UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-7685
AVERY DENNISON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-1492269
(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
150 North Orange Grove Boulevard, Pasadena, California 91103
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (626) 304-2000
Indicate by a check [X] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes [X] No
----- -----
Number of shares of $1 par value common stock outstanding as of April 27,
2001: 110,243,432
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
INDEX TO FORM 10-Q
------------------
Page No.
-------
Part I. Financial Information (Unaudited):
Financial Statements:
Condensed Consolidated Balance Sheet
March 31, 2001 and December 30, 2000 3
Consolidated Statement of Income
Quarters Ended March 31, 2001 and April 1, 2000 4
Condensed Consolidated Statement of Cash Flows
Quarters Ended March 31, 2001 and April 1, 2000 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations
and Financial Condition 11
Quantitative and Qualitative Disclosures About Market Risk 16
Part II. Other Information:
Submission of Matters to a Vote of Security Holders,
Exhibits and Reports on Form 8-K 17
Signatures 18
2
PART I. ITEM 1. FINANCIAL INFORMATION
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
March 31, 2001 December 30, 2000
--------------------- ---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 20.5 $ 11.4
Trade accounts receivable, net 592.2 580.5
Inventories, net 294.4 271.5
Prepaid expenses 29.2 25.2
Deferred tax assets 64.3 64.5
Other current assets 27.2 29.3
-------- --------
Total current assets 1,027.8 982.4
Property, plant and equipment, at cost 2,030.9 2,011.8
Accumulated depreciation 942.4 932.8
-------- --------
1,088.5 1,079.0
Intangibles resulting from business acquisitions, net 424.6 394.3
Other assets 272.9 243.4
-------- --------
$2,813.8 $2,699.1
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 206.5 $ 54.3
Accounts payable 349.1 326.4
Other current liabilities 377.8 420.0
-------- --------
Total current liabilities 933.4 800.7
Long-term debt 725.6 772.9
Deferred taxes and other long-term liabilities 224.8 223.5
Other long-term obligation 73.4 73.9
Shareholders' equity:
Common stock - $1 par value, authorized - 400,000,000
shares; issued - 124,126,624 shares at March 31, 2001 and
December 30, 2000 124.1 124.1
Capital in excess of par value 656.6 692.0
Retained earnings 1,478.8 1,448.3
Cost of unallocated ESOP shares (15.3) (15.3)
Employee stock benefit trusts, 12,590,810 shares
at March 31, 2001 and 12,758,017 shares at
December 30, 2000 (654.7) (699.9)
Treasury stock at cost, 13,884,521 shares at March 31,
2001 and 13,881,533 shares at December 30, 2000 (615.8) (615.7)
Accumulated other comprehensive loss (117.1) (105.4)
-------- --------
Total shareholders' equity 856.6 828.1
-------- --------
$2,813.8 $2,699.1
======== ========
See Notes to Consolidated Financial Statements
3
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
(Unaudited)
Quarter Ended
----------------------------------------------------------
March 31, 2001 April 1, 2000
------------------------- ------------------------
Net sales $963.2 $965.3
Cost of products sold 644.2 631.2
------ ------
Gross profit 319.0 334.1
Marketing, general and administrative expense 209.2 214.2
Interest expense 13.8 12.3
------ ------
Income before taxes 96.0 107.6
Taxes on income 32.2 37.4
------ ------
Income before accounting change 63.8 70.2
Cumulative effect of accounting change, net of tax (.2) -
------ ------
Net income $ 63.6 $ 70.2
====== ======
Per share amounts:
Net income per common share:
Before accounting change $ .65 $ .71
Cumulative effect of accounting change - -
------ ------
Net income per common share $ .65 $ .71
====== ======
Net income per common share, assuming dilution:
Before accounting change $ .65 $ .70
Cumulative effect of accounting change - -
------ ------
Net income per common share, assuming dilution $ .65 $ .70
====== ======
Dividends $ .30 $ .27
====== ======
Average shares outstanding:
Common shares 97.6 98.8
Common shares, assuming dilution 98.5 100.8
See Notes to Consolidated Financial Statements
4
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
Quarter Ended
