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 29, 2002
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 (I.R.S. employer
incorporation or organization) 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,
2002: 109,844,002
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
INDEX TO FORM 10-Q
------------------
Page No.
--------
Part I. Financial Information (Unaudited):
- --------------------------------------------
Financial Statements:
Condensed Consolidated Balance Sheet
June 29, 2002 and December 29, 2001 3
Consolidated Statement of Income
Three and Six Months Ended June 29, 2002 and June 30, 2001 4
Condensed Consolidated Statement of Cash Flows
Six Months Ended June 29, 2002 and June 30, 2001 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations and Financial Condition 14
Quantitative and Qualitative Disclosures About Market Risk 22
Part II. Other Information:
- ---------------------------
Exhibits and Reports on Form 8-K 23
Signatures 24
2
PART I. ITEM 1. FINANCIAL INFORMATION
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
June 29, 2002 December 29, 2001
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 25.9 $ 19.1
Trade accounts receivable, net 753.6 569.1
Inventories, net 355.6 267.4
Deferred taxes 55.7 61.1
Other current assets 69.3 65.8
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 1,260.1 982.5
Property, plant and equipment, at cost 2,193.4 2,057.5
Accumulated depreciation 1,042.6 982.9
- ------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 1,150.8 1,074.6
Goodwill, net 464.7 293.2
Intangibles resulting from business acquisitions, net 130.9 120.0
Other assets 356.8 348.9
- ------------------------------------------------------------------------------------------------------------------------
$ 3,363.3 $ 2,819.2
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term and current portion of long-term debt $ 441.7 $ 223.0
Accounts payable 409.5 316.4
Other current liabilities 490.7 411.9
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,341.9 951.3
Long-term debt 668.3 626.7
Non-current deferred taxes and other long-term liabilities 233.0 237.2
Other long-term obligation 80.2 74.6
Shareholders' equity:
Common stock - $1 par value; authorized - 400,000,000 shares; issued -
124,126,624 shares at June 29, 2002 and
December 29, 2001 124.1 124.1
Capital in excess of par value 777.9 707.2
Retained earnings 1,622.2 1,556.1
Cost of unallocated ESOP shares (13.7) (13.7)
Employee stock trusts, 11,349,478 shares at June 29, 2002 and
12,008,123 shares at December 29, 2001 (711.6) (674.5)
Treasury stock at cost, 14,282,622 shares at June 29, 2002 and
14,235,871 shares at December 29, 2001 (636.4) (633.4)
Accumulated other comprehensive loss (122.6) (136.4)
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,039.9 929.4
- ------------------------------------------------------------------------------------------------------------------------
$ 3,363.3 $ 2,819.2
========================================================================================================================
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 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001
- ----------------------------------------------------------------------------------------------------------------------
Net sales $ 1,056.3 $ 960.8 $ 1,987.1 $ 1,924.0
Cost of products sold 709.8 649.0 1,331.7 1,293.2
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 346.5 311.8 655.4 630.8
Marketing, general and administrative expense 231.4 208.4 437.1 417.6
Interest expense 9.6 13.5 18.9 27.3
- ----------------------------------------------------------------------------------------------------------------------
Income before taxes 105.5 89.9 199.4 185.9
Taxes on income 31.7 30.1 60.8 62.3
- ----------------------------------------------------------------------------------------------------------------------
Income before accounting change 73.8 59.8 138.6 123.6
Cumulative effect of accounting change, net of tax - - - (.2)
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 73.8 $ 59.8 $ 138.6 $ 123.4
======================================================================================================================
Per share amounts:
Net income per common share:
Before accounting change $ .75 $ .61 $ 1.41 $ 1.26
Cumulative effect of accounting change - - - -
- ----------------------------------------------------------------------------------------------------------------------
Net income per common share $ .75 $ .61 $ 1.41 $ 1.26
======================================================================================================================
Net income per common share, assuming dilution:
Before accounting change $ .74 $ .61 $ 1.40 $ 1.25
Cumulative effect of accounting change - - - -
- ----------------------------------------------------------------------------------------------------------------------
Net income per common share, assuming dilution $ .74 $ .61 $ 1.40 $ 1.25
======================================================================================================================
Dividends $ .33 $ .30 $ .66 $ .60
======================================================================================================================
Average shares outstanding:
Common shares 98.3 97.8 98.2 97.7
Common shares, assuming dilution 99.4 98.7 99.2 98.6
======================================================================================================================
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 29, 2002 June 30, 2001
- --------------------------------------------------------------------------------------------------------
Operating Activities:
- --------------------
Net income $ 138.6 $ 123.4
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 62.8 62.2
Amortization 9.5 16.1
Deferred taxes 3.1 (1.3)
Changes in assets and liabilities (46.2) (97.6)
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 167.8 102.8
- --------------------------------------------------------------------------------------------------------
Investing Activities:
- --------------------
Purchase of property, plant and equipment (38.4) (64.7)
Acquisitions, net of miscellaneous proceeds from sale of assets (218.1) (50.6)
Other (11.6) (37.9)
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (268.1) (153.2)
- --------------------------------------------------------------------------------------------------------
Financing Activities:
- --------------------
Additional borrowings 386.0 434.3
Payments of debt (223.4) (330.9)
Dividends paid (72.5) (66.1)
Purchase of treasury stock (3.3) (8.2)
Proceeds from exercise of stock options 20.5 13.7
Other (.5) 6.8
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 106.8 49.6
- --------------------------------------------------------------------------------------------------------
Effect of foreign currency translation on cash balances .3 (.3)
- --------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 6.8 (1.1)
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of period 19.1 11.4
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 25.9 $ 10.3
========================================================================================================
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 2001 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 2001 Annual Report on Form 10-K.
