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 September 29, 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 October 27,
2001: 109,891,031
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
INDEX TO FORM 10-Q
------------------
Page No.
--------
Part I. Financial Information (Unaudited):
- -------------------------------------------
Financial Statements:
Condensed Consolidated Balance Sheet
September 29, 2001 and December 30, 2000 3
Consolidated Statement of Income
Three and Nine Months Ended September 29, 2001 and September 30, 2000 4
Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 29, 2001 and September 30, 2000 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations and Financial Condition 13
Quantitative and Qualitative Disclosures About Market Risk 20
Part II. Other Information:
- ---------------------------
Exhibits and Reports on Form 8-K 21
Signatures 22
2
PART I. ITEM 1. FINANCIAL INFORMATION
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
September 29, 2001 December 30, 2000
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 17.5 $ 11.4
Trade accounts receivable, net 616.4 580.5
Inventories, net 292.4 271.5
Other receivables 37.1 29.3
Prepaid expenses 28.0 25.2
Deferred tax assets 64.2 64.5
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 1,055.6 982.4
Property, plant and equipment, at cost 2,055.2 2,011.8
Accumulated depreciation 977.8 932.8
- --------------------------------------------------------------------------------------------------------------------------------
1,077.4 1,079.0
Intangibles resulting from business acquisitions, net 426.1 394.3
Other assets 296.0 243.4
- --------------------------------------------------------------------------------------------------------------------------------
$ 2,855.1 $ 2,699.1
================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 187.9 $ 54.3
Accounts payable 350.0 326.4
Other current liabilities 394.5 420.0
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 932.4 800.7
Long-term debt 701.7 772.9
Deferred taxes and other long-term liabilities 215.3 223.5
Other long-term obligation 75.4 73.9
Shareholders' equity:
Common stock - $1 par value; authorized - 400,000,000 shares; issued -
124,126,624 shares at September 29, 2001 and
December 30, 2000 124.1 124.1
Capital in excess of par value 601.0 692.0
Retained earnings 1,534.3 1,448.3
Cost of unallocated ESOP shares (15.3) (15.3)
Employee stock benefit trusts, 12,110,140 shares at September
29, 2001 and 12,758,017 shares at December 30, 2000 (572.6) (699.9)
Treasury stock at cost, 14,234,435 shares at September
29, 2001 and 13,881,533 shares at December 30, 2000 (633.4) (615.7)
Accumulated other comprehensive loss (107.8) (105.4)
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 930.3 828.1
- --------------------------------------------------------------------------------------------------------------------------------
$ 2,855.1 $ 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 Nine Months Ended
----------------------------------------------------------------------------------------
September 29, 2001 September 30, 2000 September 29, 2001 September 30, 2000
----------------------------------------------------------------------------------------
Net sales $ 966.7 $ 1,001.7 $ 2,890.7 $ 2,960.4
Cost of products sold 653.9 661.4 1,947.1 1,942.3
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 312.8 340.3 943.6 1,018.1
Marketing, general and administrative
expense 209.6 215.8 627.2 648.7
Interest expense 12.4 14.2 39.7 41.1
- ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes 90.8 110.3 276.7 328.3
Taxes on income 29.1 37.3 91.4 112.3
- ------------------------------------------------------------------------------------------------------------------------------------
Income before accounting change 61.7 73.0 185.3 216.0
Cumulative effect of accounting change,
net of tax -- -- (.2) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 61.7 $ 73.0 $ 185.1 $ 216.0
====================================================================================================================================
Per share amounts:
Net income per common share:
Before accounting change $ .63 $ .74 $ 1.89 $ 2.19
Cumulative effect of accounting
change -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income per common share $ .63 $ .74 $ 1.89 $ 2.19
====================================================================================================================================
Net income per common share, assuming dilution:
Before accounting change $ .63 $ .73 $ 1.88 $ 2.16
Cumulative effect of accounting
change -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income per common share, assuming $ .63 $ .73 $ 1.88 $ 2.16
dilution
====================================================================================================================================
Dividends $ .30 $ .27 $ .90 $ .81
====================================================================================================================================
Average shares outstanding:
Common shares 97.9 98.1 97.8 98.5
Common shares, assuming dilution 98.6 99.4 98.6 100.2
See Notes to Consolidated Financial Statements
4
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended
----------------------------------------------
September 29, 2001 September 30, 2000
- --------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
- --------------------- $ 185.1 $ 216.0
Net income
Adjustments to reconcile net income to net cash provided by operating
activities: 93.1 94.6
Depreciation 23.9 23.0
Amortization 1.9 7.4
Deferred taxes
Changes in assets and liabilities, net of the effect of foreign
currency translation, business divestitures and acquisitions (59.6) (48.4)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 244.4 292.6
- --------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
- ---------------------
Purchase of property, plant and equipment (96.6) (120.2)
Acquisitions, net of miscellaneous proceeds from sale of assets (52.9) (75.2)
Other (56.2) (36.0)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (205.7) (231.4)
- --------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
- ---------------------
Net increase in short-term debt 61.0 96.6
Net (decrease) increase in long-term debt (1.2) 38.2
