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 October 2, 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 (I.R.S. employer
of 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 October 29,
1999: 112,675,576
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
INDEX TO FORM 10-Q
------------------
Page No.
--------
Part I. Financial Information (Unaudited):
Financial Statements:
Condensed Consolidated Balance Sheet
October 2, 1999 and January 2, 1999 3
Consolidated Statement of Income
Three and Nine Months Ended October 2, 1999
and September 26, 1998 4
Condensed Consolidated Statement of Cash Flows
Nine Months Ended October 2, 1999
and September 26, 1998 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations
and Financial Condition 12
Quantitative and Qualitative Disclosures About Market Risk 19
Part II. Other Information:
Exhibits and Reports on Form 8-K 20
Signatures 21
2
PART I. ITEM 1. FINANCIAL INFORMATION
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
October 2, 1999 January 2, 1999
--------------------- ---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5.8 $ 18.5
Trade accounts receivable, net 573.2 454.8
Inventories, net 260.2 230.6
Prepaid expenses 24.3 19.0
Deferred tax assets 71.2 55.1
Other current assets 27.9 24.0
--------------------- ---------------------
Total current assets 962.6 802.0
Property, plant and equipment, at cost 1,923.9 1,932.6
Accumulated depreciation 905.3 897.0
--------------------- ---------------------
1,018.6 1,035.6
Intangibles resulting from business acquisitions, net 368.1 145.1
Other assets 169.5 159.9
--------------------- ---------------------
$ 2,518.8 $ 2,142.6
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 27.5 $ 71.3
Accounts payable 294.2 269.8
Other current liabilities 464.6 323.2
--------------------- ---------------------
Total current liabilities 786.3 664.3
Long-term debt 652.5 465.9
Deferred taxes and other long-term liabilities 203.0 179.1
Long-term obligation 85.5 -
Shareholders' equity:
Common stock - $1 par value authorized - 400,000,000
shares; issued - 124,126,624 shares at October 2, 1999 and
January 2, 1999 124.1 124.1
Capital in excess of par value 673.5 587.5
Retained earnings 1,251.2 1,185.1
Cost of unallocated ESOP shares (18.3) (18.3)
Employee stock benefit trusts, 14,052,688
at October 2, 1999 and 15,036,525 shares at
January 2, 1999 (733.4) (677.6)
Treasury stock at cost, 11,156,891 shares at October 2,
1999 and 9,060,617 shares at January 2, 1999 (464.8) (359.4)
Accumulated other comprehensive loss (40.8) (8.1)
--------------------- ---------------------
Total shareholders' equity 791.5 833.3
--------------------- ---------------------
$ 2,518.8 $ 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)
Three Months Ended Nine Months Ended
----------------------------------------- ----------------------------------------
October 2, 1999 September 26, 1998 October 2, 1999 September 26, 1998
----------------- ------------------ --------------- ------------------
Net sales $ 961.0 $ 860.2 $ 2,823.4 $ 2,575.3
Cost of products sold 633.5 579.3 1,869.8 1,722.6
--------------- ------------------ --------------- ------------------
Gross profit 327.5 280.9 953.6 852.7
Marketing, general and
administrative expense 214.7 188.9 630.3 575.0
Restructuring charge - - 65.0 -
Interest expense 11.6 8.7 31.2 25.3
--------------- ------------------ --------------- ------------------
Income before taxes 101.2 83.3 227.1 252.4
Taxes on income 35.2 27.5 79.0 85.0
--------------- ------------------ --------------- ------------------
Net income $ 66.0 $ 55.8 $ 148.1 $ 167.4
=============== ================== =============== ==================
Per share amounts:
Net income per common share $ .66 $ .55 $ 1.49 $ 1.64
=============== ================== =============== ==================
Net income per common share,
assuming dilution $ .65 $ .54 $ 1.46 $ 1.60
=============== ================== =============== ==================
Dividends $ .24 $ .21 $ .72 $ .63
=============== ================== =============== ==================
Average shares outstanding:
Common shares 99.3 101.7 99.4 101.9
Common shares, assuming dilution 101.3 104.2 101.5 104.6
See Notes to Consolidated Financial Statements
4
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended
---------------------------------------------
October 2, 1999 September 26, 1998
----------------- --------------------
Operating Activities:
- --------------------
Net income $ 148.1 $ 167.4
Adjustments to reconcile net income to net cash provided
by operating activities:
Restructuring charge 65.0 -
