UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Six Months Ended June 30, 1999
Commission File Number 1-5277
BEMIS COMPANY, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-0178130
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 South 9th Street, Suite 2300
Minneapolis, Minnesota 55402-4099
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 376-3000
Indicate by check mark whether the registrant has: (1) filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been subject
to such filing requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
52,310,115 shares of Common Stock, $.10 par value on August 9, 1999
ITEM 1. FINANCIAL STATEMENTS
The financial statements, enclosed as Exhibit 19, are incorporated
by reference in this Form 10-Q. In the opinion of management, the financial
statements reflect all adjustments necessary to a fair statement of the
results for the six months ended June 30, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - SECOND QUARTER 1999
Net sales for the second quarter of 1999 were $481.3 million
compared to $470.6 million for the second quarter of 1998, an increase of 2.3
percent or $10.7 million. Net income was $31.6 million, or $0.60 per diluted
share, for the second quarter of 1999 compared to $27.6 million, or $0.51 per
diluted share, for the same quarter in 1998, an increase of 14.3 percent.
The 1998 earnings have been restated to reflect the Company's change
to the first-in, first-out (FIFO) inventory valuation method from the
last-in, first-out (LIFO) inventory valuation method. Management believes the
change from LIFO to FIFO inventory valuation method benefits the company by
providing the best matching of the applicable raw material cost of a unit of
product to the product's selling price and, therefore, presents a clearer
picture of operating results. The change also enables management to forecast
costs more accurately. The change to FIFO inventory accounting will result in
incremental tax payments of approximately $12 million expected to be spread
over the next four years. These taxes have been reflected in the restatement
of prior years and will, therefore, have no effect on income for 1999 and
future years. Restated financial statements have been filed with the United
States Securities and Exchange Commission on Form 8-K.
The Company's flexible packaging operations reported a 3.7 percent
increase in net sales and operating profit growth of 20.0 percent compared to
the second quarter of last year due to strong results in both high barrier
plastic products and polyethylene products. The pressure sensitive materials
operations reported a 1.7 percent decrease in net sales and 20.0 percent
lower profits compared with the year earlier quarter, as that business'
previously announced reorganization continues as well as the costs of adding
new focused manufacturing capacity both affected profitability.
Within flexible packaging, net sales of high barrier products
increased $18.8 million, or 10.2 percent, while net sales declined $3.3
million for polyethylene packaging products and $2.7 million for paper
products, or 2.8 percent and 6.0 percent, respectively. Net sales in the
pressure sensitive materials business declined $2.1 million or 1.7 percent.
The $0.5 million increase in research and development expense
occurred in the flexible packaging business segment. Income associated with
the Company's flexible packaging joint venture in Brazil account for nearly
all of the favorable second quarter 1999 change in other costs (income), net,
compared to the same 1998 period. This improvement is principally due to the
partial recovery of previously recorded currency exchange rate losses. The
minority interest decrease resulted from lower operating income in the
Company's pressure sensitive materials business segment. The effective tax
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rate for the second quarter of 1999 and 1998 was 38.4 percent and 38.8
percent, respectively.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1999
Net sales for the six-month period of 1999 were $931.9 million
compared to $922.1 million for the same period in 1998, an increase of 1.1
percent. Net income was $50.3 million for 1999 compared to $48.3 million for
the same six-month period in 1998, an increase of 4.1 percent. Excluding
non-comparable operating results of business acquisitions from the first half
of 1999 and 1998, net sales increased 0.3 percent while operating profit
increased 4.3 percent.
Flexible packaging net sales, adjusted for noncomparable business
activity, increased 0.8 percent while operating income increased 11.6
percent. The impact of multiple price increases for key raw materials,
experienced during the first half of 1999, has been tempered by increasing
inventory levels in advance of the announced increase. Additional increases,
expected during the balance of the year, could have a negative impact on
margins.
Pressure sensitive materials net sales declined 1.2 percent while
operating income declined 15.8 percent, as this segment's previously
announced reorganization and the costs of adding new focused manufacturing
capacity affected profitability. Sequential improvement is expected during
the second half of 1999.
Costs associated with the Company's flexible packaging joint venture
in Brazil account for nearly all of the six-month change in other costs
(income), net, compared to the same 1998 period. The effective tax rates for
the first half of 1999 and 1998 was 38.7 percent and 38.7 percent,
respectively.
EUROPEAN COMMON CURRENCY (EURO)
The European Economic and Monetary Union (EMU) and a new currency,
the "euro", began in Europe on January 1, 1999. This is a significant and
critical element in the European Union's (EU) plan to blend the economies of
the EU's member states into one integrated market, with unrestricted and
unencumbered trade and commerce across borders. Eleven of the fifteen member
EU countries are initially participating. Other member states may join in the
years to come.
