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 March 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-7685
AVERY DENNISON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-1492269
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
150 North Orange Grove Boulevard, Pasadena, California 91103
(Address of principal executive offices) (Zip code)
(626) 304-2000
(Registrant's telephone number, including area code)
Indicate by a check |X| whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes [X] No
Number of shares of $1 par value common stock outstanding as of April 27, 2002:
109,848,118
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
INDEX TO FORM 10-Q
------------------
Part I. Financial Information (Unaudited): Page No.
- -------------------------------------------- --------
Financial Statements:
Condensed Consolidated Balance Sheet
March 30, 2002 and December 29, 2001 3
Consolidated Statement of Income
Quarters Ended March 30, 2002 and March 31, 2001 4
Condensed Consolidated Statement of Cash Flows
Quarters Ended March 30, 2002 and March 31, 2001 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations and Financial Condition 13
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)
March 30, 2002 December 29, 2001
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 16.0 $ 19.1
Trade accounts receivable, net 586.3 569.1
Inventories, net 289.7 267.4
Deferred taxes 59.6 61.1
Other current assets 59.6 65.8
- ------------------------------------------------------------------------------------------------------------------
Total current assets 1,011.2 982.5
Property, plant and equipment, at cost 2,045.8 2,057.5
Accumulated depreciation 997.2 982.9
- ------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 1,048.6 1,074.6
Goodwill, net 295.6 293.2
Intangibles resulting from business acquisitions, net 116.7 120.0
Other assets 353.5 348.9
- ------------------------------------------------------------------------------------------------------------------
$ 2,825.6 $ 2,819.2
==================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term and current portion of long-term debt $ 218.8 $ 223.0
Accounts payable 317.8 316.4
Other current liabilities 379.2 411.9
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 915.8 951.3
Long-term debt 657.8 626.7
Non-current deferred taxes and other long-term liabilities 228.7 237.2
Other long-term obligation 72.4 74.6
Shareholders' equity:
Common stock - $1 par value; authorized - 400,000,000 shares; issued -
124,126,624 shares at March 30, 2002 and
December 29, 2001 124.1 124.1
Capital in excess of par value 760.8 707.2
Retained earnings 1,584.6 1,556.1
Cost of unallocated ESOP shares (13.7) (13.7)
Employee stock trusts, 11,695,258 shares at March 30, 2002 and
12,008,123 shares at December 29, 2001 (713.3) (674.5)
Treasury stock at cost, 14,267,923 shares at March 30, 2002 and
14,235,871 shares at December 29, 2001 (635.4) (633.4)
Accumulated other comprehensive loss (156.2) (136.4)
- ------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 950.9 929.4
- ------------------------------------------------------------------------------------------------------------------
$ 2,825.6 $ 2,819.2
==================================================================================================================
See Notes to Consolidated Financial Statements
3
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
(Unaudited)
Quarter Ended
--------------------------------------
March 30, 2002 March 31, 2001
---------------------------------------------------------------------------------------------------------
Net sales $ 930.8 $ 963.2
Cost of products sold 621.9 644.2
--------------------------------------------------------------------------------------------------------
Gross profit 308.9 319.0
Marketing, general and administrative expense 205.7 209.2
Interest expense 9.3 13.8
--------------------------------------------------------------------------------------------------------
Income before taxes and accounting change 93.9 96.0
Taxes on income 29.1 32.2
--------------------------------------------------------------------------------------------------------
Income before accounting change 64.8 63.8
Cumulative effect of accounting change, net of tax - (.2)
--------------------------------------------------------------------------------------------------------
Net income $ 64.8 $ 63.6
========================================================================================================
Per share amounts:
Net income per common share:
Before accounting change $ .66 $ .65
Cumulative effect of accounting change - -
--------------------------------------------------------------------------------------------------------
Net income per common share $ .66 $ .65
========================================================================================================
Net income per common share, assuming dilution:
Before accounting change $ .66 $ .65
Cumulative effect of accounting change - -
--------------------------------------------------------------------------------------------------------
Net income per common share, assuming dilution $ .66 $ .65
========================================================================================================
Dividends $ .33 $ .30
========================================================================================================
Average shares outstanding:
Common shares 98.0 97.6
Common shares, assuming dilution 98.9 98.5
========================================================================================================