Depreciation 94.3 84.2
Amortization 16.0 9.1
Deferred taxes (9.4) 1.5
Net change in assets and liabilities, net of the effect of
foreign currency translation, business divestitures,
acquisitions and restructuring charge (34.4) (30.9)
----------------- -----------------
Net cash provided by operating activities 279.6 231.3
----------------- -----------------
Investing Activities:
- --------------------
Purchase of property, plant and equipment (99.4) (102.1)
Payments for acquisitions (167.8) (3.1)
Other 4.6 (11.5)
----------------- -----------------
Net cash used in investing activities (262.6) (116.7)
----------------- -----------------
Financing Activities:
- --------------------
Net increase in short-term debt 144.3 66.4
Net decrease in long-term debt (.9) (5.4)
Dividends paid (82.0) (74.0)
Purchase of treasury stock (105.4) (116.7)
Proceeds from exercise of stock options 14.2 18.4
Other .4 (1.8)
----------------- -----------------
Net cash used in financing activities (29.4) (113.1)
----------------- -----------------
Effect of foreign currency translation on cash balances (.3) .1
----------------- -----------------
(Decrease) increase in cash and cash equivalents (12.7) 1.6
----------------- -----------------
Cash and cash equivalents, beginning of period 18.5 3.3
----------------- -----------------
Cash and cash equivalents, end of period $ 5.8 $ 4.9
================= =================
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 third quarters of 1999 and 1998 consisted of thirteen-week periods
ending October 2, 1999 and September 26, 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 pretax 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 remaining
balance as of October 2, 1999 (included within "Other current liabilities")
were as follows:
Amounts
(In millions) Charge Utilized Balance
----------- ----------- ------------
Severance and related costs $ 35.1 $ 14.5 $ 20.6
Asset write-downs 29.9 8.1 21.8
----------- ----------- ------------
$ 65.0 $ 22.6 $ 42.4
=========== =========== ============
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 as of the planned date of disposal.
6
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Restructuring (continued)
At the end of the third quarter, five plant closures had commenced and
approximately 750 employees had left the Company. The Company expects to
complete the restructuring program in the year 2000.
3. Net Income Per Share
Net income per common share amounts were computed as follows:
(In millions, except per share amounts)
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
October 2, September 26, October 2, September 26,
1999 1998 1999 1998
--------------- -------------- -------------- -------------
(A) Net income available to
common shareholders $ 66.0 $ 55.8 $ 148.1 $ 167.4
=============== ============== ============== =============
(B) Weighted average number
of common shares outstanding 99.3 101.7 99.4 101.9
Additional common shares
issuable under employee
stock options using the
treasury stock method 2.0 2.5 2.1 2.7
--------------- --------------- -------------- -------------
(C) Weighted average number
of common shares
outstanding assuming the
exercise of stock options 101.3 104.2 101.5 104.6
=============== ============== ============== =============
Net income per common share (A) /
(B) $ .66 $ .55 $ 1.49 $ 1.64
=============== ============== ============== =============
Net income per common share,
assuming dilution (A) / (C) $ .65 $ .54 $ 1.46 $ 1.60
=============== ============== ============== =============
4. Comprehensive Income
Comprehensive income includes net income and foreign currency translation
adjustments that are currently presented as a component of shareholders'
equity. The Company's total comprehensive income for the three and nine
months ended October 2, 1999 was $68.2 million and $115.4 million,
respectively. For the three and nine months ended September 26, 1998 total
comprehensive income was $64.2 million and $171.6 million, respectively.
7
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Foreign Currency Translation
Transactions in foreign currencies and translation of financial statements
of subsidiaries operating in hyperinflationary economies during 1999
resulted in a gain of $.1 million and a loss of $1 million, respectively,
during the three and nine months ended October 2, 1999. For the three and
nine months ended September 26, 1998, the Company recorded losses of $.7
million and $2.1 million, respectively. Operations in hyperinflationary
economies consist of the Company's operations in Turkey for 1999 and Mexico
for 1998.
