Management's Discussion and Analysis



Three Years Ended December 31, 2008


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



Three-year review of results

(dollars in millions)                  2008                   2007                   2006
Net sales                       $ 3,779.4     100.0 %  $ 3,649.3     100.0 %  $ 3,639.4     100.0 %
Cost of products sold             3,131.4      82.9      2,973.3      81.5      2,942.7      80.9
Gross margin                        648.0      17.1        676.0      18.5        696.7      19.1
Selling, general, and
administrative expenses             342.7       9.1        341.6       9.4        336.4       9.2
All other expenses                   42.8       1.1         48.5       1.3         74.5       2.0
Income before income taxes          262.5       6.9        285.9       7.8        285.8       7.9
Provision for income taxes           96.3       2.5        104.3       2.9        109.5       3.1
Net income                      $   166.2       4.4 %  $   181.6       5.0 %  $   176.3       4.8 %
Effective income tax rate                      36.7 %                 36.5 %                 38.3 %

Overview

Bemis Company, Inc. is a leading global manufacturer of flexible packaging and pressure sensitive materials supplying a variety of markets. Generally about 60 percent of our total company net sales are to customers in the food industry. Sales of our flexible packaging products are widely diversified among food categories and can be found in nearly every aisle of the grocery store. Other markets into which we sell our flexible packaging products include medical devices, personal care, and lawn and garden. Our emphasis on supplying packaging to the food industry has historically provided a more stable market environment for our flexible packaging business segment, which accounts for about 83 percent of our net sales. The remaining 17 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.

The markets into which our products are sold are highly competitive. Our leading flexible packaging market positions in North and South America reflect our focus on expanding our offering of value-added, proprietary products. We also manufacture products that are less unique but for which our technical know-how and economies of scale offer us a competitive advantage. The primary raw materials for our business segments are polymer resins, films, paper, ink, and adhesives.

Market Conditions

During 2008, economic conditions continued to weaken and global financial markets experienced a significant liquidity crisis. Governments around the world have responded to the financial crisis with funding support for their regional financial systems. Consumer spending declined and unemployment in the United States increased. The housing and automotive markets continue to be weak. Commodity prices hit historically high levels during the second and third quarters of 2008, resulting in increased raw material and energy costs for manufacturers. Some of the commodity grade raw material costs steadily decreased throughout the fourth quarter as the global financial crisis widened. Our raw material costs hit historic highs during the year, but by the end of the year certain material costs had declined to early 2007 levels. While lower raw material costs benefit operating profit on a short-term basis, our selling prices will decrease to reflect these lower costs over a few months.

Restructuring and Related Charges

In January 2006, we announced the planned closure of five flexible packaging facilities and one pressure sensitive materials facility in order to consolidate production capacity and improve overall cost structure and efficiency. These efforts were substantially complete as of December 31, 2006. Total remaining costs incurred in 2007 were substantially offset by restructuring related gains. Restructuring and related charges incurred in 2006 totaled $31.2 million, of which $12.9 million primarily reflected accelerated depreciation and was recorded as a component of cost of products sold. The remaining $18.3 million primarily reflected employee-related costs and was recorded as a component of other costs (income).

Acquisitions


In April 2006, we acquired the remaining shares of our three majority-owned
joint ventures in Mexico for $6.8 million.



Results of Operations
Consolidated Overview

(in millions, except per share amounts)     2008        2007        2006
Net sales                                 $ 3,779.4   $ 3,649.3   $ 3,639.4
Net income                                    166.2       181.6       176.3
Diluted earnings per share                     1.65        1.74        1.65

2008 versus 2007

For the year ended December 31, 2008, net sales increased 3.6 percent, reflecting increased raw material costs incorporated into higher selling prices during the year. Unit volume sold into certain food packaging markets increased compared to 2007, while unit volumes declined in advertising, display film, and construction-related markets that are more sensitive to economic conditions. Currency translation benefits increased net sales by 1.7 percent.

Diluted earnings per share were $1.65 for 2008, a 5.2 percent decrease compared to $1.74 per share for 2007. In 2007, diluted earnings per share included $0.02 per share tax benefit related to dividends from foreign subsidiaries. Higher raw material costs in 2008 negatively impacted gross margins.

2007 versus 2006

For the year ended December 31, 2007, net sales increased 0.3 percent, reflecting a net sales benefit from currency translation of 3.4 percent, offset by a 3.1 percent decrease in net sales related to lower unit sales volume.

