EXHIBIT 13
AVERY DENNISON CORPORATION
FINANCIAL HIGHLIGHTS
(In millions, except per share amounts) 2002 2001 2000
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FOR THE YEAR
Net sales $ 4,206.9 $ 3,803.3 $ 3,893.5
Income before taxes 364.8 359.8 426.3
Net income 257.2 243.2 283.5
Net income as a percent of sales 6.1 6.4 7.3
Net income per common share, assuming dilution $ 2.59 $ 2.47 $ 2.84
Dividends per common share 1.35 1.23 1.11
Capital expenditures 151.8 135.4 198.3
Return on average shareholders' equity (percent) 25.7 27.4 34.6
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AVERY DENNISON CORPORATION
FIVE-YEAR SUMMARY
Compound 2002/(1)/ 2001/(3)/ 2000
Growth Rate
(In millions, except per share amounts) 5 Year Dollars % Dollars % Dollars %
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FOR THE YEAR
Net sales 4.7% $ 4,206.9 100.0 $ 3,803.3 100.0 $ 3,893.5 100.0
Gross profit 4.6 1,353.7 32.2 1,240.2 32.6 1,332.2 34.2
Marketing, general and
administrative expense 4.3 913.1 21.7 830.5 21.8 851.3 21.9
Interest expense 6.6 43.7 1.0 50.2 1.3 54.6 1.4
Income before taxes 3.2 364.8 8.7 359.8 9.5 426.3 10.9
Taxes on income .2 107.6 2.6 116.4 3.1 142.8 3.7
Net income 4.7 257.2 6.1 243.2 6.4 283.5 7.3
==========================================================================================================================
1999/(4)/ 1998
(In millions, except per share amounts) Dollars % Dollars %
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FOR THE YEAR
Net sales $ 3,768.2 100.0 $ 3,459.9 100.0
Gross profit 1,281.4 34.0 1,144.5 33.1
Marketing, general and
administrative expense 842.6 22.4 773.2 22.3
Interest expense 43.4 1.2 34.6 1.0
Income before taxes 330.4 8.8 336.7 9.7
Taxes on income 115.0 3.1 113.4 3.3
Net income 215.4 5.7 223.3 6.5
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2002 2001 2000 1999 1998
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PER SHARE INFORMATION
Net income per common share 5.6% $ 2.61 $ 2.49 $ 2.88 $ 2.17 $ 2.20
Net income per common share,
assuming dilution 6.1 2.59 2.47 2.84 2.13 2.15
Dividends per common share 13.4 1.35 1.23 1.11 .99 .87
Average common shares outstanding (.9) 98.5 97.8 98.3 99.2 101.5
Average common shares outstanding,
assuming dilution (1.3) 99.4 98.6 99.8 101.3 104.1
Book value at fiscal year end 5.4 $ 10.64 $ 9.49 $ 8.49 $ 8.20 $ 8.33
Market price at fiscal year end 6.2 59.05 56.20 54.88 72.88 45.06
Market price range 52.86 to 44.39 to 43.31 to 39.75 to 40.88 to
69.49 60.24 78.00 72.88 60.75
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AT YEAR END
Working capital $ (80.6) $ 31.2 $ 181.7 $ 105.6 $ 137.7
Property, plant and equipment, net 1,199.2 1,074.6 1,079.0 1,043.5 1,035.6
Total assets/(2)/ 3,652.4 2,909.6 2,766.3 2,647.1 2,187.4
Long-term debt 837.2 626.7 772.9 617.5 465.9
Total debt 1,144.2 849.7 827.2 685.7 537.2
Shareholders' equity 1,056.4 929.4 828.1 809.9 833.3
Number of employees 20,500 17,300 17,900 17,400 16,100
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OTHER INFORMATION
Depreciation expense $ 127.1 $ 124.1 $ 126.0 $ 126.5 $ 114.6
Research and development expense 74.5 69.9 67.8 64.3 65.0
Effective tax rate 29.5% 32.4% 33.5% 34.8% 33.7%
Long-term debt as a percent of
total long-term capital 44.2 40.3 48.3 43.3 35.9
Total debt as a percent of total capital 52.0 47.8 50.0 45.8 39.2
Return on average shareholders'
equity (percent) 25.7 27.4 34.6 27.1 26.7
Return on average total capital (percent) 15.8 16.2 19.6 17.0 19.0
=================================================================================================================
/(1)/ Results for 2002 include sales of approximately $270 million from three
acquisitions completed during the year. Results for 2002 also include a
pretax charge for asset impairments and lease cancellation costs of
$21.4 million as well as a pretax charge of $10.7 million related to
severance.
/(2)/ Certain amounts for prior years were reclassified to conform with the
current year presentation.
/(3)/ Results for 2001 include a pretax gain of $20.2 million for the sale of
the Company's specialty coatings business and a pretax cost reduction
charge of $19.9 million.
/(4)/ Results for 1999 include a pretax cost reduction charge of $65 million.
2
AVERY DENNISON CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions) 2002 2001
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ASSETS
Current assets:
Cash and cash equivalents $ 22.8 $ 19.1
Trade accounts receivable, less allowances
of $46.1 and $37.5 for 2002 and 2001, respectively 733.4 579.2
Inventories, net 343.6 267.4
Deferred taxes 25.7 58.8
Other current assets 90.0 65.8
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Total current assets 1,215.5 990.3
Property, plant and equipment, net 1,199.2 1,074.6
Goodwill, net 628.7 293.2
Other intangibles resulting from business acquisitions, net 147.9 120.0
Other assets 461.1 431.5
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$ 3,652.4 $ 2,909.6
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term and current portion of long-term debt $ 307.0 $ 223.0
Accounts payable 441.0 316.4
Accrued payroll and employee benefits 178.7 116.5
Other accrued liabilities 298.5 214.4
Income taxes payable 70.9 88.8
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Total current liabilities 1,296.1 959.1
Long-term debt 837.2 626.7
Long-term retirement benefits and other accrued liabilities 304.2 236.2
Non-current deferred taxes 74.0 83.6
Other long-term obligation 84.5 74.6
Shareholders' equity:
Common stock, $1 par value, authorized - 400,000,000 shares at year end
2002 and 2001; issued - 124,126,624 shares at year end 2002 and 2001;
outstanding - 99,303,840 shares and 97,882,630 shares at year end 2002
and 2001, respectively 124.1 124.1
Capital in excess of par value 740.2 707.2
Retained earnings 1,664.8 1,556.1
Cost of unallocated ESOP shares (12.2) (13.7)
Employee stock trusts, 11,163,451 shares and
12,008,123 shares at year end 2002 and 2001, respectively (658.7) (674.5)
Treasury stock at cost, 13,659,333 shares and
14,235,871 shares at year end 2002 and 2001, respectively (596.9) (633.4)
Accumulated other comprehensive loss (204.9) (136.4)
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Total shareholders' equity 1,056.4 929.4
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$ 3,652.4 $ 2,909.6
==============================================================================================================
See Notes to Consolidated Financial Statements
3
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts) 2002 2001 2000
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Net sales $ 4,206.9 $ 3,803.3 $ 3,893.5
Cost of products sold 2,853.2 2,563.1 2,561.3
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Gross profit 1,353.7 1,240.2 1,332.2
Marketing, general and administrative expense 913.1 830.5 851.3
Interest expense 43.7 50.2 54.6
Other expense (income), net 32.1 (.3) -
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Income before taxes and accounting change 364.8 359.8 426.3
Taxes on income 107.6 116.4 142.8
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Income before accounting change 257.2 243.4 283.5
Cumulative effect of accounting change, net of tax - (.2) -
- -------------------------------------------------------------------------------------------------------
Net income $ 257.2 $ 243.2 $ 283.5
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Per share amounts:
Net income per common share:
Before accounting change $ 2.61 $ 2.49 $ 2.88
Cumulative effect of accounting change - - -
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Net income per common share $ 2.61 $ 2.49 $ 2.88
=======================================================================================================
Net income per common share, assuming dilution:
Before accounting change $ 2.59 $ 2.47 $ 2.84
Cumulative effect of accounting change - - -
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Net income per common share, assuming dilution $ 2.59 $ 2.47 $ 2.84
=======================================================================================================
Dividends $ 1.35 $ 1.23 $ 1.11
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Average shares outstanding:
Common shares 98.5 97.8 98.3
Common shares, assuming dilution 99.4 98.6 99.8
=======================================================================================================
Common shares outstanding at year end 99.3 97.9 97.5
=======================================================================================================
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Cost of
Common Capital in unallocated
stock, $1 excess of Retained ESOP
(Dollars in millions) par value par value earnings shares
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Fiscal year ended 1999 $ 124.1 $ 962.3 $ 1,288.5 $ (16.8)
Comprehensive income:
Net income 283.5
Foreign currency translation adjustment
Total comprehensive income
Repurchase of 2.4 million shares for
treasury
Stock issued under option plans, net of
$36.3 of tax and dividends paid on stock
held in stock trusts (28.9)
Dividends: $1.11 per share (123.7)
ESOP transactions, net 1.5
Employee stock benefit trust market value
adjustment (241.4)
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Fiscal year ended 2000 124.1 692.0 1,448.3 (15.3)
Comprehensive income:
Net income 243.2
Other comprehensive loss:
Foreign currency translation adjustment
Minimum pension liability adjustment
Effective portion of gains or losses
on cash flow hedges
Other comprehensive loss
Total comprehensive income
Repurchase of .4 million shares for
treasury, net of shares issued
Stock issued under option plans, net of
$22.3 of tax and dividends paid on stock
held in stock trusts .2
Dividends: $1.23 per share (135.4)
ESOP transactions, net 1.6
Employee stock benefit trust market value
adjustment 15.0
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Fiscal year ended 2001 124.1 707.2 1,556.1 (13.7)
Comprehensive income:
Net income 257.2
Other comprehensive loss:
Foreign currency translation adjustment
Minimum pension liability adjustment
Effective portion of gains or losses
on cash flow hedges
Other comprehensive loss
Total comprehensive income
Treasury stock issued of .7 million shares
for L&E acquisition
Repurchase of .2 million shares for
treasury, net of shares issued
Stock issued under option plans,
net of $26.5 of tax and dividends paid
on stock held in stock trusts (3.5)
Dividends: $1.35 per share (148.5)
ESOP transactions, net 1.5
Employee stock benefit trust market value
adjustment 36.5
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Fiscal year ended 2002 $ 124.1 $ 740.2 $ 1,664.8 $ (12.2)
=================================================================================================
Accumulated
other
(Dollars in millions) Employee Treasury comprehensive
stock trusts stock income (loss) Total
- -------------------------------------------------------------------------------------------------
Fiscal year ended 1999 $ (1,014.0) $ (481.3) $ (52.9) $ 809.9
Comprehensive income:
Net income 283.5
Foreign currency translation adjustment (52.5) (52.5)
-----------
Total comprehensive income 231.0
Repurchase of 2.4 million shares for (134.4)
treasury (134.4)
Stock issued under option plans, net of
$36.3 of tax and dividends paid on stock
held in stock trusts 72.7 43.8
Dividends: $1.11 per share (123.7)
ESOP transactions, net 1.5
Employee stock benefit trust market value
adjustment 241.4 -
- -------------------------------------------------------------------------------------------------
Fiscal year ended 2000 (699.9) (615.7) (105.4) 828.1
Comprehensive income:
Net income 243.2
Other comprehensive loss:
Foreign currency translation adjustment (17.7) (17.7)
Minimum pension liability adjustment (14.3) (14.3)
Effective portion of gains or losses
on cash flow hedges 1.0 1.0
------------------------
Other comprehensive loss (31.0) (31.0)
-----------
Total comprehensive income 212.2
Repurchase of .4 million shares for
treasury, net of shares issued (17.7) (17.7)
Stock issued under option plans, net of
$22.3 of tax and dividends paid on stock
held in stock trusts 40.4 40.6
Dividends: $1.23 per share (135.4)
ESOP transactions, net 1.6
Employee stock benefit trust market value
adjustment (15.0) -
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Fiscal year ended 2001 (674.5) (633.4) (136.4) 929.4
Comprehensive income:
Net income 257.2
Other comprehensive loss:
Foreign currency translation adjustment 11.7 11.7
Minimum pension liability adjustment (53.9) (53.9)
Effective portion of gains or losses
on cash flow hedges (26.3) (26.3)
