, those described under Item 1A “Risk Factors” of this Annual Report on Form 10-K and our quarterly reports on Form 10-Q, could cause actual future results to differ materially from those projected in the forward-looking statements.  In addition, actual future results could differ materially from those projected in the forward-looking statement as a result of changes in the assumptions used in making such forward-looking statement.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required is included in Note 14 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, and under the caption “Market Risks and Foreign Currency Exposures” which is part of Management’s Discussion and Analysis included in Item 7 of this Annual Report on Form 10-K.  Based on a sensitivity analysis (assuming a 10 percent adverse change in market rates) of our foreign exchange and interest rate derivatives and other financial instruments, changes in exchange rates or interest rates would not materially affect our financial position and liquidity.  The effect on our results of operations would be substantially offset by the impact of the hedged items.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management’s Responsibility Statement

The management of Bemis Company, Inc. is responsible for the integrity, objectivity, and accuracy of the financial statements of the Company.  The financial statements are prepared by the Company in accordance with accounting principles generally accepted in the United States of America, and using management’s best estimates and judgments, where appropriate.  The financial information presented throughout this Annual Report on Form 10-K is consistent with that in the financial statements.

The management of Bemis Company, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).  Under the direction, supervision, and participation of the Chief Executive Officer and the Chief Financial Officer, the Company’s management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO-Framework).  Based on the results of this evaluation management has concluded that internal control over financial reporting was effective as of December 31, 2006.

Item 9A of this Annual Report on Form 10-K contains management’s favorable assessment of internal controls over financial reporting based on their review and evaluation utilizing the COSO-Framework criteria.  Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, has been audited by PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm, as stated in their report which is included in Item 8 of this Form 10-K.

The Audit Committee of the Board of Directors, which is composed solely of outside directors, meets quarterly with management, the Internal Audit Director, the Director of Global Financial Compliance, and independent accountants to review the work of each and to satisfy itself that the respective parties are properly discharging their responsibilities.  PricewaterhouseCoopers LLP, the Director of Global Financial Compliance, and the Internal Audit Director have had and continue to have unrestricted access to the Audit Committee, without the presence of Company management.

Jeffrey H. Curler

 

Gene C. Wulf

 

Stanley A. Jaffy

President and

 

Senior Vice President and

 

Vice President and

Chief Executive Officer

 

Chief Financial Officer

 

Controller

18




Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of Bemis Company:

We have completed integrated audits of Bemis Company, Inc.’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006 in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the accompanying balance sheets and the related consolidated statements of income, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Bemis Company, Inc. and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

As described in Note 6, effective December 31, 2006, the Company adopted the provisions of Financial Accounting Standards Board Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in the “Management’s Report on Internal Control Over Financial Reporting” appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria.  Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on Internal Control - Integrated Framework issued by the COSO.  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinions.

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

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

PricewaterhouseCoopers LLP

 

Minneapolis, Minnesota

 

February 28, 2007

 

 

19




BEMIS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

(in thousands, except per share amounts)

For the years ended December 31,

 

2006

 

2005

 

2004

 

Net sales

 

$

3,639,363

 

$

3,473,950

 

$

2,834,394

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of products sold

 

2,942,650

 

2,798,326

 

2,238,694

 

Selling, general, and administrative expenses

 

336,409

 

330,881

 

284,991

 

Research and development.

 

25,024

 

23,528

 

21,138

 

Interest expense

 

49,252

 

38,737

 

15,503

 

Other costs (income), net

 

(3,308

)

112

 

(20,088

)

Minority interest in net income

 

3,540

 

5,937

 

489

 

 

 

 

 

 

 

 

 

Income before income taxes

 

285,796

 

276,429

 

293,667

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

109,500

 

113,900

 

113,700

 

 

 

 

 

 

 

 

 

Net income

 

$

176,296

 

$

162,529

 

$

179,967

 

 

 

 

 

 

 

 

 

Basic earnings per share of common stock

 

$

1.68

 

$

1.53

 

$

1.68

 

 

 

 

 

 

 

 

 

Diluted earnings per share of common stock

 

$

1.65

 

$

1.51

 

$

1.67

 

 

See accompanying notes to consolidated financial statements.