On January 1, 1999, the European Central Bank (ECB) established
fixed conversion rates between the euro and existing currencies (legacy
currencies) of participating member countries of the EMU. The euro now trades
on currency exchanges and is available for noncash transactions on a "no
compulsion, no prohibition" basis. The euro will coexist with the legacy
currencies through January 1, 2002. During this transition period, currency
conversion rates no longer will be computed directly from one legacy currency
to another. Instead, a "triangulation" process must be applied with any
amount denominated in a legacy currency first converted into a euro amount
and then into the second legacy currency. Beginning on January 1, 2002, the
ECB will issue euro-denominated bills and coins for use in cash transactions.
On or before July 1, 2002, the participating countries will withdraw all
legacy bills and coins and use the euro as their legal currency.
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The principal impact on the Company will be experienced by its
operations whose functional currency is the existing currency (legacy
currency) of a participating member country of the EMU. The "triangulation"
process and the resulting single currency denomination (the euro) will impact
the information technology infrastructure, accounting record keeping
requirements, and cross-border purchasing and selling. The Company recognizes
that failure to timely resolve internal euro issues could result, in a worst
case, in the Company's European operations' inability to obtain raw materials
in a timely manner; reductions, delays, or cancellations of customer orders;
delays in payments by customers for products shipped; or a general inability
to record, track, and consummate business transactions. Any or all of these
events could have a material adverse effect on the Company's business,
financial condition, and results of operations.
The Company has selected and installed new computer software which
is euro-compliant (also Year 2000 compliant) and expects that the initial
positive experience during the first quarter of 1999 will continue as actual
utilization of the new software more fully tests its functionality over a
longer period of time. The cost of these efforts is expected to total $1.5
million of which approximately $1.0 million was incurred in 1998 and $0.3
million in 1999 for both expense and capital items. The overall effect on the
Company's international operations, principally its Pressure Sensitive
Materials business segment, is not expected to be material. In addition, the
increased "price and cost transparency" expected to result from a single
currency for a larger integrated market, is expected to lower material cost
and lower costs associated with currency transactions, however, selling
prices may be adversely affected. The experience during the first quarter of
1999 has not been out of the ordinary and the Company expects this transition
experience to continue.
YEAR 2000 ISSUE
In late-1992, the Company began to set direction for upgrading all
of its information technology (IT) systems with a focus on significant
enhancement of IT support at the division level. It was the Company's
intention to replace legacy IT systems with hardware and software that
reflected the current state of technology. Principal objectives of this major
effort were to significantly improve the quality and usefulness of
computerized information management systems, to improve employee and
manufacturing efficiencies, and to notably enhance the quality of service to
customers, suppliers, and employees. "Year 2000 compliant," was one of many
necessary attributes of any system considered. Computers and related
equipment, computer software, and other office and manufacturing equipment
utilizing microprocessors that use only two digits to identify a year in a
date field may be unable to accurately process certain date-based information
at or after the Year 2000. This is commonly referred to as the "Year 2000
issue."
The Company, like commerce in general, is highly dependent on
computerized systems or controls for the administrative recording of business
transactions, for the administrative control and actual manufacture of
products it sells, and for the efficient interaction between third parties
such as suppliers, customers, banks, and employees. The Company recognizes
that failure to timely resolve internal Year 2000 issues could result, in a
worst case, in the Company's inability to obtain raw materials in a timely
manner; reductions in the quality or quantity of materials obtained;
reductions, delays, or cancellations of customer orders; delays in payments
by customers for products shipped; or a general inability to record, track,
and consummate business transactions. Any or all of these events
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could have a material adverse effect on the Company's business, financial
condition, and results of operations.
The Company is addressing its Year 2000 issue in three areas: (1) IT
system applications, (2) non-IT systems, including engineering and
manufacturing equipment applications, and (3) relationships with third
parties.
The Company has conducted an assessment of its company-wide Year
2000 issue surrounding its IT systems. Since the initial assessment in
late-1992, concurrent efforts have been underway to evaluate, select, and
implement third party supplied or internally developed software for
company-wide or division-wide applications. All new major software
applications are in daily operation. Internally developed software is Year
2000 compliant, and where third party supplied software is not Year 2000
compliant the Company has received assurance of such compliance once the
updated software version, which was received during the second quarter 1999,
is installed, which is scheduled for completion during the third quarter of
1999. While the current stages of completion for these concurrent efforts
vary, the Company believes that implementation will be substantially complete
and Year 2000 compliant by the end of the third quarter of 1999 with
potentially one or two sites requiring fourth quarter efforts to complete the
conversion of their historical data.