------------------------
Other comprehensive loss (68.5) (68.5)
--------------
Total comprehensive income 188.7
Treasury stock issued of .7 million shares 46.9 46.9
for L&E acquisition
Repurchase of .2 million shares for (10.4) (10.4)
treasury, net of shares issued
Stock issued under option plans,
net of $26.5 of tax and dividends paid
on stock held in stock trusts 52.3 48.8
Dividends: $1.35 per share (148.5)
ESOP transactions, net 1.5
Employee stock benefit trust market value
adjustment (36.5) -
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Fiscal year ended 2002 $ (658.7) $ (596.9) $ (204.9) $ 1,056.4
=================================================================================================
See Notes to Consolidated Financial Statements
5
AVERY DENNISON CORPORATION
6
AVERY DENNISON CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions) 2002 2001 2000
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OPERATING ACTIVITIES
Net income $ 257.2 $ 243.2 $ 283.5
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 127.1 124.1 126.0
Amortization 25.7 31.9 30.9
Deferred taxes 22.2 3.0 11.8
Asset impairment and net (gain) or loss on sale of assets of $3.2 in 2002 and
$(20.2) in 2001 20.7 (0.3) -
Changes in assets and liabilities, net of the effect of foreign currency translation,
business acquisitions and divestitures:
Trade accounts receivable (41.1) 7.8 (37.0)
Inventories (16.7) 1.9 8.8
Other current assets 1.3 (4.4) (8.4)
Accounts payable and accrued liabilities 142.9 (58.3) (4.3)
Taxes on income 6.2 27.4 6.5
Long-term retirement benefits and other accrued liabilities (22.7) (.8) (7.9)
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Net cash provided by operating activities 522.8 375.5 409.9
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INVESTING ACTIVITIES
Purchase of property, plant and equipment (151.8) (135.4) (198.3)
Purchase of software (20.1) (50.3) (35.0)
Payments for acquisitions (397.4) (63.9) (75.3)
Proceeds from sale of assets 10.7 33.7 10.6
Other (16.8) (52.4) (17.5)
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Net cash used in investing activities (575.4) (268.3) (315.5)
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FINANCING ACTIVITIES
Additional borrowings 697.0 364.8 373.8
Payments of debt (520.2) (343.5) (228.3)
Dividends paid (148.5) (135.4) (123.7)
Purchase of treasury stock (10.4) (17.9) (134.4)
Proceeds from exercise of stock options, net 22.1 17.4 19.7
Other 17.0 15.5 3.9
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Net cash provided by (used in) financing activities 57.0 (99.1) (89.0)
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Effect of foreign currency translation on cash balances (0.7) (.4) (.9)
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Increase in cash and cash equivalents 3.7 7.7 4.5
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Cash and cash equivalents, beginning of year 19.1 11.4 6.9
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Cash and cash equivalents, end of year $ 22.8 $ 19.1 $ 11.4
================================================================================================================================
See Notes to Consolidated Financial Statements
7
AVERY DENNISON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Avery Dennison Corporation (the "Company") is a worldwide manufacturer of
pressure-sensitive adhesives and materials, and consumer and converted products.
The Company's major markets are in office products, data processing, health
care, retail, transportation, industrial and durable goods, food and apparel.
The Pressure-sensitive Adhesives and Materials segment contributes approximately
60 percent of the Company's total sales while the Consumer and Converted
Products segment contributes approximately 40 percent of the Company's total
sales. Sales are generated primarily in the United States and continental
Europe.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all majority-owned
subsidiaries. All intercompany accounts, transactions and profits are
eliminated. Investments representing less than 20 percent ownership are
accounted for by the cost method of accounting.
FISCAL YEAR
The Company's 2002, 2001 and 2000 fiscal years reflected 52-week periods ending
December 28, 2002, December 29, 2001, and December 30, 2000, respectively.
Normally, each fiscal year consists of 52 weeks, but every fifth or sixth fiscal
year consists of 53 weeks.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions for
the reporting period and as of the financial statement date. These estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities and the reported amounts of revenues and
expenses. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, deposits in banks and short-term
investments, with maturities of three months or less when purchased. The
carrying amounts of these assets approximate fair value due to the short
maturity of the instruments. Cash paid for interest and taxes was as follows:
(In millions) 2002 2001 2000
- ------------------------------------------------------------------------------
Interest, net of capitalized amounts $ 44.4 $ 50.0 $ 54.8
Income taxes, net of refunds 91.6 95.1 142.8
==============================================================================
In 2002, non-cash activities included the issuance of approximately $47 million
in Avery Dennison common shares for the L&E acquisition and the assumption of
approximately $100 million in debt from the Jackstadt acquisition. Refer to Note
2 "Acquisitions" for further detail. In 2001, non-cash activities included the
receipt of $16.7 million in notes and receivables related to the sale of assets
and the sale of the Company's specialty coatings business.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is determined
using methods that approximate both the first-in, first-out (FIFO) and last-in,
first-out (LIFO) methods. Inventories valued using the LIFO method comprised 34
percent and 39 percent of inventories before LIFO adjustment at year end 2002
and 2001, respectively. Inventories at year end were as follows:
(In millions) 2002 2001
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Raw materials $ 101.9 $ 82.9
Work-in-progress 81.5 67.6
Finished goods 176.9 134.6
- ---------------------------------------------------------------------------------------
Inventories at lower of FIFO cost or market (approximates
replacement cost) 360.3 285.1
Less LIFO adjustment (16.7) (17.7)
- ---------------------------------------------------------------------------------------
$ 343.6 $ 267.4
=======================================================================================
8
AVERY DENNISON CORPORATION
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment are stated at cost and were as
follows:
(In millions) 2002 2001
- -----------------------------------------------------------------------------
Land $ 54.9 $ 45.7
Buildings and improvements 537.9 469.4
Machinery and equipment 1,574.8 1,457.6
Construction-in-progress 122.8 84.8
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2,290.4 2,057.5
Accumulated depreciation (1,091.2) (982.9)
- -----------------------------------------------------------------------------
$ 1,199.2 $ 1,074.6
=============================================================================
Depreciation is generally computed using the straight-line method over the
estimated useful lives of the assets ranging from ten to forty-five years for
buildings and improvements and three to fifteen years for machinery and
equipment. Maintenance and repair costs are expensed as incurred; renewals and
betterments are capitalized. Upon the sale or retirement of properties, the
accounts are relieved of the cost and the related accumulated depreciation, with
any resulting profit or loss included in net income.
SOFTWARE
The Company capitalizes software costs in accordance with American Institute of
Certified Public Accountants' Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," and are
included in "Other assets" in the Consolidated Balance Sheet. Capitalized
software is amortized on a straight-line basis over the estimated useful life of
the software, not to exceed ten years. Capitalized software costs were as
follows:
(In millions) 2002 2001
- ----------------------------------------------------------------------------
Cost $ 176.4 $ 158.0
Accumulated amortization (63.0) (55.5)
- ----------------------------------------------------------------------------
$ 113.4 $ 102.5
============================================================================
GOODWILL AND OTHER INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
The Company adopted all provisions of Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations," at the beginning of fiscal
2002. However, because certain provisions of the Statement apply to business
combinations initiated after June 30, 2001, the Company adopted those provisions
as of the beginning of the third quarter of 2001. For business combinations
accounted for using the purchase method before July 1, 2001, the provisions of
the Statement were effective at the beginning of fiscal 2002. All business
combinations are accounted for by the purchase method, and the excess of the
acquisition cost over the fair value of net tangible assets and identified
intangible assets acquired is considered goodwill. As a result, the Company
discloses goodwill separately from other intangible assets and, as of the
beginning of fiscal 2002, recorded no amortization on goodwill. Other
acquisition intangibles are identified using the criteria included in this
Statement, including trademarks and tradenames, patented and other acquired
technology, customer relationships and other intangibles.
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," at the
beginning of fiscal 2002. As required, the Company identified its reporting
units and the amounts of goodwill, other intangible assets, and other assets and
liabilities allocated to those reporting units. 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.
SFAS No. 142 requires that goodwill be tested for impairment upon adoption of
the Statement, as well as annually thereafter. The Company completed its
transitional goodwill impairment test during the first quarter of 2002 and had
no impairment losses. Other 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 other intangible assets with
indefinite lives. See Note 3 "Goodwill and Other Intangibles Resulting from
Business Acquisitions" for more information.
9
AVERY DENNISON CORPORATION
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FOREIGN CURRENCY TRANSLATION
All asset and liability accounts of international operations are translated into
U.S. dollars at current rates. Revenue, costs and expenses are translated at the
weighted-average currency rate, which prevailed during the fiscal year.
Translation gains and losses of subsidiaries operating in hyperinflationary
economies are included in net income currently. Operations in hyperinflationary
economies consist of the Company's operations in Turkey for 2002, 2001 and 2000.
Gains and losses resulting from foreign currency transactions are included in
income currently, except for gains and losses resulting from hedging the value
of investments in certain international operations and from translation of
financial statements which are recorded directly to a component of other
comprehensive loss.
Transaction and translation losses decreased net income in 2002, 2001 and 2000
by $3.5 million, $2.7 million and $3 million, respectively.
FINANCIAL INSTRUMENTS
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. The
Company also enters into interest rate contracts to manage its exposure to
interest rate fluctuations.
On the date the Company enters into a derivative contract, it determines whether
the derivative 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 generally 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 is
recorded as a component of other comprehensive loss, and the ineffective portion
is reported currently in earnings. Amounts in accumulated other comprehensive
loss are reclassified into earnings in the same period during which the hedged
forecasted transaction is consummated. In the event 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.
REVENUE RECOGNITION
Sales, provisions for estimated sales returns, and the cost of products sold are
recorded at the time title transfers to customers. Actual product returns are
charged against estimated sales return allowances. Volume, promotional, price,
cash and other discounts and customer incentives are accounted for as a
reduction to gross sales.