20




BEMIS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(dollars in thousands, except per share amounts)

As of December 31,

 

2006

 

2005

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

112,160

 

$

91,125

 

Accounts receivable, net

 

448,382

 

436,035

 

Inventories

 

467,853

 

420,950

 

Prepaid expenses

 

65,317

 

39,700

 

Total current assets

 

1,093,712

 

987,810

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

Land and land improvements

 

50,590

 

43,641

 

Buildings and leasehold improvements

 

447,521

 

419,095

 

Machinery and equipment

 

1,513,531

 

1,488,256

 

Total property and equipment

 

2,011,642

 

1,950,992

 

Less accumulated depreciation

 

(835,683

)

(807,453

)

Net property and equipment

 

1,175,959

 

1,143,539

 

 

 

 

 

 

 

Other long-term assets:

 

 

 

 

 

Goodwill

 

603,691

 

581,419

 

Other intangible assets

 

102,123

 

105,580

 

Deferred charges and other assets

 

63,524

 

146,252

 

Total other long-term assets

 

769,338

 

833,251

 

TOTAL ASSETS

 

$

3,039,009

 

$

2,964,600

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

16,345

 

$

3,907

 

Short-term borrowings

 

51,232

 

50,107

 

Accounts payable

 

383,351

 

327,569

 

Accrued liabilities:

 

 

 

 

 

Salaries and wages

 

94,220

 

79,056

 

Income taxes

 

3,141

 

4,801

 

Other

 

7,166

 

8,880

 

Total current liabilities

 

555,455

 

474,320

 

 

 

 

 

 

 

Long-term debt, less current portion

 

722,211

 

790,107

 

Deferred taxes

 

134,168

 

168,447

 

Other liabilities and deferred credits

 

125,974

 

154,679

 

Total liabilities

 

1,537,808

 

1,587,553

 

 

 

 

 

 

 

Minority interest

 

29,185

 

27,692

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $10 par value:
Authorized - 500,000,000 shares
Issued - 116,114,347 and 115,978,746 shares

 

11,611

 

11,598

 

Capital in excess of par value

 

317,177

 

267,274

 

Retained earnings

 

1,431,747

 

1,337,590

 

Accumulated other comprehensive income

 

29,098

 

32,706

 

Common stock held in treasury,
11,272,771 and 10,672,771 shares, at cost

 

(317,617

)

(299,813

)

Total stockholders’ equity

 

1,472,016

 

1,349,355

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

3,039,009

 

$

2,964,600

 

 

See accompanying notes to consolidated financial statements.

21




BEMIS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

For the years ended December 31,

 

2006

 

2005

 

2004

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

176,296

 

$

162,529

 

$

179,967

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

152,375

 

150,779

 

130,846

 

Minority interest in net income

 

3,540

 

5,937

 

489

 

Excess tax benefit from share-based payment arrangements

 

(926

)

 

 

 

 

Share-based compensation

 

11,694

 

14,199

 

11,908

 

Deferred income taxes

 

(7,930

)

2,360

 

25,332

 

Income of unconsolidated affiliated companies

 

(32

)

(874

)

(8,807

)

(Gain) loss on sale of property and equipment

 

896

 

(667

)

(4,667

)

Restructuring related activities

 

13,145

 

(896

)

(2,408

)

Proceeds from cash flow hedge

 

 

 

6,079

 

 

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

9,709

 

(13,404

)

(9,424

)

Inventories

 

(31,387

)

(783

)

(73,989

)

Prepaid expenses

 

(23,505

)

500

 

583

 

Accounts payable

 

36,720

 

(8,967

)

42,557

 

Accrued salaries and wages

 

15,694

 

7,542

 

15,774

 

Accrued income taxes

 

(438

)

(6,105

)

8,892

 

Accrued other taxes

 

(1,730

)

(3,179

)

300

 

Changes in other liabilities and deferred credits

 

2,329

 

(14,516

)

(24,989

)

Changes in deferred charges and other investments

 

(7,491

)

(20,117

)

(20,819

)

Net cash provided by operating activities

 

348,959

 

280,417

 

271,545

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Additions to property and equipment

 

(158,837

)

(186,965

)

(134,511

)

Business acquisitions, net of cash acquired

 

(10,800

)

(237,992

)

(30,733

)

Proceeds from sales of property, equipment, and other assets

 

1,373

 

1,900

 

13,239

 

Proceeds from sale of restructuring related assets

 

2,116

 

2,985

 

8,191

 