The second quarters of 2002 and 2001 consisted of thirteen-week periods
ending June 29, 2002 and June 30, 2001, respectively. The interim results
of operations are not necessarily indicative of future financial results.
2. Recent Acquisitions
On May 17, 2002, the Company acquired Jackstadt GmbH, a privately-held
manufacturer of pressure-sensitive adhesive materials based in Germany.
Jackstadt has a global customer base and had consolidated revenues of
approximately $400 million in 2001. The Jackstadt business is included in
the Company's Pressure-sensitive Adhesives and Materials segment. Jackstadt
complements the Company's operations in North America, Asia, Latin America
and Europe, and will enhance the Company's ability to grow in Eastern
Europe. Jackstadt is expected to enhance the Company's global presence and
enable it to offer a broader selection of products and services.
The purchase price at closing was approximately $300 million, which
includes $200 million in cash and assumed debt of $100 million. The Company
assumed liabilities of approximately $202 million, including the assumed
debt, and had incurred acquisition costs of approximately $14 million by
the end of the second quarter. The Company funded the transaction with cash
and short-term commercial paper. The excess of the cost-basis over the fair
value of net tangible assets acquired is currently estimated to be
approximately $157 million, which includes estimated identified intangible
assets of approximately $11 million, which are being amortized on a
straight-line basis over 5 years. The purchase price paid at closing was
based on financial statement values at June 30, 2001, and is subject to
adjustment based upon a formula in the purchase agreement and which is
subject to finalization of the closing financial statements. Jackstadt's
results of operations have been included in the Company's consolidated
financial statements as of the acquisition date.
The preliminary allocation of the purchase price as of June 29, 2002 has
been made and recorded in these financial statements. The Company has not
finalized this allocation and is currently obtaining third-party valuations
of assets and liabilities. In addition, the Company is currently reviewing
its plans with regard to facilities rationalization that may require
adjustments to estimated amounts recorded for closure of certain facilities
and carrying values of Jackstadt assets. Receipt of the final valuations
and ongoing assessments may impact the allocation of the purchase price,
and changes to the preliminary allocation are likely to occur.
6
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Recent Acquisitions (continued)
The following represents the unaudited pro forma results of operations for
the Company and Jackstadt as though the acquisition of Jackstadt had
occurred at the beginning of the periods shown. The pro forma results
include interest expense on additional debt that would have been needed to
finance the purchase, amortization of intangibles that would have been
acquired, and certain adjustments that would have been required to conform
to the Company's accounting policies. The pro forma results of operations
have been prepared based on the preliminary allocation of the purchase
price and may require adjustment in accordance with the terms of the
purchase agreement or as a result of the finalization of the purchase price
allocation. This pro forma information is for comparison purposes only, and
is not necessarily indicative of the results that would have occurred had
the acquisition been completed at the beginning of the periods presented,
nor is it necessarily indicative of future results.
(In millions, except per share amounts)
(Unaudited)
----------------------------------------------------------------
Three Months Ended Six Months Ended
----------------------------------------------------------------
June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001
----------------------------------------------------------------------------------------------------------
Net sales $1,108.8 $1,060.2 $2,138.0 $2,127.3
----------------------------------------------------------------------------------------------------------
Net income $ 74.7 $ 60.3 $ 139.1 $ 124.6
----------------------------------------------------------------------------------------------------------
Net income per common share $ .76 $ .62 $ 1.42 $ 1.27
----------------------------------------------------------------------------------------------------------
Net income per common share,
assuming dilution $ .75 $ .61 $ 1.40 $ 1.26
----------------------------------------------------------------------------------------------------------
Other acquisitions during 2002 were not significant to the Company's
consolidated financial position or results of operations.
3. Goodwill and Intangibles Resulting from Business Acquisitions
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 (APB) Opinion
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 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 were effective in the first quarter of 2002. As a result of this
Statement, the Company discloses goodwill separately from intangible assets
on the Condensed Consolidated Balance Sheet.
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. SFAS No. 142 provides
that (i) goodwill and indefinite-lived intangible assets will no longer be
amortized, (ii) impairment will be measured using various valuation
techniques based on discounted cash flows, (iii) goodwill will be tested
for impairment at least annually at the reporting unit level, (iv)
intangible assets deemed to have an indefinite life will be tested for
impairment at least annually and (v) intangible assets with finite lives
will be amortized over their useful lives. The Statement provides specific
guidance on testing goodwill and intangible assets for impairment, and
requires that reporting units be identified
7
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Goodwill and Intangibles Resulting from Business Acquisitions (continued)
for the purpose of assessing potential future impairments. All provisions
of this Statement were effective at the beginning of fiscal 2002. Utilizing
internal and external resources, the Company adopted SFAS No.142 in the
first quarter of 2002. The Company identified its reporting units and the
amounts of goodwill, intangible assets, other assets and liabilities
allocated to those reporting units.