----------------------------------------------
March 31, 2001 April 1, 2000
------------------- --------------------
Operating Activities:
- --------------------
Net income $ 63.6 $ 70.2
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 31.3 31.9
Amortization 7.9 7.5
Deferred taxes 4.1 (.2)
Changes in assets and liabilities, net of the effect of
foreign currency translation, business divestitures and acquisitions (58.6) (52.0)
------- -------
Net cash provided by operating activities 48.3 57.4
------- -------
Investing Activities:
- --------------------
Purchase of property, plant and equipment (35.8) (32.8)
Acquisitions, net of miscellaneous proceeds from sale of assets (58.1) (73.1)
Other (23.7) (3.9)
------- -------
Net cash used in investing activities (117.6) (109.8)
------- -------
Financing Activities:
- --------------------
Net increase in short-term debt 104.0 112.2
Net decrease in long-term debt (.2) (.4)
Dividends paid (33.1) (30.4)
Purchase of treasury stock (.1) (29.1)
Proceeds from exercise of stock options 4.6 6.8
Other 3.6 (3.7)
------- -------
Net cash provided by financing activities 78.8 55.4
------- -------
Effect of foreign currency translation on cash balances (.4) (.1)
------- -------
Increase in cash and cash equivalents 9.1 2.9
------- -------
Cash and cash equivalents, beginning of period 11.4 6.9
------- -------
Cash and cash equivalents, end of period $ 20.5 $ 9.8
======= =======
See Notes to Consolidated Financial Statements
5
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The accompanying unaudited consolidated financial statements include normal
recurring adjustments necessary for a fair presentation of the Company's
interim results. Certain prior year amounts have been reclassified to conform
with current year presentation. The condensed financial statements and notes
in this Form 10-Q are presented as permitted by Regulation S-X, and as such,
they do not contain certain information included in the Company's 2000 annual
financial statements and notes. This Form 10-Q should be read in conjunction
with the Company's consolidated financial statements and notes included in
the Company's 2000 Annual Report on Form 10-K.
The first quarters of 2001 and 2000 consisted of thirteen-week periods ending
March 31, 2001 and April 1, 2000, respectively. The interim results of
operations are not necessarily indicative of future financial results.
2. Net Income Per Share
Net income per common share amounts were computed as follows:
(In millions, except per share amounts)
March 31, 2001 April 1, 2000
----------------------- ------------------------
(A) Net income available to common shareholders $63.6 $ 70.2
===== ======
(B) Weighted average number of common shares
outstanding 97.6 98.8
Additional common shares issuable under
employee stock options using the treasury
stock method .9 2.0
----- ------
(C) Weighted average number of common shares
outstanding assuming the exercise of
stock options 98.5 100.8
===== ======
Net income per common share (A) / (B) $ .65 $ .71
===== ======
Net income per common share,
assuming dilution (A) / (C) $ .65 $ .70
===== ======
3. Comprehensive Income
Comprehensive income includes net income, foreign currency translation
adjustments and the effective portion of gains or losses on cash flow hedges
that are currently presented as a component of shareholders' equity. The
Company's total comprehensive income for the three months ended March 31,
2001 and April 1, 2000 was $51.9 million and $62.1 million, respectively.
6
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Foreign Currency Translation
Transactions in foreign currencies and translation of financial statements of
subsidiaries operating in hyperinflationary economies resulted in a loss of
$.3 million for the first quarter of 2001 and a loss of $.1 million for the
first quarter of 2000. Operations in hyperinflationary economies consist of
the Company's operations in Turkey for 2001 and 2000.
5. Financial Instruments
The Company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended,
in the first quarter of 2001 and recorded a transition adjustment reducing
net income by $.2 million (net of tax). This Statement requires that all
derivative instruments be recorded on the balance sheet at their fair value.
