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 June 30, 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)
(626) 304-2000
(Registrant's telephone number, including area code)
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 July 27, 2001:
110,104,689
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
INDEX TO FORM 10-Q
------------------
Page No.
--------
Part I. Financial Information (Unaudited):
- ------------------------------------------
Financial Statements:
Condensed Consolidated Balance Sheet
June 30, 2001 and December 30, 2000 3
Consolidated Statement of Income
Three and Six Months Ended June 30, 2001 and July 1, 2000 4
Condensed Consolidated Statement of Cash Flows
Six Months Ended June 30, 2001 and July 1, 2000 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations and Financial Condition 12
Quantitative and Qualitative Disclosures About Market Risk 18
Part II. Other Information:
- ---------------------------
Exhibits and Reports on Form 8-K 19
Signatures 20
2
PART I. ITEM 1. FINANCIAL INFORMATION
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
June 30, 2001 December 30, 2000
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 10.3 $ 11.4
Trade accounts receivable, net 626.8 580.5
Inventories, net 309.5 271.5
Other receivables 31.9 29.3
Prepaid expenses 25.1 25.2
Deferred tax assets 66.5 64.5
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 1,070.1 982.4
Property, plant and equipment, at cost 2,028.2 2,011.8
Accumulated depreciation 953.8 932.8
- ----------------------------------------------------------------------------------------------------------------------
1,074.4 1,079.0
Intangibles resulting from business acquisitions, net 416.9 394.3
Other assets 281.0 243.4
- ----------------------------------------------------------------------------------------------------------------------
$2,842.4 $2,699.1
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 228.3 $ 54.3
Accounts payable 357.3 326.4
Other current liabilities 378.9 420.0
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 964.5 800.7
Long-term debt 702.5 772.9
Deferred taxes and other long-term liabilities 218.1 223.5
Other long-term obligation 70.7 73.9
Shareholders' equity:
Common stock - $1 par value; authorized - 400,000,000 shares;
issued - 124,126,624 shares at June 30, 2001 and
December 30, 2000 124.1 124.1
Capital in excess of par value 641.4 692.0
Retained earnings 1,505.6 1,448.3
Cost of unallocated ESOP shares (15.3) (15.3)
Employee stock benefit trusts, 12,146,539 shares at June 30,
2001 and 12,758,017 shares at December 30, 2000 (619.8) (699.9)
Treasury stock at cost, 14,021,935 shares at June 30, 2001
and 13,881,533 shares at December 30, 2000 (623.7) (615.7)
Accumulated other comprehensive loss (125.7) (105.4)
- ----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 886.6 828.1
- ----------------------------------------------------------------------------------------------------------------------
$2,842.4 $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)
Three Months Ended Six Months Ended
-----------------------------------------------------------------------
June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000
- ------------------------------------------------------------------------------------------------------------------------
Net sales $960.8 $993.4 $1,924.0 $1,958.7
Cost of products sold 649.0 649.7 1,293.2 1,280.9
- ------------------------------------------------------------------------------------------------------------------------
Gross profit 311.8 343.7 630.8 677.8
Marketing, general and administrative expense 208.4 218.7 417.6 432.9
Interest expense 13.5 14.6 27.3 26.9
- ------------------------------------------------------------------------------------------------------------------------
Income before taxes 89.9 110.4 185.9 218.0
Taxes on income 30.1 37.6 62.3 75.0
- ------------------------------------------------------------------------------------------------------------------------
Income before accounting change 59.8 72.8 123.6 143.0
Cumulative effect of accounting change,
net of tax - - (.2) -
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 59.8 $ 72.8 $ 123.4 $ 143.0
========================================================================================================================
Per share amounts:
Net income per common share:
Before accounting change $ .61 $ .74 $ 1.26 $ 1.45
Cumulative effect of accounting change - - - -
- ------------------------------------------------------------------------------------------------------------------------
Net income per common share $ .61 $ .74 $ 1.26 $ 1.45
========================================================================================================================
Net income per common share, assuming dilution:
Before accounting change $ .61 $ .73 $ 1.25 $ 1.42
Cumulative effect of accounting change - - - -
- ------------------------------------------------------------------------------------------------------------------------
Net income per common share, assuming dilution $ .61 $ .73 $ 1.25 $ 1.42