SHIPPING AND HANDLING COSTS
Shipping and handling costs, which consist primarily of transportation charges
incurred to move finished goods to customers, are included in "Cost of products
sold" for the Pressure-sensitive Adhesives and Materials segment and in
"Marketing, general and administrative expense" for the Consumer and Converted
Products segment. Shipping and handling costs included in "Marketing, general
and administrative expense" were $47.1 million, $32.2 million and $32.9 million
for 2002, 2001 and 2000, respectively.
ADVERTISING COSTS
Advertising costs included in "Marketing, general and administrative expense"
were $8.3 million, $6.1 million and $8.1 million for 2002, 2001 and 2000,
respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Research and
development expense for 2002, 2001 and 2000 was $74.5 million, $69.9 million and
$67.8 million, respectively.
10
AVERY DENNISON CORPORATION
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PRODUCT WARRANTY
The Company provides for an estimate of costs that may be incurred under its
basic limited warranty at the time product revenue is recognized. These costs
primarily include materials and labor associated with the service or sale of the
product. Factors that affect the Company's warranty liability include the number
of units installed or sold, historical and anticipated rate of warranty claims
on those units and cost per claim to satisfy the Company's warranty obligation.
As these factors are impacted by actual experience and future expectations, the
Company assesses the adequacy of its recorded warranty liability and adjusts the
amounts as necessary.
Product warranty liabilities were as follows:
(In millions) 2002 2001
- --------------------------------------------------------------------------
Balance at beginning of year $ 1.3 $ 1.3
Accruals for warranties issued 1.5 .9
Payments (1.4) (.9)
- --------------------------------------------------------------------------
Balance at end of year $ 1.4 $ 1.3
==========================================================================
STOCK-BASED COMPENSATION
The Company has a policy whereby all stock option grants are priced at fair
market value on the date of grant. Under the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company uses the intrinsic value
method of accounting for stock-based compensation in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the intrinsic value method, compensation cost is the excess,
if any, of the quoted market price of the stock at the grant date or other
measurement date over the amount an employee must pay to acquire the stock.
In accordance with the disclosure provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosures," the following table
reflects pro forma net income and earnings per share had the Company elected to
adopt the fair value approach of SFAS No. 123:
(In millions, except per share amounts) 2002 2001 2000
- -------------------------------------------------------------------------------------
Net income, as reported $ 257.2 $ 243.2 $ 283.5
Compensation expense, net of tax (16.5) (12.6) (12.4)
- -------------------------------------------------------------------------------------
Pro forma net income $ 240.7 $ 230.6 $ 271.1
- -------------------------------------------------------------------------------------
Earnings per share, as reported $ 2.61 $ 2.49 $ 2.88
Earnings per share, assuming dilution, as reported 2.59 2.47 2.84
- -------------------------------------------------------------------------------------
Pro forma earnings per share $ 2.44 $ 2.36 $ 2.75
Pro forma earnings per share, assuming dilution 2.42 2.34 2.72
=====================================================================================
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that do not contribute to current or future revenue
generation are expensed. Expenditures for newly acquired assets and those which
extend or improve the economic useful life of existing assets are capitalized
and amortized over the remaining asset life. The Company reviews, on a quarterly
basis, its estimates of costs of compliance with environmental laws related to
remediation and cleanup of various sites, including sites in which governmental
agencies have designated the Company as a potentially responsible party. When it
is probable that obligations have been incurred and where a minimum cost or a
reasonable estimate of the cost of compliance or remediation can be determined,
the applicable amount is accrued. For other potential liabilities, the timing of
accruals coincides with the related ongoing site assessments. Potential
insurance reimbursements are not recorded or offset against the liabilities
until received, and liabilities are not discounted.
INVESTMENT TAX CREDITS
Investment tax credits are accounted for in the period earned in accordance with
the flow-through method.
11
AVERY DENNISON CORPORATION
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE
Net income per common share amounts were computed as follows:
(In millions, except per share amounts) 2002 2001 2000
- -------------------------------------------------------------------------------------------------
(A) Net income available to common shareholders $ 257.2 $ 243.2 $ 283.5
- -------------------------------------------------------------------------------------------------
(B) Weighted-average number of common shares outstanding 98.5 97.8 98.3
Additional common shares issuable under employee stock
options using the treasury stock method .9 .8 1.5
- -------------------------------------------------------------------------------------------------
(C) Weighted-average number of common shares
outstanding assuming the exercise of stock options 99.4 98.6 99.8
=================================================================================================
Net income per common share (A) / (B) $ 2.61 $ 2.49 $ 2.88
Net income per common share, assuming dilution (A) / (C) 2.59 2.47 2.84
=================================================================================================
Certain employee stock options were not included in the computation of net
income per common share, assuming dilution, because these options would not have
had a dilutive effect. The number of antidilutive stock options (which are
options that have exercise prices greater than the average market price for the
period) excluded from the computation were .2 million, 1.8 million and 1 million
for the years ended December 28, 2002, December 29, 2001 and December 30, 2000,
respectively.
COMPREHENSIVE INCOME
Comprehensive income for the Company includes net income, foreign currency
translation adjustments, adjustments to the minimum pension liability and the
effective portion of gains or losses on cash flow hedges which are currently
presented as a component of shareholders' equity.
The components of accumulated other comprehensive loss at year end were as
follows:
(In millions) 2002 2001
- --------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment $ (111.4) $ (123.1)
Minimum pension liability (68.2) (14.3)
Net (loss) gain on derivative instruments designated as cash flow instruments (25.3) 1.0
- --------------------------------------------------------------------------------------------------------
Total accumulated other comprehensive loss $ (204.9) $ (136.4)
========================================================================================================
Cash flow hedging instrument activity in other comprehensive income (loss) was
as follows:
(In millions) 2002 2001
- ------------------------------------------------------------------------------
Beginning accumulated derivative gain $ 1.0 -
Net gain reclassified to earnings (.6) $ (.6)
Net change in the revaluation of hedging transactions (25.7) 1.6
- ------------------------------------------------------------------------------
Ending accumulated derivative (loss) gain $ (25.3) $ 1.0
==============================================================================
The Company entered into a forward starting interest rate swap in May 2002 to
secure the interest rate on the Company's anticipated long-term debt issuance.
The principal amount hedged was $250 million. Because of a shift in interest
rates, an unrealized loss of approximately $37.4 million ($26.2 million, net of
tax) was included in other comprehensive loss during 2002. In connection with
the issuance of the $250 million 10-year Senior Notes in January 2003 (see Note
4 "Debt" for further detail), the Company settled the interest rate swap at a
loss of approximately $32.5 million. The loss will be amortized to interest
expense over 10 years, which corresponds to the term of the related debt.
12
AVERY DENNISON CORPORATION
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING REQUIREMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities - an
Interpretation of ARB No. 51." The Interpretation clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The provisions of this Interpretation are effective
for all enterprises with variable interests in variable interest entities
created after January 31, 2003. The adoption of this Interpretation is not
expected to have a significant impact on the Company's financial results.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This Statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for an entity that voluntarily changes to the fair value-based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. Finally, this Statement
amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure
about those effects in interim financial information. The provisions of this
Statement are effective for financial statements of interim or annual periods
ending after December 15, 2002. The Company has continued to use the intrinsic
value method of accounting for stock-based compensation in 2002 in accordance
with APB Opinion No. 25. The Company, however, has adopted the disclosure
provisions of SFAS No. 148 as presented in "Stock Based Compensation" in this
Note.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This Interpretation clarifies the requirements for a
guarantor's accounting for and disclosures of certain guarantees issued and
outstanding. This Interpretation also clarifies the requirements related to the
recognition of a liability by a guarantor at the inception of a guarantee for
the obligations the guarantor has undertaken in issuing that guarantee. The
disclosure provisions of the Interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company has adopted the disclosure provisions of this Interpretation as
disclosed in Notes 1, 4 and 8 of these consolidated financial statements. The
initial recognition and initial measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company is currently in the process of determining the
impact of this Interpretation on the Company's financial results for those
provisions effective in 2003.
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 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 No. 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 adoption of SFAS No. 146 will affect the timing of
the recognition of future costs associated with exit or disposal activities and
will not affect previous charges related to such activities.
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 SFAS No. 4, "Reporting Gains and Losses from Extinguishment
of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements." This Statement amends SFAS 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 SFAS 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 adoption of this Statement for
those provisions effective in 2003 is not expected to have a significant impact
on the Company's financial results.
13
AVERY DENNISON CORPORATION
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
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 No. 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 year ended December 28, 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 adoption of this Statement is not expected to
have a significant impact on the Company's financial results.
The Company is currently reviewing the requirements of EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue No.
00-21 addresses certain aspects of the accounting by a vendor for arrangements
under which it will perform multiple revenue-generating activities.
Specifically, EITF Issue No. 00-21 addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting. The provisions of EITF Issue No. 00-21 will be effective in fiscal
periods beginning after June 15, 2003. The Company is in the process of
determining the impact of EITF Issue No. 00-21 on the Company's financial
results when effective.
RELATED PARTY TRANSACTIONS
From time to time, the Company enters into transactions in the normal course of
business with related parties. The Company believes that such transactions are
at arm's-length and for terms that would have been obtained from unaffiliated
third parties. One of the Company's directors, Mr. Peter W. Mullin, is the
chairman and chief executive officer and a director of MC Insurance Services,
Inc. ("MC"), Mullin Insurance Services, Inc. ("MINC") and PWM Insurance
Services, Inc. ("PWM"), executive compensation and benefit consultants and
insurance agents. Mr. Mullin is also the majority stockholder of MC, MINC and
PWM. During 2002 and 2001, the Company paid insurance companies premiums for
life insurance placed by MC, MINC and PWM in connection with various Company
employee benefit plans. In 2002, 2001 and 2000, MC, MINC and PWM earned
commissions from such insurance companies in aggregate amounts of approximately
$1.3 million, $1.7 million, and $1.6 million, respectively, for the placement
and renewal of this insurance. Mr. Mullin had direct and indirect interests
related to these commissions of approximately $.9 million in 2002 and $1 million
in each of the years 2001 and 2000. The majority of these commissions were
allocated to and used by MCP Insurance Services, LLC (an affiliate of MC), and
another affiliate, to administer benefit plans and provide benefit statements to
participants under various Company employee benefit plans. None of these
transactions are significant to the financial position or results of operations
of the Company.
FINANCIAL PRESENTATION
Certain prior year amounts have been reclassified to conform with the 2002
financial statement presentation.
NOTE 2. ACQUISITIONS
On November 5, 2002, the Company acquired 100 percent of RVL Packaging, Inc.
("RVL"), a provider of brand identification products to apparel manufacturers
and retailers. RVL designs, markets and distributes woven and printed labels,
graphic tags and specialty packaging products. On the same day, the Company also
acquired the assets of L&E Packaging ("L&E"), one of RVL's suppliers. L&E offers
a broad range of printing products tailored to the specific needs of the apparel
and retail industries. Both transactions included the acquisition of certain
related entities. The combination of existing data management and ticketing
businesses with the operations of RVL and L&E is expected to provide apparel
manufacturers and retailers with a comprehensive range of products and services
that offer a total solution for their entire supply chain, including a full
array of brand identification and data management tools. On a combined basis,
unaudited revenues for RVL, L&E and affiliated companies were approximately $175
million in 2001. The RVL and L&E operations are included in the Company's
Consumer and Converted Products segment. RVL and L&E's results of operations
have been included in the Company's consolidated financial statements as of the
acquisition date.