SFAS No. 142 requires that goodwill be tested for impairment upon adoption
of the Statement, as well as annually thereafter. The Company completed its
goodwill impairment test during the first quarter of 2002 and had no
impairment losses. Intangible assets deemed to have an indefinite life are
tested for impairment by comparing the fair value of the asset to its
carrying amount. The Company does not have intangible assets with
indefinite lives. Based on the results of the impairment tests, the Company
did not record a transitional impairment loss upon adoption of SFAS No.
142.
The Company adopted SFAS No. 142 effective at the beginning of fiscal 2002
and as a result, ceased amortization of goodwill as of that date. Changes
in the net carrying amount of goodwill for the year ended June 29, 2002, by
reportable segment, are as follows:
Consumer and Pressure-sensitive
Converted Adhesives and
(In millions) Products Materials Total
------------------------------------------------------------------------------------------------------------
Balance as of December 29, 2001 $ 148.9 $ 144.3 $ 293.2
Goodwill acquired during the period 3.4 150.2 153.6
Impairment losses - - -
Translation adjustments and other 6.1 11.8 17.9
------------------------------------------------------------------------------------------------------------
Balance as of June 29, 2002 $ 158.4 $ 306.3 $ 464.7
------------------------------------------------------------------------------------------------------------
The following table sets forth the Company's acquired intangible assets at
June 29, 2002 and December 29, 2001, which will continue to be amortized:
June 29, 2002 December 29, 2001
----------------------------------- -------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
(In millions) Amount Amortization Amount Amount Amortization Amount
----------------------------------------------------------------------------------------------------------------
Amortizable intangible assets:
Tradenames and trademarks $ 35.4 $ 8.6 $ 26.8 $ 23.4 $ 6.8 $ 16.6
Patented technology 63.6 7.5 56.1 63.6 5.8 57.8
Customer relations 51.2 4.7 46.5 47.6 3.6 44.0
Other intangibles 2.5 1.0 1.5 2.3 .7 1.6
----------------------------------------------------------------------------------------------------------------
Total $ 152.7 $ 21.8 $ 130.9 $ 136.9 $ 16.9 $ 120.0
----------------------------------------------------------------------------------------------------------------
8
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Goodwill and Intangibles Resulting from Business Acquisitions (continued)
Amortization expense on intangible assets resulting from business
acquisitions was $2 million and $4 million for three and six months ended
June 29, 2002, respectively, and $1.8 million and $3.6 million for the
three and six months ended June 30, 2001. Amortization expense on goodwill
was $3.6 million and $7.1 million for the three and six months ended June
30, 2001. Based on current information, estimated amortization expense for
such acquired intangible assets for this fiscal year, and for each of the
next four succeeding fiscal years, is expected to be approximately $10
million, $10 million, $9 million, $9 million and $9 million, respectively.
As required by SFAS No. 142, the results for the prior year's quarters have
not been restated. Had the Company accounted for its goodwill under SFAS
No. 142 for all periods presented, the Company's net income and earnings
per share would have been as follows:
Three Months Ended Six Months Ended
------------------------------------------------------------------------
(In millions, except per share amounts) June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001
----------------------------------------------------------------------------------------------------------------------
Reported net income $ 73.8 $ 59.8 $ 138.6 $ 123.4
Goodwill amortization, net of tax - 3.5 - 6.8
-----------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 73.8 $ 63.3 $ 138.6 $ 130.2
-----------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
As reported $ .75 $ .61 $ 1.41 $ 1.26
Goodwill amortization - .04 - .07
-----------------------------------------------------------------------------------------------------------------------
Adjusted basic earnings per share $ .75 $ .65 $ 1.41 $ 1.33
-----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
As reported $ .74 $ .61 $ 1.40 $ 1.25
Goodwill amortization - .03 - .07
-----------------------------------------------------------------------------------------------------------------------
Adjusted diluted earnings per share $ .74 $ .64 $ 1.40 $ 1.32
-----------------------------------------------------------------------------------------------------------------------
4. 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 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001
-----------------------------------------------------------------------------------------------------------------------------
(A) Net income available to common shareholders $ 73.8 $ 59.8 $ 138.6 $ 123.4
-----------------------------------------------------------------------------------------------------------------------------
(B) Weighted average number of common shares
outstanding 98.3 97.8 98.2 97.7
Additional common shares issuable under employee
stock options using the treasury stock method 1.1 .9 1.0 .9
-----------------------------------------------------------------------------------------------------------------------------
(C) Weighted average number of common shares
outstanding assuming the exercise of stock options 99.4 98.7 99.2 98.6
=============================================================================================================================
Net income per common share (A) / (B) $ .75 $ .61 $ 1.41 $ 1.26
=============================================================================================================================
Net income per common share, assuming
dilution (A) / (C) $ .74 $ .61 $ 1.40 $ 1.25
=============================================================================================================================
9
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Comprehensive Income
Comprehensive income for the Company included net income, foreign currency
translation adjustments and the effective portion of 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 29, 2002 was $107.4 million and $152.4 million, respectively. For the
three and six months ended June 30, 2001, total comprehensive income was
$51.3 million and $103.2 million, respectively. As of June 29, 2002, the
foreign currency translation adjustment, minimum pension liability, net
loss on derivative instruments designated as cash flow hedges and total
accumulated other comprehensive loss balances were $(102.4) million,
$(14.3) million, $(5.9) million and $(122.6) million, respectively. As of
December 29, 2001, the foreign currency translation adjustment, minimum
pension liability, net gain on derivative instruments designated as cash
flow hedges and total accumulated other comprehensive loss balances were
$(123.1) million, $(14.3) million, $1 million and $(136.4) million
respectively.