See Notes to Consolidated Financial Statements
4
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
Quarter Ended
--------------------------------------
March 30, 2002 March 31, 2001
- -------------------------------------------------------------------------------------------------------------------
Operating Activities:
- --------------------
Net income $ 64.8 $ 63.6
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 31.0 31.3
Amortization 5.3 7.9
Deferred taxes .4 4.1
Changes in assets and liabilities, net of the effect of foreign
currency translation, business acquisitions and divestitures (71.9) (58.6)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 29.6 48.3
-----------------------------------------------------------------------------------------------------------------
Investing Activities:
--------------------
Purchase of property, plant and equipment (17.5) (35.8)
Acqusitions, net of miscellaneous proceeds from sale of assets (6.4) (58.1)
Other (9.1) (23.7)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (33.0) (117.6)
- ------------------------------------------------------------------------------------------------------------------
Financing Activities:
---------------------
Additional borrowings 233.2 428.1
Payments of debt (204.5) (324.3)
Dividends paid (36.3) (33.1)
Purchase of treasury stock (2.0) (.1)
Proceeds from exercise of stock options 8.4 4.6
Other 2.0 3.6
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities .8 78.8
- ------------------------------------------------------------------------------------------------------------------
Effect of foreign currency translation on cash balances (.5) (.4)
- ------------------------------------------------------------------------------------------------------------------
(Decrease)/increase in cash and cash equivalents (3.1) 9.1
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of period 19.1 11.4
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 16.0 $ 20.5
==================================================================================================================
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 2001 annual financial statements and
notes. This Form 10-Q should be read in conjunction with the Company's
consolidated financial statements and notes included in the Company's 2001
Annual Report on Form 10-K.
The first quarters of 2002 and 2001 consisted of thirteen-week periods
ending March 30, 2002 and March 31, 2001, respectively. The interim
results of operations are not necessarily indicative of future financial
results.
2. Pending Acquisition
On September 7, 2001, the Company announced an agreement to acquire the
Jackstadt GmbH pressure-sensitive adhesive materials business. Jackstadt
is a privately-held manufacturer of pressure-sensitive adhesive materials
based in Germany. Jackstadt, with consolidated revenues of approximately
$400 million in 2000, has a global customer base and generates
approximately 80 percent of its sales outside of Germany. On May 2, 2002,
the German Federal Cartel Office issued a ruling clearing the Company's
announced acquisition. The Company is proceeding to complete the
transaction, which remains subject to satisfaction of other closing
conditions, and expects to finalize the acquisition of Jackstadt during
the second quarter of 2002. At the end of the first quarter of 2002, the
Company had capitalized approximately $10 million for direct costs related
to this pending acquisition.
3. Goodwill and Intangibles Resulting from Business Acquisitions
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," which supersedes Accounting Principles Board (APB) Opinion
No. 16, "Business Combinations." This Statement requires that all business
combinations be accounted for by the purchase method and establishes
specific criteria for the recognition of intangible assets separately from
goodwill. The provisions of the Statement apply to business combinations
initiated after June 30, 2001. For business combinations accounted for
using the purchase method before July 1, 2001, the provisions of this
Statement were effective in the first quarter of 2002. As a result of this
Statement, the Company discloses goodwill separately from intangible
assets on the Condensed Consolidated Balance Sheet.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes APB Opinion No. 17, "Intangible Assets." This
Statement addresses the accounting and reporting of goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 provides
that (i) goodwill and indefinite-lived intangible assets will no longer be
amortized, (ii) impairment will be measured using various valuation
techniques based on discounted cash flows, (iii) goodwill will be tested
for impairment at least annually at the reporting unit level, (iv)
intangible assets deemed to have an indefinite life will be tested for
impairment at least annually and (v) intangible assets with finite lives
will be amortized over their useful lives. The Statement provides specific
guidance on testing
6
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Goodwill and Intangibles Resulting from Business Acquisitions (continued)
goodwill and intangible assets for impairment, and requires that reporting
units be identified for the purpose of assessing potential future
impairments. All provisions of this Statement were effective at the
beginning of fiscal 2002. Utilizing internal and external resources, the
Company adopted SFAS No.142 in the first quarter of 2002. The Company
identified its reporting units and the amounts of goodwill, intangible
assets, other assets and liabilities allocated to those reporting units.