14
AVERY DENNISON CORPORATION
NOTE 2. ACQUISITIONS (Continued)
The purchase price, net of cash acquired, for these transactions was
approximately $222 million, including cash of approximately $175 million and
approximately $47 million in Avery Dennison common shares (743,108). The value
of these common shares issued was determined based on the average closing market
price of the Company's common shares for a three-day period before and after the
date the parties agreed to the number of shares to be issued. Funds to complete
the acquisitions were also derived from short-term borrowings. The Company
assumed liabilities of approximately $38 million, including accounts payable and
other current and long-term liabilities.
The preliminary allocation of the purchase price as of December 28, 2002 has
been made and recorded in these financial statements. Although the Company has
obtained third-party valuations of acquired assets, ongoing assessments may
impact the allocation of the purchase price.
The following table summarizes the preliminary estimated fair values of the
assets acquired and liabilities assumed at the date of the acquisition:
(In millions) November 5, 2002
- -------------------------------------------------------------------------
Current assets, net of cash acquired $ 41.2
Property, plant, and equipment and other assets 28.8
Intangible assets 19.9
Goodwill 169.8
- -------------------------------------------------------------------------
Total assets acquired 259.7
Current liabilities (30.2)
Other long-term liabilities (8.0)
- -------------------------------------------------------------------------
Total liabilities assumed (38.2)
- -------------------------------------------------------------------------
Net assets acquired $ 221.5
=========================================================================
The excess of the cost-basis over the fair value of net tangible assets acquired
is currently estimated to be approximately $190 million, including goodwill of
approximately $170 million and identified amortizable intangible assets of
approximately $20 million. Of the total goodwill, approximately $54 million is
expected to be deductible for tax purposes. The acquired intangible assets have
a weighted-average useful life of sixteen years. These assets include
approximately $16 million for customer relationships (nineteen-year
weighted-average useful life), approximately $2 million for design intellectual
property (three-year weighted-average useful life), and approximately $2 million
of other intangibles (six-year weighted-average useful life). Additionally,
approximately $2 million of computer software (three-year weighted-average
useful life) is included in "Other assets" in the Consolidated Balance Sheet.
On May 17, 2002, the Company acquired Jackstadt GmbH ("Jackstadt"), a
manufacturer of pressure-sensitive adhesive materials based in Germany.
Jackstadt has an international 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 Europe, Latin America, Asia and North
America. Jackstadt enhances the Company's international presence, including its
capability to grow in Eastern Europe, and enables it to offer a broader
selection of products and services.
The purchase price, net of cash acquired, was approximately $311 million, which
included approximately $211 million in cash and assumed debt of approximately
$100 million. The purchase price paid at closing was based on financial
statement values at a date prior to closing and adjusted based upon a formula in
the purchase agreement. The Company assumed liabilities of approximately $189
million, including the assumed debt, accrued payroll and benefits, accounts
payable, other accrued liabilities, long-term retirement benefits and other
current and long-term liabilities. The Company funded the transaction with cash
and short-term commercial paper. 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 December 28, 2002 has
been made and recorded in these financial statements. 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 acquired assets. Although the Company has obtained
third-party valuations of acquired assets, ongoing assessments may impact the
allocation of the purchase price.
The Company has determined certain costs related to exit activities and
integration costs. These costs have been recognized as liabilities assumed,
totaling approximately $18 million, and are included in the liabilities
aforementioned, and in "Accrued payroll and employee benefits" and "Other
accrued liabilities" in the Consolidated Balance Sheet. The costs were primarily
related to severance costs for involuntary terminations of approximately 500
employees of Jackstadt, to be paid through 2004. Also included are lease exit
costs, which are expected to be completed through 2003. At year end 2002,
approximately $12 million remained accrued. Of the total positions under these
actions, approximately 225 employees had left the Company at the end of 2002.
15
AVERY DENNISON CORPORATION
NOTE 2. ACQUISITIONS (Continued)
The following table summarizes the preliminary estimated fair values of the
assets acquired and liabilities assumed at the date of the acquisition:
(In millions) May 17, 2002
- --------------------------------------------------------------------
Current assets, net of cash acquired $ 155.7
Property, plant, and equipment and other assets 92.6
Intangible assets 11.4
Goodwill 140.7
- --------------------------------------------------------------------
Total assets acquired 400.4
Current liabilities (166.5)
Long-term debt and other long-term liabilities (22.6)
- --------------------------------------------------------------------
Total liabilities assumed (189.1)
- --------------------------------------------------------------------
Net assets acquired $ 211.3
====================================================================
The excess of the cost-basis over the fair value of net tangible assets acquired
is currently estimated to be approximately $152 million, including goodwill of
approximately $141 million and identified amortizable intangible assets of
approximately $11 million. No portion of the total goodwill is expected to be
deductible for tax purposes. The acquired intangible assets consisting of
tradenames have a weighted-average useful life of five years.
In the first quarter of 2001, the Company acquired Dunsirn Industries, Inc.
("Dunsirn"). Dunsirn is a supplier of non-adhesive materials to the narrow-web
printing industry, as well as a provider of customized slitting and distribution
services for roll pressure-sensitive materials manufacturers. Customized
slitting and distribution services refers to the process of cutting bulk rolls
of material into sizes requested by customers and then shipping these materials
to customers. The Dunsirn operation is included within the Company's
Pressure-sensitive Adhesives and Materials segment. Sales in 2000 for Dunsirn
were approximately $68 million, including sales to the Company. The excess of
the cost-basis over the fair value of net tangible assets acquired was $30.8
million, which included identified intangible assets of $5.5 million.
In the first quarter of 2001, the Company acquired CD Stomper, a product line
consisting 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. The excess of the cost-basis over the fair value of net tangible assets
acquired was $22.6 million, which included identified intangible assets of $9.7
million.
In the first quarter of 2000, the Company acquired the Adespan
pressure-sensitive materials operation of Panini S.p.A., a European printing and
publishing company based in Italy. Adespan had sales of approximately $75
million in 1999. The Adespan business operates as a division within the
Company's Pressure-sensitive Adhesives and Materials segment. The excess of the
cost-basis over the fair value of net tangible assets acquired was $25.4
million, which included identified intangible assets of $12.4 million.
The aggregate cost of acquired companies was approximately $546 million, $66
million and $76 million in 2002, 2001 and 2000, respectively. Goodwill resulting
from these business acquisitions was approximately $326 million, $34 million and
$13 million in 2002, 2001 and 2000, respectively. Intangibles resulting from
these business acquisitions were approximately $31 million, $15 million and $12
million in 2002, 2001 and 2000, respectively. Other acquisitions during 2002,
2001 and 2000 not described above were not significant to the consolidated
position of the Company. In 2002, 2001 and 2000, acquired businesses added
approximately seven percent, two percent and three percent, respectively, to the
Company's total sales. Pro forma results for significant acquisitions in 2002
are presented below. Pro forma results for acquisitions in 2001 and 2000 are not
presented, as the acquired businesses did not have a significant impact on the
Company's results of operations for the two years ended December 29, 2001.
The following represents the unaudited pro forma results of operations for the
Company as though the acquisitions of Jackstadt, RVL and L&E had occurred at the
beginning of the periods presented. 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 acquisitions been completed at the beginning of the
periods presented, nor is it necessarily indicative of future results.
16
AVERY DENNISON CORPORATION
NOTE 2. ACQUISITIONS (Continued)
(In millions, except per share amounts) 2002 2001
- ----------------------------------------------------------------------
Net sales $ 4,590.0 $ 4,387.3
- ----------------------------------------------------------------------
Net income $ 260.4 $ 232.1
- ----------------------------------------------------------------------
Net income per common share $ 2.64 $ 2.36
Net income per common share, assuming
dilution 2.62 2.34
- ----------------------------------------------------------------------
NOTE 3. GOODWILL AND OTHER INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
Changes in the net carrying amount of goodwill for the year ended December 28,
2002, by reportable segment, are as follows:
Pressure-sensitive
Consumer and Adhesives and
(In millions) Converted Products Materials Total
- ---------------------------------------------------------------------------------------------
Balance as of December 29, 2001 $ 148.9 $ 144.3 $ 293.2
Goodwill acquired during the period 176.2 150.3 326.5
Translation adjustments 11.3 (2.3) 9.0
- ---------------------------------------------------------------------------------------------
Balance as of December 28, 2002 $ 336.4 $ 292.3 $ 628.7
- ---------------------------------------------------------------------------------------------
Amortization expense on goodwill was $14.8 million and $13.2 million for the
years ended December 29, 2001 and December 30, 2000, respectively.
The following table sets forth the Company's acquired other intangible assets at
December 28, 2002 and December 29, 2001, which will continue to be amortized:
2002 2001
- -------------------------------------------------------------------------------------- --------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
(In millions) Amount Amortization Amount Amount Amortization Amount
- --------------------------------------------------------------------------------------------------------------------------------
Amortizable other intangible assets:
Tradenames and trademarks $ 36.6 $ 11.4 $ 25.2 $ 23.4 $ 6.8 $ 16.6
Patented and other acquired technology 65.4 9.2 56.2 63.6 5.8 57.8
Customer relationships 70.1 6.1 64.0 47.6 3.6 44.0
Other intangibles 4.0 1.5 2.5 2.3 .7 1.6
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 176.1 $ 28.2 $ 147.9 $ 136.9 $ 16.9 $ 120.0
- --------------------------------------------------------------------------------------------------------------------------------
Amortization expense on intangible assets resulting from business acquisitions
was $9.7 million for the year ended December 28, 2002, $7.3 million for the year
ended December 29, 2001 and $6.3 million for the year ended December 30, 2000.
The weighted-average amortization periods for intangible assets resulting from
business acquisitions are thirteen years for tradenames and trademarks, nineteen
years for patented and other acquired technology, twenty-two years for customer
relationships, seven years for other intangibles and nineteen years in total.
Based on current information, estimated amortization expense for such acquired
intangible assets for each of the next five succeeding fiscal years is expected
to be approximately $12 million, $12 million, $12 million, $11 million and $8
million, respectively.