Diluted earnings per share were $1.74 for 2007, including a $0.02 per share tax benefit related to dividends from foreign subsidiaries. In 2006, diluted earnings per share were $1.65 for 2006, including $0.18 per share of restructuring and related charges.

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. 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. Selling price changes lag behind changes in our raw material costs. During 2008, resin costs dramatically increased during the second and third quarters. Certain commodity resin costs subsequently decreased during the fourth quarter. The magnitude and frequency of these cost changes negatively impacted operating profit during 2008.

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.

(dollars in millions)                                 2008          2007          2006
Net sales                                          $  3,153.2    $  3,001.8    $  3,000.1
Operating profit (See Note 12 to the
Consolidated Financial Statements)                      315.9         346.6         335.1
Operating profit as a percentage of net sales            10.0 %        11.5 %        11.2 %

2008 versus 2007

Net sales in our flexible packaging business segment increased 5.0 percent in 2008, principally reflecting the impact of higher selling prices. Currency effects accounted for sales growth of 1.4 percent during 2008. Increases in net sales of packaging for meat and cheese, dairy and liquids, bakery products, and medical products markets reflected higher unit volume. These markets represent approximately 48 percent of total flexible packaging net sales. Net sales also increased in packaging for dry foods, health and hygiene, and industrial product markets, driven primarily by higher selling prices. These markets represent approximately 22 percent of flexible packaging net sales. We experienced lower net sales in the remaining 30 percent of our flexible packaging market categories as a result of lower unit volume. These lower volume markets include confectionery and snack markets, pet products, overwrap film for bottled water, frozen foods, lawn and garden, and protective display films. Non-discretionary food markets have historically provided defensive characteristics during times of economic weakness. Markets for protective display films and packaging for discretionary food and consumer products have been negatively impacted during the recent economic downturn. We expect these trends to continue until the economy begins to strengthen and consumer confidence improves.

Operating profit as a percentage of net sales decreased to 10.0 percent in 2008 from 11.5 percent in 2007. Restructuring and related activities increased 2007 operating income by $1.5 million. Raw material prices increased substantially during the first eight months of 2008, and many specialty materials used in our food packaging products maintained those prices through the end of the year. Our method of passing these input costs on to customers through increased selling prices normally occurs with a several month lag and pressures operating profit margins during that period.

2007 versus 2006

Net sales in our flexible packaging business segment were virtually unchanged from 2006 to 2007. A benefit from currency translation of 3.1 percent was completely offset by weak demand across many of our packaging markets. Net sales of packaging for meat and cheese, which represent about 30 percent of our flexible packaging net sales, decreased about 3 percent excluding the impact of currency. Packaging for bakery products and dry foods, for which consumer demand has been impacted by increased wheat prices, experienced a drop in net sales of about 10 percent from 2006 levels. Packaging for pet products and industrial products also decreased over 9 percent in 2007. Packaging for bakery, dry foods, pet products, and industrial products represents about 17 percent of flexible packaging net sales. Growth in other flexible packaging markets representing a combined 17 percent of total flexible packaging net sales substantially offset the impact of these decreases. Packaging for dairy and liquid products and overwrap for bottled beverages each increased by about 11 percent. Net sales of medical device packaging increased almost 6 percent compared to 2006, despite a slowdown related to a period of manufacturing shutdown during 2007 in order to move equipment to a new facility in Northern Ireland.

Operating profit as a percentage of net sales increased to 11.5 percent in 2007 from 11.2 percent in 2006. Restructuring and related activities resulted in $1.5 million of operating income in 2007 and a $29.0 million reduction in operating profit in 2006. During 2007, operating profit was negatively impacted by the lower unit sales volume noted in the previous paragraph and a steady increase in raw material costs.

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 and competitive pressures 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 for this 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.

(dollars in millions)                                 2008          2007          2006
Net sales                                          $    626.2    $    647.5    $    639.3
Operating profit (See Note 12 to the
Consolidated Financial Statements)                       34.3          40.3          50.1
Operating profit as a percentage of net sales             5.5 %         6.2 %         7.8 %

2008 versus 2007

Our pressure sensitive materials business segment reported a net sales decrease of 3.3 percent in 2008, reflecting a benefit from currency translation of 2.8 percent which was more than offset by lower unit sales. Unit volumes declined in each of our pressure sensitive product lines, partially offset by increased label products prices and improved sales mix for technical products. Our label and graphic product lines represent 88 percent of our 2008 pressure sensitive materials net sales. Demand for these products in the discretionary consumer and advertising markets declined during the recent global economic downturn.