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.
8
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Inventories
Inventories consisted of (in millions):
October 2, 1999 January 2, 1999
---------------------- ----------------------
Raw materials $ 80.2 $ 69.2
Work-in-progress 68.9 66.6
Finished goods 137.1 121.4
LIFO adjustment (26.0) (26.6)
---------------------- ----------------------
$260.2 $230.6
====================== ======================
8. Intangibles Resulting From Business Acquisitions
Accumulated amortization of intangible assets at October 2, 1999 and
January 2, 1999 was $61.9 million and $55.6 million, respectively.
9. Research and Development
Research and development expense for the three and nine months ended
October 2, 1999 was $15.4 million and $45.9 million, respectively. For the
three and nine months ended September 26, 1998, research and development
expense was $16.5 million and $50.1 million, respectively.
10. Contingencies
The Company has been designated by the U.S. Environmental Protection Agency
(EPA) and/or other responsible state agencies as a potentially responsible
party (PRP) at 14 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.
9
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Contingencies (continued)
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.
11. Segment Information
Financial information by reportable operating segment is set forth below:
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
October 2, September 26, October 2, September 26,
(In millions) 1999 1998 1999 1998
------------------------------------------------------------------------------------------------------------------
Net sales:
Pressure-sensitive Adhesives
and Materials $ 518.1 $ 457.6 $ 1,507.6 $ 1,391.0
Consumer and Converted Products 485.6 437.1 1,446.7 1,297.2
Intersector (42.7) (34.5) (130.9) (112.9)
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 961.0 $ 860.2 $ 2,823.4 $ 2,575.3
===================================================================================================================
Income (loss) from operations
before interest and taxes:
Pressure-sensitive Adhesives
and Materials $ 53.5 $ 37.1 $ 131.1 $ 126.9
Consumer and Converted Products 65.7 58.7 152.3 166.4
Corporate administrative and
research and development expenses (6.4) (3.8) (25.1) (15.6)
- -------------------------------------------------------------------------------------------------------------------
$ 112.8 $ 92.0 $ 258.3 $ 277.7
Interest expense (11.6) (8.7) (31.2) (25.3)
- -------------------------------------------------------------------------------------------------------------------
Income before taxes $ 101.2 $ 83.3 $ 227.1 $ 252.4
===================================================================================================================
10
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Segment Information (continued)
Results for the nine months ended October 2, 1999 include a pretax
restructuring charge of $65 million, which was recorded in the first
quarter of 1999. The charge 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
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 2001. The
Company is in the process of determining the impact of this new standard
and, based on current market conditions, anticipates that the new rules
will not have a material impact on the Company's financial results when
effective.
13. Subsequent Events
On October 28, 1999, the Board of Directors authorized the repurchase of an
additional 5 million shares of the Company's outstanding common stock.
Stock purchases may be made from time to time at the discretion of Company
management. The acquired shares may be reissued under the Company's stock
option and incentive plans, or used for other authorized purposes.
On October 28, 1999, the Board of Directors amended the bylaws of the
Company to increase the size of the board from 11 to 12 members.
11
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 $961 million, an 11.7 percent increase over third
quarter 1998 sales of $860.2 million. Excluding sales growth due to recent
acquisitions, the Zweckform venture and the impact of currency, sales grew 5.7
percent.
Gross profit margin increased to 34.1 percent for the quarter compared to 32.7
percent for the third quarter of 1998. The improvement was primarily due to
sales growth, cost reduction initiatives and productivity improvements.
Marketing, general and administrative expense, as a percent of sales, increased
to 22.3 percent compared to 22 percent for the third quarter of 1998, primarily
due to the integration of recent acquisitions.
Interest expense increased to $11.6 million for the quarter, compared to $8.7
million a year ago, primarily reflecting increased debt to fund acquisitions and
share repurchases.
Income before taxes, as a percent of sales, increased to 10.5 percent from 9.7
percent a year ago, primarily as a result of improved operational efficiencies.
The effective tax rate increased to 34.8 percent for the quarter compared to 33
percent for the third quarter of 1998, primarily due to a different geographic
mix of income.