The table below details the cash flow hedging instrument activity in other
comprehensive income (loss) for the first six months of 2002:
(In millions) June 29, 2002
------------------------------------------------------------------------
Beginning accumulated derivative gain $ 1.0
Net loss reclassified to earnings .1
Net change in the revaluation of hedging transactions (7.0)
------------------------------------------------------------------------
Ending accumulated derivative loss $ (5.9)
========================================================================
6. Foreign Currency
Translation of financial statements of subsidiaries operating in
hyperinflationary economies and transactions in foreign currencies resulted
in losses of $.9 million and $2.1 million, respectively, during the three
and six months ended June 29, 2002. For the three and six months ended June
30, 2001, the Company recorded gains of $.4 million and $.2 million,
respectively. Operations in hyperinflationary economies consist of the
Company's operations in Turkey for 2001 and 2002.
7. Financial Instruments
The Company adopted SFAS 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 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.
During the three and six months ended June 29, 2002 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 28, 2002 are not expected to be significant. A loss of
approximately $2.7 million related to a net investment hedge is included in
the foreign currency translation adjustment reported in accumulated other
comprehensive loss.
10
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Inventories
Inventories consisted of:
(In millions) June 29, 2002 December 29, 2001
--------------------------------------------------------------------------
Raw materials $ 103.5 $ 82.9
Work-in-progress 83.6 67.6
Finished goods 185.3 134.6
LIFO adjustment (16.8) (17.7)
--------------------------------------------------------------------------
$ 355.6 $ 267.4
==========================================================================
9. Research and Development
Research and development expense for the three and six months ended June
29, 2002 was $18 million and $35 million, respectively. For the three and
six months ended June 30, 2001, research and development expense was $17.9
million and $35.3 million, respectively.
10. 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. The Company is participating with
other PRPs at 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 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. Amounts currently accrued are not significant to the
consolidated financial position of the Company and, based upon current
information, management believes that it is unlikely the final resolution
of these matters will significantly impact the consolidated financial
position and operations of 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 is
not expected to materially affect the Company.
11
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Cost Reduction Program
The Company recorded a charge in the fourth quarter of 2001 relating to
cost reduction actions. The 2001 charge involves cost reduction programs
and the reorganization of manufacturing and administrative facilities in
both of the Company's operating segments. The cost reduction efforts
resulted in a pretax charge of $19.9 million, which consisted of employee
severance and related costs of $13.1 million for approximately 400
positions worldwide, and asset write-downs of $6.8 million. The positions
included approximately 170 employees in the Pressure-sensitive Adhesives
and Materials segment, 210 employees in the Consumer and Converted Products
segment and 20 Corporate employees. Severance and related costs represent
cash paid or to be paid to employees terminated under the program. Asset
write-downs represent non-cash charges required to reduce the carrying
value of assets to be disposed of to net realizable value as of the planned
date of disposal. At the end of the second quarter of 2002, $4.8 million
remained accrued for severance and related costs (included in "Other
current liabilities") and $0.7 million remained accrued for asset
write-downs (included in "Other current liabilities") in the Condensed
Consolidated Balance Sheet. At the end of the second quarter, of the 400
positions under these actions, approximately 320 employees had left the
Company. The Company expects to complete this cost reduction program in
2002.
12. Segment Information
Financial information by reportable operating segment is set forth below:
Three Months Ended Six Months Ended
---------------------------------------------------------------------
(In millions) June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001
-----------------------------------------------------------------------------------------------------------------------
Net sales:
Pressure-sensitive Adhesives and Materials $ 640.2 $ 558.2 $ 1,190.6 $ 1,094.6
Consumer and Converted Products 460.0 448.1 880.1 900.7
Intersegment/(1)/ (43.9) (45.5) (83.6) (71.3)
-----------------------------------------------------------------------------------------------------------------------
Net sales $ 1,056.3 $ 960.8 $ 1,987.1 $ 1,924.0
=======================================================================================================================
Income (loss) from operations before
interest and taxes:
Pressure-sensitive Adhesives and Materials $ 60.9 $ 46.4 $ 111.9 $ 91.3
Consumer and Converted Products 66.0 63.1 126.0 133.7
Corporate administrative and research and
development expenses (11.8) (6.1) (19.6) (11.8)
Interest expense (9.6) (13.5) (18.9) (27.3)
-----------------------------------------------------------------------------------------------------------------------
Income before taxes and accounting change $ 105.5 $ 89.9 $ 199.4 $ 185.9
=======================================================================================================================
/(1)/ Intersegment sales primarily represent sales from the
Pressure-sensitive Adhesives and Materials segment to the Consumer and
Converted Products segment.
12
.
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. Recent Accounting Requirements
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Under EITF Issue No. 94-3, a liability for an exit cost is
recognized at the date an entity commits to an exit plan. SFAS No. 146
eliminates the definition and requirements for recognition of exit costs in
EITF Issue 94-3 and requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred.
