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 April 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-7685
AVERY DENNISON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-1492269
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
150 North Orange Grove Boulevard, Pasadena, California 91103
(Address of principal executive offices) (Zip code)
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 April 30,
1999: 113,718,746
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
INDEX TO FORM 10-Q
------------------
Page No.
--------
Part I. Financial Information (Unaudited):
Financial Statements:
Condensed Consolidated Balance Sheet
April 3, 1999 and January 2, 1999 3
Consolidated Statement of Income
Quarters Ended April 3, 1999 and March 28, 1998 4
Condensed Consolidated Statement of Cash Flows
Quarters Ended April 3, 1999 and March 28, 1998 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations
and Financial Condition 11
Quantitative and Qualitative Disclosures About Market Risk 15
Part II. Other Information:
Submission of Matters to a Vote of Security Holders,
Exhibits and Reports on Form 8-K 16
Signatures 17
2
PART I. ITEM 1. FINANCIAL INFORMATION
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
April 3, 1999 January 2, 1999
------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 10.5 $ 18.5
Trade accounts receivable, net 504.8 454.8
Inventories, net 252.6 230.6
Prepaid expenses 19.8 19.0
Deferred tax assets 77.7 55.1
Other current assets 23.4 24.0
------------ -----------
Total current assets 888.8 802.0
Property, plant and equipment, at cost 1,893.2 1,932.6
Accumulated depreciation 887.2 897.0
------------ -----------
1,006.0 1,035.6
Intangibles resulting from business acquisitions, net 258.5 145.1
Other assets 161.0 159.9
------------ -----------
$2,314.3 $2,142.6
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 43.5 $ 71.3
Accounts payable 278.3 269.8
Other current liabilities 421.1 323.2
------------ -----------
Total current liabilities 742.9 664.3
Long-term debt 548.6 465.9
Deferred taxes and other long-term liabilities 175.7 179.1
Long-term obligation 88.6 -
Shareholders' equity:
Common stock - $1 par value, authorized - 400,000,000
shares; issued - 124,126,624 shares at April 3, 1999
and January 2, 1999 124.1 124.1
Capital in excess of par value 769.9 587.5
Retained earnings 1,176.2 1,185.1
Cost of unallocated ESOP shares (18.3) (18.3)
Employee stock benefit trust, 14,580,431 shares (844.7) (677.6)
at April 3, 1999 and 15,036,525 shares at
January 2, 1999
Treasury stock at cost, 10,312,839 shares at April 3, (415.8) (359.4)
1999 and 9,060,617 shares at January 2, 1999
Accumulated other comprehensive loss (32.9) (8.1)
------------ -----------
Total shareholders' equity 758.5 833.3
------------ -----------
$2,314.3 $2,142.6
============ ===========
See Notes to Consolidated Financial Statements
3
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
(Unaudited)
Quarter Ended
--------------------------------
April 3, 1999 March 28, 1998
------------- ---------------
Net sales $933.9 $843.6
Cost of products sold 622.0 563.1
--------- --------
Gross profit 311.9 280.5
Marketing, general and 208.3 190.1
administrative expense
Restructuring charge 65.0 -
Interest expense 10.4 8.1
--------- --------
Income before taxes 28.2 82.3
Taxes on income 9.8 28.1
--------- --------
Net income $ 18.4 $ 54.2
========= ========
Per share amounts:
Net income per common share $ .19 $ .53
Net income per common share, assuming dilution .18 .52
Dividends .24 .21
Average shares outstanding:
Common shares 99.4 102.2
Common shares, assuming dilution 101.5 105.0
See Notes to Consolidated Financial Statements
4
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
Quarter Ended
--------------------------------
April 3, 1999 March 28, 1998
------------- --------------
Operating Activities:
- --------------------
Net income $ 18.4 $ 54.2
Adjustments to reconcile net income to net cash provided
by operating activities:
Restructuring charge 65.0 -
Depreciation 31.7 27.1
Amortization 4.8 2.9
Deferred taxes (22.2) (.7)
Changes in assets and liabilities, net of the effect of (29.8) (35.2)
foreign currency translation, business divestitures,
acquisitions and restructuring charge
----------- ---------------
Net cash provided by operating activities 67.9 48.3
----------- ---------------
Investing Activities:
- --------------------
Purchase of property, plant and equipment (23.9) (36.8)
Payments for acquisitions (35.1) (2.7)
Other (6.8) 1.3
----------- ---------------
Net cash used in investing activities (65.8) (38.2)
----------- ---------------
Financing Activities:
- --------------------
Net increase in short-term debt 57.2 70.0
Net decrease in long-term debt (.2) (5.4)
Dividends paid (27.3) (24.8)
Purchase of treasury stock (56.4) (58.0)
Proceeds from exercise of stock options 7.9 10.5
Other 9.3 (2.1)
----------- ---------------
Net cash used in financing activities (9.5) (9.8)
----------- ---------------
Effect of foreign currency translation on cash balances (.6) -
----------- ---------------
(Decrease) increase in cash and cash equivalents (8.0) .3
----------- ---------------
Cash and cash equivalents, beginning of period 18.5 3.3
----------- ---------------
Cash and cash equivalents, end of period $ 10.5 $ 3.6
=========== ===============
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 1998 annual
financial statements and notes.