Increased investment in unconsolidated affiliated company

 

 

 

 

 

(7,065

)

Net cash used in investing activities

 

(166,148

)

(420,072

)

(150,879

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt, net

 

 

 

296,548

 

 

 

Repayment of long-term debt

 

(41,859

)

(6,183

)

(776

)

Net repayment of commercial paper

 

(31,254

)

(48,426

)

(41,120

)

Net borrowing (repayment) of short-term debt

 

7,364

 

32,859

 

(1,185

)

Cash dividends paid to stockholders

 

(82,139

)

(76,634

)

(68,423

)

Common stock purchased for the treasury

 

(17,804

)

(49,469

)

 

 

Excess tax benefit from share-based payment arrangements

 

926

 

 

 

 

 

Stock incentive programs

 

51

 

1,366

 

411

 

Net cash provided (used) by financing activities

 

(164,715

)

150,061

 

(111,093

)

 

 

 

 

 

 

 

 

Effect of exchange rates on cash

 

2,939

 

(13,179

)

7,849

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash

 

21,035

 

(2,773

)

17,422

 

Cash balance at beginning of year

 

91,125

 

93,898

 

76,476

 

 

 

 

 

 

 

 

 

Cash balance at end of year

 

$

112,160

 

$

91,125

 

$

93,898

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Business acquisitions, net of divestures and cash:

 

 

 

 

 

 

 

Working capital acquired (net)

 

$

(147

)

$

23,672

 

$

9,921

 

Property acquired

 

 

 

157,667

 

19,546

 

Goodwill and intangible assets (divested) or acquired, net

 

8,398

 

151,952

 

(1,059

)

Deferred charges and other assets acquired

 

 

 

28,018

 

3,031

 

Long-term debt, deferred taxes, and other liabilities

 

2,549

 

(123,317

)

(706

)

Cash used for acquisitions

 

$

10,800

 

$

237,992

 

$

30,733

 

 

 

 

 

 

 

 

 

Interest paid during the year

 

$

46,396

 

$

38,731

 

$

15,735

 

Income taxes paid during the year

 

$

116,520

 

$

120,496

 

$

78,515

 

 

See accompanying notes to consolidated financial statements

22




BEMIS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Capital In

 

 

 

Other

 

Common

 

Total

 

 

 

Common

 

Excess of

 

Retained

 

Comprehensive

 

Stock Held

 

Stockholders’

 

 

 

Stock

 

Par Value

 

Earnings

 

Income (Loss)

 

In Treasury

 

Equity

 

Balance at December 31, 2003

 

$

11,505

 

$

249,609

 

$

1,140,151

 

$

(12,188

)

$

(250,344

)

$

1,138,733

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

179,967

 

 

 

 

 

179,967

 

Translation adjustment

 

 

 

 

 

 

 

39,780

 

 

 

39,780

 

Pension liability adjustment, net of tax effect $(1,433)

 

 

 

 

 

 

 

(2,071

)

 

 

(2,071

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

217,676

 

Cash dividends paid on common stock $0.64 per share

 

 

 

 

 

(68,423

)

 

 

 

 

(68,423

)

Recognition of cumulative translation adjustment related to divesture of investment in foreign entity

 

 

 

 

 

 

 

6,153

 

 

 

6,153

 

Stock incentive programs and related tax effects (705,082 shares)

 

70

 

13,657

 

 

 

 

 

 

 

13,727

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2004

 

11,575

 

263,266

 

1,251,695

 

31,674

 

(250,344

)

1,307,866

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

162,529

 

 

 

 

 

162,529

 

Unrecognized gain on derivative, net of tax $2,371

 

 

 

 

 

 

 

3,708

 

 

 

3,708

 

Unrecognized gain reclassified to earnings, net of tax $(266)

 

 

 

 

 

 

 

(417

)

 

 

(417

)

Translation adjustment

 

 

 

 

 

 

 

4,178

 

 

 

4,178

 

Pension liability adjustment, net of tax effect $(4,322)

 

 

 

 

 

 

 

(6,437

)

 

 

(6,437

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

163,561

 

Cash dividends paid on common stock $0.72 per share

 

 

 

 

 

(76,634

)

 

 

 

 

(76,634

)

Stock incentive programs and related tax effects (228,557 shares)

 

23

 

4,008

 

 

 

 

 

 

 