SFAS No. 142 requires that goodwill be tested annually for impairment. The
Company completed its goodwill impairment test during the first quarter of
2002 and had no impairment losses. Intangible assets deemed to have an
indefinite life are tested for impairment by comparing the fair value of
the asset to its carrying amount. The Company does not have intangible
assets with an indefinite life. Based on the results of the impairment
tests, the Company did not record a transitional impairment loss upon
adoption of SFAS No. 142.
The Company adopted SFAS No. 142 effective at the beginning of fiscal 2002
and as a result, ceased amortization of goodwill as of that date. Changes
in the net carrying amount of goodwill for the quarter ended March 30,
2002, by reportable segment, are as follows:
Consumer and Pressure-sensitive
Converted Adhesives and
(In millions) Products Materials Total
---------------------------------------------------------------------------------------------------
Balance as of December 29, 2001 $ 148.9 $ 144.3 $ 293.2
Goodwill acquired during the period 1.6 5.0 6.6
Impairment losses - - -
Translation adjustments and other (2.2) (2.0) (4.2)
---------------------------------------------------------------------------------------------------
Balance as of March 30, 2002 $ 148.3 $ 147.3 $ 295.6
---------------------------------------------------------------------------------------------------
The following table sets forth the Company's acquired intangible assets,
which will continue to be amortized, for the periods ended March 30, 2002
and December 29, 2001:
March 30, 2002 December 29, 2001
----------------------------------------- ---------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
(In millions) Amount Amortization Amount Amount Amortization Amount
------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Tradenames and trademarks $ 23.1 $ 7.3 $ 15.8 $ 23.4 $ 6.8 $ 16.6
Patented technology 63.6 6.6 57.0 63.6 5.8 57.8
Customer relations 46.2 3.9 42.3 47.6 3.6 44.0
Other intangibles 2.3 .7 1.6 2.3 .7 1.6
------------------------------------------------------------------------------------------------------------------------
Total $ 135.2 $ 18.5 $ 116.7 $ 136.9 $ 16.9 $ 120.0
------------------------------------------------------------------------------------------------------------------------
7
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Goodwill and Intangibles Resulting from Business Acquisitions (continued)
Amortization expense on acquired intangible assets was $2 million and $1.8
million for the quarter ended March 30, 2002 and March 31, 2001,
respectively. Amortization expense on goodwill was $3.5 million for the
first quarter of 2001. Based on current information, estimated amortization
expense for acquired intangible assets (excluding the impact of amortizable
intangible assets from business combinations subsequent to March 30, 2002)
for this fiscal year, and each of the next four succeeding fiscal years, is
expected to be approximately $8 million, $7 million, $7 million, $6 million
and $6 million, respectively.