17
AVERY DENNISON CORPORATION
NOTE 3. GOODWILL AND OTHER INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
(CONTINUED)
As required by SFAS No. 142, the results for the prior years have not been
restated. Had the Company applied the non-amortization provisions related to
goodwill under SFAS No. 142 for all periods presented, the Company's net income
and earnings per share would have been as follows:
(In millions, except per share amounts) 2002 2001 2000
- -------------------------------------------------------------------------------
Reported net income $ 257.2 $ 243.2 $ 283.5
Goodwill amortization, net of tax - 13.8 12.9
- -------------------------------------------------------------------------------
Adjusted net income $ 257.2 $ 257.0 $ 296.4
- -------------------------------------------------------------------------------
Basic earnings per share:
As reported $ 2.61 $ 2.49 $ 2.88
Goodwill amortization - .14 .13
- -------------------------------------------------------------------------------
Adjusted basic earnings per share $ 2.61 $ 2.63 $ 3.01
- -------------------------------------------------------------------------------
Diluted earnings per share:
As reported $ 2.59 $ 2.47 $ 2.84
Goodwill amortization - .14 .13
- -------------------------------------------------------------------------------
Adjusted diluted earnings per share $ 2.59 $ 2.61 $ 2.97
- -------------------------------------------------------------------------------
NOTE 4. DEBT
Long-term debt and its respective weighted-average interest rates at December
28, 2002 consisted of the following:
(In millions) 2002 2001
- ------------------------------------------------------------------------------------------------------
Medium-term notes
Series 1993 at 6.6% - due 2003 through 2005 $ 98.0 $ 98.0
Series 1994 at 7.7% - due 2003 through 2004 80.0 100.0
Series 1995 at 7.3% - due 2005 through 2025 100.0 100.0
Series 1997 at 6.6% - due 2007 60.0 60.0
Series 1998 at 5.9% - due 2008 50.0 50.0
Series 2000 at 2.0% - due 2006 - 40.0
Other long-term borrowings 13.5 4.1
Variable rate short-term borrowings at 1.87% to be refinanced on a long-term 512.2 195.0
basis/(1)/
Less amount classified as current (76.5) (20.4)
- ------------------------------------------------------------------------------------------------------
$ 837.2 $ 626.7
- ------------------------------------------------------------------------------------------------------
/(1)/ In January 2003, the Company refinanced $400 million of its
variable rate short-term borrowings through the offering of $250
million of 4.875 percent Senior Notes due 2013 and $150 million of
6 percent Senior Notes due 2033.
The Company's medium-term notes have maturities from 2003 through 2025 and
accrue interest at fixed rates.
Maturities of long-term debt during the years 2003 through 2007 are $76.5
million (classified as current), $86.5 million, $76.1 million, $112.6 million
and $60.4 million, respectively, with $501.6 million maturing thereafter.
The Company's total interest costs in 2002, 2001 and 2000 were $47.6 million,
$57.1 million and $59 million, respectively, of which $3.9 million, $6.9 million
and $4.4 million, respectively, were capitalized as part of the cost of assets
constructed for the Company's use.
The Company had $80.5 million of borrowings outstanding under short-term lines
of credit with a weighted-average interest rate of 7.7 percent for 2002.
18
AVERY DENNISON CORPORATION
NOTE 4. DEBT (Continued)
Variable rate short-term borrowings at December 28, 2002 were $512.2 million
with a weighted average interest rate of 1.87 percent. In January 2003, the
Company refinanced $400 million of these variable rate short-term borrowings
through the offering of $250 million of 4.875 percent Senior Notes due 2013 and
$150 million of 6 percent Senior Notes due 2033. The aggregate $400 million
refinancing was issued under the Company's existing shelf registration statement
filed with the Securities and Exchange Commission in the third quarter of 2001,
permitting the Company to issue up to $600 million in debt and equity
securities. After the issuance of the $400 million, there is a remaining $200
million available for general corporate purposes including acquisitions and
capital expenditures, repaying, redeeming or repurchasing existing debt and for
working capital. Remaining variable rate short-term borrowings that the Company
does not intend to repay within the next year and had the ability to refinance
under its long-term revolving credit agreement, discussed above, are classified
as long-term liabilities.
In December 2002, the Company issued $150 million one-year callable commercial
notes at a weighted-average interest rate of 2.5 percent. The issuance replaced
the December 2001 issuance of $150 million of one-year callable commercial notes
at a weighted-average interest rate of 2.1 percent.
At December 28, 2002, the Company had additional available short-term lines of
credit totaling $558.1 million. These available lines of credit included a
364-day revolving credit facility with eight domestic and foreign banks to
provide up to $200 million in borrowings through December 5, 2003. The Company
may annually extend the revolving period and due date with the approval of the
banks or may convert the loan to a one-year term loan at the Company's option.
Financing available under this agreement will be used as a commercial paper
back-up facility and to finance other corporate requirements. There was no debt
outstanding under this agreement as of year end 2002. The Company also has a
bridge credit agreement with two domestic financial institutions to provide up
to $200 million in borrowings through January 31, 2003. There was no debt
outstanding under this agreement as of year end 2002.
The Company also has a revolving credit agreement with four domestic banks to
provide up to $250 million in borrowings through July 1, 2006. The Company may
annually extend the revolving period and due date with the approval of the
banks. Financing available under this agreement will be used as a commercial
paper back-up facility and to finance other corporate requirements. There was no
debt outstanding under this agreement as of year end 2002.
The terms of various loan agreements in effect at year end require that the
Company maintain specified ratios on consolidated debt and consolidated interest
expense in relation to certain measures of income. Under the loan agreements,
consolidated debt as a ratio to consolidated earnings before interest, taxes,
depreciation and amortization may not exceed 3.5 to 1.0. The Company's ratio at
year end 2002 was 2.0 to 1.0. Consolidated earnings before interest and taxes,
as a ratio to consolidated interest may not be less than 3.5 to 1.0. The
Company's ratio at year end 2002 was 9.3 to 1.0.
Commitment fees relating to the financing arrangements are not significant. The
debt assumed in connection with the acquisition of Jackstadt is securitized by
the acquired assets. At December 28, 2002, the total Jackstadt debt balance was
approximately $33.2 million.
The fair value of the Company's debt is estimated based on the discounted amount
of future cash flows using the current rates offered to the Company for debts of
the same remaining maturities. At year end 2002 and 2001, the fair value of the
Company's total debt, including short-term borrowings, was $1.18 billion and
$857.6 million, respectively.
The Company had standby letters of credit outstanding of $182.7 million and
$217.9 million at the end of 2002 and 2001, respectively. The aggregate contract
amount of all outstanding standby letters of credit approximated fair value.
In addition, the Company had uncommitted lines of credit of approximately $237.4
million at year end 2002. The Company's uncommitted lines of credit do not have
a commitment expiration date, and may be cancelled at any time by the Company or
the banks.
The Company guaranteed $349.3 million of its foreign subsidiaries' lines of
credit and foreign exchange lines, as well as $15.9 million of its foreign
subsidiaries' certain obligations to their suppliers as of December 28, 2002.
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 $84.5 million is the
only amount reported in the "Other long-term obligation" line in the
Consolidated Balance Sheet. The obligation is guaranteed by a standby letter of
credit and it is the intention of the Company to pay the entire obligation in
early 2004.
19
AVERY DENNISON CORPORATION
NOTE 5. 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.
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.
During the year ended December 28, 2002, the ineffectiveness related to cash
flow hedges was not significant. The reclassification from other comprehensive
loss to earnings was a net gain of approximately $.6 million during 2002 and
2001. A net loss of approximately $1.1 million is expected to be reclassified
from other comprehensive loss to earnings within the next 12 months. The maximum
length of time in which the Company hedges its exposure to the variability in
future cash flows for forecasted foreign currency transactions is generally 12
months. The Company entered into a forward starting interest rate swap in May
2002 to secure the interest rate on the Company's anticipated long-term debt
issuance to finance the acquisition of Jackstadt. The principal amount hedged
was $250 million. Because of a shift in interest rates, an unrealized loss of
approximately $37.4 million was included in other comprehensive loss at the end
of 2002. In connection with the issuance of the $250 million 10-year Senior
Notes in January 2003, the Company settled the interest rate swap at a loss of
approximately $32.5 million. The loss will be amortized to interest expense over
10 years, which corresponds to the term of the related debt.
A loss of approximately $2.7 million related to a net investment hedge was
included in the foreign currency translation adjustment reported in accumulated
other comprehensive loss.
The carrying value of the foreign exchange forward contracts approximated the
fair value, which, based on quoted market prices of comparable instruments, was
a net asset of approximately $.5 million and $1 million at the end of 2002 and
2001, respectively.
The carrying value of the foreign exchange option contracts, based on quoted
market prices of comparable instruments, was a net asset of approximately $.1
million and net liability of approximately $.1 million at the end of 2002 and
2001, respectively. The carrying value of the foreign exchange option contracts
approximated the fair market value.
During 1998, the Company entered into a swap contract to hedge foreign currency
commitments of approximately $9 million over a five-year period. The carrying
value of this contract approximated fair value, which was an asset of
approximately $.5 million and $.4 million at the end of 2002 and 2001,
respectively.
The counterparties to foreign exchange forward, option and swap contracts
consist of a large number of major international financial institutions. The
Company centrally monitors its positions and the financial strength of its
counterparties. Therefore, while the Company may be exposed to losses in the
event of nonperformance by these counterparties, it does not anticipate any such
losses.
At year end 2002 and 2001, approximately 17 percent and 23 percent,
respectively, of trade accounts receivable were from nine retail customers of
the Company's Office Products business. The Company does not require its
customers to provide collateral, but the financial position and operations of
these customers are monitored on an ongoing basis. The Company may be exposed to
losses and maintains reserves in the event of nonpayment.
NOTE 6. COMMITMENTS
Minimum annual rental commitments on operating leases having initial or
remaining noncancellable lease terms in excess of one year are as follows:
(In millions)
- -------------------------------------------------------
Year
- -------------------------------------------------------
2003 $ 41.0
2004 32.8
2005 25.1
2006 15.6
2007 12.1
Thereafter 45.6
- -------------------------------------------------------
Total minimum lease payments $ 172.2
=======================================================
20
AVERY DENNISON CORPORATION
Operating leases relate primarily to office and warehouse space, electronic data
processing and transportation equipment. The terms of these leases do not impose
any significant restrictions or unusual obligations. There are no significant
capital leases.
Rent expense for 2002, 2001 and 2000 was $60 million, $50 million and $49
million, respectively.
NOTE 7. TAXES BASED ON INCOME
Taxes based on income were as follows:
(In millions) 2002 2001 2000
- --------------------------------------------------------------------------------
Current:
U.S. federal tax $ 43.0 $ 47.5 $ 68.6
State taxes 3.3 7.5 12.3
International taxes 39.1 45.5 50.6
- --------------------------------------------------------------------------------
85.4 100.5 131.5
================================================================================
Deferred:
U.S. taxes 11.0 8.5 8.4
International taxes 11.2 7.4 2.9
- --------------------------------------------------------------------------------
22.2 15.9 11.3
- --------------------------------------------------------------------------------
Taxes on income $ 107.6 $ 116.4 $ 142.8
================================================================================
The principal items accounting for the difference in taxes as computed at the
U.S. statutory rate and as recorded were as follows:
(In millions) 2002 2001 2000
- ---------------------------------------------------------------------------------------
Computed tax at 35% of income before taxes $ 127.7 $ 125.9 $ 149.2
Increase (decrease) in taxes resulting from:
State taxes, net of federal tax benefit 3.8 4.9 8.0
Foreign earnings taxed at different rates (12.1) (9.1) (9.7)
Tax credits (6.9) (5.6) (4.2)
Other items, net (4.9) .3 (.5)
- ---------------------------------------------------------------------------------------
Taxes on income $ 107.6 $ 116.4 $ 142.8
=======================================================================================
Consolidated income before taxes for U.S. and international operations was as
follows:
(In millions) 2002 2001 2000
- -------------------------------------------------------------------------------
U.S. $ 194.4 $ 182.8 $ 245.5
International 170.4 177.0 180.8
- -------------------------------------------------------------------------------
$ 364.8 $ 359.8 $ 426.3
===============================================================================
U.S. income taxes have not been provided on undistributed earnings of
international subsidiaries of approximately $800 million and $700 million at
year ended 2002 and 2001, respectively, because such earnings are considered to
be reinvested indefinitely or because U.S. income taxes on dividends would be
substantially offset by foreign tax credits.
