UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 27, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 1-7685
AVERY DENNISON CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-1492269
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
150 NORTH ORANGE GROVE BOULEVARD, PASADENA, CALIFORNIA 91103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (626) 304-2000
Indicate by a check X whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No _____
-----
Number of shares of $1 par value common stock outstanding as of July 24,
1998: 117,011,192
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
INDEX TO FORM 10-Q
------------------
Page No.
--------
Part I. Financial Information (Unaudited):
Financial Statements:
Condensed Consolidated Balance Sheet
June 27, 1998 and December 27, 1997 3
Consolidated Statement of Income
Three and Six Months Ended June 27, 1998 and June 28, 1997 4
Condensed Consolidated Statement of Cash Flows
Six Months Ended June 27, 1998 and June 28, 1997 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations and
Financial Condition 11
Part II. Other Information:
Quantitative and Qualitative Disclosures About Market Risk 16
Exhibits and Reports on Form 8-K 16
Signatures 17
2
PART I. FINANCIAL INFORMATION
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
June 27, 1998 December 27, 1997
----------------------- ------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3.7 $ 3.3
Trade accounts receivable, net 485.3 457.7
Inventories, net 243.9 230.1
Prepaid expenses 22.8 19.6
Other current assets 76.0 82.8
----------------------- ------------------------
Total current assets 831.7 793.5
Property, plant and equipment, at cost 1,836.7 1,790.5
Accumulated depreciation (843.0) (805.2)
----------------------- ------------------------
993.7 985.3
Intangibles resulting from business acquisitions, net 134.4 133.7
Other assets 140.5 134.0
----------------------- ------------------------
$ 2,100.3 $ 2,046.5
======================= ========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 61.5 $ 43.6
Accounts payable 265.9 245.3
Other current liabilities 313.5 341.0
----------------------- ------------------------
Total current liabilities 640.9 629.9
Long-term debt 449.8 404.1
Deferred taxes and other long-term liabilities 172.0 175.3
Shareholders' equity:
Common stock - $1 par value authorized - 400,000,000 shares;
issued - 124,126,624 shares at June 27, 1998 and
December 27, 1997 124.1 124.1
Capital in excess of par value 714.9 592.5
Retained earnings 1,125.7 1,063.6
Cumulative foreign currency translation adjustment (25.6) (21.4)
Cost of unallocated ESOP shares (19.3) (23.4)
Minimum pension liability (1.1) (1.1)
Employee stock benefit trusts, 15,503,703 shares at
June 27, 1998 and 16,693,347 shares at December 27, 1997 (822.5) (730.3)
Treasury stock at cost, 6,879,272 shares at June 27,
1998 and 5,053,046 shares at December 27, 1997 (258.6) (166.8)
----------------------- ------------------------
Total shareholders' equity 837.6 837.2
----------------------- ------------------------
$ 2,100.3 $ 2,046.5
======================= ========================
See Notes to Consolidated Financial Statements
3
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 27, 1998 June 28, 1997 June 27, 1998 June 28, 1997
------------- ------------- ------------- -------------
Net Sales $ 871.5 $ 844.8 $ 1,715.1 $ 1,673.7
Cost of products sold 580.2 571.0 1,143.3 1,137.0
------------- ------------- ------------- -------------
Gross profit 291.3 273.8 571.8 536.7
Marketing, general and
administrative expense 196.0 188.7 386.1 369.0
Interest expense 8.5 8.8 16.6 17.3
------------- ------------- ------------- -------------
Income before taxes 86.8 76.3 169.1 150.4
Taxes on income 29.4 26.7 57.5 52.6
------------- ------------- ------------- -------------
Net income $ 57.4 $ 49.6 $ 111.6 $ 97.8
============= ============= ============= =============
PER SHARE AMOUNTS:
Net income per common share $ .56 $ .48 $ 1.09 $ .95
Net income per common share,
assuming dilution .55 .47 1.07 .92
Dividends .21 .17 .42 .34
AVERAGE SHARES OUTSTANDING:
Common shares 101.7 103.3 102.0 103.4
Common shares, assuming dilution 104.4 106.2 104.7 106.4
See Notes to Consolidated Financial Statements
4
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
Six Months Ended
---------------------------------------------
June 27, 1998 June 28, 1997
------------------- -------------------
OPERATING ACTIVITIES:
- --------------------
Net income $ 111.6 $ 97.8
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 55.3 52.1
Amortization 6.0 5.6
Deferred taxes (1.3) 5.8
Net change in assets and liabilities, net of the effect of