The first quarters of 1999 and 1998 consisted of thirteen-week periods ending
April 3, 1999 and March 28, 1998, respectively. The interim results of
operations are not necessarily indicative of future financial results.
2. Restructuring
In the first quarter of 1999, the Company announced a major realignment of
its cost structure designed to increase operating efficiencies and improve
profitability. The realignment resulted in a one-time pre-tax restructuring
charge of $65 million, or $.42 per diluted share on an after-tax basis, in
the first quarter of 1999.
The restructuring involves the consolidation of manufacturing and
distribution capacity in both of the Company's operating segments. The $65
million charge reflects the costs to close eight manufacturing and
distribution facilities, the elimination of approximately 1,500 positions
(principally in manufacturing), and other initiatives to exit activities.
The significant components of the restructuring charge and the accrual
balance as of April 3, 1999 (included within "Other current liabilities")
were as follows:
(In millions) Charge Amounts Utilized Liability Balance
------ ---------------- -----------------
Severance and related costs $35.1 $5.6 $29.5
Asset write-downs 29.9 0.4 29.5
-------- ------- --------
$65.0 $6.0 $59.0
======== ======= ========
Severance and related costs represent cash to be paid to employees being
terminated under the program. Asset write-downs identified as part of the
restructuring program, principally related to equipment, represent non-cash
charges required to reduce the carrying value of the assets to be disposed of
to net realizable value.
At the end of the quarter, four plant closures had commenced and
approximately 300 employees had left the Company. The Company expects to
complete the restructuring program in the year 2000.
6
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Net Income Per Share
Net income per common share amounts were computed as follows:
(In millions, except per share amounts)
April 3, 1999 March 28, 1998
(A) Net income available to common shareholders $ 18.4 $ 54.2
=========================== =========================
(B) Weighted average number of common shares
outstanding 99.4 102.2
Additional common shares issuable
under employee stock options using the
treasury stock method 2.1 2.8
--------------------------- -------------------------
(C) Weighted average number of common shares
outstanding assuming the exercise
of stock options 101.5 105.0
=========================== =========================
Net income per common share (A) / (B) $ .19 $ .53
=========================== =========================
Net income per common share,
assuming dilution (A) / (C) .18 .52
=========================== =========================
4. Comprehensive Income
Comprehensive income includes net income and foreign currency translation
adjustments that is currently presented as a component of shareholders'
equity. The Company's total comprehensive (loss) income for the three months
ended April 3, 1999 and March 28, 1998 was $(6.4) million and $44 million,
respectively.
5. Foreign Currency Translation
Beginning in 1999, Mexico was no longer treated as being in a
hyperinflationary economy for accounting purposes. Transactions in foreign
currencies and translation of financial statements operating in a
hyperinflationary economy (Mexican operations) had no impact on net income
for the first quarter of 1999 and resulted in a loss of $1 million for the
first quarter of 1998.
7
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Financial Instruments
The Company enters into foreign exchange forward, option and swap 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.
Foreign exchange forward, option and swap 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, option and swap
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 a
component of other comprehensive income.
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.
7. Inventories
Inventories consisted of (in millions):
April 3, 1999 January 2, 1999
------------- ---------------
Raw materials $ 74.9 $ 69.2
Work-in-progress 73.8 66.6
Finished goods 130.5 121.4
LIFO adjustment (26.6) (26.6)
------ ------
$252.6 $230.6
====== ======
8. Intangibles Resulting From Business Acquisitions
Accumulated amortization of intangible assets at April 3, 1999 and January
2, 1999 was $56.5 million and $55.6 million, respectively.