========================================================================================================================
Dividends $ .30 $ .27 $ .60 $ .54
========================================================================================================================
Average shares outstanding:
Common shares 97.8 98.7 97.7 98.8
Common shares, assuming dilution 98.7 100.4 98.6 100.6
See Notes to Consolidated Financial Statements
4
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
Six Months Ended
-------------------------------------
June 30, 2001 July 1, 2000
- -----------------------------------------------------------------------------------------------------------------
Operating Activities:
- --------------------
Net income $ 123.4 $ 143.0
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 62.2 63.5
Amortization 16.1 15.1
Deferred taxes (1.3) 3.7
Changes in assets and liabilities, net of the effect of foreign
currency translation, business divestitures and acquisitions (97.6) (54.9)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 102.8 170.4
- -----------------------------------------------------------------------------------------------------------------
Investing Activities:
- --------------------
Purchase of property, plant and equipment (64.7) (77.3)
Acquisitions, net of miscellaneous proceeds from sale of assets (50.6) (76.9)
Other (37.9) (13.6)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (153.2) (167.8)
- -----------------------------------------------------------------------------------------------------------------
Financing Activities:
- --------------------
Net increase in short-term debt 103.7 100.6
Net decrease in long-term debt (.3) (1.5)
Dividends paid (66.1) (60.6)
Purchase of treasury stock (8.2) (52.7)
Proceeds from exercise of stock options 13.7 13.0
Other 6.8 (1.6)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 49.6 (2.8)
- -----------------------------------------------------------------------------------------------------------------
Effect of foreign currency translation on cash balances (.3) (.3)
- -----------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (1.1) (.5)
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of period 11.4 6.9
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 10.3 $ 6.4
=================================================================================================================
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 second quarters of 2001 and 2000 consisted of thirteen-week periods
ending June 30, 2001 and July 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:
Three Months Ended Six Months Ended
------------------------------ -------------------------------
(In millions, except per share amounts) June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000
- ----------------------------------------------------------------------------------------------------------------------
(A) Net income available to common shareholders $ 59.8 $ 72.8 $123.4 $143.0
- ----------------------------------------------------------------------------------------------------------------------
(B) Weighted average number of common shares
outstanding 97.8 98.7 97.7 98.8
Additional common shares issuable under
employee stock options using the treasury stock
method .9 1.7 .9 1.8
- ----------------------------------------------------------------------------------------------------------------------
(C) Weighted average number of common shares
outstanding assuming the exercise of stock
options 98.7 100.4 98.6 100.6
======================================================================================================================
Net income per common share (A) divided by (B) $ .61 $ .74 $ 1.26 $ 1.45
======================================================================================================================
Net income per common share, assuming
dilution (A) divided by (C) $ .61 $ .73 $ 1.25 $ 1.42
======================================================================================================================
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 and six months ended June
30, 2001 was $51.3 million and $103.2 million, respectively. For the three
and six months ended July 1, 2000, total comprehensive income was $52.9
million and $115 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 gains of
$.7 million and $.4 million, respectively, during the three and six months
ended June 30, 2001. For the three and six months ended July 1, 2000, the
Company recorded losses of $1.1 million and $1.2 million, respectively.
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 hedged
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 the 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 and six months ended June 30, 2001 changes in fair market
value related to fair value hedges and the ineffectiveness related to cash
flow hedges were not significant. Amounts the Company expects to reclassify
from other comprehensive income to earnings during the fiscal year ending
December 29, 2001 are not expected to be significant.