4,031

 

Purchase of 1,869,710 shares of common stock

 

 

 

 

 

 

 

 

 

(49,469

)

(49,469

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2005

 

11,598

 

267,274

 

1,337,590

 

32,706

 

(299,813

)

1,349,355

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

176,296

 

 

 

 

 

176,296

 

Unrecognized gain reclassified to earnings, net of tax $(337)

 

 

 

 

 

 

 

(526

)

 

 

(526

)

Translation adjustment

 

 

 

 

 

 

 

60,850

 

 

 

60,850

 

Pension liability adjustment, net of tax effect $(15,988)

 

 

 

 

 

 

 

24,794

 

 

 

24,794

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

261,414

 

Adjustment to initially apply FAS No 158, net of tax $55,076

 

 

 

 

 

 

 

(88,726

)

 

 

(88,726

)

Cash dividends paid on common stock $0.76 per share

 

 

 

 

 

(82,139

)

 

 

 

 

(82,139

)

Stock incentive programs and related tax effects (135,601 shares)

 

13

 

2,914

 

 

 

 

 

 

 

2,927

 

Impact of adopting FAS No 123(R)

 

 

 

35,295

 

 

 

 

 

 

 

35,295

 

Share-based compensation

 

 

 

11,694

 

 

 

 

 

 

 

11,694

 

Purchase of 600,000 shares of common stock

 

 

 

 

 

 

 

 

 

(17,804

)

(17,804

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2006

 

$

11,611

 

$

317,177

 

$

1,431,747

 

$

29,098

 

$

(317,617

)

$

1,472,016

 

 

See accompanying notes to consolidated financial statements.

 

23




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES

Description of the business:  Bemis Company, Inc., a Missouri corporation, was founded in 1858 and incorporated in 1885 as Bemis Bro. Bag Company.  In 1965 the name was changed to Bemis Company, Inc. (the Company).  Based in Neenah, Wisconsin, the Company employs approximately 15,700 individuals and has 55 manufacturing facilities located in the United States and ten other countries around the world.  The Company is a manufacturer of flexible packaging products and pressure sensitive materials selling to customers throughout the Americas and Europe, with a growing presence in Asia Pacific.

The Company’s business activities are organized around its two business segments, Flexible Packaging, which accounted for approximately 82 percent of 2006 net sales, and Pressure Sensitive Materials, which accounted for the remaining net sales.  The Company’s flexible packaging business has a strong technical base in polymer chemistry, film extrusion, coating, laminating, printing, and converting.  The Company’s pressure sensitive materials business specializes in adhesive technologies.  The primary markets for the Company’s products are in the food industry, which accounted for approximately 60 percent of 2006 net sales.  The Company’s flexible packaging products are widely diversified among food categories and can be found in nearly every aisle of the grocery store.  Other markets include chemical, agribusiness, medical, pharmaceutical, personal care products, electronics, automotive, construction, graphic industries, and other consumer goods.  All markets are considered to be highly competitive as to price, innovation, quality, and service.

Principles of consolidation:  The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries.  All intercompany transactions and accounts have been eliminated.  Joint ventures are accounted for by the equity method of accounting with earnings ($32,000 and $874,000 for Laminor in 2006 and 2005, respectively; and $11,698,000 for Itap Bemis Ltda. in 2004) included in other costs (income), net, on the accompanying consolidated statement of income.  The Laminor joint venture interest was acquired as part of the January 2005 acquisition of Dixie Toga S.A.  Investments in joint ventures are included in deferred charges and other assets on the accompanying consolidated balance sheet.  Results of Itap Bemis were consolidated in 2006 and 2005.

Estimates and assumptions required:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Translation of foreign currencies:  The Company considers the local currency to be the reporting currency for all foreign subsidiaries.  Assets and liabilities are translated at the exchange rate as of the balance sheet date.  All revenue and expense accounts are translated at average exchange rates in effect during the year.  Translation gains or losses are recorded in the foreign currency translation component in accumulated other comprehensive income (loss) in stockholders’ equity.  Foreign currency transaction gains (losses) of $(849,000) $(5,434,000), and $1,002,000, in 2006, 2005, and 2004, respectively, are included as a component of other costs (income), net.