As required by SFAS No. 142, the results for the prior year's quarter have
not been restated. Had the Company been accounting for its goodwill under
SFAS No. 142 for all periods presented, the Company's net income and
earnings per share would have been as follows:
Quarters Ended
-----------------------------------
(In millions, except per share amounts) March 30, 2002 March 31, 2001
---------------------------------------------------------------------------
Reported net income $ 64.8 $ 63.6
Goodwill amortization, net of tax - 3.3
---------------------------------------------------------------------------
Adjusted net income $ 64.8 $ 66.9
---------------------------------------------------------------------------
Basic earnings per share:
As reported $ .66 $ .65
Goodwill amortization - .03
---------------------------------------------------------------------------
Adjusted net income $ .66 $ .68
---------------------------------------------------------------------------
Diluted earnings per share:
As reported $ .66 $ .65
Goodwill amortization - .03
---------------------------------------------------------------------------
Adjusted net income $ .66 $ .68
---------------------------------------------------------------------------
4. Net Income Per Share
Net income per common share amounts were computed as follows:
Quarter Ended
-------------------------------------
(In millions, except per share amounts) March 30, 2002 March 31, 2001
----------------------------------------------------------------------------------------------------------
(A) Net income available to common shareholders $ 64.8 $ 63.6
----------------------------------------------------------------------------------------------------------
(B) Weighted average number of common shares outstanding 98.0 97.6
Additional common shares issuable under employee stock
options using the treasury stock method .9 .9
----------------------------------------------------------------------------------------------------------
(C) Weighted average number of common shares outstanding
assuming the exercise of stock options 98.9 98.5
==========================================================================================================
Net income per common share (A) / (B) $ .66 $ .65
==========================================================================================================
Net income per common share, assuming dilution (A) / (C) $ .66 $ .65
==========================================================================================================
8
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Comprehensive Income
Comprehensive income includes net income, foreign currency translation
adjustments and the effective portion of gains or losses on cash flow
hedges that are currently presented as a component of shareholders'
equity. The Company's total comprehensive income for the three months
ended March 30, 2002 and March 31, 2001 was $45 million and $51.9 million,
respectively. As of March 30, 2002, the foreign currency translation
adjustment, minimum pension liability, net loss on derivative instruments
designated as cash flow hedges and total accumulated other comprehensive
loss balances were $(141.5) milllion, $(14.3) million, $(.4) million and
$(156.2) million, respectively. As of December 29, 2001, the foreign
currency translation adjustment, minimum pension liability, net gain on
derivative instruments designated as cash flow hedges and total
accumulated other comprehensive loss balances were $(123.1) million
$(14.3) million, $1 million and $(136.4) million respectively.
The table below details the cash flow hedging instrument activity in other
comprehensive income (loss) for the first quarter of 2002:
(In millions) March 30, 2002
--------------------------------------------------------------------------
Beginning accumulated derivative gain $ 1.0
Net loss reclassified to earnings .1
Net change in the revaluation of hedging transactions (1.5)
--------------------------------------------------------------------------
Ending accumulated derivative loss $ (.4)
==========================================================================
6. Foreign Currency
Translation of financial statements of subsidiaries operating in
hyperinflationary economies and transactions in foreign currencies
resulted in losses of $1.2 million and $.3 million during the three months
ended March 30, 2002 and March 31, 2001, respectively. Operations in
hyperinflationary economies consist of the Company's operations in Turkey
for 2002 and 2001.
7. Financial Instruments
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, in the first quarter of 2001 and
recorded a transition adjustment reducing net income by $.2 million (net
of tax). This Statement requires that all derivative instruments be
recorded on the balance sheet at their fair value.
The Company enters into foreign exchange forward, option and swap
contracts to reduce its risk from exchange rate fluctuations associated
with receivables, payables, loans and firm commitments denominated in
foreign currencies that arise primarily as a result of its operations
outside the United States of America. The Company also enters into
interest rate contracts to manage its exposure to interest rate
fluctuations.
During the three months ended March 30, 2002 changes in fair market value
related to fair value hedges and the ineffectiveness related to cash flow
hedges were not significant. Amounts the Company expects to reclassify
from other comprehensive income to earnings during the fiscal year ending
December 28, 2002 are not expected to be significant.
9
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Inventories
Inventories consisted of:
(In millions) March 30, 2002 December 29, 2001
--------------------------------------------------------------------------
Raw materials $ 87.6 $ 82.9
Work-in-progress 70.0 67.6
Finished goods 149.1 134.6
LIFO adjustment (17.0) (17.7)
--------------------------------------------------------------------------
$ 289.7 $ 267.4
==========================================================================
9. Research and Development
Research and development expense for the first quarters of 2002 and 2001
was $17 million and $17.4 million, respectively.