Operating profit as a percent of net sales was lower in 2008 compared to 2007, reflecting decreased unit sales volumes across all product lines. Due to the nature of the markets served by this business segment, we expect operating profit as a percent of net sales to continue to decline until global economic conditions improve.

2007 versus 2006

Our pressure sensitive materials business segment reported a net sales increase of 1.3 percent in 2007, reflecting a benefit from currency translation of 4.5 percent, substantially offset by lower unit sales for label and technical products. Increased industry capacity for label products dampened unit sales volume and pricing during 2007, resulting in a 4 percent decrease in net sales of label products, excluding the impact of currency. Technical product net sales decreased by over 8 percent as customers faced economic challenges associated with the housing and medical markets. Graphic product net sales increased by about 5 percent during 2007.

Operating profit as a percent of net sales was lower in 2007 compared to 2006, reflecting decreased sales of value-added technical products and a lower margin sales mix in our graphic product sales.

Consolidated Gross Margin

(dollars in millions)                        2008      2007      2006
Gross margin                                $ 648.0   $ 676.0   $ 696.7
Gross margin as a percentage of net sales      17.1 %    18.5 %    19.1 %

Restructuring and related charges reduced gross margins by $0.3 million in 2007 and $12.9 million in 2006. There were no restructuring charges during 2008. The time lag between increases in raw material costs and the implementation of related selling price increases negatively impacted gross margins as a percent of net sales in each of the years presented. In addition, lower production volume associated with weak consumer demand for products in our markets reduced fixed cost absorption during 2007 and 2008. The impact of these cost pressures was partially offset by ongoing initiatives to improve production efficiency and cost management during the same timeframe.

Consolidated Selling, General and Administrative Expenses

(dollars in millions)                                  2008      2007      2006
Selling, general and administrative expenses (SG&A)   $ 342.7   $ 341.6   $ 336.4
SG&A as a percentage of net sales                         9.1 %     9.4 %     9.2 %

Selling, general and administrative expenses have remained relatively stable over the past few years, reflecting management's focus on cost management. The decline in the ratio of these expenses to net sales was driven by higher selling prices included in net sales over these time periods.

Other Expenses



(dollars in millions)               2008     2007     2006
Research and development (R&D)     $ 25.0   $ 26.0   $ 25.0
R&D as a percentage of net sales      0.7 %    0.7 %    0.7 %
Interest expense                   $ 39.4   $ 50.3   $ 49.3
Other costs (income), net           (27.6 )  (31.5 )   (3.3 )
Minority interest in net income       6.0      3.7      3.5
Income taxes                         96.3    104.3    109.5
Effective tax rate                   36.7 %   36.5 %   38.3 %

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 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 costs of products sold.

Interest Expense

Interest expense decreased by $10.9 million during 2008, reflecting lower levels of debt outstanding and lower average interest rates. The percentage of variable rate debt included in total debt is 55 percent in 2008, 64 percent in 2007, and 59 percent in 2006. The effective interest rate was 4.8 percent in 2008, 5.9 percent in 2007, and 5.9 percent in 2006.

Other Costs (Income), Net

In 2008, other costs (income) included $33.5 million of financial income, about 40 percent of which relates to interest income on cash held at non-U.S. locations. The use of cash on hand for debt reduction during the fourth quarter of 2008 is expected to result in lower interest income during 2009. The remainder of the financial income is generated from fiscal incentives for certain flexible packaging locations and is considered as a part of flexible packaging operating profit. These fiscal incentives are associated with net sales in South America and are expected to continue to grow at a modest pace over the next few years in conjunction with sales growth in that region. Transaction losses on foreign currency totaling $6.8 million offset financial income in 2008. Of this total, $6.1 million of transaction losses were recorded during the fourth quarter as dramatic changes in currency exchange rates occurred as a result of the global financial crisis.

In 2007, other costs (income) included $28.3 million of financial income, about half of which related to interest income on cash held at non-U.S. locations. 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.

Minority Interest in Net Income

Minority interest in net income is primarily associated with the accounting for the outstanding preferred shares of Dixie Toga, our Brazilian flexible packaging subsidiary.

Income Taxes

The difference between our overall tax rate of 36.7 percent in 2008, 36.5 percent in 2007, and 38.3 percent in 2006 and the U.S. statutory 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. The lower effective tax rates in 2008 and 2007 as compared to 2006 reflect benefits related to dividends from a foreign subsidiary, the increasing impact of U.S. tax incentives for manufacturing companies, and a change in the geographic mix of pretax income.

