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, 2003
Commission File Number 1-5277

 

Registrant’s telephone number, including area code:   (612) 376-3000

 

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 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 ý     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.   ý

 

Indicate by check mark whether the Registrant is an accelerated filer.      YES ý   NO o

 

The aggregate market value of the voting stock held by nonaffiliates of the Registrant on June 30, 2003, based on a closing price of $46.80 per share ($23.40 post-split) as reported on the New York Stock Exchange, was $2,485,677,000.

 

As of March 8, 2004, the Registrant had 106,817,028 shares of Common Stock issued and outstanding.

 

Documents Incorporated by Reference

Proxy Statement - Annual Meeting of Stockholders May 6, 2004 - Part III

 

 

BEMIS COMPANY, INC. AND SUBSIDIARIES

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

Part I
	Item 1.	Business
	Item 2.	Properties
	Item 3.	Legal Proceedings
	Item 4.	Submission of Matters to a Vote of Security Holders
Part II
	Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters
	Item 6.	Selected Financial Data
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk
	Item 8.	Financial Statements and Supplementary Data
		Management’s Responsibility Statement
		Report of Independent Auditors
		Consolidated Statement of Income
		Consolidated Balance Sheet
		Consolidated Statement of Cash Flows
		Consolidated Statement of Stockholders’ Equity
		Notes to Consolidated Financial Statements
	Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
	Item 9A.	Controls and Procedures
Part III
	Item 10.	Directors and Executive Officers of the Registrant
	Item 11.	Executive Compensation
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13.	Certain Relationships and Related Transactions
	Item 14.	Principal Accountant Fees and Services
Part IV
	Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
Exhibit Index
Schedule II – Valuation and Qualifying Accounts and Reserves
Report of Independent Auditors on Financial Statement Schedules
Exhibit 4(b) – Certificate of Bemis Company, Inc
Exhibit 10(f) – Bemis Supplemental Retirement Plan for Senior Officers
Exhibit 10(n) – Resolution Amending Bemis Company, Inc. 2001 Stock Incentive Plan
Exhibit 14 – Financial Code of Ethics
Exhibit 21 – Parent and Subsidiaries of the Registrant
Exhibit 23 – Consent of PricewaterhouseCoopers LLP
Exhibit 31.1 – Certification of Jeffrey H. Curler, Chief Executive Officer of the Company, pursuant to Rule 13a-14(a)/15d-14(a), dated March 8, 2004
Exhibit 31.2 – Certification of Gene C. Wulf, Chief Financial Officer of the Company, pursuant to Rule 13a-14(a)/15d-14(a), dated March 8, 2004
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 March 8, 2004

 

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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 Registrant was incorporated in 1885 as Bemis Bro. Bag Company with the name changed to Bemis Company, Inc. in 1965.  The Registrant is a principal manufacturer of flexible packaging products and pressure sensitive materials selling to customers throughout the United States, Canada, and Europe with a growing presence in Asia Pacific, South America, and Mexico.  In 2003, approximately 80 percent of the Registrant’s sales were derived from the Flexible Packaging segment and approximately 20 percent were derived from the Pressure Sensitive Materials segment.

 

The primary market for its products is the food industry.  Other markets include companies in the following types of businesses: chemical, agribusiness, medical, pharmaceutical, personal care products, tissue, batteries, electronics, automotive, construction, graphic industries, and other consumer goods.  Further information about the Registrant’s operations in its business segments is available at Note 13 to the Consolidated Financial Statements included in Item 8 of this Form 10-K Annual Report.

 

As of December 31, 2003, the Registrant had approximately 11,500 employees, about 8,000 of whom were classified as production employees.  Many of the North American production employees are covered by collective bargaining contracts involving four different international unions and one independent union and 19 individual contracts with terms ranging from one to six years.  During 2003, seven contracts covering approximately 570 employees at five different locations in the United States were successfully negotiated.  During 2004, five domestic labor agreements are scheduled to expire.  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 six 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.  Customer and vendor payment terms are split approximately equally between net 30 days and discountable terms.  Discounts are generally one percent for payment within ten days.  Inventory levels reflect a reasonable balance between raw material pricing and availability, and the Registrant’s commitment to promptly fill customer orders.  Backlogs are not a significant factor in the industries in which the Registrant operates as most orders placed with the Registrant are for delivery within 90 days or less.  The business of each of the segments is not seasonal to any significant extent.

 

The Registrant 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 Registrant also has a number of trademarks and trademark registrations in the United States and in foreign countries.  The Registrant’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 Registrant’s results as a whole or those of either of its segments.

 

The Registrant’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 Registrant’s business activities reported by its two business segments follows.

 

Flexible Packaging Segment

The Registrant manufactures a broad range of consumer and industrial packaging.  Due to changes in our organizational and manufacturing structure to better meet the needs of the market, the Registrant now manages the Flexible Packaging segment in terms of markets served rather than products produced.

 

Multilayer flexible polymer film structures and barrier laminates are sold for food, medical and personal care products as well as non-food applications utilizing controlled or modified atmosphere packaging.  Monolayer and coextruded films are also produced for applications with fewer barrier requirements.  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, sanitary products, disposable diapers, printed shrink overwrap for the food and beverage industry, personal care, agribusiness, minerals and medical device packaging.

 

Pressure Sensitive Materials Segment

The Registrant 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 packaging, personal care product packaging, 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 labels, signs, or vehicle graphics.  Primary markets are indoor and outdoor signage, photograph and digital print overlaminates, and vehicle graphics.

 

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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 batteries, electronics, automotive, construction, medical, and pharmaceuticals.

 

Marketing, Distribution, and Competition

While the Registrant’s sales are made through a variety of distribution methods, more than 90 percent of each segment’s sales are made by the Registrant’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 Registrant’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 Registrant’s total sales.  Furthermore, the loss of one or a few major customers would not have a material adverse effect on the Registrant’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 Registrant’s manufacturing site and the customer.