10. Contingencies
The Company has been designated by the U.S. Environmental Protection
Agency (EPA) and/or other responsible state agencies as a potentially
responsible party (PRP) at 9 waste disposal or waste recycling sites,
which are the subject of separate investigations or proceedings concerning
alleged soil and/or groundwater contamination and for which no settlement
of the Company's liability has been agreed upon. The Company is
participating with other PRPs at all such sites, and anticipates that its
share of cleanup costs will be determined pursuant to remedial agreements
entered into in the normal course of negotiations with the EPA or other
governmental authorities.
The Company has accrued liabilities for all sites, including sites in
which governmental agencies have designated the Company as a PRP, where it
is probable that a loss will be incurred and the minimum cost or amount of
loss can be reasonably estimated. However, because of the uncertainties
associated with environmental assessment and remediation activities,
future expense to remediate the currently identified sites, and sites
which could be identified in the future for cleanup, could be higher than
the liability currently accrued. Amounts currently accrued are not
significant to the consolidated financial position of the Company and,
based upon current information, management believes that it is unlikely
the final resolution of these matters will significantly impact the
consolidated financial position and operations of the Company.
The Company and its subsidiaries are involved in various other lawsuits,
claims and inquiries, most of which are routine to the nature of the
business. In the opinion of management, the resolution of these matters is
not expected to materially affect the Company.
10
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Cost Reduction Program
The Company recorded a charge in the fourth quarter of 2001 relating to
cost reduction actions. The 2001 charge involves cost reduction programs
and the reorganization of manufacturing and administrative facilities in
both of the Company's operating segments. The cost reduction efforts
resulted in a pretax charge of $19.9 million, which consisted of employee
severance and related costs of $13.1 million for approximately 400
positions worldwide, and asset write-downs of $6.8 million. The positions
included approximately 170 employees in the Pressure-sensitive Adhesives
and Materials segment, 210 employees in the Consumer and Converted
Products segment and 20 Corporate employees. Severance and related costs
represent cash paid or to be paid to employees terminated under the
program. Asset write-downs represent non-cash charges required to reduce
the carrying value of assets to be disposed of to net realizable value as
of the planned date of disposal. At the end of the first quarter of 2002,
$7.8 million remained accrued for severance and related costs (included in
"Other current liabilities") and $3.1 million remained accrued for asset
write-downs (included in "Other current liabilities") in the Condensed
Consolidated Balance Sheet. At the end of the first quarter, of the 400
positions under these actions, approximately 260 employees had left the
Company. The Company expects to complete this cost reduction program in
2002.
12. Segment Information
Financial information by reportable operating segment is set forth below:
Quarter Ended
-------------------------------
(In millions) March 30, 2002 March 31, 2001
----------------------------------------------------------------------------------------------------
Net sales/(1)/:
Pressure-sensitive Adhesives and Materials $ 550.4 $ 536.4
Consumer and Converted Products 420.1 452.6
Intersegment/(2)/ (39.7) (25.8)
---------------------------------------------------------------------------------------------------
Net sales $ 930.8 $ 963.2
===================================================================================================
Income (loss) from operations before interest and taxes/(3)/:
Pressure-sensitive Adhesives and Materials $ 51.0 $ 44.9
Consumer and Converted Products 60.0 70.6
Corporate administrative and research and development expenses (7.8) (5.7)
---------------------------------------------------------------------------------------------------
103.2 109.8
Interest expense (9.3) (13.8)
---------------------------------------------------------------------------------------------------
Income before taxes and accounting change $ 93.9 $ 96.0
===================================================================================================
(1) Net sales for 2001 include sales from divested operations of $19.4
million, of which the Pressure-sensitive Adhesives and Materials
segment recorded $12.2 million and the Consumer and Converted Products
segment recorded $7.2 million.