The Company formed an implementation team drawn from both internal and
external resources, which reviewed the Company's derivative contracts and
existing hedge relationships, developed appropriate hedge effectiveness
models and updated accounting and reporting procedures to ensure proper
measurement, recording and reporting of derivative instruments and hedge
items.
The Company enters into foreign exchange forward, option and swap contracts
to reduce its risk from exchange rate fluctuations associated with
receivables, payables, loans and firm commitments denominated in foreign
currencies that arise primarily as a result of its operations outside the
United States of America. The Company also enters into interest rate
contracts to manage its exposure to interest rate fluctuations.
On the date that the Company enters into a derivative contract, it determines
whether the derivatives will be designated as a hedge. Those derivatives not
designated as hedges are recorded on the balance sheet at fair value, with
changes in fair value recognized currently in earnings. The Company
designates derivatives as either (1) a hedge of the fair value of a
recognized asset or liability or an unrecognized firm commitment (a "fair
value" hedge) or (2) a hedge of a forecasted transaction or the variability
of cash flows that are to be received or paid in connection with a recognized
asset or liability (a "cash flow" hedge). The Company does not hold or
purchase any foreign currency or interest rate contracts for trading
purposes.
The Company assesses, both at the inception of the hedge and on an ongoing
basis, whether derivatives that are designated as either fair value hedges or
cash flow hedges are highly effective. If it is determined that a derivative
is not highly effective as a hedge, the Company prospectively discontinues
hedge accounting. For those derivatives designated as cash flow hedges, the
effective portion of the related gains and losses are recorded as a component
of other comprehensive income, and the ineffective portion is reported
currently in earnings. Amounts in accumulated other comprehensive income are
reclassified into earnings in the same period during which the hedged
forecasted transaction is consummated. In the event that the anticipated
transaction is no longer likely to occur, the Company recognizes the change
in fair value of the instrument in earnings currently. Changes in the fair
value of derivatives that are designated as fair value hedges are recognized
currently in earnings. Changes in the fair values of underlying hedged items
(such as unrecognized firm commitments) are also recognized currently in
earnings and offset the changes in the fair value of the derivative.
7
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Financial Instruments (continued)
During the three months ended March 31, 2001, changes in fair market value
related to fair value hedges and the ineffectiveness related to cash flow
hedges were immaterial. Amounts the Company expects to reclassify from other
comprehensive income to earnings during the fiscal year ending December 29,
2001 are expected to be immaterial.
For purposes of this footnote, the terms "cash flow hedge," "derivative
instrument," "fair value," "fair value hedge," "financial instrument," "firm
commitment," and "highly effective" are used as these terms are defined in
SFAS No. 133, as amended.
6. Inventories
Inventories consisted of (in millions):
March 31, 2001 December 30, 2000
--------------------- ---------------------
Raw materials $ 94.4 $ 85.8
Work-in-progress 70.4 67.1
Finished goods 151.0 139.9
LIFO adjustment (21.4) (21.3)
------ ------
$294.4 $271.5
====== ======
7. Intangibles Resulting From Business Acquisitions
During the first quarter of 2001, the Company acquired two companies for
approximately $59 million. The acquisitions represent additions to the
Company's materials and office products operations and were accounted for
using the purchase method of accounting. Operating results have been included
in the consolidated financial statements since acquisition, and the assets
and liabilities of the entities have been recorded using a preliminary
estimate of fair value. The excess of the purchase price over the fair value
of net assets acquired is approximately $35 million and is being amortized
over its expected useful life. These businesses are not significant in
relation to the consolidated financial position and results of operations.
Accumulated amortization of intangible assets at March 31, 2001 and December
30, 2000 was $87.9 million and $83.4 million, respectively.
8. Research and Development
Research and development expense for the first quarters of 2001 and 2000 was
$17.4 million and $16.5 million, respectively.