Dividends paid (99.1) (90.6)
Purchase of treasury stock (17.8) (120.8)
Proceeds from exercise of stock options 14.6 15.6
Other 9.9 1.3
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (32.6) (59.7)
- --------------------------------------------------------------------------------------------------------------------------------
Effect of foreign currency translation on cash balances - (.7)
- --------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 6.1 .8
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of period 11.4 6.9
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 17.5 $ 7.7
================================================================================================================================
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 third quarters of 2001 and 2000 consisted of thirteen-week periods
ending September 29, 2001 and September 30, 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 Nine Months Ended
--------------------------------------------------------------
September September September September
(In millions, except per share amounts) 29, 2001 30, 2000 29, 2001 30, 2000
-----------------------------------------------------------------------------------------------------------------------
(A) Net income available to common shareholders $ 61.7 $ 73.0 $ 185.1 $ 216.0
-----------------------------------------------------------------------------------------------------------------------
(B) Weighted average number of common shares
outstanding 97.9 98.1 97.8 98.5
Additional common shares issuable under employee
stock options using the treasury stock method .7 1.3 .8 1.7
-----------------------------------------------------------------------------------------------------------------------
(C) Weighted average number of common shares
outstanding assuming the exercise of stock options 98.6 99.4 98.6 100.2
=======================================================================================================================
Net income per common share (A) / (B) $ .63 $ .74 $ 1.89 $ 2.19
=======================================================================================================================
Net income per common share, assuming
dilution (A) / (C) $ .63 $ .73 $ 1.88 $ 2.16
=======================================================================================================================
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 nine
months ended September 29, 2001 was $79.5 million and $182.7 million,
respectively. For the three and nine months ended September 30, 2000,
total comprehensive income was $46.4 million and $161.4 million,
respectively.
6
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Foreign Currency Translation
Translation of financial statements of subsidiaries operating in
hyperinflationary economies and transactions in foreign currencies
resulted in losses of $.6 million and $.4 million, respectively, during
the three and nine months ended September 29, 2001. For the three and nine
months ended September 30, 2000, the Company recorded losses of $.3
million and $1.5 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. Those derivatives designated as hedges are classified 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 hedges are highly effective. If it is determined that a
hedge is not highly effective, the Company prospectively discontinues
hedge accounting. For 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
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 nine months ended September 29, 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) September 29, 2001 December 30, 2000
--------------------------------------------------------------------------
Raw materials $ 100.0 $ 85.8
Work-in-progress 70.0 67.1
Finished goods 142.5 139.9
LIFO adjustment (20.1) (21.3)
--------------------------------------------------------------------------
$ 292.4 $ 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 $38.6 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 September 29, 2001 and
December 30, 2000 was $99.8 million and $83.4 million, respectively.
8. Research and Development
Research and development expense for the three and nine months ended
September 29, 2001 was $16.6 million and $51.9 million, respectively. For
the three and six months ended September 30, 2000, research and
development expense was $17.7 million and $51.7 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 one 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 Nine Months Ended
----------------------------------------------------------------------------------
(In millions) September September September September
29, 2001 30, 2000 29, 2001 30, 2000
-------------------------------------------------------------------------------------------------------------------------------
Net sales:
Pressure-sensitive Adhesives and Materials $ 549.2 $ 536.3 $ 1,647.9 $ 1,612.0
Consumer and Converted Products 460.5 486.8 1,352.1 1,412.7
Intersegment/(1)/ (47.4) (34.5) (129.8) (102.2)
Divested operations 4.4 13.1 20.5 37.9
-------------------------------------------------------------------------------------------------------------------------------
Net sales $ 966.7 $ 1,001.7 $ 2,890.7 $ 2,960.4
===============================================================================================================================
Income (loss) from operations before
interest and taxes:
Pressure-sensitive Adhesives and Materials $ 47.4 $ 52.8 $ 139.7 $ 172.7
Consumer and Converted Products 62.6 79.7 197.0 219.4
Corporate administrative and research and
development expenses (6.9) (7.3) (18.8) (20.7)
Divested operations .1 (.7) (1.5) (2.0)
-------------------------------------------------------------------------------------------------------------------------------
103.2 124.5 316.4 369.4
Interest expense (12.4) (14.2) (39.7) (41.1)
-------------------------------------------------------------------------------------------------------------------------------
Income before taxes $ 90.8 $ 110.3 $ 276.7 $ 328.3
===============================================================================================================================
/(1)/Intersegment sales primarily represent sales from Pressure-sensitive
Adhesives and Materials to Consumer and Converted Products.