This Statement also establishes that fair value is the objective for
initial measurement of the liability. The provisions of this Statement will
be effective after December 31, 2002. The Company is currently in the
process of evaluating the impact of adopting SFAS No. 146.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," and an amendment of that
Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." This Statement amends FASB Statement No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions of this Statement related to the rescission of Statement No. 4
are effective beginning in 2003. All other provisions were effective May
16, 2002. The provisions adopted, effective May 16, 2002, did not have a
significant impact on the Company's financial results. The Company is in
the process of determining the impact of this standard on the Company's
financial results for those provisions effective in 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement was effective
for the Company on December 30, 2001, and 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)
Opinion No. 30, "Reporting the Results of Operations - 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 Opinion No. 30's requirement that companies
report discontinued operations separately from continuing operations. For
the quarter and six months ended June 29, 2002, the Company divested
operations whose results, including the gain/loss on asset sales, did not
have a significant impact on the income statement and were, therefore, not
reflected as discontinued operations in the Company's Consolidated
Statement of Income.
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.
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
- --------------------------------------
On May 17, 2002, the Company acquired Jackstadt GmbH, a privately-held
manufacturer of pressure-sensitive adhesive materials based in Germany.
Jackstadt has a global customer base and had consolidated revenues of
approximately $400 million in 2001. The Jackstadt business is included in the
Company's Pressure-sensitive Adhesives and Materials segment. Jackstadt
complements the Company's operations in North America, Asia, Latin America and
Europe, and will enhance the Company's ability to grow in Eastern Europe.
Jackstadt is expected to enhance the Company's global presence and enable it to
offer a broader selection of products and services.
The purchase price at closing was approximately $300 million, which includes
$200 million in cash and assumed debt of $100 million. The Company assumed
liabilities of approximately $202 million, including the assumed debt, and had
incurred acquisition costs of approximately $14 million by the end of the second
quarter. The Company funded the transaction with cash and short-term commercial
paper. The excess of the cost-basis over the fair value of net tangible assets
acquired is currently estimated to be approximately $157 million, which includes
estimated identified intangible assets of approximately $11 million, which are
being amortized on a straight-line basis over 5 years. The purchase price paid
at closing was based on financial statement values at June 30, 2001, and is
subject to adjustment based upon a formula in the purchase agreement and which
is subject to finalization of the closing financial statements. Jackstadt's
results of operations have been included in the Company's consolidated financial
statements as of the acquisition date.
Quarterly sales were $1.06 billion, compared to second quarter 2001 sales of
$960.8 million. Excluding the impact of currency, sales increased 10.3 percent.
The acquisition of Jackstadt contributed an additional $45.7 million in sales to
the second quarter of 2002 as compared to the same period last year. The
reduction in sales related to divested operations represented $18 million for
the quarter.
Gross profit margin increased to 32.8 percent for the quarter compared to 32.5
percent for the second quarter of 2001. The increase was primarily due to cost
reduction programs and productivity improvement gains achieved through the Six
Sigma program. These improvements were partially offset by lower gross profit
margin on the Jackstadt business.
Marketing, general and administrative expense, as a percent of sales, was 21.9
percent compared to 21.7 percent for the second quarter of 2001. The increase
was primarily due to increases in marketing expenses and bonus accruals due to
higher sales and net income. Integration costs related to the Jackstadt
acquisition also contributed to the increase in marketing, general and
administrative expense. Productivity improvements and the change in accounting
for goodwill amortization partially offset the increases.
Interest expense decreased to $9.6 million for the quarter, compared to $13.5
million a year ago, primarily reflecting lower interest rates on short-term,
floating rate debt. The decrease in interest expense was partially offset by the
additional interest on the debt used to fund the Jackstadt acquisition.
Income before taxes, as a percent of sales, was 10 percent compared to 9.4
percent a year ago. The increase reflects the higher gross profit margin and the
decrease in interest expense. The elimination of goodwill amortization also had
a positive impact on the Company's pretax income. The effective tax rate
decreased to 30 percent for the quarter compared to 33.5 percent for the second
quarter of 2001 and 32.4 percent for the full year 2001, primarily due to the
change in accounting for goodwill, as well as both structural and operational
changes that reduced the effective tax rate on a global basis.
Net income totaled $73.8 million compared to $59.8 million in the second quarter
of 2001. Net income, as a percent of sales, was 7 percent for the second quarter
of 2002 and 6.2 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: For the Quarter (continued)
- --------------------------------------------------
Net income per common share for the quarter was $.75 compared to $.61 in the
second quarter of 2001. Net income per common share, assuming dilution, was $.74
for the second quarter of 2002 and $.61 for the second quarter of 2001. The
results for the second quarter of 2002 include an approximate $(.02) per share,
assuming dilution, impact from the acquisition of Jackstadt and a benefit of
approximately $.03 per share, assuming dilution, related to the accounting
change eliminating goodwill amortization.
Results of Operations by Reportable Operating Segment
Pressure-sensitive Adhesives and Materials: Three Months Ended
----------------------------------------------
(In millions) June 29, 2002 June 30, 2001
- -----------------------------------------------------------------------------------------------------------
Net sales $ 640.2 $ 558.2
Income from operations before interest and taxes 60.9 46.4
- -----------------------------------------------------------------------------------------------------------
The Pressure-sensitive Adhesives and Materials segment reported increased sales
for the second quarter of 2002 compared to the same period last year. Sales
increased domestically primarily due to the strong volume growth in the roll
materials business, including the market share gain from business obtained from
the closure of a competitor's plant and a supply agreement with a company that
decided to outsource its manufacturing of certain roll label materials, as well
as strong volume growth in the specialty tapes business. The sales increase was
partially offset by the reduction in sales from divested operations, including
the specialty coatings business sold in the fourth quarter of 2001. Sales
increased internationally, primarily due to the acquisition of Jackstadt and
sales growth in most businesses in Asia, Europe and Latin America.