 

The major markets in which the Registrant 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 Amcor Limited, Exopack Company, Hood Corporation, Intertape Polymer Group Inc., Alcan Packaging, Pliant Corporation, Printpack, Inc., Rexam PLC, Sealed Air Corporation, Sonoco Products Company, Smurfit-Stone Container Corporation, and Wihuri OY.  In the Pressure Sensitive Materials segment major competitors include Avery Dennison Corporation, Acucote, Inc., Green Bay Packaging Inc., 3M, Ricoh Company, Ltd., Ritrama Inc., Flexcon Co., Inc., Spinnaker Industries, Inc., Technicote Inc., UPM-Kymmene Corporation, and Wausau Coated Products Inc.

 

The Registrant 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 Registrant’s precise competitive position in these markets is not reasonably determinable.  Advertising is limited primarily to business and trade publications emphasizing the Registrant’s product features and related technical capabilities and the individual problem-solving approach to customer problems.

 

Raw Materials

Plastic resins and films, paper, inks, and chemicals constitute the basic major raw materials.  These are purchased from a variety of industry sources and the Registrant is not dependent on any one supplier for its raw materials.  While temporary shortages of raw materials may occur occasionally, these items are currently readily available.

 

Research and Development Expense

Research and development expenditures were as follows:

 

		2003			2002			2001
Flexible Packaging		$	17,060,000		$	14,509,000		$	8,527,000
Pressure Sensitive Materials		4,394,000			2,937,000			1,786,000
Total		$	21,454,000		$	17,446,000		$	10,313,000

 

The increase in 2003 reflects additional effort related to new product development.

 

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, and competitive position of the Registrant and its subsidiaries.

 

Available Information

The Registrant is an 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 450 Fifth Street NW, Washington, DC 20549 (call 1-800-792-0330 for hours of operation). Electronically filed reports can also be accessed through the Registrant’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., 222 South Ninth Street, Suite 2300, Minneapolis, Minnesota 55402-4099, or calling (612) 376-3000.  In addition, the Registrant’s Board Committee charters and the Company’s standards of business conduct can be electronically accessed at the Company’s website or, free of charge, by writing directly to the Company.  The Registrant 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 Registrant’s website.

 

Explanation of Terms Describing the Registrant’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.

 

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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.

High Barrier Products – A grouping of Bemis 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.

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

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.

Paper Products – A grouping of Bemis products that consist primarily of multiwall and single ply paper bags and printed paper roll stock.

Polyethylene Products – A grouping of Bemis products that consist of packaging made from monolayer and coextruded polymer films that are often printed and converted to bags, roll stock or shrink overwrap.  The polymer raw material used to manufacture these products is polyethylene resin.

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.

Roll label products – Pressure sensitive materials made up and sold in roll form.

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 2 - PROPERTIES

 

Properties utilized by the Registrant at December 31, 2003, were as follows:

 

Flexible Packaging Segment

This segment has 44 manufacturing plants located in 15 states and nine non-USA countries, of which 37 are owned directly by the Registrant or its subsidiaries and seven are leased from outside parties.  Leases generally provide for minimum terms of three to 25 years and have one or more renewal options.  The initial terms of leases in effect at December 31, 2003, expire between 2004 and 2010.

 

Pressure Sensitive Materials Segment

This segment has nine manufacturing plants located in five states and two non-USA countries, of which eight are owned directly by the Registrant or its subsidiaries and one is leased from an outside party.  The initial term, excluding renewal options, of the lease in effect as of December 31, 2003, expires in 2004.

 

Corporate and General

The executive offices of the Registrant, which are leased, are located in Minneapolis, Minnesota.  The Registrant 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 capacity depending on the type of operation and market conditions.

 

ITEM 3 - LEGAL PROCEEDINGS

 

The Registrant 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 Registrant’s financial condition or results of operations.

 

The Registrant is a potentially responsible party (PRP) in fourteen superfund sites around the United States.  In all cases, the Registrant is a “de minimis” PRP and has negotiated a position as such.  The Registrant has reserved an amount that it believes to be adequate to cover its exposure.

 

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.  This issue was first disclosed in a Form 8-K filed with the Securities and Exchange Commission on

 

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April 23, 2003, and further discussed in the Company’s Form 10-Q filed for the quarter ended June 30, 2003.  The Company has substantially complied with the subpoena and will continue to cooperate fully with the requests of the Department of Justice.

 

The Company and its wholly-owned subsidiary, Morgan Adhesives Company, have been named as defendants in nine civil lawsuits.  Each lawsuit purports 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 held an Initial Pretrial Conference on December 17, 2003, at which time he entered a Case Management Order, which calls for discovery to be taken on the issues relating to class certification and briefing on plaintiffs’ motion for class certification to be completed in October 2004.  The Order does not set, at this time, a discovery cut-off or a trial date.

 

The Company intends to vigorously defend these lawsuits.  Given the preliminary nature of the Department of Justice investigation and related civil lawsuits, however, the Company is unable to predict the outcome of the lawsuits and what effect, if any, the resolution of these matters may have on the Company’s financial position or results of operations.  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 2003.

 

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

 

ITEM 5 - MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

The Company’s common stock is traded on the New York Stock Exchange under the symbol BMS.  On December 31, 2003, there were 4,484 registered holders of record of our common stock.  Dividends paid and the high and low common stock prices per share were as follows:

 

		March 31			June 30			September 30			December 31
2003 *
Dividend paid per common share		$	0.14		$	0.14		$	0.14		$	0.14
Common stock price per share
High		$	25.58		$	24.15		$	24.33		$	25.03
Low		$	19.66		$	20.86		$	21.39		$	21.77
2002 *
Dividend paid per common share		$	0.13		$	0.13		$	0.13		$	0.13
Common stock price per share
High		$	29.12		$	28.53		$	27.19		$	27.15
Low		$	23.32		$	23.55		$	19.70		$	22.77
2001 *
Dividend paid per common share		$	0.125		$	0.125		$	0.125		$	0.125
Common stock price per share
High		$	18.00		$	20.33		$	22.50		$	26.24
Low		$	14.35		$	15.80		$	17.93		$	19.67

 

* All per share data have been restated to reflect the two-for-one stock split declared by the Board of Directors on January 29, 2004.