11. Recent Accounting Requirements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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.
10
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Recent Accounting Requirements (continued)
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.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This
Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. All provisions of this Statement will be effective at
the beginning of fiscal 2003. The Company is in the process of determining
the impact of this standard on the Company's financial results when
effective.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and amends Accounting Principles
Board (APB) No. 30, "Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This Statement requires that long-lived assets that are to
be disposed of by sale be measured at the lower of book value or fair
value less costs to sell. SFAS No. 144 retains the fundamental provisions
of SFAS 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used and (b) measurement of long-lived
assets to be disposed of by sale. This Statement also retains APB No. 30's
requirement that companies report discontinued operations separately from
continuing operations. 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. 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.
11
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. Pending Acquisition
On September 7, 2001, the Company announced an agreement to acquire the
Jackstadt GmbH pressure-sensitive adhesive materials business. Jackstadt
is a privately-held manufacturer of pressure-sensitive adhesive materials
based in Germany. Jackstadt, with consolidated revenues of approximately
$400 million in 2000, has a global customer base and generates
approximately 80 percent of its sales outside of Germany. The transaction
is subject to a number of closing conditions, including regulatory
approvals, and is expected to close in the fourth quarter of 2001 or early
2002.
13. Subsequent Event
In October 2001, the Board of Directors amended the bylaws of the Company
to increase the size of the board from 12 to 13 members.
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
- --------------------------------------
Quarterly sales were $966.7 million, compared to third quarter 2000 sales of
$1,001.7 million. Excluding the impact of currency, sales decreased 1.6 percent.
The acquisitions of Dunsirn Industries and CD Stomper contributed $18.1 million
in sales to the third quarter of 2001. The reduction in sales related to
divested operations represented $8.7 million for the quarter.
Gross profit margin decreased to 32.4 percent for the quarter compared to 34
percent for the third quarter of 2000. The decline was primarily due to adverse
product mix shift and slower volume growth, as well as lower gross profit
margin of a recently acquired business.
Marketing, general and administrative expense, as a percent of sales, was 21.7
percent compared to 21.5 percent for the third quarter of 2000.
Interest expense decreased to $12.4 million for the quarter, compared to $14.2
million a year ago, primarily reflecting lower interest rates.
Income before taxes, as a percent of sales, was 9.4 percent compared to 11
percent a year ago. The decrease reflects lower gross profit margin. The
effective tax rate decreased to 32 percent for the quarter compared to 33.8
percent for the third quarter of 2000, primarily due to a more favorable
geographic mix of income and increased research and investment credits.
Net income totaled $61.7 million compared to $73.0 million in the third quarter
of 2000. Net income, as a percent of sales, was 6.4 percent for the third
quarter of 2001 and 7.3 percent for the same period last year.
Net income per common share for the quarter was $.63 compared to $.74 in the
third quarter of 2000. Net income per common share, assuming dilution, was $.63
for the third quarter of 2001 and $.73 for the third 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 third quarter of
2001.
Results of Operations by Reportable Operating Segment
Pressure-sensitive Adhesives and Materials: Three Months Ended
----------------------------------
(In millions) September 29, September 30,
2001 2000
- ------------------------------------------------------------------------------------------
Net sales $ 549.2 $ 536.3
Income from operations before interest and taxes 47.4 52.8
- ------------------------------------------------------------------------------------------
The Pressure-sensitive Adhesives and Materials segment reported increased sales
for the third 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, which includes the benefit of new
businesses obtained from the closure of a competitor's plant and a new supply
agreement with a company that decided to outsource its manufacturing of certain
roll label materials. The sales increase was partially offset by the effects of
the continued slowdown in the North American economy and its effect on the
graphics and specialty tapes businesses. Excluding currency, sales increased
internationally compared to the same period last year. Volume growth in the roll
materials business in Asia and Europe was offset by declines in Latin America,
the negative impact of foreign currency exchange rates and the continued
slowdown in the Company's graphics business. 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,
13
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)
- --------------------------------------------------
reduced leverage of fixed costs, adverse product mix shift, a more competitive
pricing environment and one-time costs associated with the start-up of a new
coater facility in the U.S.