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) June 30, 2001 December 30, 2000
- -------------------------------------------------------------------------------------------------------
Raw materials $ 96.8 $ 85.8
Work-in-progress 73.9 67.1
Finished goods 160.3 139.9
LIFO adjustment (21.5) (21.3)
- -------------------------------------------------------------------------------------------------------
$309.5 $271.5
=======================================================================================================
7. 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 at fair value. The excess
of the purchase price over the fair value of net assets acquired is
approximately $37 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 for the Company.
Accumulated amortization of intangible assets at June 30, 2001 and December
30, 2000 was $92.4 million and $83.4 million, respectively.
8. Research and Development
Research and development expense for the three and six months ended June 30,
2001 was $17.9 million and $35.3 million, respectively. For the three and six
months ended July 1, 2000, research and development expense was $17.5 million
and $34 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:
Three Months Ended Six Months Ended
-----------------------------------------------------------------------
(In millions) June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000
- ------------------------------------------------------------------------------------------------------------------
Net sales:
Pressure-sensitive Adhesives and
Materials $544.9 $541.6 $1,091.6 $1,075.7
Consumer and Converted Products 449.5 478.2 900.3 936.0
Intersegment(1) (37.0) (35.8) (75.7) (67.8)
Divested operations 3.4 9.4 7.8 14.8
- -----------------------------------------------------------------------------------------------------------------
Net sales $960.8 $993.4 $1,924.0 $1,958.7
=================================================================================================================
Income (loss) from operations before
interest and taxes:
Pressure-sensitive Adhesives and
Materials $ 46.5 $ 57.4 $ 92.3 $ 119.9
Consumer and Converted Products 64.2 74.8 135.1 140.5
Corporate administrative and research
and development expenses (6.1) (6.7) (11.8) (13.4)
Divested operations (1.2) (.5) (2.4) (2.1)
- -----------------------------------------------------------------------------------------------------------------
103.4 125.0 213.2 244.9
Interest expense (13.5) (14.6) (27.3) (26.9)
- -----------------------------------------------------------------------------------------------------------------
Income before taxes $ 89.9 $110.4 $ 185.9 $ 218.0
=================================================================================================================
(1) Intersegment sales primarily represent sales from Pressure-sensitive
Adhesives and Materials to Consumer and Converted Products.
10
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Recent Accounting Requirements
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 adoption of this new standard in the
second quarter of 2001 did not have a material effect on the Company's
financial results.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," which
supersedes Accounting Principles Board Opinion (APB) No. 16, "Business
Combinations." This Statement requires that all business combinations be
accounted for by the purchase method and establishes specific criteria for
the recognition of intangible assets separately from goodwill. The Statement
also requires unallocated negative goodwill to be written off immediately as
an extraordinary gain. The provisions of the Statement apply to business
combinations initiated after June 30, 2001. For business combinations
accounted for using the purchase method before July 1, 2001, the provisions
of this Statement will be effective at the beginning of fiscal 2002. The
Company is in the process of determining the impact of this standard on the
Company's financial results when effective.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes APB Opinion No. 17, "Intangible Assets." This
Statement addresses the accounting and reporting of goodwill and other
intangible assets subsequent to their acquisition. The Statement also
provides specific guidance on testing goodwill and intangible assets for
impairment. SFAS No. 142 provides that (i) goodwill and indefinite-lived
intangible assets will no longer be amortized, (ii) goodwill will be tested
for impairment at least annually at the reporting unit level, (iii)
intangible assets deemed to have an indefinite life will be tested for
impairment at least annually and (iv) intangible assets with finite lives
will be amortized over their useful lives. Goodwill and intangible assets
acquired after June 30, 2001 will immediately be subject to the provisions
of this Statement. All provisions of this Statement will be effective at the
beginning of fiscal 2002. The Company is in the process of determining the
impact of this standard on the Company's financial results when effective.