Operating loss carryforwards of foreign subsidiaries for 2002 and 2001 are $58.4
million and $25 million, respectively, and credit carryforwards are $6.2 million
for federal income tax purposes. Net operating losses of $9.3 million expire
from 2003 through 2012, while net operating losses of $49.1 million can be
carried forward indefinitely. The credit carryforwards will expire from 2003
through 2007. The Company has established a valuation allowance for the net
operating loss carryforwards not expected to be utilized.
21
AVERY DENNISON CORPORATION
NOTE 7. TAXES BASED ON INCOME (CONTINUED)
Deferred income taxes reflect the temporary differences between the amounts at
which assets and liabilities are recorded for financial reporting purposes and
the amounts utilized for tax purposes. The primary components of the temporary
differences which give rise to the Company's deferred tax assets and liabilities
were as follows:
(In millions) 2002 2001
- -------------------------------------------------------------------------------
Accrued expenses not currently deductible $ 33.2 $ 86.7
Net operating losses and foreign tax credit carryforwards 24.9 13.1
Postretirement and postemployment benefits 46.2 14.1
Pension costs (13.3) (18.7)
Depreciation and amortization (136.7) (127.6)
Inventory reserves 11.1 14.0
Other 3.9 (2.0)
Valuation allowance (17.6) (4.4)
- -------------------------------------------------------------------------------
Total net deferred tax liabilities $ (48.3) $ (24.8)
===============================================================================
NOTE 8. 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 eight 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 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.
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 that final resolution of these matters will significantly
impact the consolidated financial position and operations of the Company.
The Company participates in an international receivable financing program with a
financial institution whereby advances may be requested from the financial
institution. All advances are guaranteed by the Company. At December 28, 2002,
the Company had guaranteed $1.8 million.
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.
NOTE 9. SHAREHOLDERS' EQUITY
COMMON STOCK AND COMMON STOCK REPURCHASE PROGRAM
The Company's Certificate of Incorporation authorizes five million shares of $1
par value preferred stock (none outstanding), with respect to which the Board of
Directors may fix the series and terms of issuance, and 400 million shares of $1
par value voting common stock.
In December 1997, the Company redeemed the outstanding preferred stock purchase
rights and issued new preferred stock purchase rights, declaring a dividend of
one such right on each outstanding share of common stock, and since such time,
the Company has issued such rights with each share of common stock that has been
subsequently issued. When exercisable, each new right will entitle its holder to
buy one one-hundredth of a share of Series A Junior Participating Preferred
Stock at a price of $150.00 per one one-hundredth of a share until October 31,
2007. The rights will become exercisable if a person acquires 20 percent or more
of the Company's common stock or makes an offer, the consummation of which will
result in the person's owning 20 percent or more of the Company's common stock.
In the event the Company is acquired in a merger, each right entitles the holder
to purchase common stock of the acquiring company having a market value of twice
the exercise price of the right. If a person or group acquires 20 percent or
more of the Company's common stock, each right entitles the holder to purchase
the Company's common stock with a market value equal to twice the exercise price
of the right. The rights
22
AVERY DENNISON CORPORATION
NOTE 9. SHAREHOLDERS' EQUITY (CONTINUED)
may be redeemed by the Company at a price of one cent per right at any time
prior to a person's or group's acquiring 20 percent of the Company's common
stock. The 20 percent threshold may be reduced by the Company to as low as 10
percent at any time prior to a person's acquiring a percent of Company stock
equal to the lowered threshold.
The Board of Directors has authorized the repurchase of an aggregate 40.4
million shares of the Company's outstanding common stock. The acquired shares
may be reissued under the Company's stock option and incentive plans or used for
other corporate purposes. At year end 2002, approximately 3.2 million shares
were still available for repurchase pursuant to this authorization.
STOCK OPTION AND INCENTIVE PLANS
The Board of Directors previously authorized the issuance of up to 18 million
shares to be used for the issuance of stock options and the funding of other
Company obligations arising from various employee benefit plans. The remaining
shares available are held in the Company's Employee Stock Benefit Trust (ESBT).
The ESBT common stock is carried at market value with changes in share price
from prior reporting periods reflected as an adjustment to capital in excess of
par value.
The Company maintains various stock option and incentive plans which are fixed
employee stock-based compensation plans. Under the plans, incentive stock
options and stock options granted to directors may be granted at not less than
100 percent of the fair market value of the Company's common stock on the date
of the grant, whereas nonqualified options granted to employees may be issued at
prices no less than par value. The Company has a policy whereby all stock option
grants are priced at fair market value on the date of the grant and generally
vest ratably over a two-year period for directors, or over a four-year period
for employees, except that options may cliff-vest over a 3 to 9.75 year period
for certain officers based on the Company's performance. Unexercised options
expire ten years from the date of grant. The following table sets forth stock
option information relative to these plans (options in thousands):
2002 2001 2000
------------------------------ ------------------------------ -----------------------------
Weighted-average Number Weighted-average Number Weighted-average Number
exercise price of options exercise price of options exercise price of options
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year $ 46.07 6,843.1 $ 40.75 6,071.2 $ 35.49 7,252.1
Granted 62.80 1,384.4 54.72 1,929.6 54.57 744.0
Exercised 33.50 (1,050.1) 27.69 (902.0) 22.34 (1,611.6)
Forfeited or expired 51.88 (235.0) 49.95 (255.7) 46.43 (313.3)
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at year end 51.10 6,942.4 46.07 6,843.1 40.75 6,071.2
Options exercisable at year end $ 41.91 2,939.3 $ 36.72 3,079.4 $ 30.90 3,095.2
==================================================================================================================================
The following table summarizes information on fixed stock options outstanding at
December 28, 2002 (options in thousands):
Options outstanding Options exercisable
------------------------------------------------------------ ------------------------------------
Weighted-average
Number remaining Weighted-average Number Weighted-average
Range of exercise prices outstanding contractual life exercise price exercisable exercise price
- -----------------------------------------------------------------------------------------------------------------------------------
$ 12.88 to 50.72 2,520.2 5.0 years $ 38.37 2,163.4 $ 36.60
51.13 to 59.16 2,888.8 8.1 years 56.05 696.0 56.26
59.18 to 68.31 1,533.4 9.7 years 62.73 79.9 60.66
- -----------------------------------------------------------------------------------------------------------------------------------
$ 12.88 to 68.31 6,942.4 7.3 years $ 51.10 2,939.3 $ 41.91
===================================================================================================================================
23
AVERY DENNISON CORPORATION
NOTE 9. SHAREHOLDERS' EQUITY (Continued)
The weighted-average fair value of options granted during 2002, 2001 and 2000
was $16.94, $18.31 and $22.16, respectively. Option grant date fair values were
determined using a Black-Scholes option pricing model. The underlying
assumptions used were as follows:
2002 2001 2000
- ------------------------------------------------------------------------------
Risk-free interest rate 4.43% 5.14% 6.10%
Expected stock price volatility 29.06 33.37 34.63
Expected dividend yield 2.14 2.30 1.43
Expected option term 7 years 10 years 10 years
==============================================================================
NOTE 10. COMPONENTS OF OTHER INCOME AND EXPENSE
The Company recorded a charge in the fourth quarter of 2002 relating to cost
reduction actions. The 2002 charge involved 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 $10.7 million, which consisted of employee severance and related costs
for approximately 300 positions worldwide. The positions eliminated included
approximately 80 employees in the Pressure-sensitive Adhesives and Materials
segment and approximately 220 employees in the Consumer and Converted Products
segment. Severance and related costs represent cash paid or to be paid to
employees terminated under the program. At year end 2002, $9.8 million remained
accrued for severance and related costs (included in "Accrued payroll and
employee benefits" in the Consolidated Balance Sheet). At the end of 2002, of
the approximate 300 positions affected by these actions, approximately 50
employees (10 employees from the Consumer and Converted Products segment and 40
employees from the Pressure-sensitive Adhesives and Materials segment) had left
the Company. The Company expects to complete this cost reduction program in
2003.
In the fourth quarter of 2002, the Company recorded a $6.2 million pretax charge
for the disposition of fixed assets (comprised of machinery and equipment)
related to a reduction of costs in the Reflective business, as well as the
Jackstadt integration. The charge, shown in the "Other expense" line in the
Consolidated Statement of Income, related entirely to assets owned by the
Company prior to the acquisition of Jackstadt.
In the third quarter of 2002, the Company recorded a $15.2 million pretax charge
for the disposition of fixed assets (land, buildings, machinery and equipment)
and lease cancellation costs associated with the integration of Jackstadt
operations, as well as the planned closure of a plant facility, costs to exit
leases and other fixed asset impairments related to other businesses.
Approximately 60 percent of the charge related to the integration of Jackstadt.
The charge, shown in the "Other expense" line in the Consolidated Statement of
Income, related entirely to assets and leases owned by the Company prior to the
acquisition of Jackstadt. Of the $15.2 million charge, approximately $11.3
million related to asset impairments for property, plant and equipment ($1.3
million for buildings and $10 million for machinery and equipment) and $3.9
million related to lease cancellation costs. The Company expects to pay the
lease cancellation costs through 2011. The lease contracts extend for a period
of up to eight years at which time the accruals for these leases will be fully
utilized.
The table below details the lease cancellation cost activity:
(In millions)
- -------------------------------------------------------------------------
Accrued lease cancellation costs $ 3.9
Cancellation costs paid (.2)
- -------------------------------------------------------------------------
Accrued lease cancellation costs, end of period $ 3.7
=========================================================================
In the fourth quarter of 2001, the Company sold its specialty coatings business,
reported within the Pressure-sensitive Adhesives and Materials segment. Cash
proceeds and $11.5 million in notes and receivables were received in conjunction
with the sale, which resulted in a pretax gain of approximately $20.2 million.
Net sales from this business were $26.7 million for ten months in 2001 and $37.7
million in 2000.
24
AVERY DENNISON CORPORATION
NOTE 10. COMPONENTS OF OTHER INCOME AND EXPENSE (Continued)
The Company also recorded a charge in the fourth quarter of 2001 relating to
cost reduction actions. The 2001 charge involved 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
impairments of $6.8 million. The positions eliminated 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 represented cash paid or to be paid to
employees terminated under the program. Asset impairments represented non-cash
charges required to reduce the carrying value of the assets that were disposed
of to net realizable value as of the planned date of disposal. At year end 2002,
$1.9 million remained accrued for severance and related costs (included in
"Accrued payroll and employee benefits" in the Consolidated Balance Sheet),
associated with long-term severance contracts, which will be paid through 2004.
All amounts related to asset impairments were utilized.
NOTE 11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
DEFINED BENEFIT PLANS AND POSTRETIREMENT HEALTH BENEFITS
The Company sponsors a number of defined benefit plans covering substantially
all U.S. employees, employees in certain other countries and non-employee
directors. It is the Company's policy to make contributions to these plans
sufficient to meet the minimum funding requirements of applicable laws and
regulations, plus additional amounts, if any, as the Company's actuarial
consultants advise to be appropriate. Plan assets are invested in a diversified
portfolio that consists primarily of equity securities. Benefits payable to
employees are based primarily on years of service and employees' pay during
their employment with the Company. Certain benefits provided by the Company's
U.S. defined benefit plan may be paid, in part, from an employee stock ownership
plan.