8
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Contingencies
The Company has been designated by the U.S. Environmental Protection Agency
(EPA) and/or other responsible state agencies as a potentially responsible
party (PRP) at 9 waste disposal or waste recycling sites which are the
subject of separate investigations or proceedings concerning alleged soil
and/or groundwater contamination and for which no settlement of the Company's
liability has been agreed upon. Litigation has been initiated by a
governmental authority with respect to two of these sites, but the Company
does not believe that any such proceedings will result in the imposition of
monetary sanctions. The Company is participating with other PRPs at all such
sites, and anticipates that its share of cleanup costs will be determined
pursuant to remedial agreements entered into in the normal course of
negotiations with the EPA or other governmental authorities.
The Company has accrued liabilities for all sites, including sites in which
governmental agencies have designated the Company as a PRP, where it is
probable that a loss will be incurred and the minimum cost or amount of loss
can be reasonably estimated. However, because of the uncertainties associated
with environmental assessment and remediation activities, future expense to
remediate the currently identified sites, and sites which could be identified
in the future for cleanup, could be higher than the liability currently
accrued. Based on current site assessments, management believes that the
potential liability over the amounts currently accrued would not materially
affect the Company.
The Company and its subsidiaries are involved in various other lawsuits,
claims and inquiries, most of which are routine to the nature of the
business. In the opinion of management, the resolution of these matters will
not materially affect the Company.
9
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Segment Information
Financial information by reportable operating segment is set forth below:
(In millions) March 31, 2001 April 1, 2000
- ----------------------------------------------------------------------------------------------------------------------------
Net sales:
Pressure-sensitive Adhesives and Materials $547.7 $536.8
Consumer and Converted Products 452.0 460.1
Intersegment(1) (36.9) (32.6)
Divested operations .4 1.0
- ----------------------------------------------------------------------------------------------------------------------------
Net sales $963.2 $965.3
============================================================================================================================
Income (loss) from operations before interest and taxes:
Pressure-sensitive Adhesives and Materials $ 45.1 $ 61.1
Consumer and Converted Products 70.8 65.8
Corporate administrative and research and
development expenses (5.7) (6.6)
Divested operations (.4) (.4)
- ----------------------------------------------------------------------------------------------------------------------------
$109.8 $119.9
Interest expense (13.8) (12.3)
============================================================================================================================
Income before taxes $ 96.0 $107.6
============================================================================================================================
(1) Intersegment sales primarily represent sales from Pressure-sensitive
Adhesives and Materials to Consumer and Converted Products.
11. Future Accounting Requirements
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - A
Replacement of FASB Statement No. 125." This Statement revises the
standards for accounting for securitizations and other transfers of
financial assets and collateral. The Company will adopt this new standard
in the second quarter of 2001 and it is not anticipated to have a material
effect on the Company's financial results.
10
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations: For the Quarter
- --------------------------------------
Quarterly sales were $963.2 million, compared to first quarter 2000 sales of
$965.3 million. Excluding the impact of currency, sales grew 3 percent. The
acquisition of Adespan, Dunsirn Industries and CD Stomper contributed
approximately $33 million in sales to the first quarter of 2001.
Gross profit margin decreased to 33.1 percent for the quarter compared to 34.6
percent for the first quarter of 2000. The decline was primarily due to slower
volume growth, severance costs and lower gross profit margins in recently
acquired businesses.
Marketing, general and administrative expense, as a percent of sales, decreased
to 21.7 percent from 22.2 percent for the first quarter of 2000. The improvement
was primarily due to spending controls.
Interest expense increased to $13.8 million for the quarter compared to $12.3
million a year ago, primarily reflecting increased debt to fund acquisitions.
Income before taxes, as a percent of sales, was 10 percent compared to 11.1
percent a year ago. The decrease reflects the lower gross profit margin. The
effective tax rate decreased to 33.5 percent for the quarter compared to 34.8
percent for the first quarter of 2000, primarily due to a more favorable
geographic mix of income.