The segment reported an increase in income for the second quarter of 2002
compared to the same period last year. Income increased domestically and
internationally primarily due to strong volume growth and improved profitability
achieved through cost reductions and productivity gains, and the change in
accounting for goodwill amortization. The increase was partially offset by
integration costs related to the Jackstadt acquisition.
Consumer and Converted Products: Three Months Ended
----------------------------------------------
(In millions) June 29, 2002 June 30, 2001
- -----------------------------------------------------------------------------------------------------------
Net sales $ 460.0 $ 448.1
Income from operations before interest and taxes 66.0 63.1
- -----------------------------------------------------------------------------------------------------------
The Consumer and Converted Products segment reported an increase in sales for
the second quarter of 2002 compared to the same period last year. Sales in the
U.S operations increased primarily due to increased sales volume in the office
products business because of higher sales related to the back-to-school season
in the second quarter, as well as increased sales from the industrial and
automotive business. Sales from international operations increased primarily due
to the strong volume growth in Asia, especially in the ticketing business, and
sales growth in Europe. The increase was partially offset by the reduction in
sales from divested operations. The segment reported an increase in income for
the second quarter of 2002 compared to the same period last year. Income
increased domestically and internationally primarily due to improved sales,
improved productivity and the change in accounting for goodwill amortization.
15
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
- ----------------------------------------------
Sales for the first six months of 2002 were $1.99 billion, compared to $1.92
billion in the corresponding period of 2001. Excluding the impact of currency,
sales increased 4.3 percent. The acquisitions of Jackstadt in May of 2002 and
Dunsirn Industries and CD Stomper in February of 2001 contributed an additional
$53.3 million in sales for the first six months of 2002 over the amounts
contributed by these businesses as compared to the same period last year. The
reduction in sales related to divested operations represented $37.9 million for
the first six months.
Gross profit margin for the first six months increased to 33 percent compared to
32.8 percent for the first six months of 2001. The increase was primarily due to
cost reduction programs and productivity improvement gains achieved through the
Six Sigma program. Lower gross profit margin on the Jackstadt business partially
offset the improvements.
Marketing, general and administrative expense, as a percent of sales, for the
first six months was 22 percent compared to 21.7 percent for the first six
months of 2001. The increase was primarily due to increases in marketing
expenses and bonus accruals due to higher sales and net income. Integration
costs related to the Jackstadt acquisition also contributed to the increase in
marketing, general and administrative expense. Productivity improvements and the
change in accounting for goodwill amortization partially offset the increases.
Interest expense decreased to $18.9 million for the first six months, compared
to $27.3 million for the first six months of 2001, primarily reflecting lower
interest rates on short-term, floating rate debt. The decrease in interest
expense was partially offset by the additional interest on the debt used to fund
the Jackstadt acquisition.
Income before taxes, as a percent of sales, was 10 percent compared to 9.7
percent a year ago. The increase reflects the higher gross profit margin and the
decrease in interest expense. The elimination of goodwill amortization also had
a positive impact on the Company's pretax income. The year-to-date effective tax
rate decreased to 30.5 percent for 2002 from 33.5 percent for the first six
months of 2001 and 32.4 percent for the full year 2001. The decrease is
primarily due to the change in accounting for goodwill, as well as both
structural and operational changes that reduced the effective tax rate on a
global basis.
Net income totaled $138.6 million compared to $123.4 million in the first six
months of 2001. Net income, as a percent of sales, was 7 percent for the first
six months of 2002 and 6.4 percent for the same period last year.
Net income per common share for the first six months was $1.41 compared to $1.26
for the same period last year. Net income per common share, assuming dilution,
was $1.40 for the first six months of 2002 and $1.25 for the first six months of
2001. The results for the first six months of 2002 include an approximate $(.02)
per share, assuming dilution, impact from the acquisition of Jackstadt and a
benefit of approximately $.07 per share, assuming dilution, related to the
accounting change eliminating goodwill amortization.
Results of Operations by Reportable Operating Segment
Pressure-sensitive Adhesives and Materials: Six Months Ended
-----------------------------------------
(In millions) June 29, 2002 June 30, 2001
- ------------------------------------------------------------------------------------------------------------------
Net sales $ 1,190.6 $ 1,094.6
Income from operations before interest and taxes 111.9 91.3
- ------------------------------------------------------------------------------------------------------------------
The Pressure-sensitive Adhesives and Materials segment reported increased sales
for the first six months of 2002 compared to the same period last year. Sales
increased domestically primarily due to the strong volume growth in
16
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)
- ----------------------------------------------------------
the roll materials business, including the market share gain from business
obtained from the closure of a competitor's plant and a supply agreement with a
company that decided to outsource its manufacturing of certain roll label
materials, as well as a full six months of sales from the Dunsirn acquisition,
which occurred in February of 2001. Sales also improved in the U.S. specialty
tapes business. The sales increase was partially offset by the reduction in
sales from divested operations, including the specialty coatings business sold
in the fourth quarter of 2001. Sales increased internationally, primarily due to
the acquisition of Jackstadt and strong volume growth in Asia and Europe. Sales
growth in Latin America was partially offset by the negative impact of changes
in foreign currency exchange rates.