foreign currency translation and business divestitures and
acquisitions (23.5) (73.0)
------------------- -------------------
Net cash provided by operating activities 148.1 88.3
------------------- -------------------
INVESTING ACTIVITIES:
- --------------------
Purchase of property, plant and equipment (74.4) (67.6)
Net payments from sale of assets, business
divestitures and acquisitions (3.1) (4.2)
Other (6.0) (3.8)
------------------- -------------------
Net cash used in investing activities (83.5) (75.6)
------------------- -------------------
FINANCING ACTIVITIES:
- --------------------
Net increase in short-term debt 94.9 121.5
Net decrease in long-term debt (31.7) (53.0)
Dividends paid (49.5) (41.2)
Purchase of treasury stock (91.8) (40.7)
Proceeds from exercise of stock options 15.2 6.7
Other (1.3) .2
------------------- -------------------
Net cash used in financing activities (64.2) (6.5)
------------------- -------------------
Effect of foreign currency translation on cash balances -- (.5)
------------------- -------------------
Increase in cash and cash equivalents .4 5.7
------------------- -------------------
Cash and cash equivalents, beginning of period 3.3 3.8
------------------- -------------------
Cash and cash equivalents, end of period $ 3.7 $ 9.5
=================== ===================
See Notes to Consolidated Financial Statements
5
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The accompanying unaudited consolidated financial statements include normal
recurring adjustments necessary for a fair presentation of the Company's
interim results. Certain prior year amounts have been reclassified to conform
with current year presentation. The condensed financial statements and notes
in this Form 10-Q are presented as permitted by Regulation S-X, and as such,
they do not contain certain information included in the Company's 1997 annual
financial statements and notes.
The second quarters of 1998 and 1997 consisted of thirteen-week periods
ending June 27, 1998 and June 28, 1997, respectively. The interim results of
operations are not necessarily indicative of future financial results.
2. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", was adopted during the first quarter of 1998. The
standard establishes guidelines for the reporting and display of
comprehensive income and its components in financial statements.
Comprehensive income includes foreign currency translation adjustments and
adjustments to the minimum pension liability that are currently presented as
components of shareholders' equity. Companies are required to report total
comprehensive income for interim periods beginning first quarter of 1998.
Disclosure of comprehensive income and its components will be required
beginning fiscal year end 1998. The Company's total comprehensive income for
the three and six months ended June 27, 1998 was $63.4 million and $107.4
million, respectively. For the three and six months ended June 28, 1997,
total comprehensive income was $45.8 million and $68.5 million, respectively.
3. FOREIGN CURRENCY TRANSLATION
Transactions in foreign currencies and translation of the financial
statements of subsidiaries which operate in hyperinflationary economies
during 1998 resulted in losses of $.4 million and $1.4 million, respectively,
during the three and six months ended June 27, 1998. The Company did not
incur any losses during the second quarter of 1997 and incurred $.6 million
of losses, during the six months ended June 28, 1997. Operations in
hyperinflationary economies consist of the Company's Mexican operations for
1998 and 1997 and Brazilian operations for 1997.
4. FINANCIAL INSTRUMENTS
The Company enters into foreign exchange forward and option contracts and
interest rate contracts to manage exposure to fluctuations in foreign
currency exchange and interest rates. The Company does not hold or purchase
any foreign currency or interest rate contracts for trading purposes.
6
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. FINANCIAL INSTRUMENTS (CONTINUED)
Foreign exchange forward and option contracts that hedge existing assets,
liabilities or firm commitments are measured at fair value and the related
gains and losses on these contracts are recognized in net income currently.
Foreign exchange forward and option contracts that hedge forecasted
transactions are measured at fair value and the related gains and losses on
these contracts are deferred and subsequently recognized in net income in the
period in which the underlying transaction is consummated. In the event that
an anticipated transaction is no longer likely to occur, the Company
recognizes the change in fair value of the instrument in net income
currently.