Net income totaled $63.6 million compared to $70.2 million in the first quarter
of 2000. Net income, as a percent of sales, was 6.6 percent for the first
quarter of 2001 and 7.3 percent for the same period last year.
Net income per common share for the quarter was $.65 compared to $.71 in the
first quarter of 2000. Net income per common share, assuming dilution, was $.65
for the first quarter of 2001 and $.70 for the first quarter of 2000. Excluding
the impact of currency exchange rates, net income per common share, assuming
dilution, would have been $.02 higher for the first quarter of 2001.
Results of Operations by Reportable Operating Segment
Pressure-sensitive Adhesives and Materials:
(In millions) March 31, 2001 April 1, 2000
- ----------------------------------------------------------------------------------------
Net sales $547.7 $536.8
Income from operations before interest and taxes 45.1 61.1
- ----------------------------------------------------------------------------------------
11
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations: For the Quarter (continued)
- --------------------------------------------------
The Pressure-sensitive Adhesives and Materials segment reported increased sales
for the first quarter of 2001 compared to the same period last year, primarily
due to acquisitions and international growth. Sales declined domestically due to
the slowdown in the North American economy, and the resulting impact on volume
growth in the roll materials, graphics and specialty tapes businesses. These
declines were partially offset by the Dunsirn acquisition. Sales increased
internationally, primarily as a result of the Adespan acquisition in 2000 and
strong unit volume growth in Asia, Latin America and Europe. This increase was
partially offset by the negative impact of foreign currency rates and a slowdown
in certain European markets served by the Company's graphics and specialty tapes
businesses. The segment reported a decrease in income primarily due to sales
weakness in North America and the European graphics and specialty tapes
businesses. Severance costs incurred in the first quarter also impacted income
for the segment's U.S. operations.
Consumer and Converted Products:
(In millions) March 31, 2001 April 1, 2000
- --------------------------------------------------------------------------------------------
Net sales $452.0 $460.1
Income from operations before interest and taxes 70.8 65.8
- --------------------------------------------------------------------------------------------
The Consumer and Converted Products segment reported a decrease in sales;
however, excluding the impact of currency, the segment's sales increased by one
percent. Sales in the U.S. operations were impacted by decreased sales due to
three factors: the slowdown in the North American economy, particularly in the
Company's industrial and automotive business, the closing of office product
retail stores by the Company's customers, and several large purchases made by
major customers late in the fourth quarter of 2000. Partially offsetting these
factors were the strong sales growth for certain Avery-brand office products,
and the acquisition of CD Stomper. Solid volume growth in the international
operations, particularly in the worldwide ticketing business, was more than
offset by the negative impact of foreign currency exchange rates. The segment
reported an increase in income for the first quarter of 2001 compared to the
same period last year, primarily reflecting productivity improvements related to
the Company's 1999 restructuring program and Six Sigma projects. Income from
U.S. operations increased due to sales growth for certain Avery-brand office
products and improved productivity. Income from international operations was
comparable to the same period last year due to the negative impact of currency.
Financial Condition
- -------------------
Average working capital, excluding short-term debt, as a percentage of sales,
increased to 7.8 percent from 6.7 percent a year ago. This increase is due
primarily to the increase in accounts receivable related to rapid sales growth
in international markets, higher working capital requirements at recently
acquired businesses, and the decrease in current liabilities related to the 1999
restructuring program. The average number of days sales outstanding in accounts
receivable increased to 56 days compared to 55 days a year ago, reflecting
longer payment terms associated with increased international sales and recent
acquisitions. Average inventory turnover for the first quarter of 2001 was 8.8
inventory turns compared to 8.6 inventory turns a year ago.
12
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financial Condition (continued)
- -------------------------------
Net cash flows provided by operating activities totaled $48.3 million for the
first quarter of 2001 compared to $57.4 million for the first quarter of 2000.