 

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ITEM 6 - SELECTED FINANCIAL DATA

 

FIVE-YEAR CONSOLIDATED REVIEW

(dollars in millions, except per share amounts)

 

Years Ended December 31,		2003			2002			2001			2000			1999
Operating Data
Net sales		$	2,635.0		$	2,369.0		$	2,293.1		$	2,164.6		$	1,962.6
Cost of products sold and other expenses		2,383.2			2,086.5			2,035.4			1,921.5			1,755.5
Interest expense		12.6			15.5			30.3			31.6			21.2
Income before income taxes		239.2			267.0			227.4			211.5			185.9
Provision for income taxes		92.1			101.5			87.1			80.9			71.1
Net income		147.1			165.5			140.3			130.6			114.8
Net income as a percent of net sales		5.6		%	7.0		%	6.1		%	6.0		%	5.8		%
Common Share Data *
Basic earnings per share		1.39			1.56			1.33			1.23			1.10
Diluted earnings per share		1.37			1.54			1.32			1.22			1.09
Dividends per share		0.56			0.52			0.50			0.48			0.46
Book value per share		10.72			9.06			8.38			7.59			6.95
Stock price/earnings ratio range		15-19		x	13-19		x	11-20		x	10-16		x	14-18		x
Weighted-average shares outstanding for computation of diluted earnings per share		107,733,383			107,492,974			106,243,596			107,105,406			105,314,136
Common shares outstanding at December 31,		106,242,046			105,887,476			105,739,858			105,204,828			104,377,430
Capital Structure and Other Data
Current ratio		2.4			2.2			2.5			1.3			2.3
Working capital		436.3			395.8			348.7			144.9			330.3
Total assets		2,292.9			2,256.7			1,923.0			1,888.6			1,532.1
Short-term debt		6.5			5.2			5.7			234.8			6.8
Long-term debt		583.4			718.3			595.2			438.0			372.3
Stockholders’ equity		1,138.7			959.0			886.1			798.8			725.9
Return on average stockholders’ equity		14.0		%	17.9		%	16.7		%	17.1		%	16.2		%
Return on average total capital		8.4		%	10.3		%	10.0		%	10.8		%	10.9		%
Depreciation and amortization		128.2			119.2			124.1			108.1			97.7
Capital expenditures		106.5			91.0			117.5			100.4			137.4
Number of common stockholders		4,484			4,542			4,747			5,005			5,316
Number of employees		11,505			11,837			11,012			10,969			9,534

 

*  Share and per share data have been restated to reflect the two-for-one stock split declared by the Board of Directors on January 29, 2004.

 

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

 

Management’s Discussion and Analysis

 

Three years ended December 31, 2003

Management’s Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and related Notes beginning on page 26.

 

		Percent
Three-year review of results		2003		2002		2001
Net sales		100.0	%	100.0	%	100.0	%
Cost of products sold		79.8		77.7		79.2
Gross margin		20.2		22.3		20.8
Selling, general, and administrative expenses		9.7		9.7		9.0
All other expenses		1.4		1.3		1.9
Income before income taxes		9.1		11.3		9.9
Provision for income taxes		3.5		4.3		3.8
Net income		5.6	%	7.0	%	6.1	%
Effective tax rate		38.5	%	38.0	%	38.3	%

 

Overview

Bemis Company, Inc. is a leading manufacturer of flexible packaging and pressure sensitive materials supplying a variety of industries.  The food industry is our largest market, representing about 65 percent of our total company net sales.  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 tissue overwrap.  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 80 percent of our net sales.  The remaining 20 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

Weak economic conditions have negatively impacted certain markets in which we participate that are more commodity-like in nature, in particular the pressure sensitive roll label market and the market for unprinted polyethylene film.  In both cases, competitive pricing and excess industry capacity have reduced profitability in those markets.  In response, we initiated restructuring efforts during 2003 to improve profitability by removing capacity and reducing fixed costs associated with our participation in each of those markets.  Competition from low cost foreign sources has not had a significant impact on our business during the past three years.  Our focus on the

 

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food industry and on unique, proprietary packaging structures combined with our proximity and service to customers creates barriers to entry for these competitors.

 

Terminated agreement to sell pressure sensitive materials segment

In August 2002, we announced an agreement to sell our pressure sensitive materials business segment for $420 million in cash to UPM-Kymmene, a large multinational paper company headquartered in Finland.  In July of 2003, after extensive negotiations with the U. S. Department of Justice and subsequent court proceedings in an attempt to obtain regulatory approval for the transaction, a U.S. District Court granted an injunction against the transaction, citing concerns about industry competition.  The purchase and sale agreement was terminated and we renewed our commitment to the pressure sensitive materials business segment and its customer base.

 

Restructuring and related charges

During 2003, we recorded restructuring and related charges totaling $16.7 million pre-tax.  This amount included charges for the flexible packaging business segment totaling $13.9 million related to the closure of three facilities: Murphysboro, Illinois; Union City, California; and Prattville, Alabama.  These plant closures eliminated less efficient capacity and consolidated production of monolayer blown film into fewer, more efficient facilities.  These unprinted, monolayer blown film products are sold into industrial markets in which demand has decreased substantially over the past several years.

 

Restructuring and related charges for the pressure sensitive materials business segment totaled $2.7 million in 2003, primarily reflecting the closure costs associated with the Brampton, Ontario, Canada and North Las Vegas, Nevada facilities, severance costs incurred at European and Brazilian operations, and supply chain adjustments.  We expect to incur an additional $1.7 million of charges during the first half of 2004 in connection with the closure of the North Las Vegas, Nevada facility.  These efforts will consolidate our roll label manufacturing into fewer plants and reduce costs in a highly competitive product line.

 

Annual savings as a result of the restructuring events detailed above are expected to be approximately $16 million for the flexible packaging business segment, beginning in 2004, and approximately $10 million for the pressure sensitive materials business segment, beginning during the second half of 2004.  We expect these savings to be substantially offset by unrelated increases in employee pension and other benefit costs.

 

Acquisitions

Since 1990, we have been active participants in the consolidation of the flexible packaging industry.  Our acquisition strategy is growth oriented, focused on the identification of businesses that offer unique packaging technologies, access to new markets or product lines, or critical mass.  Since 2000, we have completed four such acquisitions to enhance the breadth of our product offerings and expand the market and geographic participation of our business segments.  These four acquisitions have added nearly $300 million of net sales to our results, about half of which is from non-U.S. manufacturing plants.  We expect to continue to be an active participant in the global consolidation of our industries.