The segment reported an increase in income for the first six months of 2002
compared to the same period last year. Income increased domestically and
internationally primarily due to sales growth, improved profitability in the
roll materials, graphics and specialty tapes businesses achieved through cost
reductions and productivity gains, and the change in accounting for goodwill
amortization.
Consumer and Converted Products: Six Months Ended
--------------------------------------
(In millions) June 29, 2002 June 30, 2001
- -------------------------------------------------------------------------------------------------------------
Net sales $ 880.1 $ 900.7
Income from operations before interest and taxes 126.0 133.7
- -------------------------------------------------------------------------------------------------------------
The Consumer and Converted Products segment reported a decrease in sales for the
first six months of 2002 compared to the same period last year. Sales in the U.S
operations declined primarily due to weak retail apparel sales in the first
quarter, which impacted the ticketing business, and the general economic
weakness in the first quarter, which impacted sales volumes across most of the
segment. The decrease in sales in the U.S. operations was partially offset by a
full six months of sales from the acquisition of CD Stomper, which occurred in
February of 2001. Excluding the reduction in sales from divested operations,
sales from international operations increased. The increase was primarily due to
the sales increase in Asia. The increase was partially offset by the negative
impact of changes in foreign currency exchange rates, weak retail apparel sales
in the first quarter which impacted the ticketing business and the general
weakness in business conditions experienced in international markets during the
first quarter. The segment reported a decrease in income primarily due to the
overall decline in sales from U.S. operations. This decrease was partially
offset by the change in accounting for goodwill amortization.
Financial Condition
- -------------------
Average working capital, excluding short-term debt, as a percent of sales,
decreased to 8.5 percent for the quarter from 8.7 percent a year ago. This
decrease is due primarily to the increase in sales. Excluding the Jackstadt
acquisition, average working capital, excluding short-term debt, would have been
7.2 percent. The average number of days sales outstanding in accounts receivable
increased to 65 days compared to 59 days a year ago, reflecting the increase in
accounts receivable at the end of the quarter from the Jackstadt acquisition and
longer payment terms associated with increased international sales.
Net cash flows provided by operating activities totaled $167.8 million for the
first six months of 2002 and $102.8 million for the first six months of 2001.
The increase in net cash flows provided by operating activities was primarily
due to the changes in working capital and the increase in net income. In
addition to cash flows from operations, the Company has adequate financing
arrangements, at competitive rates, to conduct its operations.
17
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financial Condition (continued)
- -------------------------------
Capital expenditures for the quarter were $20.9 million compared to $28.9
million a year ago. For the first six months of 2002, capital spending totaled
$38.4 million compared to $64.7 million a year ago. Capital expenditures for
2002 are expected to be approximately $160 million, as compared to $135.4
million in 2001. The Company's major capital projects this year are focused on
the international markets, including additional capital needs for the Jackstadt
business.
Other expenditures in investing activities declined compared to the prior year
primarily due to a reduction in spending for software.
During the first six months of 2002, total debt increased $260.3 million to
$1.11 billion from year end 2001. The increase in debt was due primarily to fund
the acquisition of Jackstadt, capital purchases and for other general purposes.
Total debt to total capital was 51.6 percent as of the end of the second quarter
of 2002 and 47.8 percent at year end 2001. The increase is due to additional
short-term borrowings to fund the Jackstadt acquisition. 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 of $80.2 million is reported in the "Other
long-term obligation" line on the Condensed Consolidated Balance Sheet, and is
scheduled to be paid in 2004.
In the third quarter of 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 $1.04 billion from $929.4 million at year end
2001. During the first six months of 2002, the Company purchased approximately
53,000 shares of common stock at a cost of $3.3 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, increased by $37.1 million to
$711.6 million from year end 2001. Dividends paid for the first six months of
2002 totaled $72.5 million compared to $66.1 million a year ago.
Cost Reduction Program
- ----------------------
The Company recorded a charge in the fourth quarter of 2001 relating to cost
reduction actions. The 2001 charge involves cost reduction programs and the
reorganization of manufacturing and administrative facilities in both of the
Company's operating segments. The cost reduction efforts resulted in a pretax
charge of $19.9 million, which consisted of employee severance and related costs
of $13.1 million for approximately 400 positions worldwide, and asset
write-downs of $6.8 million. The positions included approximately 170 employees
in the Pressure-sensitive Adhesives and Materials segment, 210 employees in the
Consumer and Converted Products segment and 20 Corporate employees. Severance
and related costs represent cash paid or to be paid to employees terminated
under the program. Asset write-downs represent non-cash charges required to
reduce the carrying value of assets to be disposed of to net realizable value as
of the planned date of disposal. At the end of the second quarter of 2002, $4.8
million remained accrued for severance and related costs (included in "Other
current liabilities") and $0.7 million remained accrued for asset write-downs
(included in "Other current liabilities") in the Condensed Consolidated Balance
Sheet. At the end of the second quarter, of the 400 positions under these
actions, approximately 320 employees had left the Company. The Company expects
to complete this cost reduction program in 2002.