The Company provides postretirement health benefits to certain of its U.S.
retired employees up to the age of 65 under a cost-sharing arrangement, and
supplemental Medicare benefits to certain U.S. retirees over the age of 65. The
Company's policy is to fund the cost of the postretirement benefits on a cash
basis.
25
AVERY DENNISON CORPORATION
NOTE 11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
The following provides a reconciliation of benefit obligations, plan assets and
funded status of the plans:
Postretirement
Pension Benefits Health Benefits
- ----------------------------------------------------------------------------------------------- ----------------------------
2002 2001 2002 2001
(In millions) U.S. Int'l U.S. Int'l U.S.
- -------------------------------------------------------------- -------------------------------- ----------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 340.1 $ 189.5 $ 309.8 $ 176.9 $ 45.7 $ 26.1
Service cost 9.4 6.4 8.1 5.3 .9 .7
Interest cost 24.0 12.2 23.3 10.7 2.8 2.5
Participant contribution - 2.3 - 2.0 - -
Amendments (.2) .2 - .2 - -
Actuarial loss 12.1 13.7 19.0 4.4 2.3 18.8
Plan transfer 5.6 - 3.5 - - -
Benefits paid (25.4) (6.5) (23.6) (5.9) (4.1) (2.4)
Acquisition - 8.9 - - - -
Foreign currency translation - 31.2 - (4.1) - -
- -------------------------------------------------------------- -------------------------------- ----------------------------
Benefit obligation at end of year $ 365.6 $ 257.9 $ 340.1 $ 189.5 $ 47.6 $ 45.7
- -------------------------------------------------------------- -------------------------------- ----------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 396.9 $ 217.5 $ 415.1 $ 235.8 - -
Actual return on plan assets (26.2) (23.7) .8 (7.0) - -
Plan transfer 5.6 - 3.5 - - -
Employer contribution 16.0 4.4 1.1 1.7 $ 4.1 $ 2.4
Participant contribution - 2.3 - 1.9 - -
Benefits paid (25.4) (6.5) (23.6) (5.9) (4.1) (2.4)
Foreign currency translation - 15.6 - (9.0) - -
- -------------------------------------------------------------- -------------------------------- ----------------------------
Fair value of plan assets at end of year $ 366.9 $ 209.6 $ 396.9 $ 217.5 $ - $ -
- -------------------------------------------------------------- -------------------------------- ----------------------------
FUNDED STATUS OF THE PLANS:
Plan assets in excess of (less than) benefit
obligation $ 1.3 $ (48.2) $ 56.7 $ 28.1 $ (47.6) $ (45.7)
Unrecognized net actuarial loss (gain) 75.6 91.2 (5.6) 18.7 12.1 9.9
Unrecognized prior service cost (3.2) 5.2 (3.1) 5.1 1.0 1.1
Unrecognized net asset (1.2) (7.2) (1.9) (8.4) - -
- -------------------------------------------------------------- -------------------------------- ----------------------------
Net amount recognized $ 72.5 $ 41.0 46.1 $ 43.5 $ (34.5) $ (34.7)
- -------------------------------------------------------------- -------------------------------- ----------------------------
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEET CONSIST OF:
Prepaid benefit cost $ 106.9 $ 36.3 $ 90.0 $ 52.3 - -
Accrued benefit liability (89.7) (48.0) (64.7) (8.8) $ (34.5) $ (34.7)
Intangible asset 5.4 5.2 6.5 - - -
Other comprehensive income 49.9 47.5 14.3 - - -
- -------------------------------------------------------------- -------------------------------- ----------------------------
Net amount recognized $ 72.5 $ 41.0 $ 46.1 $ 43.5 $ (34.5) $ (34.7)
- -------------------------------------------------------------- -------------------------------- ----------------------------
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets for U.S. plans were $246.4 million, $244.2 million and $154.7
million, respectively, at year end 2002, and $227.6 million, $224.8 million and
$162.1 million, respectively, at year end 2001.
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets for international plans were $125.4 million, $114.9 million and
$68.8 million, respectively, at year end 2002, and $12.8 million, $12.1 million
and $3.9 million, respectively, at year end 2001.
26
AVERY DENNISON CORPORATION
NOTE 11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (Continued)
Postretirement
Pension Benefits Health Benefits
- ----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 2002 2001 2000
U.S. Int'l U.S. Int'l U.S. Int'l U.S.
- ----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS USED:
Discount rate 7.0% 5.5% 7.3% 5.9% 7.8% 6.2% 7.00% 7.25% 7.75%
Expected long-term rate of return on plan assets 9.5 7.1 9.8 7.5 10.0 7.8 - - -
Rate of increase in future compensation levels 3.6 2.6 4.1 3.7 4.0 4.0 - - -
==================================================================================================================================
The following table sets forth the components of net periodic benefit (income)
cost:
Postretirement
Pension Benefits Health Benefits
- --------------------------------------------------------------------------------------------------- ----------------------
2002 2001 2000 2002 2001 2000
(In millions) U.S. Int'l U.S. Int'l U.S. Int'l U.S.
- --------------------------------------------------------------------------------------------------- ----------------------
COMPONENTS OF NET PERIODIC BENEFIT
(INCOME) COST:
Service cost $ 9.4 $ 6.4 $ 8.1 $ 5.3 $ 6.5 $ 5.5 $ .9 $ .7 $ .6
Interest cost 24.0 12.2 23.3 10.7 22.3 10.0 2.9 2.5 1.9
Expected return on plan assets (41.0) (16.8) (39.2) (16.4) (36.8) (16.4) - - -
Recognized net actuarial (gain) loss (2.1) .5 (3.4) (.2) (1.6) (.3) - - (.4)
Amortization of prior service cost .2 .4 .5 .3 .5 .3 .1 .1 .1
Amortization of transition
obligation or asset (.7) (1.1) (.7) (1.0) (.7) (1.2) - - -
Curtailment (.2) (.2) - - - - - - -
- --------------------------------------------------------------------------------------------------- ----------------------
Net periodic benefit (income) cost $ (10.4) $ 1.4 $ (11.4) $ (1.3) $ (9.8) $ (2.1) $ 3.9 $ 3.3 $ 2.2
=================================================================================================== ======================
For measurement purposes, an 11 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2003. The rate is
expected to decrease to 6 percent by 2008.
An one-percentage-point change in assumed health care cost trend rates would
have the following effects:
One-percentage-point One-percentage-point
(In millions) increase decrease
- ----------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ .4 $ (.4)
Effect on postretirement benefit obligation 4.6 (4.0)
- ----------------------------------------------------------------------------------------------------
As a result of changes in assumptions and the negative return on plan assets
during 2002 and 2001, an additional minimum pension liability of $34.5 million
and $20.2 million, respectively, for U.S. pension plans and an additional
minimum pension liability of $52.7 million in 2002 for international pension
plans is reflected in the Company's Consolidated Balance Sheet. There was no
additional minimum pension liability for international pension plans in 2001.
These transactions generated an additional intangible pension asset or liability
of $(1.1) million and $6.2 million, respectively, in 2002 and 2001 for U.S.
pension plans and $5.2 million in 2002 for international pension plans with a
charge to equity for the remainder. There was no additional intangible pension
asset recognized in 2001 for international pension plans.
DEFINED CONTRIBUTION PLANS
The Company sponsors various defined contribution plans covering its U.S.
employees, including a 401(k) savings plan. The Company matches participant
contributions to the 401(k) savings plan based on a formula within the plan. The
Avery Dennison Corporation Employee Savings Plan (Savings Plan) has a leveraged
employee stock ownership plan (ESOP) feature, which allows the plan to borrow
funds to purchase shares of the Company's common stock at market prices. Savings
Plan expense consists primarily of stock contributions from the ESOP feature to
participant accounts.
27
AVERY DENNISON CORPORATION
ESOP expense is accounted for under the cost of shares allocated method. Total
ESOP (income) expense for 2002, 2001 and 2000 was $(.1) million, $.1 million and
$(1.6) million, respectively. Company contributions to pay interest or principal
on ESOP borrowings were $.8 million and $1.8 million in 2002 and 2001,
respectively. There were no Company contributions to pay interest or principal
on ESOP borrowings for 2000.
Interest costs incurred by the ESOPs for 2002, 2001 and 2000 were $.5 million,
$1.2 million and $1.7 million, respectively. Dividends on unallocated ESOP
shares used for debt service were $1.6 million in 2002, 2001 and 2000.
Consolidated expense (income) for all defined contribution plans (including
total ESOP expense) for 2002, 2001 and 2000 was $1.6 million, $1.7 million and
$(.5) million, respectively. Of the total shares held by the ESOP, 4.1 million
shares were allocated and 1.1 million shares were unallocated at year end 2002,
and 4.7 million shares were allocated and 1.3 million shares were unallocated at
year end 2001.
OTHER RETIREMENT PLANS
The Company has deferred compensation plans which permit eligible employees and
directors to defer a portion of their compensation. The deferred compensation,
together with certain Company contributions, earns specified and variable rates
of return. As of year end 2002 and 2001, the Company had accrued $114 million
and $115.9 million, respectively, for its obligations under these plans. These
obligations are secured by standby letters of credit of $82.5 million for 2002
and $127.6 million for 2001. The Company's expense, which includes Company
contributions and interest expense, was $10 million, $12.7 million and $11.5
million for 2002, 2001 and 2000, respectively. A portion of the interest may be
forfeited by participants if employment is terminated before age 55 other than
by reason of death, disability or retirement.
To assist in the funding of these plans, the Company purchases corporate-owned
life insurance contracts. Proceeds from the insurance policies are payable to
the Company upon the death of the participant. The cash surrender value of these
policies, net of outstanding loans, included in "Other assets" in the
Consolidated Balance Sheet was $109.8 million and $101.4 million at year end
2002 and 2001, respectively.
NOTE 12. SEGMENT INFORMATION
The Company manages its business in two operating segments: Pressure-sensitive
Adhesives and Materials and Consumer and Converted Products. The segments were
determined based upon the types of products produced and markets served by each
segment. The Pressure-sensitive Adhesives and Materials segment manufactures
pressure-sensitive adhesives and base materials that are sold primarily to
converters and label printers for further processing. Products in this segment
include Fasson-brand papers, films and foils, graphic and reflective films,
specialty tapes and chemicals. The Consumer and Converted Products segment
manufactures products for home, school and office uses, and for the retail
industry and original-equipment manufacturers. This segment includes Avery-brand
labels and other consumer products, custom labels, tickets and tags, high
performance specialty films and labels, battery labels, postage stamps,
automotive applications and fasteners.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Intersegment sales are recorded at
or near market prices and are eliminated in determining consolidated sales. The
Company evaluates performance based on income from operations before interest
expense and taxes. General corporate expenses are also excluded from the
computation of income from operations.
