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