 

Results of Operations

Consolidated Overview

For the year ended December 31, 2003, net sales increased 11.2 percent to $2.64 billion from net sales of $2.37 billion in 2002.  Acquisitions made during the latter half of 2002 accounted for 6.6 percent of this net sales growth and currency translation accounted for about 3 percent.  The remaining 1.6 percent sales growth in 2003 primarily reflects the increased sales volumes in flexible packaging.  Net sales in 2002 increased 3.3 percent from $2.29 billion in 2001.  Acquisitions accounted for 4.7 percent of the net sales growth in 2002.  Strong 2002 flexible packaging sales to food markets were more than offset by weakness in markets such as industrial products, agribusiness products, and personal care.

 

Operating profit decreased to $280.0 million in 2003, compared to $316.4 million in 2002 and $289.0 million in 2001.  Operating profit as a percent of net sales decreased to 10.6 percent in 2003 compared to 13.4 percent in 2002 and 12.6 percent in 2001.  Included in operating profit for 2003 are $16.7 million of restructuring and related charges and an increase in pension expense of $12.8 million from 2002.  Competitive pricing pressures for flexible packaging products sold into industrial markets and for pressure sensitive roll label materials, in addition to increases in certain resin costs, contributed to lower margins in 2003.  Operating profit levels in 2002 benefited from increased production efficiencies and cost controls in both business segments.

 

Net income for 2003 totaled $147.1 million, compared to $165.5 million and $140.3 million in 2002 and 2001, respectively.  Diluted earnings per share were $1.37 for 2003, including a restructuring charge of $0.10 per diluted share.  This result is compared to diluted earnings per share of $1.54 for 2002 and $1.32 for 2001.  Effective January 1, 2002, we adopted the requirements of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.”  This new accounting standard requires that goodwill no longer be amortized but instead be reviewed for impairment not less than annually.  If this standard had been in effect in 2001, diluted earnings per share would have been $1.41.

 

Flexible Packaging Business Segment

Our flexible packaging business segment provides packaging to a variety of end markets, including meat, cheese, confectionery products, personal care, pet food, frozen foods, produce, lawn and garden, diapers, tissue paper, beverages, newspaper, medical devices, bakery, and snack 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 our flexible packaging business segment are polymer resins, which we use to develop and manufacture single layer and multilayer film products.  Most of our flexible packaging products are sold under contract in which selling prices are adjusted periodically to reflect the prevailing market price of raw material components.  Generally, the impact of

 

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raw material price changes on our operating margins is minimized by the use of these contracts.  During periods of unusual price volatility, selling price changes may lag behind changes in raw material pricing.  Of the polymer resins we use, polyethylene resin is the most prevalent and experiences the greatest market price volatility.  Changes in the price of polyethylene resin normally have a corresponding impact on the net sales of our packaging into the bakery, tissue and industrial markets.  During 2003, polyethylene resin prices increased 30 percent during the first quarter in anticipation of natural gas shortages due to conflict in the Middle East and other international supply concerns.  As concerns subsided in April, prices drifted back down resulting in a volatile pricing period that delayed our ability to adjust selling prices, which negatively impacted operating margins.

 

Our flexible packaging business segment recorded net sales of $2.10 billion in 2003, a 12.3 percent increase from $1.87 billion in 2002.  Of this total increase, 8.4 percent is a result of acquisitions completed during the latter half of 2002 and 2.0 percent is a result of currency translation.  During 2003, our flexible packaging business segment benefited from the impact of new products in the shrink bag product line and growth in the medical device packaging market.  These positive factors were partially offset by weaker sales in early 2003 to weather-sensitive markets such as lawn and garden, packaged ice and bottled water due to unusually cold and wet Spring weather.  Net sales were also negatively impacted by increased competition in industrial markets for sales of unprinted polyethylene film and multiwall paper bags for agricultural and chemical products.  In the future, we will continue to use our material science expertise to introduce new products to our customers and we believe the medical device market will continue to grow over the next several years.  We expect competition in certain low margin markets to remain strong, and we have responded by reducing costs for those products with the 2003 restructuring program described below.  Net sales increased 3.8 percent in 2002 from $1.80 billion in 2001.  Acquisitions accounted for an increase of 6.0 percent from 2001 levels.  This increase was partially offset by lower production volumes and inefficiencies in certain manufacturing plants driven by a change in sales mix that created capacity constraints during 2002.

 

Operating profit decreased to $263.7 million in 2003 from $289.1 million and $276.9 million in 2002 and 2001, respectively.  Operating profit as a percentage of net sales decreased to 12.6 percent in 2003 compared to 15.5 percent in 2002 and 15.4 percent in 2001.  Factors that dampened operating profit in 2003 include increased employee pension and other benefit costs and unusual volatility in the price of polyethylene resin during the first half of the year.  While raw material prices are expected to fluctuate during the next year, we do not anticipate the level of volatility that we experienced in 2003.

 

In July 2003, we announced a restructuring effort to reduce fixed costs, take out monolayer film capacity and direct production volume to more efficient facilities.  We closed three flexible packaging manufacturing facilities in the latter half of 2003 recording restructuring and related charges of $13.9 million.  These charges included costs related to accelerated depreciation of assets totaling $7.1 million, which has been recorded as costs of products sold.  The remaining $6.8 million of charges include $5.0 million for employee severance and related costs and $1.8 million of other exit costs, primarily equipment relocation, all of which have been recorded as other costs (income), net.  With the flexible packaging restructuring efforts essentially completed, we expect to achieve annual savings, primarily in cash, of about $16 million beginning in 2004.  This savings is expected to be substantially offset by unrelated increases in employee pension and other benefit costs in 2004.

 

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, battery, construction and medical industries.  This business segment was adversely affected by the general weakness in the economy, and the roll label industry in particular has been plagued with excess capacity since 2000.