Gains and losses resulting from foreign exchange forward and option contracts
are recorded in the same category as the related item being hedged. Cash
flows from the use of financial instruments are reported in the same category
as the hedged item in the Condensed Consolidated Statement of Cash Flows.
Gains and losses on contracts used to hedge the value of investments in
certain foreign subsidiaries are included in the cumulative foreign currency
translation adjustment component of shareholders' equity.
The net amounts paid or received on interest rate agreements are recognized
as adjustments to interest expense over the terms of the agreements. Contract
premiums paid, if any, are amortized to interest expense over the terms of
the underlying instruments.
5. INVENTORIES
Inventories consisted of (in millions):
June 27, 1998 December 27, 1997
----------------------- ------------------------
Raw materials $ 74.4 $ 74.4
Work-in-progress 67.4 70.9
Finished goods 131.1 114.7
LIFO adjustment (29.0) (29.9)
----------------------- ------------------------
$ 243.9 $ 230.1
======================= ========================
6. INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
Accumulated amortization of intangible assets at June 27, 1998 and December
27, 1997 was $52 million and $49.4 million, respectively.
7. RESEARCH AND DEVELOPMENT
Research and development expense for the three and six months ended June 27,
1998 was $17.4 million and $33.6 million, respectively. For the three and six
months ended June 28, 1997, research and development expense was $16.1
million and $30.6 million, respectively.
7
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 16 waste disposal or waste recycling sites which are the
subject of separate investigations or proceedings concerning alleged soil
and/or groundwater contamination and for which no settlement of the Company's
liability has been agreed upon. Litigation has been initiated by a
governmental authority with respect to two of these sites, but the Company
does not believe that any such proceedings will result in the imposition of
monetary sanctions. The Company is participating with other PRPs at all such
sites, and anticipates that its share of cleanup costs will be determined
pursuant to remedial agreements entered into in the normal course of
negotiations with the EPA or other governmental authorities.
The Company has accrued liabilities for all sites, including sites in which
governmental agencies have designated the Company as a PRP, where it is
probable that a loss will be incurred and the minimum cost or amount of loss
can be reasonably estimated. However, because of the uncertainties associated
with environmental assessment and remediation activities, future expense to
remediate the currently identified sites, and sites which could be identified
in the future for cleanup, could be higher than the liability currently
accrued. Based on current site assessments, management believes that the
potential liability over the amounts currently accrued would not materially
affect the Company.
The Company and its subsidiaries are involved in various other lawsuits,
claims and inquiries, most of which are routine to the nature of the
business. In the opinion of management, the resolution of these matters will
not materially affect the Company.
9. NET INCOME PER SHARE
SFAS No. 128, "Earnings Per Share", was adopted in the fourth quarter of 1997
and supersedes the Company's previous standards for computing net income per
share under Accounting Principles Board No. 15. The new standard requires
dual presentation of net income per common share and net income per common
share, assuming dilution, on the face of the income statement. All prior year
net income per share data has been restated for 1997 in accordance with the
new standard.
8
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. NET INCOME PER SHARE (CONTINUED)
In accordance with SFAS No. 128, net income per common share amounts were
computed as follows:
(In millions, except per share amounts)
Three Months Ended Six Months Ended
----------------------------------- ----------------------------------
June 27, 1998 June 28, 1997 June 27, 1998 June 28, 1997
------------- ------------- ------------- -------------
(A) Net income available to common
shareholders $ 57.4 $ 49.6 $ 111.6 $ 97.8
============= ============= ============= =============
(B) Weighted average number of
common shares outstanding 101.7 103.3 102.0 103.4
Additional common shares issuable
under employee stock options
using the treasury stock method 2.7 2.9 2.7 3.0
------------- ------------- ------------- -------------
(C) Weighted average number of
common shares outstanding
assuming the exercise of stock
options 104.4 106.2 104.7 106.4
============= ============= ============= =============
Net income per common share (A) / (B) $ .56 $ .48 $ 1.09 $ .95
============= ============= ============= =============
Net income per common share,
assuming dilution (A) / (C) .55 .47 1.07 .92
============= ============= ============= =============
10.FUTURE ACCOUNTING REQUIREMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information".