Revenue recognition:  Sales and related costs of sales are recognized upon shipment of products or when all of the conditions of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 are fulfilled.  All costs associated with revenue, including customer rebates and discounts, are recognized at the time of sale.  Customer rebates are accrued in accordance with EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer and recorded as a reduction to sales.  Shipping and handling costs are classified as a component of costs of sales while amounts billed to customers for shipping and handling are classified as a component of sales.  The Company accrues for estimated warranty costs when specific issues are identified and the amounts are determinable.

Environmental cost:  The Company is involved in a number of environmental related disputes and claims.  The Company accrues for environmental costs when it is probable that these costs will be incurred and can be reasonably estimated.  At December 31, 2006 and 2005, reserves were $830,500 and $786,000, respectively.  Adjustments to the reserve accounts and costs which were directly expensed for environmental remediation matters resulted in charges to the income statements for 2006, 2005, and 2004 of $128,000, $14,000, and  $174,000, net of third party reimbursements totaling $102,000, $11,000, and $79,000, for 2006, 2005, and 2004, respectively.

Earnings per share:  Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the year.  Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the year and dilutive shares relating to stock incentive plans.  The following table presents information necessary to compute basic and diluted earnings per common share:

(in thousands, except per share amounts)

 

2006

 

2005

 

2004

 

Weighted average common shares outstanding — basic

 

104,865

 

106,433

 

106,892

 

Dilutive shares

 

1,902

 

1,386

 

1,050

 

Weighted average common and common equivalent shares outstanding — diluted

 

106,767

 

107,819

 

107,942

 

Net income for basic and diluted earnings per share computation

 

$

176,296

 

$

162,529

 

$

179,967

 

Earnings per common share — basic

 

$

1.68

 

$

1.53

 

$

1.68

 

Earnings per common share — diluted

 

$

1.65

 

$

1.51

 

$

1.67

 

 

Certain options outstanding at December 31, 2005 (2,494 shares) were not included in the computation of diluted earnings per share above because they would not have had a dilutive effect.

Research and development:  Research and development expenditures are expensed as incurred.

24




Taxes on undistributed earnings:  No provision is made for U.S. income taxes on earnings of non-U.S. subsidiary companies which the Company controls but does not include in the consolidated federal income tax return as it is management’s practice and intent to indefinitely reinvest the earnings.

Accounting for Stock-Based Compensation:  Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (FAS 123(R)), which significantly changed accounting practice with respect to employee stock options.  FAS 123(R) requires that the Company measure the cost of equity-based service awards based on the grant-date fair value of the award.  The impact of adopting this standard on January 1, 2006, was insignificant to the Company’s results of operations since no new stock option awards have been granted since 2003 and all stock options outstanding at December 31, 2005, are fully or partially vested.  Prior to adopting FAS 123(R), the Company applied the recognition and measurement principles of APB No. 25, Accounting for Stock Issued to Employees.  The intrinsic value method is used to account for stock-based compensation plans.  If compensation expense had been determined based on the fair value method with the pro forma compensation expense reflected over the vesting period, net income and income per share would have been adjusted to the pro forma amounts indicated below:

(in thousands, except per share amounts)

 

2005

 

2004

 

Net income - as reported

 

$

162,529

 

$

179,967

 

Add: Stock-based compensation expense included in net income, net of related tax effects

 

8,655

 

7,297

 

Deduct: Total stock-based compensation expense under fair value-based method, net of related tax effects

 

(8,996

)

(7,790

)

Net income - pro forma

 

$

162,188

 

$

179,474

 

 

 

 

 

 

 

Basic earnings per share - as reported

 

$

1.53

 

$

1.68

 

Basic earnings per share - pro forma

 

$

1.52

 

$

1.68

 

Diluted earnings per share - as reported

 

$

1.51

 

$

1.67

 

Diluted earnings per share - pro forma

 

$

1.50

 

$

1.66

 

 

Compensation expense for pro forma purposes was reflected over the vesting period.  Note 8 contains the significant assumptions used in determining the underlying fair value of options.

Cash Equivalents:  The Company considers all highly liquid temporary investments with a maturity of three months or less when purchased to be cash equivalents.  Cash equivalents are carried at cost which approximates market value.