 

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

 

Our pressure sensitive materials business segment reported net sales of $534.1 million in 2003, an increase of 7.0 percent compared to the prior year.  Net sales were $498.9 million and $491.2 million in 2002 and 2001, respectively.  The increase in net sales during 2003 is primarily related to translation of results of our European pressure sensitive materials operations due to the strengthening of the Euro currency during the year.  Our European operations represent about 41 percent of our total segment net sales.  Improvements in unit sales volume for roll label materials were substantially offset by unit sales volume declines in graphic products.  The combination of results attributed to changes in price and mix delivered a total of one percent improvement to net sales in 2003.  During 2002, increased unit sales volume for roll label products provided modest net sales growth in this segment compared to 2001.

 

Operating profit decreased to $16.3 million or 3.1 percent of net sales in 2003 from $27.3 million or 5.5 percent of net sales in 2002.  Operating profit increased in 2002 from $12.1 million or 2.5 percent of net sales in 2001.  Roll label markets remained very competitive throughout 2003, as reduced selling prices offset much of the benefits of improving production volume during the year.  During 2003, we recorded restructuring and related charges of $2.7 million and announced the closure of two pressure sensitive materials facilities in order to improve capacity utilization in early 2004.  New high performance adhesive products and ongoing Six Sigma production and service improvements are also expected to positively impact operating profit levels in 2004.  Improving economic conditions would increase demand for pressure sensitive materials products and benefit operating profit through increased sales in this segment.

 

In October of 2003, we announced the restructuring of our roll label capacity.  By the end of the second quarter of 2004, we expect to have closed two facilities to reduce fixed costs and improve capacity utilization.  Restructuring and related charges of $2.7 million were recorded primarily as other costs (income), net, in 2003, of which $2.3 million was related to severance and related charges.  The remaining $0.4 million reflects the accelerated depreciation of assets and other related costs and was recorded as an element of cost of products sold.  We expect to record approximately $1.7 million of additional charges during the first half of 2004 upon completion of

 

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these efforts.  Estimated savings resulting from reduced fixed costs and improved capacity utilization are expected to be about $10 million annually, beginning in the second half of 2004.  Increased employee benefit and pension costs are expected to offset a portion of these savings.

 

Consolidated Gross Margin

Gross margins decreased to 20.2% in 2003 from 22.3% in 2002 and 20.8% in 2001.  Lower margins in 2003 reflect the impact of unusually volatile raw material prices for flexible packaging products, coupled with pricing pressure in markets for certain commodity-like products.  We have reduced our exposure to these markets through restructuring efforts and are introducing unique materials into markets where value can be added.  Restructuring charges primarily related to accelerated depreciation reduced gross margins by $7.6 million in 2003.  We also continue to implement Six Sigma efforts focused on specific areas of concern to reduce waste and manufacturing costs.

 

Consolidated Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of net sales for 2003 remained level with 2002 at 9.7 percent and increased from the 2001 level of 9.0 percent.  Expenses totaled $256.7 million in 2003, $229.3 million in 2002, and $207.2 million in 2001.  These amounts include $0.2 million in 2003 for restructuring related costs and legal fees of $3.2 million for 2003 and $1.8 million for 2002, primarily related to the effort to sell the pressure sensitive materials business.  We expect selling, general and administrative expenses in 2004 to be about 9.5 percent of net sales.

 

Research and Development

Research and development expenses increased to $21.5 million in 2003, compared to $17.4 million in 2002 and $10.3 million in 2001.  Increased research and development spending in 2003 reflects increased product development activities that incorporate newly acquired film technologies, as well as new applications for flexible packaging products.  Research and development efforts associated with new pressure sensitive materials products also impacted costs in 2003.  Rather than managing our research and development effort as a separate business unit, we make it an integral part of our daily plant operations.  This results in lower overhead expense and limits capital requirements. Our research and development engineers work directly on commercial production equipment, bringing new products to market without the use of pilot equipment. We believe this approach significantly improves the efficiency, effectiveness, and relevance of our research and development activities and results in earlier commercialization of new products.  Expenditures that are not distinctly identifiable as research and development costs are included in cost of products sold.

 

Interest Expense

During 2003, strong cash flow from operations was used to reduce commercial paper outstanding.  In addition, interest rates continued to decline to historically low levels.  With substantially all of our outstanding debt subject to variable rates and lower debt levels during 2003, interest expense decreased to $12.6 million compared to $15.4 million in 2002 and $30.3 million in 2001.

 

Other Costs (Income), Net

We reported net other costs of $2.7 million in 2003, compared to net other income of $1.2 million in 2002 and net other costs of $1.9 million in 2001.  In 2003, this item included $8.9 million of restructuring charges related specifically to employee severance and related charges associated with the closure of manufacturing facilities.  Results of our Brazilian joint venture, which is accounted for using the equity method of accounting, are also reflected in other costs and income.  The joint venture delivered $3.2 million of income during 2003, compared to nearly breakeven in 2002 and a $3.7 million loss in 2001.  The joint venture has benefited from improved production efficiencies and cost control efforts over the last few years.  Cash balances held in foreign bank accounts increased during 2003 and provided additional interest income compared to the prior year.

 

Income Taxes

Our effective tax rate was 38.5 percent in 2003, 38.0 percent in 2002 and 38.3 percent in 2001.  The difference between our overall tax rate and the U.S. statutory tax rate of 35 percent in each of those three years principally relates to state and local income taxes net of federal income tax benefits.

 

Capital Expenditures

Capital expenditures increased to $106.5 million in 2003, compared to $91.0 million in 2002 and $117.5 million in 2001.  The 2001 acquisition of Duralam, Inc. delivered additional capacity to the flexible packaging business segment, effectively reducing the need for capital expenditures in 2002.  One of the more significant projects in 2002 and 2003 has been the construction of the new film plant for the medical device packaging market that began operations in the summer of 2003.  Capital expenditures for 2004 are expected to range from $130 to $135 million, nearly equivalent to our expected total annual depreciation and amortization charge for 2004.  Planned expenditures for 2004 include additional capacity for our European operations to meet strong demand for our shrink bag products and to provide a platform to introduce new proprietary film products.