The Company has completed the assessment of the Year 2000 issue
surrounding its non-IT systems, including engineering and manufacturing
equipment applications. Year 2000 remediation and testing efforts, which are
continuing throughout the Company, are more than 80 percent complete. This
Company-wide effort is being centrally coordinated with actual assessment,
remediation, and implementation assigned to identified individuals at each
manufacturing, warehouse, or office site. While the degree of effort and
extensiveness of remediation will vary by site, it is expected that all sites
will be Year 2000 compliant by the end of the third quarter of 1999.
Finally, the Company is continuing to examine its relationship with
third parties whose failure to become Year 2000 compliant in a timely manner,
if at all, could have a material effect on the Company. The Company has been
in contact with significant vendors and customers with respect to such
companies' Year 2000 compliance programs and status. In addition, follow-up
conversations have been conducted with key customers and vendors. While the
Company believes this risk has been substantially and satisfactorily
addressed, efforts surrounding third party relationships will continue as
circumstances and business relationships demand.
The Company is developing contingency plans to address the effects
of the failure of the Company or any of its principal suppliers, customers,
or other third parties to become Year 2000 compliant in a timely manner.
Initial contingency plans developed during the second quarter of 1999 will
continue to be expanded and updated throughout 1999 as required by changes in
events, facts, and circumstances surrounding the Company's Year 2000
compliance efforts as well as that of its principal suppliers, customers, and
other third parties.
Most business units meet at least monthly to review progress and
plans. Senior level representatives from the various concurrent
implementation and remediation teams meet at least quarterly with senior
level Company management to assess progress, to assure a coordinated effort
where required, and to verify a continued Company-wide focus toward a
satisfactory resolution of the
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Company's Year 2000 issue. The Company is utilizing both internal and
external resources to meet its timetable for becoming Year 2000 compliant.
Since late-1992, when the Company began to set direction for
upgrading all of its IT systems in the normal course of business, the Company
has made capital investments in certain third party software and hardware
systems to address the financial and operational needs of the business. These
systems, which will improve the efficiencies and productivity of the replaced
systems, have been, or will be certified Year 2000 compliant by the vendors
and have been or will be substantially installed and operational by the end
of the third quarter 1999. To date all of these capital projects were part of
the Company's long term strategic capital plan and their timing was not
accelerated as a result of the Year 2000 issue. Total expenditures for the
remediation of "embedded chip exposures" in manufacturing equipment and
facilities together with the unexpected replacement of selected computer
equipment is estimated to total $2.6 million, of which approximately $0.3
million has been incurred in 1998 and $1.1 million in 1999. This effort is
expected to be substantially completed by the end of the third quarter 1999.
All expenditures are made from internally generated funds and have not had a
negative impact on the Company's capital expenditure program.
FORWARD-LOOKING STATEMENTS
The following "Safe Harbor Statement" is made pursuant to the
Private Securities Litigation Reform Act of 1995. Certain of the statements
contained in the body of this report are forward-looking statements (rather
than historical facts). With respect to such forward-looking statements, the
Company seeks the protections afforded by the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based on management's
current plans and expectations and are subject to a number of uncertainties
and risks that could cause actual results to differ materially from those
described in such statements. These forward-looking statements include, but
are not limited to, the following: the expectation of increasing raw material
prices; the successful reorganization of the pressure sensitive materials
segments; the expectation that packaging operations will remain strong in
1999; the success of the Company in expanding its international business; the
amount and distribution of expected capital expenditures in 1999; the
expectation that total debt will decrease slightly in 1999; the cost and
success of the Company's Year 2000 compliance program and euro conversion
program; and the opinion of management that resolution of the Company's
current environmental litigation will not produce a material adverse effect
on its financial condition or results of operations.
Factors that could cause actual results to differ from those
expected include, but are not limited to, general economic conditions such as
inflation, interest rates, and foreign currency exchange rates; competitive
conditions within the Company's markets, including the acceptance of new and
existing products offered by the Company; price increases for raw materials
and the ability of the Company to pass these price increases on to its
customers or otherwise manage commodity price fluctuation risks; the presence
of adequate cash available for investment in the Company's business in order
to maintain desired debt levels; unanticipated consequences of the Year 2000,
including noncompliance by the Company's customers or suppliers;
unanticipated consequences of the EMU's conversion to the euro; changes in
governmental regulation, especially in the areas of environmental, health and
safety matters, and foreign investment; unexpected outcomes in the Company's
current and future litigation proceedings; and changes in the Company's labor
relations.