Consumer and Converted Products: Three Months Ended
------------------------------
(In millions) September 29, September 30,
2001 2000
- ----------------------------------------------------------------------------------------
Net sales $ 460.5 $ 486.8
Income from operations before interest and taxes 62.6 79.7
- ----------------------------------------------------------------------------------------
The Consumer and Converted Products segment reported a decrease in sales for the
third quarter of 2001 compared to the same period last year. Sales in the U.S.
operations were impacted by sales volume declines in the office products and
converting businesses. Sales of Avery-brand products by the office superstores
were below prior year levels, which is consistent with the public announcements
made by the Company's customers of their reduced in-store traffic following the
events of September 11, and with a weaker back-to-school season. Domestic
converting businesses were negatively impacted by a weak retail environment and
the continued effects of the soft economy. 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 businesses in Europe.
The segment reported a decrease in income for the third quarter of 2001 compared
to the same period last year, primarily due to the overall decline in sales
volume and an adverse shift in product mix.
Results of Operations: Nine Months Year-To-Date
- -----------------------------------------------
Sales for the first nine months of 2001 were $2.89 billion compared to $2.96
billion in the corresponding period of 2000. Excluding the impact of currency,
sales were comparable to the prior year. Acquisitions contributed approximately
$66.8 million in sales for the first nine months of 2001. The reduction in sales
related to divested operations represented $17.4 million for the first nine
months.
Gross profit margin for the first nine months decreased to 32.6 percent compared
to 34.4 percent for the first nine months of 2000. The decline was primarily due
to adverse product mix and slower volume growth, as well as lower gross profit
margin of a recently acquired business.
Marketing, general and administrative expense, as a percent of sales, for the
first nine months improved to 21.7 percent compared to 21.9 percent for the
first nine months of 2000. The improvement was primarily due to spending
controls.
Interest expense decreased to $39.7 million for the first nine months compared
to $41.1 million for the first nine months of 2000, primarily reflecting lower
interest rates. This decrease was partially offset by increased debt to fund
acquisitions.
Income before taxes, as a percent of sales, was 9.6 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 percent for 2001 from 34.2
percent for 2000 primarily due to a more favorable geographic mix of income and
increased research and investment credits. The Company expects the full year
2001 tax rate to be in the range of 32.5 percent to 33 percent.
Net income totaled $185.1 million compared to $216 million in the first nine
months of 2000. Net income, as a percent of sales, was 6.4 percent for the first
nine months of 2001 and 7.3 percent for the same period last year.
14
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations: Nine Months Year-To-Date (continued)
- -----------------------------------------------------------
Net income per common share for the first nine months was $1.89 compared to
$2.19 for the same period last year. Net income per common share, assuming
dilution, was $1.88 for the first nine months of 2001 and $2.16 for the first
nine 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 nine months of 2001.
Results of Operations by Reportable Operating Segment
Pressure-sensitive Adhesives and Materials: Nine Months Ended
------------------------------
(In millions) September 29, September 30,
2001 2000
- ----------------------------------------------------------------------------------------
Net sales $ 1,647.9 $ 1,612.0
Income from operations before interest and taxes 139.7 172.7
- ----------------------------------------------------------------------------------------
The Pressure-sensitive Adhesives and Materials segment reported increased sales
for the first nine 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 graphics and specialty tapes businesses. These
declines were partially offset by the Dunsirn acquisition and the benefit of new
businesses obtained from the closure of a competitor's plant and a new supply
agreement with a company that decided to outsource its manufacturing of certain
roll label materials. Sales increased internationally, primarily as a result of
the Adespan acquisition in 2000 and unit volume growth in Europe and Asia. This
increase was partially offset by the negative impact of foreign currency rates,
a slowdown in certain European markets served by the Company's graphics and
specialty tapes businesses, and sales declines in Latin America. 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,
a more competitive pricing environment and one-time costs associated with the
start-up of a new coater facility in the U.S.