 

Capital Structure, Liquidity and Cash Flow

Debt to total capitalization

At December 31, 2003, our debt to total capitalization ratio, which we define as total debt divided by total capital (total debt, deferred tax liabilities, and stockholders’ equity), was 31.4 percent, compared to 40.5 percent and 37.3 percent at December 31, 2002 and 2001, respectively.  The decrease in 2003 from previous year’s levels reflects debt payments totaling $124.4 million in 2003 and increased stockholders’ equity.  Higher debt levels in 2002 reflect the impact of two acquisitions financed primarily with commercial paper.

 

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Credit rating

Our capital structure and financial practices have earned Bemis Company long-term credit ratings of “A” from Standard and Poor’s and “A2” from Moody’s Investors Service, and a credit rating of “A-1” and “P-1” for our commercial paper program from Standard and Poor’s and Moody’s Investors Service, respectively.  Our strong financial position and credit ratings are important to our ability to issue commercial paper at favorable rates of interest.

 

Liquidity

At year-end, our debt outstanding included $194 million of commercial paper and $350 million of long-term unsecured notes.  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 existing back-up credit facilities.  These credit facilities are made up of a $334 million, multiyear credit agreement expiring in 2006, and a $215 million, 364-day credit agreement that was renewed on January 9, 2004.  Each is supported by a group of major U.S. and international banks.  Covenants imposed by these bank credit facilities 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 these credit facilities, 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 longer available to us, we would expect to meet our financial liquidity needs by accessing the bank market, which would increase our borrowing cost.

 

Commercial paper outstanding at December 31, 2003, 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 backup credit agreement expires in 2006.

 

Interest rate swaps

Our long-term unsecured notes include $100 million due in July 2005 and $250 million due in August 2008.  In September 2001, we entered into interest rate swap agreements with three 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 2005 and 2008, reduced the interest cost of the $350 million of long-term debt from about 6.6 percent to about 2.2 percent in 2003.  Since these variable rates are based upon six-month London Interbank Offered Rates (LIBOR) 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.  For each one percent increase in variable interest rates, the annual interest expense on $559.5 million of total debt outstanding would increase by $5.6 million.

 

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 $22.6 million at December 31, 2003, and an asset of $31.8 million at December 31, 2002.  For each period, an offsetting increase or decrease 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 due on the notes, nor do they impact the income statement or related cash flows.  Credit loss from counterparty nonperformance is not anticipated.

 

Share repurchases

We did not make any share repurchases during 2003 or 2002.  We purchased 30,000 shares (pre-split) for $1.2 million during 2001.  As of December 31, 2003, management is authorized by our Board of Directors to purchase up to 4.7 million shares of additional stock for the treasury.

 

Pension contribution

A voluntary, tax deductible contribution of $40 million was made to our U.S. defined benefit pension plans in August 2003 which improved the funded status of our two largest defined benefit plans.  No contributions were made to the Bemis Company U.S. defined benefit pension plans during 2002 or 2001.  We do not expect a contribution to those plans to be required during 2004.  Contributions to our non-U.S. defined benefit pension plans are not significant.

 

Cash flow

Cash provided by operating activities was $311.1 million in 2003, which reflects the payment of a $40 million pension contribution and $5.9 million for restructuring and related charges during 2003.  This is compared to cash flow from operations of $286.7 million in 2002 and $317.9 million in 2001.  Cash flow during 2001 benefited from reduced working capital levels that provided cash of $43.1 million.

 

We expect cash generated by operating activities during 2004 to be more than adequate to fund all of our cash requirements that are reasonably foreseeable for 2004.

 

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, 2003.

 

					Contractual Payments Due by Period
(in millions)		Total			Less than 1 year			1 to 3 years			3 to 5 years			More than 5 years
Debt payments (1)		$	561.9		$	1.1		$	295.1		$	250.2		$	15.5
Capital leases (2)		0.7			0.3			0.3			0.1			0.0
Operating leases (3)		24.0			6.8			7.1			4.6			5.5
Purchase Obligations (4)		95.9			87.3			8.6

 

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(1)               These amounts are included in our Consolidated Balance Sheets.  A portion of this debt is commercial paper backed by a bank credit facility that expires on August 8, 2006.  See Note 11 of the Notes to the Consolidated Financial Statements for additional information about our debt and related matters.

(2)               The present value of these obligations, excluding interest, is included on our Consolidated Balance Sheets.  See Note 10 of the Notes to the Consolidated Financial Statements for additional information about our capital lease obligations.

(3)               We enter into operating leases in the normal course of business.  Substantially all lease agreements have fixed payment terms based on the passage of time.  Some lease agreements provide us with the option to renew the lease or purchase the leased property.  Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease agreements.  Our operating lease obligations are described in Note 10 of our Consolidated Financial Statements.

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

 

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 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 $559.5 million of total debt outstanding would increase by $5.6 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, principally for transactions in non-Euro zone countries.  At December 31, 2003 and 2002, we had outstanding forward exchange contracts with notional amounts aggregating $5.2 million and $5.0 million, respectively.  Forward exchange contracts generally have maturities of less than nine months and relate primarily to major Western European currencies.  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 $15,600 net settlement expense (fair value) related to active forward foreign currency exchange contracts is recorded on the balance sheet within current liabilities and as an element of other costs (income), net, which offsets the related transaction 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 2003 net sales was an increase of $68.9 million or 2.9 percent from 2002.  Operating profit improved by approximately $6 million as a result of the positive effect of foreign currency translation during 2003.

 

Dividends

We increased our quarterly cash dividend by 7.7 percent during the first quarter of 2003 to 14 cents per share from 13 cents per share.  This followed increases of 4.0 percent and 4.2 percent in 2002 and 2001, respectively.

 

In January 2004, the Board of Directors approved the 21^st consecutive annual increase in the quarterly cash dividend on common stock to 16 cents per share, a 14.3 percent increase.

 

Long-term Compensation

Our practice of awarding long-term compensation has relied primarily on restricted stock programs that are valued at the time of the award and expensed over the vesting period.  Pursuant to SFAS No. 123, “Accounting for Stock Options,” we disclose the impact on net income and earnings per share of stock options outstanding, as if compensation expense were measured using a fair value method, in the footnotes accompanying our financial statements.  If we followed a fair value based method of recognizing expense for stock options, diluted earnings per share would have been reduced by two cents for the year ended 2003, and one cent for each of the years ended 2002 and 2001.