The Company is currently reviewing the requirements of Emerging Issues Task
Force Issue No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products." This Statement
addresses whether certain consideration from a vendor to a reseller of the
vendor's products is an adjustment to selling prices or cost. This Statement
would have no effect on the Company's net income or financial position.
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
- --------------------------------------
Quarterly sales were $960.8 million, compared to second quarter 2000 sales of
$993.4 million. Excluding the impact of currency, sales decreased 1.2 percent.
The acquisition of Dunsirn Industries and CD Stomper contributed approximately
$17.6 million in sales to the second quarter of 2001.
Gross profit margin decreased to 32.5 percent for the quarter compared to 34.6
percent for the second quarter of 2000. The decline was primarily due to adverse
product mix shift and slower volume growth, as well as lower gross profit
margins of recently acquired businesses.
Marketing, general and administrative expense, as a percent of sales, improved
to 21.7 percent compared to 22 percent for the second quarter of 2000, primarily
due to spending controls.
Interest expense decreased to $13.5 million for the quarter, compared to $14.6
million a year ago, primarily reflecting lower interest rates.
Income before taxes, as a percent of sales, was 9.4 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 34.1
percent for the second quarter of 2000, primarily due to a more favorable
geographic mix of income.
Net income totaled $59.8 million compared to $72.8 million in the second quarter
of 2000. Net income, as a percent of sales, was 6.2 percent for the second
quarter of 2001 and 7.3 percent for the same period last year.
Net income per common share for the quarter was $.61 compared to $.74 in the
second quarter of 2000. Net income per common share, assuming dilution, was $.61
for the second quarter of 2001 and $.73 for the second quarter of 2000.
Excluding the impact of currency exchange rates, net income per common share,
assuming dilution, would have been approximately $.01 higher for the second
quarter of 2001.
Results of Operations by Reportable Operating Segment
Pressure-sensitive Adhesives and Materials:
Three Months Ended
----------------------------------
(In millions) June 30, 2001 July 1, 2000
- ---------------------------------------------------------------------------------------------------
Net sales $544.9 $541.6
Income from operations before interest and taxes 46.5 57.4
- ----------------------------------------------------------------------------------------------------
The Pressure-sensitive Adhesives and Materials segment reported increased sales
for the second quarter of 2001 compared to the same period last year. Sales
increased domestically due to the acquisition of Dunsirn and volume growth in
the core U.S. roll materials business, offset by the effects of the continued
slowdown in the North American economy. Sales decreased internationally,
primarily as a result of the negative impact of foreign currency rates and the
continued slowdown in the Company's more industrially-oriented graphics and
specialty tape businesses impacted by economic weakness in Europe. The segment
reported a decrease in income primarily due to the economic slowdown, which has
impacted sales across most of the segment's domestic and international
businesses, integration costs associated with the Dunsirn acquisition, reduced
leverage of fixed costs and a more competitive pricing environment.
12
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)
- --------------------------------------------------
Consumer and Converted Products:
Three Months Ended
----------------------------------
(In millions) June 30, 2001 July 1, 2000
- -------------------------------------------------------------------------------------------------
Net sales $449.5 $478.2
Income from operations before interest and taxes 64.2 74.8
- --------------------------------------------------------------------------------------------------
The Consumer and Converted Products segment reported a decrease in sales for the
second quarter of 2001 compared to the same period last year. Sales in the U.S.
operations were impacted by sales declines in the office products businesses,
primarily due to inventory reduction by one of the Company's major customers and
weaker back-to-school orders. Domestic converting businesses were negatively
impacted by a weak retail environment and the continued effects of the soft
economy on the segment's more industrially-oriented businesses. Sales in the
international operations decreased primarily due to the negative impact of
foreign currency exchange rates and the economic slowdown impacting the
Company's industrially-oriented businesses in Europe. The segment reported a
decrease in income for the second quarter of 2001 compared to the same period
last year, primarily due to the overall decline in sales.