Net income increased 18.3 percent to $66 million compared to $55.8 million in
the third quarter of 1998. Net income per common share for the quarter was $.66
compared to $.55 in the same period last year, a 20 percent increase. Net income
per common share, assuming dilution, was $.65 for the third quarter of 1999 and
$.54 for the third quarter of 1998, a 20.4 percent increase year over year.
Results of Operations by Reportable Operating Segment
Pressure-sensitive Adhesives and Materials: Three Months Ended
---------------------------------------------------------------
(In millions) October 2, 1999 September 26, 1998
- ----------------------------------------------------------------------------------------------------------------------
Net sales $ 518.1 $ 457.6
Income from operations before interest and taxes 53.5 37.1
- ----------------------------------------------------------------------------------------------------------------------
The Pressure-sensitive Adhesives and Materials segment reported increased sales
and income for the third quarter of 1999 compared to the same period last year.
Increased sales in the U.S. were primarily due to the unit volume growth in the
U.S. roll materials business, particularly in sales of film and specialty
products, and the recent acquisition of Stimsonite Corporation. Income from the
U.S. operations improved, reflecting unit volume growth primarily in the U.S.
roll materials business, benefits from the Six Sigma and restructuring programs
and the recent acquisition. Total international operations in the segment
reported increased sales, reflecting unit volume growth in Asia, Europe and
Latin America, which were partially offset by changes in foreign currency rates.
Income for the international operations increased primarily due to increased
sales and profitability in the Asian, European and Latin American businesses.
12
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Consumer and Converted Products: Three Months Ended
--------------------------------------------------------
(In millions) October 2, 1999 September 26, 1998
- --------------------------------------------------------------------------------------------------------------------
Net sales $ 485.6 $ 437.1
Income from operations before interest and taxes 65.7 58.7
- --------------------------------------------------------------------------------------------------------------------
The Consumer and Converted Products segment reported increased sales and income
for the third quarter of 1999 compared to the same period last year. Sales in
the U.S. operations improved primarily due to recent acquisitions and unit
volume growth in Avery-brand label products, organization and presentation
products and high performance films. Income from the U.S. operations decreased
slightly primarily due to moving and transition costs related to plant closures
not included in the restructuring charge. The international operations reported
increased sales primarily due to the recent Zweckform venture and sales growth
in the worldwide ticketing business. Income for the international operations
improved primarily due to improved profitability in the office products
businesses in Europe and Asia, and the worldwide ticketing business. The segment
was impacted by decreased sales in the battery label business due to a product
mix change announced by a key customer earlier this year.
Results of Operations: Nine Months Year-To-Date
- -----------------------------------------------
Sales for the first nine months of 1999 increased 9.6 percent to $2.82 billion
compared to $2.58 billion in the corresponding period of 1998. Excluding sales
growth due to recent acquisitions, the Zweckform venture and impact of currency,
sales increased 5.1 percent.
Gross profit margin for the first nine months increased to 33.8 percent compared
to 33.1 percent for the first nine months of 1998. The improvement was due to
sales growth, cost reduction initiatives and productivity improvements.
Marketing, general and administrative expense, as a percent of sales, was
comparable to the first nine months of 1998 at 22.3 percent.
13
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 pretax 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 as of the planned
date of disposal. At the end of the third quarter, 1999, five plant closures had
commenced and approximately 750 employees had left the Company. In addition,
$14.5 million had been paid for severance and related costs and $8.1 million had
been utilized in asset write-downs. The Company expects 1999 and 2000 pretax
savings in the range of $19 million to $20 million and $38 million to $40
million, respectively. When fully implemented, the Company estimates annual
pretax savings of approximately $58 million to $62 million.
Interest expense increased to $31.2 million for the first nine months compared
to $25.3 million for the first nine months of 1998, primarily reflecting
increased debt to fund acquisitions and share repurchases. Income before taxes,
as a percent of sales, was 8 percent compared to 9.8 percent for 1998,
reflecting the $65 million restructuring charge. Excluding the restructuring
charge, income before taxes, as a percent of sales, increased to 10.3 percent
for the first nine months of 1999. The year-to-date effective tax rate increased
to 34.8 percent for 1999 from 33.7 percent for 1998 primarily due to a different
geographic mix of income. The Company estimates that the effective tax rate for
1999 will be 34.8 percent to 35 percent.