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FINANCIAL CONDITION
A statement of cash flow for the six months ended June 30, 1999 is as
follows:
Millions
--------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $50.3
Non-cash items:
Depreciation and amortization ................................. 50.6
Minority interest ............................................. 1.9
Deferred income taxes, non-current portion .................... 1.1
Net increase in working capital, net of effects of acquisitions (32.4)
Net change in deferred charges and credits .................... 4.7
Undistributed earnings of affiliated companies ................ 5.7
Other ......................................................... 0.2
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Net cash provided by operating activities ............................ 82.1
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ............................... 58.3)
Business acquisitions ............................................. (1.4)
Other ............................................................. 0.9
-----
Net cash used in investing activities ................................ (58.8)
-----
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in long-term debt .......................................... (2.1)
Change in short-term debt ......................................... 0.2
Cash dividends paid ............................................... (24.0)
-----
Net cash used by financing activities ................................ (25.9)
-----
Effect of exchange rates ............................................. (1.6)
-----
Net increase in cash ................................................. $ (4.2)
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant's 1999 Annual Meeting of Shareholders was held on
May 6, 1999.
(c) (1) The shareholders voted for three director nominees for
three-year terms. There were no abstentions and no broker
non-votes. The vote was as follows:
Name of Candidate Votes For Votes Withheld
----------------- --------- --------------
John H. Roe 39,139,002 433,288
Loring W. Knoblauch 39,320,509 251,782
Edward N. Perry 39,140,051 432,239
(2) The shareholders voted to ratify the appointment of
PricewaterhouseCoopers LLP as independent auditors for the 1999
fiscal year. The vote was 39,255,648 for, 112,153 against, and
204,490 abstentions. There were no broker non-votes.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
3(a) Restated Articles of Incorporation of the Registrant, as
amended. (1)
3(b) By-Laws of the Registrant, as amended through July 7,
1992. (2)
3(c) Amendment to the By-Laws of the Registrant dated October
29, 1998. (3)
4(a) Rights Agreement, dated as of July 29, 1999, between the
Registrant and Norwest Bank Minnesota, National
Association. (4)
4(b) Form of Indenture dated as of June 15, 1995, between the
Registrant and First Trust National Association, as
Trustee. (5)
10(a) Bemis Company, Inc. 1987 Stock Option Plan. * (6)
10(b) Bemis Company, Inc. 1994 Stock Incentive Plan, Amended
and Restated as of August 4, 1999. *
10(c) Bemis Company, Inc. 1984 Stock Award Plan .* (2)
10(d) Bemis Retirement Plan, Amended and Restated as of August
4, 1999.*
10(e) Bemis Company, Inc. Supplemental Retirement Plan dated
October 20, 1988.*(2)
10(f) Bemis Executive Incentive Plan dated April 1, 1990.* (2)
10(g) Bemis Company, Inc. Long Term Deferred Compensation
Plan, Amended and Restated as of August 4, 1999.*
10(h) Bemis Company, Inc. 1997 Executive Officer Performance
Plan. * (1)
10(i) Amended and Restated Credit Agreement among the
Registrant, the Banks Listed therein and Morgan Guaranty
Trust Company of New York, as Agent, originally dated as
of August 1, 1986, Amended and Restated as of August 1,
1991, as amended by amendment No. 1 dated as of May 1,
1992, as amended by Amendment No. 2 dated December 1,
1992, as amended by Amendment No. 3 dated January 22,
1993, as amended by Amendment No. 4 dated March 15,
1994, as amended by Amendment No. 5 dated June 1, 1994;
and as amended by Amendment No. 6 dated February 1,
1995. (2)
18 Preferability letter regarding inventory accounting
principle change.
19 Reports Furnished to Security Holders.
27 Financial Data Schedule (EDGAR electronic filing only).
-------------
*Management contract, compensatory plan or arrangement filed
pursuant to Rule 601(b)(10)(iii)(A) of Regulation S-K under
the Securities Exchange Act of 1934.
(1) Incorporated by reference to the Registrant's Definitive
Proxy Statement filed with the Securities and Exchange
Commission on March 18, 1997 (File No. 1-5277)
(2) Incorporated by reference to the Registrant's Annual
Report on Form 10-K/A for the year ended December 31,
1994 (File No. 1-5277).
(3) Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998
(File No. 1-5277).
(4) Incorporated by reference to Exhibit 1 to the
Registrant's Registration Statement on Form 8-A filed on
August 4, 1999 (File No. 1-5277).
(5) Incorporated by reference to the Registrant's Current
Report on Form 8-K dated June 30, 1995 (File No.
1-5277).