The decrease in net cash flows provided by operating activities was primarily
due to lower earnings and an increase in working capital. In addition to cash
flows from operations, the Company has more than adequate financing
arrangements, at competitive rates, to conduct its operations.
Capital expenditures for the quarter were $35.8 million compared to $32.8
million for the first quarter of 2000. Capital expenditures for 2001 are
expected to be approximately $150 million, as compared to $198.3 million in
2000.
During the first quarter of 2001, total debt increased $104.9 million to $932.1
million from year end 2000. The increase in debt was primarily due to the debt
issuance to fund acquisitions and capital expenditures. Total debt to total
capital was 52.1 percent as of the end of the first quarter of 2001 and 50
percent at year end 2000. In the first quarter of 1999, the Company
recorded an obligation associated with the transaction with Steinbeis Holding
GmbH, which combined substantially all of the Company's office products
businesses in Europe with Zweckform Buro-Produkte GmbH (Zweckform), a German
office products supplier. The obligation is reported in the "Other Long-term
obligation" line on the Condensed Consolidated Balance Sheet and is scheduled to
be paid in 2004.
On February 1, 2001, the Company announced that it acquired Dunsirn Industries,
Inc., a privately held company based in Wisconsin. Dunsirn Industries is a
leading supplier of non-pressure sensitive materials to the narrow-web printing
industry, as well as a provider of customized slitting and distribution services
for roll materials manufacturers. The Dunsirn operation is included within the
Company's Pressure-sensitive Adhesives and Materials segment. Sales in 2000 for
Dunsirn Industries were approximately $68 million and included sales to the
Company.
On February 13, 2001, the Company announced that it acquired CD Stomper, a
leading product line of CD and DVD labels, software and a label applicator, from
Stomp Inc., a software developer and manufacturer based in California. Sales in
2000 for the CD Stomper product line were approximately $20 million. The CD
Stomper product line is included in the Company's Consumer and Converted
Products segment.
Shareholders' equity increased to $856.6 million from $828.1 million at year end
2000. During the first quarter of 2001, the Company purchased approximately
3,000 shares of common stock at a cost of $.1 million. The market value of
shares held in the employee stock benefit trust, after the issuance of shares
under the Company's stock and incentive plans, decreased during the quarter by
$45.2 million to $654.7 million from year end 2000. Dividends paid in the first
quarter of 2001 totaled $33.1 million compared to $30.4 million in the first
quarter of 2000.
Recently Adopted Accounting Requirements
- ----------------------------------------
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities" and related amendments. This Statement requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are required to be recorded each period
in current earnings or other comprehensive income, depending upon the type of
hedging transaction and the hedge effectiveness.
13
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Recently Adopted Accounting Requirements (continued)
- ------------------------------------------
The Company formed an implementation team drawn from both internal and external
resources, which reviewed the Company's derivative contracts and existing hedge
relationships, developed appropriate hedge effectiveness models and updated
accounting and reporting procedures to ensure proper measurement, recording and
reporting of derivative instruments and hedge items.
The Company adopted SFAS No. 133 and related amendments in the first quarter of
2001 and recorded a transition adjustment reducing net income by $.2 million
(net of tax).
Future Accounting Requirements
- ------------------------------
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - A Replacement
of FASB Statement No. 125." This Statement revises the standards for accounting
for securitizations and other transfers of financial assets and collateral. The
Company will adopt this new standard in the second quarter of 2001 and it is not
anticipated to have a material effect on the Company's financial results.
Outlook
- -------
The Company's first quarter 2001 results reflect the continuing slowdown in the
North American economy. This has affected sales volume in the domestic
operations for both segments and may continue to do so if these economic
conditions continue. Although the outlook for the domestic economy cannot be
predicted, results in the latter part of the first quarter of 2001 and into the
second quarter of 2001 indicate some improvement in domestic sales volumes. Some
of the Company's European businesses were also negatively impacted by an
economic slowdown in the first quarter of 2001. The Company is uncertain with
respect to the outlook in European markets. A European economic slowdown would
negatively impact the Company's results.