The standard establishes guidelines for reporting information on operating
segments in interim and annual financial statements. The new standard will be
effective for the 1998 fiscal year. Abbreviated quarterly disclosure will be
required beginning first quarter of 1999, and will include both 1999 and 1998
information. The Company does not believe that the new standard will have a
material impact on the reporting of its segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives will be recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. The new rules will be effective the first quarter
of 2000. The Company is in the process of determining the impact of this new
standard and anticipates that it will not have a material impact on the
Company's financial results when effective.
9
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. SUBSEQUENT EVENT
On July 23, 1998, the Board of Directors authorized the repurchase of 5
million shares of the Company's outstanding common stock. This is in addition
to prior authorizations to purchase up to an aggregate of 30.4 million
shares. Stock purchases may be made from time to time at the discretion of
Company management.
10
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS: FOR THE QUARTER
- --------------------------------------
Quarterly sales increased to $871.5 million, a 3.2 percent increase over second
quarter 1997 sales of $844.8 million. Excluding changes in foreign currency
rates, sales increased 5 percent.
The gross profit margin increased to 33.4 percent for the quarter compared to
32.4 percent for the second quarter of 1997. The increase was due to ongoing
cost reduction programs, increased productivity and improved product mix.
Marketing, general and administrative expense, as a percent of sales, was 22.5
percent compared to 22.3 percent for the second quarter of 1997, primarily due
to an increase in research and development expenses, reflecting the Company's
focus on new product development.
Interest expense declined to $8.5 million for the second quarter of 1998,
compared to $8.8 million a year ago, due to lower average debt. Income before
taxes, as a percent of sales, increased to 10 percent from 9 percent a year ago,
primarily as a result of the improvement in gross profit. The effective tax rate
declined to 33.9 percent for the second quarter of 1998 compared to 35 percent
for the second quarter of 1997, primarily due to an increase in U.S. tax credits
for research and experimentation.
Net income increased 15.7 percent to $57.4 million compared to $49.6 million in
the second quarter of 1997. Net income per common share for the quarter was $.56
compared to $.48 in the same period last year, a 16.7 percent increase. Net
income per common share, assuming dilution was $.55 for the second quarter of
1998 and $.47 for the second quarter of 1997, a 17 percent increase year over
year.
Results of Operations by Business Sector
The Pressure-sensitive adhesives and materials sector reported increased sales
and profits for the second quarter of 1998 compared to the same period last
year. The U.S. operations' reported sales and profit growth was primarily led by
increased demand for film applications and digital graphics products. The
international operations' reported sales growth was primarily due to increased
demand for digital graphics products and geographic expansion, which was
partially offset by changes in foreign currency rates. Profits for the
international operations were primarily impacted by our geographic expansion
program and changes in foreign currency rates.
The Consumer and converted products sector reported increased sales and profits
for the second quarter of 1998 compared to the same period last year. Increased
sales and profits in the U.S. operations continue to be led by growth of its
Avery-brand products and other consumer products. Increased sales in the
international operations were primarily due to new products and geographic
expansion, which were partially offset by changes in foreign currency rates.
Increased profits in the international businesses were primarily due to new
products and higher unit volume in certain European operations.
11
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS: SIX MONTHS YEAR-TO-DATE
- ----------------------------------------------
Sales for the first six months of 1998 were up 2.5 percent to $1.72 billion
compared to $1.67 billion in the corresponding period of 1997. Excluding changes
in foreign currency rates, sales increased 5 percent.
The gross profit margin for the first six months was 33.3 percent compared to
32.1 percent for the first six months of 1997. The increase was due to ongoing
cost reduction programs, increased productivity and improved product mix.
Marketing, general and administrative expense, as a percent of sales, for the
first six months was 22.5 percent compared to 22 percent for the first six
months of 1997 primarily due to increases in marketing and research and
development expenses, reflecting the Company's focus on marketing promotion and
new product development expenses.