(6) Incorporated by reference to the Registrant's
Registration Statement on Form S-8 (File No. 33-50560).
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(b) Reports on Form 8-K
Form 8-K, filed on August 13, 1999, relating to the
adoption of the first-in, first-out (FIFO) inventory valuation
method (accounting principle change) and the adoption of a Rights
Agreement dated as of July 29, 1999.
The accounting change has been applied to prior years by
retroactively restating the financial statements. The following
prior period financial statements have been restated, where
required, and filed on Form 8-K dated August 13, 1999.
Management's Discussion and Analysis of Financial
condition and Results of Operations
Consolidated Statement of Income for the Three Years
Ended December 31, 1998
Consolidated Balance Sheet at December 31, 1998 and 1997
Consolidated Statement of Cash Flows for the Three Years
Ended December 31, 1998
Consolidated Statement of Stockholders' Equity for the
Three Years Ended December 31, 1998
Notes to Consolidated Financial Statements for the Three
Years Ended December 31, 1998
Schedule II - Valuation and Qualifying Accounts and
Reserves for the Three Years Ended December 31,
1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BEMIS COMPANY, INC.
Date August 9, 1998 /s/ Gene C. Wulf
------------------------------ ---------------------------
Gene C. Wulf, Vice President
and Controller
Date August 9, 1998 /s/ Benjamin R. Field, III
------------------------------ -------------------------------
Benjamin R. Field, III, Senior Vice
President, Chief Financial Officer
and Treasurer
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Exhibit Index
-------------
Exhibit Description Form of Filing
- ------- ----------- --------------
3(a) Restated Articles of Incorporation of the Registrant, as amended. (1)
3(b) By-Laws of the Registrant, as amended through July 7, 1992. (2)
3(c) Amendment to the By-Laws of the Registrant dated October 29, 1998. (3)
4(a) Rights Agreement, dated as of July 29, 1999, between the Registrant
and Norwest Bank Minnesota, National Association. (4)
4(b) Form of Indenture dated as of June 15, 1995, between the Registrant and
First Trust National Association, as Trustee. (5)
10(a) Bemis Company, Inc. 1987 Stock Option Plan. * (6)
10(b) Bemis Company, Inc. 1994 Stock Incentive Plan, Amended and
Restated as of August 4, 1999. * Filed Electronically
10(c) Bemis Company, Inc. 1984 Stock Award Plan. * (2)
10(d) Bemis Retirement Plan, Amended and Restated as of August 4, 1999.* Filed Electronically
10(e) Bemis Company, Inc. Supplemental Retirement Plan dated
October 20, 1988. * (2)
10(f) Bemis Executive Incentive Plan dated April 1, 1990. * (2)
10(g) Bemis Company, Inc. Long Term Deferred Compensation Plan,
Amended and Restated as of August 4, 1999. * Filed Electronically
10(h) Bemis Company, Inc. 1997 Executive Officer Performance Plan. * (1)
10(i) Amended and Restated Credit Agreement among the Registrant, the Banks
Listed therein and Morgan Guaranty Trust Company of New York as
Agent, originally dated as of August 1, 1986, Amended and Restated as of
August 1, 1991, as amended by Amendment No. 1 dated as of May 1, 1992,
as amended by Amendment No. 2 dated December 1, 1992, as amended by
Amendment No. 3 dated January 22, 1993, as amended by Amendment No. 4
dated March 15, 1994, as amended by Amendment No. 5 dated June 1, 1994;
and as amended by Amendment No. 6 dated February 1, 1995. (2)
18 Preferability letter regarding inventory accounting principle change. Filed Electronically
19 Reports Furnished to Security Holders. Filed Electronically
27 Financial Data Schedule (EDGAR electronic filing only). Filed Electronically
-------------
* Management contract, compensatory plan or arrangement filed
pursuant to Rule 601(b)(10)(iii)(A) of Regulation S-K under
the Securities Exchange Act of 1934.
(1) Incorporated by reference to the Registrant's Definitive
Proxy Statement filed with the Securities and Exchange
Commission on March 18, 1997 (File No. 1-5277).
(2) Incorporated by reference to the Registrant's Annual Report
on Form 10-K/A for the year ended December 31, 1994
(File No. 1-5277).
(3) Incorporated by reference to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1998
(File No. 1-5277).
(4) Incorporated by reference to Exhibit 1 to the Registrant's
Registration Statement on Form 8-A filed on August 4, 1999
(File No. 1-5277).
(5) Incorporated by reference to the Registrant's Current Report
on Form 8-K dated June 30, 1995 (File No. 1-5277).
(6) Incorporated by reference to the Registrant's Registration
Statement on Form S-8 (File No. 33-50560).
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