9. Research and Development
Research and development expense for the first quarters of 1999 and 1998
was $15.6 million and $16.2 million, respectively.
8
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Contingencies
The Company has been designated by the U.S. Environmental Protection Agency
(EPA) and/or other responsible state agencies as a potentially responsible
party (PRP) at 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
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Segment Information
Financial information by reportable operating segment is set forth below:
(In millions) April 3, 1999 March 28, 1998
---------------------------------------------------------------------------------------------
Net sales:
Pressure-sensitive Adhesives and Materials $498.3 $464.1
Consumer and Converted Products 476.4 421.6
Intersector (40.8) (42.1)
------------------------------------------------------------------------------------------
Net sales $933.9 $843.6
==========================================================================================
Income (loss) from operations before interest and taxes:
Pressure-sensitive Adhesives and Materials $ 26.7 $ 46.4
Consumer and Converted Products 23.0 50.8
Corporate administrative and research and (11.1) (6.8)
development expenses
------------------------------------------------------------------------------------------
$ 38.6 $ 90.4
Interest expense (10.4) (8.1)
------------------------------------------------------------------------------------------
Income before taxes $ 28.2 $ 82.3
==========================================================================================
First quarter 1999 results include a one-time pretax restructuring charge
of $65 million, which affected segment reporting as follows: $25.1 million
to the Pressure-sensitive Adhesives and Materials segment, $37.6 million to
the Consumer and Converted Products segment, and $2.3 million to Corporate.
See Note 2 for additional information regarding the Company's first quarter
1999 restructuring charge.
12. Future Accounting Requirements
In June 1998, the Financial Accounting Standards Board 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. 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, based on current market conditions, anticipates that this standard
will not have a material impact on the Company's financial results when
effective.
10
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations: For the Quarter
- --------------------------------------
Quarterly sales increased to $933.9 million, a 10.7 percent increase over first
quarter 1998 sales of $843.6 million. Excluding sales growth due to recent
acquisitions, the Zweckform venture in Germany, and a small benefit from the
impact of currency, sales grew 5.5 percent
Gross profit margin increased to 33.4 percent for the quarter compared to 33.3
percent for the first quarter of 1998. The improvement was primarily due to raw
material and manufacturing cost reductions.
Marketing, general and administrative expense, as a percent of sales, improved
to 22.3 percent from 22.5 percent for the first quarter of 1998, primarily due
to the benefit from cost reduction actions taken in the second half of 1998, as
well as ongoing tight cost controls.
In the first quarter of 1999, the Company announced a major realignment of its
cost structure designed to increase operating efficiencies and improve
profitability. The realignment resulted in a one-time pre-tax restructuring
charge of $65 million, or $.42 per diluted share on an after-tax basis, in the
first quarter of 1999. The restructuring involves the consolidation of
manufacturing and distribution capacity in both of the Company's operating
segments. The $65 million charge reflects the costs to close eight manufacturing
and distribution facilities, the elimination of approximately 1,500 positions
(principally in manufacturing), and other initiatives to exit activities. The
restructuring charge includes severance and related costs for approximately
1,500 positions ($35.1 million), and asset write-downs ($29.9 million).
Severance and related costs represent cash to be paid to employees being
terminated under the program. Asset write-downs identified as part of the
restructuring program, principally related to equipment, represent non-cash
charges required to reduce the carrying value of the assets to be disposed of to
net realizable value. At the end of the first quarter, 1999, four plant closures
had commenced and approximately 300 employees had left the Company. In addition,
approximately $5.6 million had been paid for severance and related costs and $.4
million had been utilized in asset write-downs. The Company expects to complete
the restructuring program in the year 2000. The Company expects 1999 and 2000
pretax savings in the range of $15 million to $18 million and $38 million to $40
million, respectively. When fully implemented, the Company estimates annual
savings of approximately $58 million to $62 million.
Interest expense increased to $10.4 million for the quarter compared to $8.1
million a year ago, primarily reflecting increased debt to fund share
repurchase, acquisitions and capital expenditures. In addition, the Company
recorded lower capitalized interest due to the decrease in capital spending
compared to the same period last year. Income before taxes, as a percent of
sales, was 3 percent compared to 9.8 percent a year ago, reflecting the $65
million restructuring charge. Excluding the restructuring charge, income before
taxes, as a percent of sales increased to 10 percent. The effective tax rate was
34.8 percent for the first quarter of 1999 compared to 34.1 percent for the
first quarter of 1998, primarily due to a different geographic mix of income.