Net income totaled $148.1 million compared to $167.4 million in the first nine
months of 1998. Excluding the restructuring charge in the first quarter of
1999, net income increased 13.8 percent to $190.5 million. Net income, as a
percent of sales, was 5.2 percent for the first nine months of 1999 and 6.5
percent for the same period last year. Excluding the restructuring charge, net
income, as a percent of sales, increased to 6.7 percent.
Net income per common share for the first nine months was $1.49 compared to
$1.64 for the same period last year. Excluding the restructuring charge, net
income per common share for the first nine months increased 17.1 percent to
$1.92 compared to the same period last year. Net income per common share,
assuming dilution, was $1.46 for the first nine months of 1999 and $1.60 for the
first nine months of 1998. Excluding the restructuring charge, net income per
common share, assuming dilution, was $1.88 for the first nine months of 1999, a
17.5 percent increase year over year.
14
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations by Reportable Operating Segment
Pressure-sensitive Adhesives and Materials: Nine Months Ended
--------------------------------------------------------
(In millions) October 2, 1999 September 26, 1998
- ----------------------------------------------------------------------------------------------------------------
Net sales $ 1,507.6 $ 1,391.0
Income from operations before interest and taxes 131.1 126.9
- ----------------------------------------------------------------------------------------------------------------
The Pressure-sensitive Adhesives and Materials segment reported increased sales
and income for the first nine months of 1999 compared to the same period last
year. The segment's income results include a pretax restructuring charge
recorded in the first quarter of 1999 of $25.1 million ($15.4 million in the
U.S. operations and $9.7 million in the international operations). Sales
increased in the U.S. operations primarily due to the unit volume growth in the
U.S. roll materials business, particularly in sales of film and specialty
products, and the recent acquisition of Stimsonite Corporation. Income from
U.S. operations, excluding the restructuring charge, improved primarily due to
sales growth and margin improvement in the U.S. materials business attributed to
cost reductions actions from the Six Sigma and restructuring programs, as well
as the recent acquisition. Total international operations in the segment
reported increased sales, reflecting unit volume growth in Europe, Asia and
Latin America. This increase in sales was partially offset by changes in foreign
currency rates. Excluding the restructuring charge, income from total
international operations increased primarily due to increased sales and
profitability in the Asian and Latin American businesses.
Consumer and Converted Products: Nine Months Ended
---------------------------------------------------
(In millions) October 2, 1999 September 26, 1998
- --------------------------------------------------------------------------------------------------------------
Net sales $1,446.7 $1,297.2
Income from operations before interest and taxes 152.3 166.4
- --------------------------------------------------------------------------------------------------------------
The Consumer and Converted Products segment reported increased sales for the
first nine months of 1999 compared to the same period last year. The segment's
income results include a pretax restructuring charge recorded in the first
quarter of 1999 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 the first nine months of 1998. Increased sales in the U.S.
operations were primarily led by recent acquisitions, and unit volume growth in
Avery-brand products and high performance films. Excluding the restructuring
charge, income in the U.S. operations improved primarily due to unit volume
growth in Avery-brand products and high performance films. The international
operations reported increased sales primarily due to the recent Zweckform
venture, acquisitions and sales growth in the worldwide ticketing business.
Income for the international operations, excluding the restructuring charge,
increased primarily due to the office products business in Europe and Asia. The
segment was impacted by decreased sales and income in the battery label
business. A key customer in this business made a product mix change in its
battery lines, resulting in a partial shift from higher-priced tester labels to
standard battery labels. The Company expects this negative year-to-year
comparison to continue for the next two quarters in its battery label business.
15
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financial Condition
- -------------------
Average working capital, excluding short-term debt, as a percentage of sales,
decreased to 5.3 percent for the quarter from 8 percent a year ago. Average
inventory turnover for the third quarter was 9.7 inventory turns compared to 10
inventory turns a year ago; the average number of days of sales outstanding in
accounts receivable was 54 days compared to 55 days a year ago.