Results of Operations: Six Months Year-To-Date
- ----------------------------------------------
Sales for the first six months of 2001 were $1.92 billion compared to $1.96
billion in the corresponding period of 2000. Excluding the impact of currency,
sales grew .9 percent. Acquisitions contributed approximately $48.9 million in
sales for the first six months of 2001.
Gross profit margin for the first six months decreased to 32.8 percent compared
to 34.6 percent for the first six months of 2000. The decline was primarily due
to adverse product mix and slower volume growth, as well as lower gross profit
margins of recently acquired businesses.
Marketing, general and administrative expense, as a percent of sales, for the
first six months improved to 21.7 percent compared to 22.1 percent for the first
six months of 2000. The improvement was primarily due to spending controls.
Interest expense increased to $27.3 million for the first six months compared to
$26.9 million for the first six months of 2000, primarily reflecting increased
debt to fund acquisitions. This increase was partially offset by lower interest
rates.
Income before taxes, as a percent of sales, was 9.7 percent compared to 11.1
percent for 2000. The decrease reflects the lower gross profit margin. The year-
to-date effective tax rate decreased to 33.5 percent for 2001 from 34.4 percent
for 2000 primarily due to a more favorable geographic mix of income.
Net income totaled $123.4 million compared to $143 million in the first six
months of 2000. Net income, as a percent of sales, was 6.4 percent for the first
six months of 2001 and 7.3 percent for the same period last year.
13
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations: Six Months Year-To-Date (continued)
- ----------------------------------------------------------
Net income per common share for the first six months was $1.26 compared to $1.45
for the same period last year. Net income per common share, assuming dilution,
was $1.25 for the first six months of 2001 and $1.42 for the first six months of
2000. Excluding the impact of currency exchange rates, net income per common
share, assuming dilution, would have been approximately $.03 higher for the
first six months of 2001.
Results of Operations by Reportable Operating Segment
Pressure-sensitive Adhesives and Materials:
Six Months Ended
----------------------------------
(In millions) June 30, 2001 July 1, 2000
- --------------------------------------------------------------------------------------------------
Net sales $1,091.6 $1,075.7
Income from operations before interest and taxes 92.3 119.9
- --------------------------------------------------------------------------------------------------
The Pressure-sensitive Adhesives and Materials segment reported increased sales
for the first six months of 2001 compared to the same period last year,
primarily as a result of acquisitions and international growth. Sales declined
domestically due to the slowdown in the North American economy, and the
resulting impact on volume 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 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 the economic slowdown which has impacted sales across
most of the segment's domestic and international businesses, integration costs
associated with the Dunsirn acquisition, reduced leverage of fixed costs, the
negative impact of foreign currency exchange rates and a more competitive
pricing environment.
Consumer and Converted Products:
Six Months Ended
----------------------------------
(In millions) June 30, 2001 July 1, 2000
- --------------------------------------------------------------------------------------------------
Net sales $900.3 $936.0
Income from operations before interest and taxes 135.1 140.5
- --------------------------------------------------------------------------------------------------
The Consumer and Converted Products segment reported a decrease in sales for the
first six months of 2001 compared to the same period last year. Sales in the
U.S. operations were impacted by several factors, including: the slowdown in the
North American economy, particularly affecting the Company's industrial and
automotive businesses, inventory reduction by a significant customer in the
office products business, the closing of office product retail stores in the
first quarter by the Company's customers, and weaker back-to-school orders in
the second quarter. Sales in the international operations decreased primarily
due to the negative impact of foreign currency exchange rates and the economic
slowdown impacting the Company's more industrially-oriented businesses in
Europe. The segment reported a decrease in income for the first six months of
2001 compared to the same period last year, primarily due to the overall decline
in sales and the negative impact of foreign currency exchange rates.
14
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financial Condition
- -------------------
Average working capital, excluding short-term debt, as a percentage of sales,
increased to 8.7 percent for the quarter from 6.6 percent a year ago. This
increase is due primarily to the increase in accounts receivable and a decrease
in current liabilities. The average number of days sales outstanding in accounts
receivable increased to 59 days compared to 56 days a year ago, reflecting
longer payment terms associated with increased international sales and recent
acquisitions.