 

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.

 

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

 

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•                  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 SFAS No. 87, “Employers’ Accounting for Pensions,” which requires that amounts recognized in financial statements be determined on an actuarial basis.  A substantial portion of our pension amounts relate to our defined benefit plans in the United States.  As permitted by SFAS No. 87, we use a calculated value of plan assets (which is further described below).  SFAS No. 87 requires that the effects of the performance of the pension plan’s assets and changes in pension liability discount rates on our computation of pension income or expense be amortized over future periods.

 

Pension expense recorded in 2003 was $9.6 million, compared to pension income of $3.2 million in 2002 and pension income of $10.5 million in 2001.  We expect 2004 pension expense to be approximately $25 million.

 

One element used in determining annual pension income and expense in accordance with SFAS No. 87 is the expected return on plan assets.  As of January 1, 2004, for our U.S. defined benefit pension plans, we have assumed that the expected long-term rate of return on plan assets will be 9.0 percent.  This represents a decrease from the 9.5 percent level assumed for 2003 and 10.0 percent level assumed for 2002.

 

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 10.1 percent, 10.7 percent and 11.4 percent, respectively, each in excess of our assumed rates.

 

In future years, we expect that returns will be lower than the historical returns discussed above due to a generally lower inflation and interest rate environment.  Considering this, we selected a 9.0 percent long-term rate of return on assets assumption as of January 1, 2004.  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, 2003, for our U.S. defined benefit pension plans we determined this rate to be 6.25 percent, a decrease of one half of one percent from the rate used at December 31, 2002.

 

Pension assumptions sensitivity analysis

Based upon current assumptions of 6.25 percent for the discount rate and 9.0 percent for the expected rate of return on pension plan assets, we expect pension expense before the effect of income taxes for 2004 to be approximately $25 million.  The following charts depict the sensitivity of estimated 2004 pension expense to incremental changes in the discount rate and the expected long-term rate of return on assets.

 

(dollars in millions)		Total increase (decrease) to pension expense from current assumptions
Discount rate
5.75 percent		$	3.5
6.00 percent		$	1.7
6.25 percent		$	0.0
6.50 percent		$	(1.7	)
6.75 percent		$	(3.4	)
Rate of Return on Assets
8.00 percent		$	3.4
8.50 percent		$	1.7
9.00 percent		$	0.0
9.50 percent		$	(1.7	)
10.00 percent		$	(3.4	)

 

At December 31, 2002, the actuarially measured value of the accumulated benefit obligations under the plans exceeded the fair value of the pension plan assets resulting in a minimum pension liability charge to equity (accumulated other comprehensive income, net of taxes) of approximately $48 million.  At December 31, 2003, the fair value of the pension plan assets of the largest of the defined benefit pension plans exceeded the actuarially measured value of the accumulated benefit obligations, resulting in the reversal of a portion of the charge from the previous year. As of December 31, 2003, the minimum pension liability included in equity was reduced by

 

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$26.1 million. The following chart depicts the sensitivity of the minimum pension liability adjustment to equity to changes in the assumed discount rate.

 

(dollars in millions)		Total increase (decrease) in minimum pension liability net of taxes, from current assumptions
Discount rate
5.75 percent		$	37.2
6.00 percent (1)		$	30.1
6.25 percent		$	0.0
6.50 percent		$	(2.4	)
6.75 percent		$	(4.6	)

 

(1)          The $40 million contribution to the defined benefit pension plans during 2003 increased the prepaid asset on the balance sheet.  The portion of that asset related to defined benefit plans that are underfunded is effectively reversed and recorded as a debit to equity at year end in order to record the minimum liability for the plans.  It should be noted that if the discount rate was reduced to 6.0 percent at December 31, 2003, the accumulated benefit obligation for the largest of the defined benefit pension plans would exceed the related plan assets and the related prepaid asset of about $30 million would be offset with a minimum pension liability adjustment and result in a corresponding charge to equity as shown in the table above.  A further decrease in discount rate to 5.75 percent would only result in an additional minimum liability adjustment, net of taxes, of $7.1 million.

 

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 $450.6 million as of December 31, 2003.

 

Intangible assets consist primarily of purchased technology, customer relationships, patents, trademarks, and trade names and are amortized using the straight-line method over their estimated useful lives, which range from one to 20 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

Effective December 31, 2003, the Company adopted certain disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 132R, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.”  This Statement requires additional disclosures to be made by employers regarding pensions and other postretirement benefit plans, but does not change the measurement or recognition of those plans.  Under this Statement, the disclosure provisions regarding foreign plans and estimated future benefit payments are effective for fiscal years ending after June 15, 2004.  All other provisions under this Statement are effective for fiscal years ending after December 15, 2003.  See Note 7 and Note 8 for disclosures required under this Statement.

 

On May 15, 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  This statement requires that three types of freestanding financial instruments be classified as liabilities; mandatorily redeemable shares; instruments that do or may require the issuer to buy back some of its shares in exchange for cash or assets; and obligations that can be settled with shares, the value of which is fixed, tied to a variable or varies inversely with the share price.  This Statement is effective for all financial instruments modified or entered into after May 31, 2003, and otherwise effective for interim periods beginning after December 15, 2003.  The Company will adopt the Statement as required during the first quarter of 2004, with no impact on the consolidated financial statements expected.

 

Effective February 1, 2003, the Company adopted FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities.”  This interpretation addresses the requirements for business enterprises to consolidate related entities in which they are determined to be the primary beneficiary as a result of their variable economic interests.  The interpretation is intended to provide guidance in judging multiple economic interests in an entity and in determining the primary beneficiary.  The interpretation outlines disclosure requirements for Variable Interest Entities in existence prior to January 31, 2003, and outlines consolidation requirements for Variable Interest Entities created after January 31, 2003.

 

The Company has reviewed its major commercial relationships and its overall economic interests with other companies consisting of related parties, contracted manufacturing vendors, companies in which it has an equity position, and other suppliers to determine the extent of its variable economic interest in these parties.  The review has resulted in a determination that the Company

 

14

 

would not be judged to be the primary economic beneficiary in any material relationships, or that any material entities would be judged to be Variable Interest Entities of the Company.  The Company believes it has appropriately reported the economic impact and its share of risks of its commercial relationships through its equity accounting.