Accounts Receivable:  Trade accounts receivable are stated at the amount the Company expects to collect, which is net of an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments.  The following factors are considered when determining the collectibility of specific customer accounts:  customer creditworthiness, past transaction history with the customer, and changes in customer payment terms or practices.  In addition, overall historical collection experience, current economic industry trends, and a review of the current status of trade accounts receivable are considered when determining the required allowance for doubtful accounts.  Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to valuation allowance.  Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.  Accounts receivable are presented net of an allowance for doubtful accounts of $20,287,000 and $19,120,000 at December 31, 2006 and 2005, respectively.

Inventory valuation:  Inventories are valued at the lower of cost, as determined by the first-in, first-out (FIFO) method, or market.  Inventories are summarized at December 31, as follows:

(in thousands)

 

2006

 

2005

 

Raw materials and supplies

 

$

169,914

 

$

161,110

 

Work in process and finished goods

 

316,482

 

276,331

 

Total inventories, gross

 

486,396

 

437,441

 

Less inventory write-downs

 

(18,543

)

(16,491

)

Total inventories, net

 

$

467,853

 

$

420,950

 

 

Property and equipment:  Property and equipment are stated at cost.  Maintenance and repairs that do not improve efficiency or extend economic life are expensed as incurred.  Plant and equipment are depreciated for financial reporting purposes principally using the straight-line method over the estimated useful lives of assets as follows:  land improvements, 15-30 years; buildings, 15-45 years; leasehold and building improvements, 8-20 years; and machinery and equipment, 3-16 years.  For tax purposes, the Company generally uses accelerated methods of depreciation.  The tax effect of the difference between book and tax depreciation has been provided as deferred income taxes.  Depreciation expense was $144,058,000, $142,599,000, and $126,082,000 for 2006, 2005, and 2004, respectively.  On sale or retirement, the asset cost and related accumulated depreciation are removed from the accounts and any related gain or loss is reflected in income.  Interest costs, which are capitalized during the construction of major capital projects, totaled $2,871,000 in 2006, $993,000 in 2005, and $178,000 in 2004.

The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.  If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets, the carrying values are reduced to the estimated fair value.

25




The Company capitalizes direct costs (internal and external) of materials and services used in the development and purchase of internal-use software.  Amounts capitalized are amortized on a straight-line basis over a period of three to seven years and are reported as a component of machinery and equipment within property and equipment.

Goodwill:  Goodwill represents the excess of cost over the fair value of net assets acquired in business combinations.  Effective January 1, 2002, the Company adopted the reporting requirements of Statement of Financial Accounting Standards (FAS) No. 141, Business Combinations, and FAS No. 142, Goodwill and Other Intangible Assets, and as required, has applied its requirements to acquisitions made after June 30, 2001.  In accordance with FAS No. 142, goodwill and indefinite-lived intangible assets are no longer amortized, but are reviewed at least annually for impairment.  The Company tests goodwill and indefinite-lived intangible assets for impairment on an annual basis, or whenever there is an impairment indicator, using a fair-value based approach.

Intangible assets:  Contractual or separable intangible assets that have finite useful lives are being amortized against income using the straight-line method over their estimated useful lives, with periods ranging from one to 30 years. The straight-line method of amortization reflects an appropriate allocation of the costs of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the Company in each reporting period.  The Company tests finite-lived intangible assets for impairment whenever there is an impairment indicator.  Intangible assets are tested for impairment by comparing anticipated undiscounted future cash flows from operations to net book value.

Financial Instruments:  The Company recognizes all derivative instruments on the balance sheet at fair value.  Derivatives that are not hedges are adjusted to fair value through income.  If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in stockholders’ equity through other comprehensive income until the hedged item is recognized.  Gains or losses, if any, related to the ineffective portion of any hedge are recognized through earnings in the current period.  Note 14 contains expanded details relating to specific derivative instruments included on the Company’s balance sheet, such as forward foreign currency exchange contracts and interest rate swap arrangements.

Accumulated other comprehensive income (loss):  The components of accumulated other comprehensive income (loss) are as follows as of December 31:

(in thousands)

 

2006

 

2005

 

2004

 

Foreign currency translation

 

$

122,454

 

$

61,604

 

$

57,426

 

Minimum pension liability, net of deferred tax benefit of $4,590, $20,580, and $16,258

 

(7,395

)

(32,189

)

(25,752

)

Adjustment to initially apply FAS No. 158, net of tax $55,076

 

(88,726

)

 

 

 

 

Unrecognized gain on derivative, net of deferred tax benefit of $1,768 and $2,105