Interest expense declined to $16.6 million for the first six months compared to
$17.3 million for the first six months of 1997. The decrease was primarily due
to lower average debt. Income before taxes, as a percent of sales, increased to
9.9 percent for the first six months of 1998 compared to 9 percent for 1997, as
a result of the improvement in gross profit. The year-to-date effective tax rate
was 34 percent for 1998 and 35 percent for 1997 primarily due to an increase in
U.S. tax credits for research and experimentation. The Company estimates that
the effective tax rate for 1998 will be 34 to 34.5 percent.
Net income was $111.6 million for the first six months of 1998 compared to $97.8
million for the first six months of 1997. Net income per common share increased
14.7 percent to $1.09 for the first six months of 1998 compared to $.95 for the
same period last year. Net income per common share, assuming dilution was $1.07
for the first six months of 1998 compared to $.92 for the same period last year,
a 16.3 percent increase year over year.
Results of Operations by Business Sector
The Pressure-sensitive adhesives and materials sector reported increased sales
and profits for the first six months of 1998 compared to the same period last
year. The U.S. operations' sales and profit growth were primarily led by
increased demand for film applications and digital graphics products. Sales and
profits for the international operations were impacted by changes in foreign
currency rates.
The Consumer and converted products sector reported increased sales and profits
for the first six months of 1998 compared to 1997. Increased sales and profits
in the U.S. operations continue to be led by growth of its Avery-brand products
and other consumer products. Increased sales in the international operations
were primarily due to new products and geographic expansion, which were
partially offset by changes in foreign currency rates. Increased profits in the
international operations were primarily due to new products and higher unit
volume in certain European operations.
12
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
- -------------------
Average working capital, excluding short-term debt, as a percentage of sales,
improved to 7.2 percent for the quarter from 9.3 percent a year ago. Average
inventory turnover for the second quarter was 9.5 inventory turns compared to 9
inventory turns a year ago; the average number of days of sales outstanding in
accounts receivable was 51 days compared to 54 days a year ago.
Net cash flows provided by operating activities totaled $148.1 million for the
first six months of 1998 and $88.3 million for the first half of 1997. The
increase in net cash flows provided by operating activities is primarily due to
a reduction in working capital requirements and the Company's improved
profitability.
Capital spending for the quarter was $37.6 million compared to $35.9 million a
year ago. For the first six months of 1998, capital spending totaled $74.4
million compared to $67.6 million a year ago. Total capital spending for 1998 is
expected to be approximately $175 to $200 million. In addition to cash flow from
operations, the Company has more than adequate financing arrangements to conduct
its operations.
During the first six months of 1998, total debt increased $63.6 million to
$511.3 from year end 1997. During the fourth quarter of 1996, the Company
registered with the Securities and Exchange Commission, $150 million in
principal amount of medium-term notes, of which $60 million in notes had been
issued as of year end 1997. No notes were issued for the first six months of
1998. Proceeds from the medium-term notes have been used to reduce debt and for
other general corporate purposes.
Shareholders' equity increased to $837.6 million from $837.2 million at year end
1997. During the second quarter of 1998, the Company purchased .6 million shares
of common stock at a cost of $33.8 million. For the first six months of 1998,
the Company purchased 1.8 million shares of common stock at a cost of $91.8
million. The market value of shares held in the employee stock benefit trusts,
after the issuance of shares under the Company's stock and incentive plans,
increased during the quarter by $92.2 million to $822.5 million from year end
1997. Total debt to total capital was 37.9 percent at the end of second quarter
of 1998 and 39.1 percent for the same period in 1997. Dividends paid for the
first six months of 1998 totaled $49.5 million compared to $41.2 million a year
ago.
FUTURE ACCOUNTING REQUIREMENTS
- ------------------------------
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". The standard establishes guidelines for
reporting information on operating segments in interim and annual financial
statements. The new rules will be effective for the 1998 fiscal year.
Abbreviated quarterly disclosure will be required beginning first quarter of
1999, and will include both 1999 and 1998 information. The Company does not
believe that the new standard will have a material impact on the reporting of
its segments.
13
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FUTURE ACCOUNTING REQUIREMENTS (CONTINUED)
- ------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives will be recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
new rules will be effective the first quarter of 2000. The Company is in the
process of determining the impact of this new standard and anticipates that it
will not have a material impact on the Company's financial results when
effective.