 

In November 2002, the FASB issued FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”  This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued.  It also clarifies (for guarantees issued after January 1, 2003) that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligations undertaken in issuing the guarantee.  At December 31, 2002 and 2003, the Company does not have any significant guarantees or required disclosures under FASB Interpretation No. 45.

 

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  This standard reviews the accounting for certain exit costs and disposal activities currently set forth in Emerging Issues Task Force issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”  The principal change relates to the requirements necessary for recognition of a liability for a cost associated with an exit or disposal activity.  The new statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred versus the date of commitment to an exit plan.  This statement is effective for exit and disposal activities initiated after December 31, 2002.  The new standard principally impacts the ultimate timing of when charges are recorded as opposed to the amount of the ultimate charge.  The Company adopted SFAS No. 146 for all exit activities initiated in 2003.  See Note 6 for disclosures relating to these activities.

 

Effective January 1, 2003, the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.”  This statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost.  The adoption of SFAS No. 143 did not have a material impact on the Company’s financial position or results of operations.

 

Subsequent Events

Common Stock Split

On January 29, 2004, the Board of Directors declared a two-for-one split of the common stock effected in the form of a 100 percent stock dividend on outstanding stock distributed on March 1, 2004, to the shareholders of record on February 17, 2004.  The balance sheet and statement of stockholders’ equity reflect the stock split as if it occurred on December 31, 2003.  All common share and per share data included in the financial statements and footnotes have been restated to reflect the stock split.  The par value of the additional shares of common stock issued in connection with the stock split was credited to common stock and a like amount charged to capital in excess of par.

 

Increase in ownership of Itap Bemis Ltda.

Effective January 1, 2004, we contributed our 90 percent ownership interest in Curwood Itap Ltda., our shrink film business in Brazil, to our Brazilian flexible packaging joint venture, Itap Bemis Ltda.  In exchange for this contribution, our ownership interest in Itap Bemis Ltda. increased from 33 percent to 45 percent.  The joint venture will continue to be accounted for on the equity method and equity earnings will be included as a component of other costs (income), net.

 

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), 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; 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; 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; 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 the Securities and Exchange Commission, including without limitation, our 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.

 

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ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The information required is included in Note 15 to the Consolidated Financial Statements included in Item 8 of this Form 10-K Annual Report, 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 Form 10-K Annual Report.

 

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 the Annual Report is consistent with that in the financial statements.

 

Management is also responsible for maintaining a system of internal accounting controls and procedures designed to provide reasonable assurance that the books and records reflect the transactions of the Company, and that assets are protected against loss from unauthorized use or disposition.  Such a system is maintained through written accounting policies and procedures, administered by trained Company personnel and updated on a continuing basis to ensure their adequacy to meet the changing requirements of our business.  The Company requires that all of its affairs, as reflected by the actions of its employees, will be conducted on a high ethical plane.

 

The Audit Committee of the Board of Directors, which is composed solely of outside directors, meets quarterly with management, the internal audit manager, and independent accountants to review the work of each and to satisfy itself that the respective parties are properly discharging their responsibilities.  Both PricewaterhouseCoopers LLP and the internal audit manager 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	Vice President, Chief Financial	Vice President and
Chief Executive Officer	Officer and Treasurer	Controller

 

 

Report of Independent Auditors

To the Stockholders and the Board of Directors of Bemis Company, Inc.:

 

In our opinion, the consolidated balance sheets and the related consolidated statements of income, of stockholders’ equity, and of cash flows present fairly, in all material respects, the consolidated financial position of Bemis Company, Inc., and its subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of Bemis Company, Inc.’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 auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit 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 1 to the consolidated financial statements, in 2002 the Company adopted the provisions of Statement of Financial Accounting Standard (SFAS) No. 142, “Goodwill and Other Intangible Assets.”  Under SFAS No. 142, goodwill and indefinite-lived intangible assets are no longer amortized, but are reviewed at least annually for impairment.

 

 

PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 21, 2004, except for Note 2, as to which the date is January 29, 2004

 

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BEMIS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

(in thousands, except per share amounts)

 

		Years Ended December 31,
		2003			2002			2001
Net sales		$	2,635,018		$	2,369,038		$	2,293,104
Costs and expenses:
Cost of products sold		2,101,537			1,840,115			1,815,442
Selling, general, and administrative expenses		256,689			229,325			207,158
Research and development		21,454			17,446			10,313
Interest expense		12,564			15,445			30,343
Other costs (income), net		2,659			(1,206		)	1,869
Minority interest in net income		870			898			554
Income before income taxes		239,245			267,015			227,425
Provision for income taxes		92,100			101,500			87,100
Net income		$	147,145		$	165,515		$	140,325
Basic earnings per share of common stock		$	1.39		$	1.56		$	1.33
Diluted earnings per share of common stock		$	1.37		$	1.54		$	1.32

 

See accompanying notes to consolidated financial statements.

 

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BEMIS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(dollars in thousands, except per share amounts)

 

		December 31,
		2003			2002
ASSETS
Current assets:
Cash		$	76,476		$	56,401
Accounts receivable, less $14,949 and $13,689 for doubtful accounts and allowances		333,743			321,790
Inventories		305,182			308,344
Prepaid expenses		36,505			35,120
Total current assets		751,906			721,655
Property and equipment:
Land and land improvements		25,213			22,520
Buildings and leasehold improvements		334,218			306,466
Machinery and equipment		1,255,877			1,190,516
Total property and equipment		1,615,308			1,519,502
Less accumulated depreciation		(700,033		)	(609,549		)
Net property and equipment		915,275			909,953
Other long-term assets:
Goodwill		450,593			448,009
Other intangible assets		71,149			76,176
Deferred charges and other assets		104,009			100,857
Total other long-term assets		625,751			625,042
TOTAL ASSETS		$	2,292,932		$	2,256,650
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	1,113		$	3,516
Short-term borrowings		5,402			1,714
Accounts payable		222,774			230,468
Accrued liabilities:
Salaries and wages		69,499			71,610
Income taxes		7,504			8,248
Other