Net cash flows provided by operating activities totaled $279.6 million for the
first nine months of 1999 compared to $231.3 million for the same period in
1998. The increase in net cash flows provided by operating activities was
primarily due to higher net income (before the restructuring charge). In
addition to cash flow from operations, the Company has more than adequate
financing arrangements to conduct its operations.
Capital spending for the quarter was $40.8 million compared to $27.7 million a
year ago. For the first nine months of 1999, capital spending totaled $99.4
million compared to $102.1 million a year ago. Total capital spending for 1999
is expected to be approximately $170 million.
During the first nine months of 1999, total debt increased $142.8 million to
$680 million from year end 1998. The increase in debt was primarily due to the
debt issuance to fund acquisitions and share repurchases. Total debt to total
capital was 46.2 percent as of the end of the third 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 uncollaterialized medium-term notes, of which $110 million in notes
had been issued as of year end 1998. No notes were issued during the first nine
months of 1999. Proceeds from the medium-term notes have been used to refinance
short-term debt and for other general corporate purposes.
On July 9, 1999, the Company acquired Stimsonite Corporation based in Niles,
Illinois, a leading manufacturer of reflective safety products for the
transportation and highway safety markets. The Company paid approximately $150
million (including the assumption of approximately $20 million in debt) for
Stimsonite, which was primarily funded with the issuance of debt. Stimsonite had
sales of $87 million in 1998. The excess of the cost-basis over the fair value
of net assets acquired was $104.7 million.
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. It is the intention of the Company to pay the entire
obligation in 2004. The excess of the cost-basis over the fair value of net
assets acquired was $101.3 million.
Shareholders' equity decreased to $791.5 million from $833.3 million at year end
1998. During the third quarter of 1999, the Company purchased approximately 710
thousand shares of common stock at a cost of $39.8 million. During the first
nine months of 1999, the Company purchased 2.1 million shares of common stock at
a cost of $105.4 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 by $55.8 million to $733.4 million from year end
1998. Dividends paid for the first nine months of 1999 totaled $82 million
compared to $74 million a year ago.
16
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 2001. The Company is in the process of
determining the impact of this new standard and, based on current market
conditions, anticipates that the new rules 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 continues to work on
mitigating the Y2K issue and has assessed the risks and associated costs.
The Company categorizes its Y2K efforts as follows: hardware, software, embedded
processors (located in manufacturing and distribution equipment and facilities),
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. The risks associated with hardware, software and embedded
processors have been assessed and the Company estimates that approximately 99%
of its Y2K projects have been completed as of the end of the third quarter of
1999. The remaining projects (which are not considered to be critical) will be
completed by year end. Recent acquisitions, including Stimsonite, Spartan
International and the Zweckform venture, have also been included in the
Company's Y2K efforts and remediation and testing are progressing within these
businesses. The Company continues to use internal and external resources to
remediate and test its systems.
The Company continues to exchange Y2K status information with significant
vendors. The process for determining the Company's risk with respect to
significant vendors includes assessment, analysis of responses to questionnaires
and follow-up communication. The Company also continues to exchange Y2K
information with significant customers to minimize risks associated with the
Company's relationships with business partners. Although the Company will
continue to monitor third party responses, there can be no guarantee that the
systems of other companies, including utilities, 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.
17
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company has developed and continues to update contingency plans to mitigate
risks associated with the Y2K issue. Contingency plans are intended to provide
guidance and alternatives for unexpected failures of the Company's internal
information technology systems and embedded processors. These plans include
establishing regional Y2K response teams, creating back-up operating procedures,
identifying alternative supply sources for significant vendors and adding
inventory for key raw materials and products. The Company will continue to
update its contingency planning during the remainder of 1999.
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 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.
18
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
There are no material changes in the information provided in Item 7A of the
Company's Form 10-K for the fiscal year ended January 2, 1999.
19
PART II. OTHER INFORMATION
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
ITEMS 1, 2, 3 and 4. Not applicable
- ------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
a. Exhibits: 3(ii) Bylaws of Avery Dennison Corporation - amended and
restated, October 28, 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 July
23, 1999, with respect to the acquisition of Stimsonite Corporation.
20
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)
November 12, 1999
21