The Company does not disclose total assets by operating segment since the
Company does not produce and review such information internally. The Company
does not disclose revenues from external customers for each product because it
is impracticable to do so. As the Company's reporting structure is not organized
by country, results by individual country are not provided because it is
impracticable to do so.
28
AVERY DENNISON CORPORATION
NOTE 12. SEGMENT INFORMATION (Continued)
Financial information by operating segment is set forth below:
(In millions) 2002/(2)/ 2001/(3)/ 2000
- ------------------------------------------------------------------------------------
NET SALES:
Pressure-sensitive Adhesives and Materials $ 2,568.0 $ 2,188.8 $ 2,136.4
Consumer and Converted Products 1,811.7 1,783.8 1,898.3
Intersegment/(1)/ (172.8) (169.3) (141.2)
- ------------------------------------------------------------------------------------
Net sales $ 4,206.9 $ 3,803.3 $ 3,893.5
====================================================================================
INCOME FROM OPERATIONS BEFORE TAXES:
Pressure-sensitive Adhesives and Materials $ 198.0 $ 192.1 $ 212.4
Consumer and Converted Products 245.5 244.4 293.2
Corporate administrative and research and
development expenses (35.0) (26.5) (24.7)
Interest expense (43.7) (50.2) (54.6)
- ------------------------------------------------------------------------------------
Income before taxes $ 364.8 $ 359.8 $ 426.3
====================================================================================
CAPITAL EXPENDITURES:
Pressure-sensitive Adhesives and Materials $ 93.3 $ 75.7 $ 110.8
Consumer and Converted Products 49.2 48.9 74.2
Corporate 9.3 10.8 13.3
- ------------------------------------------------------------------------------------
Capital expenditures $ 151.8 $ 135.4 $ 198.3
====================================================================================
DEPRECIATION EXPENSE:
Pressure-sensitive Adhesives and Materials $ 71.9 $ 69.4 $ 69.9
Consumer and Converted Products 49.0 49.2 48.7
Corporate 6.2 5.5 7.4
- ------------------------------------------------------------------------------------
Depreciation expense $ 127.1 $ 124.1 $ 126.0
====================================================================================
/(1)/ The majority of intersegment sales represent sales from the
Pressure-sensitive Adhesives and Materials segment to the Consumer and
Converted Products segment.
/(2)/ Results for 2002 include a pretax charge of $21.4 million for asset
impairment charges and lease cancellation costs. This charge was
recorded as follows: $17.2 million to the Pressure-sensitive Adhesives
and Materials segment and $4.2 million to the Consumer and Converted
Products segment. Results for 2002 also include a pretax cost reduction
charge of $10.7 million. This charge was recorded as follows: $4.8
million to the Pressure-sensitive Adhesives and Materials segment and
$5.9 million to the Consumer and Converted Products segment. See Note 10
"Components of Other Income and Expense" for further information.
/(3)/ Results for 2001 include a pretax gain of $20.2 million from the sale of
the Company's specialty coatings business included in the
Pressure-sensitive Adhesives and Materials segment results. Results for
2001 also include a pretax cost reduction charge of $19.9 million. This
charge was recorded as follows: $7.6 million to the Pressure-sensitive
Adhesives and Materials segment, $9.4 million to the Consumer and
Converted Products segment, and $2.9 million to Corporate. See Note 10
"Components of Other Income and Expense" for additional information
regarding the Company's 2001 cost reduction program.
29
AVERY DENNISON CORPORATION
NOTE 12. SEGMENT INFORMATION (CONTINUED)
Financial information relating to the Company's operations by geographic area is
set forth below:
(In millions) 2002 2001 2000
- -------------------------------------------------------------------------------
NET SALES:
U.S. $ 2,433.7 $ 2,318.8 $ 2,393.9
International 1,941.5 1,561.7 1,539.9
Intersegment (168.3) (77.2) (40.3)
- -------------------------------------------------------------------------------
Net sales $ 4,206.9 $ 3,803.3 $ 3,893.5
===============================================================================
PROPERTY, PLANT AND EQUIPMENT, NET:
U.S. $ 659.1 $ 673.6 $ 665.8
International 540.1 401.0 413.2
- -------------------------------------------------------------------------------
Property, plant and equipment, net $ 1,199.2 $ 1,074.6 $ 1,079.0
===============================================================================
Revenues are attributed to geographic areas based on the location to which the
product is shipped. The Company's international operations, conducted primarily
in continental Europe, are on the FIFO basis of inventory cost accounting. U.S.
operations use both FIFO and LIFO. Export sales from the United States to
unaffiliated customers are not a material factor in the Company's business.
NOTE 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
(In millions, except per share data) Quarter Quarter Quarter/(1)/ Quarter/(2)/ /(3)/
- ------------------------------------------------------------------------------------------------------------------
2002
Net sales $ 930.8 $ 1,056.3 $ 1,114.5 $ 1,105.3
Gross profit 308.9 346.5 353.2 345.1
Net income 64.8 73.8 63.1 55.5
Net income per common share .66 .75 .64 .56
Net income per common share, assuming dilution .66 .74 .64 .56
- ------------------------------------------------------------------------------------------------------------------
2001
Net sales $ 963.2 $ 960.8 $ 966.7 $ 912.6
Gross profit 319.0 311.8 312.8 296.6
Net income 63.6 59.8 61.7 58.1
Net income per common share .65 .61 .63 .60
Net income per common share, assuming dilution .65 .61 .63 .59
- ------------------------------------------------------------------------------------------------------------------
2000
Net sales $ 965.3 $ 993.4 $ 1,001.7 $ 933.1
Gross profit 334.1 343.7 340.3 314.1
Net income 70.2 72.8 73.0 67.5
Net income per common share .71 .74 .74 .69
Net income per common share, assuming dilution .70 .73 .73 .69
==================================================================================================================
/(1)/ Results in the third quarter 2002 include a $15.2 million pretax charge
for the disposition of fixed assets and lease cancellation costs
associated with the integration of the Jackstadt operations, as well as
the planned closure of a plant facility, costs to exit leases and other
fixed asset impairments related to other businesses.
/(2)/ Results in the fourth quarter 2002 include a $10.7 million pretax charge
for severance and related costs for cost reduction programs and the
reorganization of manufacturing and administrative facilities in both of
the Company's operating segments as well as a $6.2 million pretax charge
for the disposition of fixed assets related to a reduction of costs in
the Reflective business, as well as the Jackstadt integration.
/(3)/ Results in the fourth quarter 2001 include a pretax gain of $20.2
million for the sale of the Company's specialty coatings business and a
pretax cost reduction charge of $19.9 million.
30
AVERY DENNISON CORPORATION
STATEMENT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
The consolidated financial statements and accompanying information were prepared
by and are the responsibility of management. The statements were prepared in
conformity with generally accepted accounting principles and, as such, include
amounts that are based on management's best estimates and judgments.
The internal control systems are designed to provide reliable financial
information for the preparation of financial statements, to safeguard assets
against loss or unauthorized use and to ensure that transactions are executed
consistent with Company policies and procedures. Management believes that
existing internal accounting control systems are achieving their objectives and
that they provide reasonable assurance concerning the accuracy of the financial
statements.
Oversight of management's financial reporting and internal accounting control
responsibilities is exercised by the Board of Directors, through an audit
committee, which consists solely of outside directors (see page 7 of the
Company's Proxy Statement - Schedule 14A). The Committee meets periodically with
financial management, internal auditors and the independent accountants to
obtain reasonable assurance that each is meeting its responsibilities and to
discuss matters concerning auditing, internal accounting control and financial
reporting. The independent accountants and the Company's internal audit
department have free access to meet with the Audit Committee without
management's presence.
- -------------------------------- ------------------------------
Philip M. Neal Daniel R. O'Bryant
Chairman and Senior Vice President, Finance
Chief Executive Officer and Chief Financial Officer
31
AVERY DENNISON CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF AVERY DENNISON CORPORATION:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Avery Dennison
Corporation and its subsidiaries at December 28, 2002 and December 29, 2001, and
the results of their operations and their cash flows for each of the three years
in the period ended December 28, 2002 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Company adopted Statement of Financial Accounting
Standards No 142, "Goodwill and Other Intangible Assets." Accordingly, the
Company ceased amortizing goodwill as of December 30, 2001.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
January 27, 2003
32
AVERY DENNISON CORPORATION
CORPORATE INFORMATION
COUNSEL
Latham & Watkins LLP
Los Angeles, California
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Los Angeles, California
TRANSFER AGENT-REGISTRAR
EquiServe Trust Company, N.A.
P.O. Box 2500
Jersey City, NJ 07303-2500
(800) 756-8200
(201) 222-4955 (hearing impaired number)
www.equiserve.com (Web site)
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 1:30 pm, Thursday, April 24,
2003, in the Conference Center of Avery Dennison's Charles D. Miller Corporate
Center, 150 North Orange Grove Boulevard, Pasadena, California.
THE DIRECTSERVICE(TM) INVESTMENT PROGRAM
Shareholders of record may reinvest their cash dividends in additional shares of
Avery Dennison common stock at market price. Investors may also invest optional
cash payments of up to $12,500 per month in Avery Dennison common stock at
market price. Avery Dennison investors not yet participating in the program, as
well as brokers and custodians who hold Avery Dennison common stock for clients,
may obtain a copy of the program by writing to The DirectSERVICE(TM) Investment
Program, c/o EquiServe (include a reference to Avery Dennison in the
correspondence), P.O. Box 2598, Jersey City, NJ 07303-2598, or calling (800)
649-2291, or logging onto their Web site at http://www.equiserve.com.
33
AVERY DENNISON CORPORATION
DIRECT DEPOSIT OF DIVIDENDS
Avery Dennison shareholders may deposit quarterly dividend checks directly into
their checking or savings accounts. For more information, call Avery Dennison's
transfer agent and registrar, EquiServe Trust Company, N.A., at (800) 870-2340.
FORM 10-K
A copy of the Company's Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission, will be furnished to shareholders and interested
investors free of charge upon written request to the Secretary of the
Corporation.
CORPORATE HEADQUARTERS
Avery Dennison Corporation
Miller Corporate Center
150 North Orange Grove Boulevard
Pasadena, California 91103
Phone: (626) 304-2000
Fax: (626) 792-7312
Mailing Address:
P.O. Box 7090
Pasadena, California 91109-7090
34
AVERY DENNISON CORPORATION
STOCK AND DIVIDEND DATA
Common shares of Avery Dennison are listed on the New York and Pacific stock
exchanges.
Ticker symbol: AVY
2002 2001
----------------------- --------------------
High Low High Low
- -------------------------------------------------------------------------------------------------------
MARKET PRICE
First Quarter $ 64.00 $ 53.63 $ 56.25 $ 50.50
Second Quarter 69.49 59.64 60.24 48.88
Third Quarter 65.23 52.86 52.24 44.39
Fourth Quarter 65.69 55.21 56.81 46.30
=======================================================================================================
Prices shown represent closing on the NYSE
2002 2001
- -------------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE
First Quarter $ .33 $ .30
Second Quarter .33 .30
Third Quarter .33 .30
Fourth Quarter .36 .33
- -------------------------------------------------------------------------------------------------------
Total $ 1.35 $ 1.23
=======================================================================================================
Number of shareholders of record as of year end 2002 11,765
=======================================================================================================
35