Consumer and Converted Products: Nine Months Ended
-------------------------------
(In millions) September 29, September 30,
2001 2000
- ----------------------------------------------------------------------------------------
Net sales $ 1,352.1 $ 1,412.7
Income from operations before interest and taxes 197.0 219.4
- ----------------------------------------------------------------------------------------
The Consumer and Converted Products segment reported a decrease in sales for the
first nine 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 consolidation of office product retail stores by
the Company's customers, and a weak retail environment. 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 nine 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.
15
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 percent for the quarter from 6.1 percent a year ago. This
increase is due primarily to the increase in cash and a decrease in accounts
payable and other current liabilities. The average number of days sales
outstanding in accounts receivable increased to 58 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 $244.4 million for the
first nine months of 2001 and $292.6 million for the first nine months of 2000.
The decrease in net cash flows provided by operating activities was primarily
due to the decline in net income and the decline in current liabilities. 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 $31.9 million compared to $42.9
million a year ago. For the first nine months of 2001, capital spending totaled
$96.6 million compared to $120.2 million a year ago. Capital expenditures for
2001 are expected to be approximately $150 million, as compared to $198.3
million in 2000. The Company expects the capital spending level in 2002 to be
similar to 2001.
During the first nine months of 2001, total debt increased $62.4 million to
$889.6 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 48.9 percent as of the end of the third 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 $930.3 million from $828.1 million at year end
2000. During the first nine months of 2001, the Company purchased approximately
355,000 shares of common stock at a cost of $17.8 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 $127.3 million to
$572.6 million from year end 2000. Dividends paid for the first nine months of
2001 totaled $99.1 million compared to $90.6 million a year ago.
16
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Recent Accounting Requirements
- ------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. All provisions of this Statement will be effective at
the beginning of fiscal 2003. The Company is in the process of determining the
impact of this standard on the Company's financial results when effective.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and amends Accounting Principles Board (APB) No. 30, "Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." This Statement requires
that long-lived assets that are to be disposed of by sale be measured at the
lower of book value or fair value less costs to sell. SFAS No. 144 retains the
fundamental provisions of SFAS 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. This Statement also retains APB No.
30's requirement that companies report discontinued operations separately from
continuing operations. 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. 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.
17
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Pending Acquisition
- -------------------
On September 7, 2001, the Company announced an agreement to acquire the
Jackstadt GmbH pressure-sensitive adhesive materials business. Jackstadt is a
privately-held manufacturer of pressure-sensitive adhesive materials based in
Germany. Jackstadt, with consolidated revenues of approximately $400 million in
2000, has a global customer base and generates approximately 80 percent of its
sales outside of Germany. The transaction is subject to a number of closing
conditions, including regulatory approvals, and is expected to close in the
fourth quarter of 2001 or early 2002.
Subsequent Event
- ----------------
In October 2001, the Board of Directors amended the bylaws of the Company to
increase the size of the board from 12 to 13 members.
Outlook
- -------
The Company's results for the first nine months of 2001 reflect the challenging
economic environment in the U.S. and international markets. The events of
September 11, 2001 compounded the negative impact of the economic slowdown
already experienced during the first half of the year. This slowdown has
affected sales volume for both segments and is expected to continue if
current national and global economic conditions continue.
The Company is focused on cost management efforts in an uncertain global
economic environment and believes it is well positioned to resume previous
growth trends once economic conditions improve. The Company has reduced costs
and expects to continue to benefit from the implementation of productivity
improvement initiatives. During the fourth quarter of 2001, the Company expects
to divest some small non-core businesses and, in addition, plans on taking
additional cost reduction actions. The net effect of both is not expected to
have a significant impact on the Company's results of operations. In addition to
driving down costs, the Company continues to pursue longer-term growth
initiatives. These initiatives include the pending acquisition of Jackstadt,
entry into new markets, development of new products and geographic expansion.
18
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, acts of war, terrorism, natural disasters, 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.
19
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.
20
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. Exhibits: 3(ii) Bylaws of Avery Dennison Corporation - amended and
restated, October 25, 2001.
12 Computation of Ratio of Earnings to Fixed Charges
b. Reports on Form 8-K: Registrant filed a current report on Form 8-K on
September 7, 2001 with respect to a definitive agreement to acquire the
pressure-sensitive adhesive materials business of Jackstadt GmbH. The
transaction is subject to a number of closing conditions, including
regulatory approvals.
21
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)
Daniel R. O'Bryant
----------------------------------
Senior Vice President, Finance, and
Chief Financial Officer
(Principal Financial Officer)
Thomas E. Miller
-----------------------------------
Vice President and Controller
(Chief Accounting Officer)
November 13, 2001
22