(2) Intersegment sales primarily represent sales from the
Pressure-sensitive Adhesives and Materials segment to the Consumer and
Converted Products segment.
(3) Income from operations for 2002 includes $0.3 million of expenses
related to divested operations which were formerly included within the
Consumer and Converted Products segment. Income from operations for
2001 includes $0.8 million from divested operations, of which the
Pressure-sensitive Adhesives and Materials segment recorded $0.5
million and the Consumer and Converted Products segment recorded $0.3
million.
11
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. Recent Accounting Requirements
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," and an amendment of that
Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." This Statement amends FASB Statement No. 13,
"Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. This Statement also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions. The provisions of this Statement related to the
rescission of Statement No. 4 are effective beginning in 2003. All other
provisions are effective after May 15, 2002. The Company is in the process
of determining the impact of this standard on the Company's financial
results when effective.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This
Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. All provisions of this Statement will be effective at
the beginning of fiscal 2003. The Company is in the process of determining
the impact of this standard on the Company's financial results when
effective.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and amends Accounting Principles
Board (APB) No. 30, "Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This Statement requires that long-lived assets that are to
be disposed of by sale be measured at the lower of book value or fair
value less costs to sell. SFAS No. 144 retains the fundamental provisions
of SFAS No. 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used and (b) measurement of long-lived
assets to be disposed of by sale. This Statement also retains APB No. 30's
requirement that companies report discontinued operations separately from
continuing operations. All provisions of this Statement were effective at
the beginning of fiscal 2002. The adoption of this new standard did not
have a significant impact on the Company's financial results.
The Company adopted the requirements of Emerging Issues Task Force (EITF)
Issue No. 00-14, "Accounting for Certain Sales Incentives." This EITF
consensus addresses the recognition, measurement and income statement
classification for sales incentives offered by a vendor without charge to
a customer as a result of a single exchange transaction. The provisions of
this consensus were effective at the beginning of fiscal 2002 and did not
have a significant impact on the Company's financial results.
The Company adopted the requirements of EITF Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products." This EITF consensus addresses whether certain
consideration from a vendor to a reseller of the vendor's products is an
adjustment to selling prices or cost. The provisions of this consensus
were effective at the beginning of fiscal 2002 and did not have a
significant impact on the Company's financial results.
12
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 were $930.8 million, compared to first quarter 2001 sales of
$963.2 million. Excluding the impact of currency, sales decreased 1.7 percent.
The acquisitions of Dunsirn Industries and CD Stomper in February of 2001
contributed an additional $7.6 million in sales to the first quarter of 2002 as
compared to the same period last year. The reduction in sales related to
divested operations represented $19.4 million for the quarter.
Gross profit margin increased to 33.2 percent for the quarter compared to 33.1
percent for the first quarter of 2001. The increase was primarily due to cost
reduction programs and productivity improvement gains achieved through the Six
Sigma program.
Marketing, general and administrative expense, as a percent of sales, was 22.1
percent compared to 21.7 percent for the first quarter of 2001. Although the
absolute dollar value of expense decreased, due primarily to the change in
goodwill amortization and productivity improvements, the ratio increased due to
lower sales.
Interest expense decreased to $9.3 million for the quarter, compared to $13.8
million a year ago, primarily reflecting lower interest rates on short-term,
floating rate debt.
Income before taxes, as a percent of sales, was 10.1 percent compared to 10
percent a year ago. The increase reflects the higher gross profit margin, as a
percent of sales, and the decrease to interest expense. The elimination of
goodwill amortization also had a positive impact on the Company's pretax income.
The effective tax rate decreased to 31 percent for the quarter compared to 33.5
percent for the first quarter of 2001 and 32.4 percent for the full year 2001,
primarily due to the change in accounting for goodwill as well as both
structural and operational changes that are reducing taxes on a global basis.
Net income totaled $64.8 million compared to $63.6 million in the first quarter
of 2001. Net income, as a percent of sales, was 7 percent for the first quarter
of 2002 and 6.6 percent for the same period last year.