YEAR 2000
- ---------
The Year 2000 (Y2K) issue is the result of computer programs being written for,
or microprocessors using, two digits (rather than four) to define the applicable
year. Company computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000, which could result
in system failures or miscalculations. The Company is currently working to
mitigate the Y2K issue and has established processes for assessing the risks and
associated costs.
The Company categorizes its Y2K efforts as follows: hardware, software, embedded
processors, vendors and customers. Progress in assessing and remediating
information technology systems (hardware and software) and non-information
technology systems (embedded processors) will be tracked in phases including
assessment, identification of non-compliant systems, remediation, testing and
verification. Hardware, software and embedded processors have been assessed and
remediation is in progress. The Company expects that a large portion of the
Company's internal remediation work will be completed by year end 1998. The
Company will use internal and external resources to remediate and test its
systems, and to develop contingency plans to mitigate risks associated with the
Y2K issue.
The Company has initiated communications with significant vendors and customers
to coordinate the Y2K issue, and is in the process of determining the Company's
vulnerability if these companies fail to remediate their Y2K issues. There can
be no guarantee that the systems of other companies will be timely remediated,
or that other companies' failure to remediate Y2K issues would not have a
material adverse effect on the Company.
Costs incurred to date in addressing the Y2K issue have not been significant and
are being funded through operating cash flows. Based on current information,
costs to remediate and test the Company's systems are not expected to be
material.
The Company presently believes that with remediation, Y2K risks can be
mitigated. However, although the Company is not currently aware of any material
internal operational or financial Y2K related issues, the Company cannot provide
assurances that the computer systems, products, services or other systems upon
which the Company depends will be Y2K ready on schedule, that the costs of its
Y2K program will not become material or that the Company's contingency plans
will be adequate. The Company is currently unable to evaluate accurately the
magnitude, if any, of the Y2K related issues arising from the Company's vendors
and customers. If any such risks (either with respect to the Company or its
vendors or customers) materialize, the Company could experience serious
consequences to its business which could have material adverse effects on the
Company's financial condition, results of operations and liquidity.
14
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SAFE HARBOR STATEMENT
- ---------------------
Except for historical information contained herein, the matters discussed in the
Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this Form 10-Q contain "forward-looking
statements" within the meaning of the Private Securities Reform Act of 1995.
These statements, which are not statements of historical fact, may contain
estimates, assumptions, projections and/or expectations regarding future events.
Such forward-looking statements, and financial or other business targets, are
subject to certain risks and uncertainties which could cause actual results to
differ materially from any future results, performance or achievements of the
Company expressed or implied by such forward-looking statements. Such risks and
uncertainties are discussed in more detail in the Company's Annual Report on
Form 10-K for the year ended December 27, 1997 and include, but are not limited
to, risks and uncertainties relating to investment in new production facilities,
timely development and successful marketing of new products, impact of
competitive products and pricing, customer and supplier and manufacturing
concentrations, changes in customer order patterns, increased competition,
impact of Year 2000 issues, litigation risks, fluctuations in foreign exchange
rates or other risks associated with foreign operations, changes in economic or
political conditions, and other factors.
Any forward looking statements should also be considered in light of the factors
detailed in Exhibit 99 in the Company's Annual Report on Form 10-K for the year
ended December 27, 1997.
The Company's forward-looking statements represent its judgment only on the
dates such statements were made. By making any forward-looking statements, the
Company assumes no duty to update them to reflect new, changed or unanticipated
events or circumstances.
15
PART II. OTHER INFORMATION
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
There are no material changes in the information provided in Item 7A of the
Company's Form 10-K for the fiscal year ended December 27, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
a. Exhibits: 3(ii) Bylaws of Avery Dennison Corporation - amended and
restated July 23, 1998
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
b. Reports on Form 8-K: There were no reports on Form 8-K filed for the three
months ended June 27, 1998.
16
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AVERY DENNISON CORPORATION
--------------------------
(Registrant)
/s/ Robert M. Calderoni
-----------------------------------
Robert M. Calderoni
Senior Vice President, Finance, and
Chief Financial Officer
(Principal Financial Officer)
/s/ Thomas E. Miller
-----------------------------------
Thomas E. Miller
Vice President and Controller
(Chief Accounting Officer)
August 7, 1998
17