The Company estimates that the effective tax rate for 1999 will be 34.5 to 35
percent.
11
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations: For the Quarter (continued)
- --------------------------------------------------
Net income totaled $18.4 million compared to $54.2 million in the first quarter
of 1998. Excluding the restructuring charge in the first quarter of 1999, net
income increased 12.4 percent to $60.9 million. Net income, as a percent of
sales, was 2 percent for the first quarter of 1999 and 6.4 percent for the same
period last year. Excluding the restructuring charge, net income, as a percent
of sales increased to 6.5 percent.
Net income per common share for the quarter was $.19 compared to $.53 in the
first quarter of 1998. Excluding the restructuring charge, net income per common
share for the quarter increased 15.1 percent to $.61 compared to the same period
last year. Net income per common share, assuming dilution, was $.18 for the
first quarter of 1999 and $.52 for the first quarter of 1998. Excluding the
restructuring charge, net income per common share, assuming dilution, was $.60
for the first quarter of 1999, a 15.4 percent increase year over year.
Results of Operations by Reportable Operating Segment
Pressure-sensitive Adhesives and Materials:
(In millions) April 3, 1999 March 28, 1998
- ---------------------------------------------------------------------------------------
Net Sales $498.3 $464.1
Income from operations before interest and taxes 26.7 46.4
- ---------------------------------------------------------------------------------------
The Pressure-sensitive Adhesives and Materials segment reported increased sales
for the first quarter of 1999 compared to the same period last year. The
segment's income results include a pretax restructuring charge of $25.1 million
($15.4 million in the U.S. operations and $9.7 million in the international
operations). Excluding this charge, segment income increased compared to the
first quarter of 1998. Sales increased in the U.S. operations primarily due to
strong unit volume growth in the core U.S. roll materials business, particularly
in sales of film and specialty products. Income from the U.S. operations,
excluding the first quarter 1999 restructuring charge, improved primarily due to
sales growth and margin improvement in the U.S. materials business attributed to
cost reduction actions taken in the prior year and early benefits of the Six
Sigma program (Six Sigma is a program designed to reduce the number of defects
which will improve productivity and quality, while reducing costs). Total
international operations in the segment reported increased sales, reflecting
unit volume growth in Europe and the roll materials business in Asia. Excluding
the restructuring charge, income from the international operations increased
primarily due to improved profitability in the Asian and Latin American
businesses.
12
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations: For the Quarter (continued)
- --------------------------------------------------
Consumer and Converted Products:
(In millions) April 3, 1999 March 28, 1998
- ------------------------------------------------------------------------------------------
Net Sales $476.4 $421.6
Income from operations before interest and taxes 23.0 50.8
- ------------------------------------------------------------------------------------------
The Consumer and Converted Products segment reported increased sales for the
first quarter of 1999 compared to the same period last year. The segment's
income results include a pretax restructuring charge of $37.6 million ($24.3
million in the U.S. operations and $13.3 million in the international
operations). Excluding this charge, segment income increased compared to first
quarter 1998. Increased sales in the U.S. operations were primarily led by
recent acquisitions. Excluding the restructuring charge, income in the U.S.
operations improved primarily due to the increase in profitability of Avery-
brand products. The international operations reported increased sales primarily
due to the recent Zweckform venture and the worldwide ticketing business. Income
for the international operations, excluding the restructuring charge, improved
primarily due to the worldwide European office products business and the
worldwide ticketing business.
Financial Condition
- -------------------
Average working capital, excluding short-term debt, as a percentage of sales,
decreased to 5.1 percent from 7.3 percent a year ago. The decrease was primarily
due to increased sales, reduced days sales outstanding in accounts receivable
and accruals recorded for the restructuring charge. The average number of days
sales outstanding in accounts receivable decreased to 49 days compared to 52
days a year ago; average inventory turnover for the first quarters of 1999 and
1998 was 9.8 turns.
Net cash flows provided by operating activities totaled $67.9 million for the
first quarter of 1999 compared to $48.3 million for the first quarter of 1998.
The improvement in net cash flows provided by operating activities was primarily
due to higher net income (before the restructuring charge) and reductions in
working capital requirements.