Liquidity and Capital Resources

Sources of Liquidity

In the second half of 2008, global financial markets experienced a liquidity crisis. This crisis resulted in a substantial reduction in available funding for commercial banks and corporate debt issuers. Governments around the world have responded with funding support for their regional financial systems. Despite this government intervention, capital market financing has become less available and more expensive. We use commercial paper to finance our daily operations. Our strong balance sheet and short-term A-1/P-2 credit ratings have preserved our ability to access the commercial paper market at a reasonable cost. If the commercial paper market becomes unavailable to us, we would expect to use our revolving bank credit facilities to finance our operations until the commercial paper market is restored or alternative financing can be arranged.

Debt to Total Capitalization

Debt to total capitalization (which includes total debt, long-term deferred tax liabilities and equity) was 32.0 percent at December 31, 2008, compared to 32.9 percent at December 31, 2007 and 33.0 percent at December 31, 2006. Improvement in this ratio was driven by debt repayments, partially offset by reductions to stockholders' equity for pension and currency translation effects. Total debt was $686.6 million, $843.3 million, and $789.8 million at year-end 2008, 2007 and 2006, respectively.

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. These credit ratings are important to our ability to issue commercial paper at favorable rates of interest.

Net Cash Flow from Operations

Net cash provided by operations was $293.6 million for the year ended December 31, 2008, compared to $406.2 million in 2007 and $349.0 million in 2006. During 2008, cash flow was negatively impacted by lower operating profit and higher levels of working capital compared to 2007. Working capital increases during 2008 reflect the impact of higher raw material costs on inventory and increased selling prices on accounts receivable. Net cash provided by operations in the year ended December 31, 2006, was reduced by voluntary pension contributions to our U.S. pension plans of $24.0 million. Contributions of $2.3 million and $1.1 million were made to our U.S. pension plans in 2008 and 2007, respectively. We expect to contribute approximately $30 million to our U.S. pension plans in 2009. We expect to fund this contribution with cash provided by operations.

Available Financing

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 $330.8 million. Based upon our current credit rating, we enjoy ready access to the commercial paper markets. During the fourth quarter of 2008, the global financial crisis threatened to eliminate liquidity in the commercial paper market. 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. Under the terms of our revolving credit agreements, we have the capacity to borrow up to $625 million, of which $425 million matures April 28, 2013, and $200 million matures April 28, 2009. These facilities are primarily used to support our issuance of commercial paper. Our revolving credit facilities are supported by a group of major U.S. and international banks. Covenants imposed by these revolving credit facilities include limits on the sale of businesses, minimum net worth calculations, and a maximum ratio of debt to total capitalization. The revolving credit agreements include a combined $100 million multicurrency limit to support the financing needs of our international subsidiaries. In addition, we have arrangements in place to issue up to $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. As of December 31, 2008, the ECN market was unavailable due to unfavorable market conditions. If these revolving 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 costs. Borrowings under the credit agreement are subject to a variable interest rate.

Commercial paper outstanding at December 31, 2008, 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 on April 28, 2013.

On August 15, 2008, notes totaling $250 million matured and were repaid using proceeds from the issuance of commercial paper. On December 31, 2008, our revolving credit facilities supported total commercial paper outstanding of $330.8 million, industrial revenue bond outstanding of $8.0 million, and multicurrency loans outstanding of $5.8 million. As a result, we had the capacity to borrow an additional $280.4 million under the credit facility as of December 31, 2008. Of this available liquidity, $200 million of revolving credit facilities mature on April 28, 2009. While cash flows from operations are expected to provide sufficient liquidity to meet our cash obligations projected for 2009, we will continue to evaluate the need to refinance this excess revolving credit capacity in light of existing capital market conditions and updated liquidity needs.

Liquidity Outlook

Management expects cash flow from operations and available liquidity described above to be sufficient to support operations going forward. Our liquidity has not been materially impacted by the current credit environment or the recent economic slowdown, and we do not expect that it will be materially impacted in the near future. There can be no assurance, however, that the cost or availability of future borrowings will not be impacted by ongoing capital market disruptions. In addition, substantial increases in raw material costs could increase our short term liquidity needs.

Uses of Liquidity

Capital Expenditures

Capital expenditures were $120.5 million during 2008, compared to $178.9 million in 2007, and $158.8 million in 2006. Capital expenditures during the years presented supported multiyear investments for new facilities and equipment for . . .