International operations, principally in Western Europe, constitute a
significant portion of the Company's business. The Company is exposed to foreign
currency exchange rate risk, and changes to foreign exchange rates will impact
the Company's financial results.
The Company is focused on driving down costs in an uncertain global economic
environment and believes it is well positioned to resume strong growth once
economic conditions improve. The Company has reduced costs and expects to
continue to benefit from the implementation of profit improvement initiatives,
such as the Company's 1999 restructuring program, Six Sigma projects,
procurement initiatives and other manufacturing cost reductions.
14
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Safe Harbor Statement
- ---------------------
Except for historical information contained herein, the matters discussed in the
Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this Form 10-Q contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements, which are not statements of historical fact, may
contain estimates, assumptions, projections and/or expectations regarding future
events. Words such as "anticipate," "assume," "believe," "estimate," "expect,"
"plan," "project," "will," and other expressions, which refer to future events
and trends, identify forward-looking statements. Such forward-looking
statements, and financial or other business targets, are subject to certain
risks and uncertainties which could cause actual results to differ materially
from future results, performance or achievements of the Company expressed or
implied by such forward-looking statements. Certain of such risks and
uncertainties are discussed in more detail in the Company's Annual Report on
Form 10-K for the year ended December 30, 2000 and include, but are not limited
to, risks and uncertainties relating to investment in new production facilities,
timely development and successful market acceptance of new products, price and
availability of raw materials, impact of competitive products and pricing,
business mix shift, successful integration of new acquisitions, customer and
supplier and manufacturing concentrations, financial condition and inventory
strategies of customers, changes in customer order patterns, increased
competition, loss of significant contract(s) or customer(s), the euro
conversion, legal proceedings, fluctuations in foreign exchange rates and other
risks associated with foreign operations, changes in economic or political
conditions, and other factors.
Any forward looking statements should be considered in light of the factors
detailed in Exhibit 99 in the Company's Annual Report on Form 10-K for the year
ended December 30, 2000.
The Company's forward-looking statements represent its judgment only on the
dates such statements were made. By making any forward-looking statements, the
Company assumes no duty to update them to reflect new, changed or unanticipated
events or circumstances.
15
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
There are no material changes in the information provided in Item 7A of the
Company's Form 10-K for the fiscal year ended December 30, 2000.
16
PART II. OTHER INFORMATION
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
ITEM 1. There are no material changes in the information provided in Item 3 of
- ------ the Company's Form 10-K for the fiscal year ended December 30, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
The registrant held its annual stockholders' meeting on April 26, 2001. The
stockholders voted to reelect four directors to the Board of Directors as
follows:
Number of Shares Votes/1/
-------------------------------------------
For Withheld
----------------- -----------------
Philip M. Neal 89,909,009 10,062,152
Frank V. Cahouet 98,278,212 1,692,949
Peter W. Mullin 96,333,112 3,638,049
Joan T. Bok 98,391,183 1,579,978
/1/There were no abstentions or shares otherwise not voted by brokers.
Additional information concerning continuing directors called for by this Item
is incorporated by reference from pages 3 and 4 of the registrant's 2001 Proxy
Statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
a. Exhibits: 12 Computation of Ratio of Earnings to Fixed Charges
b. Reports on Form 8-K: There were no reports on Form 8-K filed for the three
months ended March 31, 2001.
17
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.
AVERY DENNISON CORPORATION
--------------------------
(Registrant)
/s/ Daniel R. O'Bryant
----------------------------------
Daniel R. O'Bryant
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
/s/ Thomas E. Miller
----------------------------------
Thomas E. Miller
Vice President and Controller
(Chief Accounting Officer)
May 14, 2001
18