Capital spending for the quarter was $23.9 million compared to $36.8 million
for the first quarter of 1998. This decrease was primarily due to the high
spending requirements for certain geographic expansions last year. Total capital
spending for 1999 is expected to be approximately $150 million. In addition to
cash flows from operations, the Company has more than adequate financing
arrangements to conduct its operations.
During the first quarter of 1999, total debt increased $54.9 million to $592.1
million from year end 1998. Total debt to total capital was 43.8 percent as of
the end of the first quarter of 1999 and 39.2 percent at year end 1998. During
the fourth quarter of 1996, the Company registered with the Securities and
Exchange Commission, $150 million in principal amount of uncollaterized medium-
term notes, of which $110 million in notes had been issued as of year end 1998.
No notes were issued in the first quarter of 1999. Proceeds from the medium-term
notes have been used to refinance short-term debt and for other general
corporate purposes.
13
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financial Condition (continued)
- ------------------- -----------
On January 12, 1999, the Company completed a transaction with Steinbeis Holding
GmbH to combine substantially all of the Company's office products businesses in
Europe with Zweckform Buro-Produkte GmbH (Zweckform), a German office products
supplier. The Company's aggregate cost basis in this venture was financed
through available cash resources of approximately $23 million and the assumption
of an obligation as reported in the "Long-term obligation" line on the Condensed
Consolidated Balance Sheet. The entire obligation is scheduled to be paid in
2004. The excess of the cost-basis over the fair value of net assets acquired
was approximately $105.3 million at the end of first quarter 1999.
Shareholders' equity decreased to $758.5 million from $833.3 million at year end
1998. During the first quarter of 1999, the Company purchased 1.25 million
shares of common stock at a cost of $56.4 million. The market value of shares
held in the employee stock benefit trust, after the issuance of shares under the
Company's stock and incentive plans, increased during the quarter by $167.1
million to $844.7 million from year end 1998.
Future Accounting Requirements
- ------------------------------
In June 1998, the Financial Accounting Standards Board 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. 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, based on current market
conditions, 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) continues to 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's Y2K project is
progressing and a large portion of its internal remediation work was completed
at the end of first quarter 1999. The Company is using internal and external
resources to remediate and test its systems.
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 remediated on a
timely basis, or that other companies' failure to remediate Y2K issues would not
have a material adverse effect on the Company. The Company continues to develop
contingency plans to mitigate risks associated with the Y2K issue.
14
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Year 2000 (continued)
- ---------------------
Costs incurred to date in addressing the Y2K issue have been expensed as
incurred and are not material. Based on current information, the total cost to
remediate and test the Company's systems is not expected to be material.
The Company presently believes that, with remediation, Y2K risks can be
mitigated. 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 compliant 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.
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. Certain of such
risks and uncertainties are discussed in more detail in the Company's Annual
Report on Form 10-K for the year ended January 2, 1999 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 and inventory levels,
increased competition, loss of significant customer(s), impact of Year 2000
issues and the euro conversion, legal proceedings, 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 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 January 2, 1999.
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.
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 January 2, 1999.
15
PART II. OTHER INFORMATION
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
ITEMS 1, 2 AND 3. Not applicable.
- ----------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
The registrant held its annual stockholders' meeting on April 29, 1999. The
stockholders voted to reelect four directors to the Board of Directors as
follows:
Number of Shares Votes/1/
-------------------------------
For Withheld
---------- ------------
Charles D. Miller 101,911,899 1,263,848
Richard M. Ferry 101,953,534 1,222,213
Dwight L. Allison, Jr. 101,936,335 1,239,412
Kent Kresa 100,993,187 2,182,560
/1/There were no abstentions or shares otherwise not voted by brokers.
The results of the voting on the following additional items were as follows:
Broker
For Against Abstained Non-Votes
------------ ------------- ------------ ----------------
Reapproval of the Senior Executive Leadership 96,946,710 4,563,101 1,665,936 -
Compensation Plan
Reapproval of the Executive Long-Term 96,201,024 5,205,275 1,769,448 -
Incentive Plan
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a. Exhibits: 3(ii) Bylaws of Avery Dennison Corporation - amended and
restated April 29, 1999
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
b. Reports on Form 8-K: Registrant filed a current report on Form 8-K on January
26, 1999, with respect to fourth quarter and year end results, and a
restructuring charge in the first quarter of 1999.
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. Calerdoni
----------------------
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)
May 18, 1999
17