Net cash flows provided by operating activities totaled $102.8 million for the
first six months of 2001 and $170.4 million for the first half of 2000. The
decrease in net cash flows provided by operating activities was primarily due to
the decline in net income and unfavorable working capital changes. 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 $28.9 million compared to $44.5
million a year ago. For the first six months of 2001, capital spending totaled
$64.7 million compared to $77.3 million a year ago. Capital expenditures for
2001 are expected to be approximately $150 million, as compared to $198.3
million in 2000.
During the first six months of 2001, total debt increased $103.6 million to
$930.8 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 51.2 percent as of the end of the second 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, 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, including 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.
On July 3, 2001, the Company filed a shelf registration statement with the
Securities and Exchange Commission to permit the issuance of up to $600 million
in debt and equity securities. Proceeds from the shelf offering may be used for
general corporate purposes, including repaying, redeeming or repurchasing
existing debt, and for working capital, capital expenditures and acquisitions.
No securities have been issued since the filing.
Shareholders' equity increased to $886.6 million from $828.1 million at year end
2000. During the first six months of 2001, the Company purchased approximately
142,000 shares of common stock at a cost of $8.2 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 by $80.1 million to
$619.8 million from year end 2000. Dividends paid for the first six months of
2001 totaled $66.1 million compared to $60.6 million a year ago.
15
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Recent Accounting Requirements
- ------------------------------
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 adoption of this new standard in the second quarter of 2001 did
not have a material effect on the Company's financial results.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," which
supersedes Accounting Principles Board Opinion (APB) No. 16, "Business
Combinations." This Statement requires that all business combinations be
accounted for by the purchase method and establishes specific criteria for the
recognition of intangible assets separately from goodwill. The Statement also
requires unallocated negative goodwill to be written off immediately as an
extraordinary gain. The provisions of the Statement apply to business
combinations initiated after June 30, 2001. For business combinations accounted
for using the purchase method before July 1, 2001, the provisions of this
Statement will be effective at the beginning of fiscal 2002. The Company is in
the process of determining the impact of this standard on the Company's
financial results when effective.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes APB Opinion No. 17, "Intangible Assets." This
Statement addresses the accounting and reporting of goodwill and other
intangible assets subsequent to their acquisition. The Statement also provides
specific guidance on testing goodwill and intangible assets for impairment. SFAS
No. 142 provides that (i) goodwill and indefinite-lived intangible assets will
no longer be amortized, (ii) goodwill will be tested for impairment at least
annually at the reporting unit level, (iii) intangible assets deemed to have an
indefinite life will be tested for impairment at least annually and (iv)
intangible assets with finite lives will be amortized over their useful lives.
Goodwill and intangible assets acquired after June 30, 2001 will immediately be
subject to the provisions of this Statement. All provisions of this Statement
will be effective at the beginning of fiscal 2002. The Company is in the process
of determining the impact of this standard on the Company's financial results
when effective.
The Company is currently reviewing the requirements of Emerging Issues Task
Force Issue No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products." This Statement
addresses whether certain consideration from a vendor to a reseller of the
vendor's products is an adjustment to selling prices or cost. This Statement
would have no effect on the Company's net income or financial position.
Outlook
- -------
The Company's results for the first six months of 2001 reflect the continued
slowdown in the North American economy and weakness in international markets.
This slowdown has affected sales volume for both segments and is expected to
continue to do so if these economic conditions continue. The Company is
uncertain with respect to the outlook in European markets. A continued European
economic slowdown would continue to 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 productivity improvement
initiatives.
16
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 also 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.
17
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.
18
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.
ITEMS 2, 3, 4 and 5.
- --------------------
Not Applicable
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
a. Exhibit 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 June 30, 2001.
19
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)
August 14, 2001
20