18
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Future Accounting Requirements
- ------------------------------
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." Under EITF
Issue No. 94-3, a liability for an exit cost is recognized at the date an entity
commits to an exit plan. SFAS No. 146 eliminates the definition and requirements
for recognition of exit costs in EITF Issue 94-3 and requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. This Statement also establishes that fair value is the
objective for initial measurement of the liability. The provisions of this
Statement will be effective after December 31, 2002. The Company is currently in
the process of evaluating the impact of adopting SFAS No. 146.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This
Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, FASB Statement No.
64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement amends FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The provisions of this Statement related to the rescission of
Statement No. 4 are effective beginning in 2003. All other provisions were
effective May 16, 2002. The provisions adopted, effective May 16, 2002, did not
have a significant impact on the Company's financial results. The Company is in
the process of determining the impact of this standard on the Company's
financial results for those provisions effective in 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement was effective for the Company on
December 30, 2001, and 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) Opinion No. 30, "Reporting the Results of
Operations - 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 Opinion No. 30's requirement that companies report discontinued
operations separately from continuing operations. For the quarter and six months
ended June 29, 2002, the Company divested operations whose results, including
the gain/loss on asset sales, did not have a significant impact on the income
statement and were, therefore, not reflected as discontinued operations in the
Company's Consolidated Statement of Income.
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.
19
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Outlook
- -------
The Company's results for the first six months of 2002 reflected stronger sales
growth in the second quarter following the challenging economic environment in
the U.S. and international markets during the first quarter. While order
patterns across many of the Company's businesses continue to be generally
strong, the Company is cautious about the outlook for the second half of 2002,
given the worldwide economic uncertainties.
The Jackstadt acquisition in May 2002 is the Company's largest acquisition in
over a decade. The Company believes the combination is a strategic fit in the
core pressure-sensitive materials and graphics businesses. Jackstadt is expected
to strengthen the Company's business in many developing markets and important
growth areas around the world, including Asia, Latin America and Eastern Europe.
Integration of the Jackstadt business has begun, and the majority of the
integration actions are expected to be completed over the next 24 months. The
Company believes the total cash cost of the integration will be in the range of
$60 million to $70 million, of which approximately $30 million to $40 million is
expected to be recorded as a charge to the income statement. The Company
anticipates finalizing its integration plans and recording the charge in the
third quarter of 2002.
Interest expense was $9.6 million for the second quarter and $18.9 million for
the first six months of 2002, reflecting lower interest rates on the Company's
short-term, floating rate debt. The Company expects interest expense to increase
to the range of $11 million to $12 million in the third quarter, after giving
effect to an anticipated refinancing of short-term debt to long-term debt.
The effective tax rate was 30 percent for the second quarter and 30.5 percent
for the first six months of 2002. Due to the change in accounting for goodwill
and both structural and operational changes, the Company believes, subject to
changes in the geographic mix of income, the effective tax rate for the
remainder of 2002 will be in the range of approximately 30 percent to 30.5
percent.
Any further devaluation of the Argentine peso would continue to negatively
impact revenues and earnings from the Company's operations in Argentina.
Political, regulatory, economic, currency and other business issues in Argentina
are likely to continue to negatively impact those operations for the remainder
of 2002 as compared to 2001. Operations in Argentina (primarily reported in the
Pressure-sensitive Adhesives and Materials segment) represented less than $25
million in sales in 2001 and are not significant to the Company's financial
results.
Other 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 in Western
Europe and elsewhere will impact the Company's financial results.
The adoption of SFAS No.142 benefited earnings per share, assuming dilution, by
approximately $.07 in the first six months of 2002. Under the new accounting
standard, the Company no longer amortizes goodwill. The Company expects the new
accounting rule to benefit earnings per share, assuming dilution, by
approximately $.13 for 2002, as compared to 2001. However, the Company
anticipates that increased amortization expense related to capitalized software
will partially offset the benefit from the accounting change for goodwill
amortization.
In this period of challenging worldwide economic conditions, the Company is
focused on cost management efforts and believes it is positioned for further
growth as economic conditions improve. The Company has reduced costs and expects
to continue to benefit from the implementation of productivity improvement
initiatives. In addition to driving down costs, the Company continues to pursue
long-term growth initiatives. These initiatives include acquisitions, entry into
new markets, development of new products and geographic expansion.
20
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 anticipated 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 29, 2001 and
include, but are not limited to, risks and uncertainties relating to investment
in development activities and 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,
credit risks, 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), 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 statement should also be considered in light of the factors
detailed in Exhibit 99 to the Company's Annual Report on Form 10-K for the year
ended December 29, 2001.
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, other than as may be required by law.
21
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 29, 2001.
22
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 29, 2001.
ITEMS 2, 3, 4 and 5.
- --------------------
Not Applicable
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
a. Exhibits: 3(ii) Bylaws, as amended July 25, 2002.
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 August 6, 2002 with
respect to SEC Order No. 4-460 related to the Company's Chief Executive
Officer and Chief Financial Officer statements.
Registrant filed a current report on Form 8-K on June 3, 2002 with respect
to the Company's acquisition of Jackstadt GmbH.
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SIGNATURES
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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/ Michael A. Skovran
-------------------------
Michael A. Skovran
Vice President and Controller
(Chief Accounting Officer)
August 13, 2002
24