Net income per common share for the quarter was $.66 compared to $.65 in the
first quarter of 2001. Net income per common share, assuming dilution, was $.66
for the first quarter of 2002 and $.65 for the first quarter of 2001. The
results for the first quarter of 2002 include the benefit of approximately $.03
per share, assuming dilution, related to the accounting change eliminating
goodwill amortization. The impact of currency exchange rates, including the
effect of further devaluation of the Argentine peso, reduced net income per
common share, assuming dilution, by approximately $.02.
Results of Operations by Reportable Operating Segment
Pressure-sensitive Adhesives and Materials:
Three Months Ended
-----------------------------------------
(In millions) March 30, 2002 March 31, 2001
- -----------------------------------------------------------------------------------------------------
Net sales $ 550.4 $ 536.4
Income from operations before interest and taxes 51.0 44.9
- -----------------------------------------------------------------------------------------------------
13
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations: For the Quarter (continued)
- -------------------------------------------------
The Pressure-sensitive Adhesives and Materials segment reported increased sales
for the first quarter of 2002 compared to the same period last year. Sales
increased domestically primarily due to the strong volume growth in the roll
materials business, driven partly by market share gain from business obtained
from the closure of a competitor's plant and a supply agreement with a company
that decided to outsource its manufacturing of certain roll label materials, as
well as a full quarter of sales from the Dunsirn acquisition, which occurred in
February of 2001. The sales increase was partially offset by the reduction in
sales from divested operations, including the specialty coatings business sold
in the fourth quarter of 2001. Sales increased internationally, primarily due to
strong volume growth in the roll materials business in Asia as well as sales
growth in the specialty tape and reflective businesses in Asia. Volume growth in
Europe and Latin America was more than offset by the negative impact of changes
in foreign currency exchange rates.
The segment reported an increase in income for the first quarter of 2002
compared to the same period last year. Income increased domestically and
internationally primarily due to sales growth, improved profitability in the
graphics and specialty tapes businesses achieved through cost reductions and
productivity gains, and the change in accounting for goodwill amortization.
These improvements were partially offset by the negative impact of changes in
foreign currency exchange rates, including the further devaluation of the
Argentine peso.
Consumer and Converted Products:
Three Months Ended
------------------------------------------
(In millions) March 30, 2002 March 31, 2001
- -----------------------------------------------------------------------------------------------------
Net sales $ 420.1 $ 452.6
Income from operations before interest and taxes 60.0 70.6
- -----------------------------------------------------------------------------------------------------
The Consumer and Converted Products segment reported a decrease in sales for the
first quarter of 2002 compared to the same period last year. Sales in the U.S
operations declined primarily due to weak retail apparel sales, which has
impacted the ticketing business, and the general economic weakness, which has
impacted sales volumes across most of the Company's businesses, especially
office products. The decrease in sales in the U.S. operations was partially
offset by a full quarter of sales from the acquisition of CD Stomper, which
occurred in February of 2001. Sales from international operations decreased
primarily due to the reduction in sales because of divested operations, the
negative impact of changes in foreign currency exchange rates, weak retail
apparel sales impacting the ticketing business and the general weakness in
business conditions in international markets. The segment reported a decrease in
income primarily due to the overall decline in sales from U.S. operations. This
decrease was partially offset by the change in accounting for goodwill
amortization.
Financial Condition
- -------------------
Average working capital, excluding short-term debt, as a percent of sales,
increased to 8.4 percent for the quarter from 7.8 percent a year ago. This
increase is due primarily to the increase in trade accounts receivable and
inventories. Receivable balances increased as a result of improved sales trends
late in the quarter, which exceeded collections for the quarter. Inventories
increased primarily due to inventory building ahead of shipments during the
holidays (Easter), which occurred in the last week of March. The average number
of days sales outstanding in accounts receivable increased to 57 days compared
to 56 days a year ago, reflecting the increase in accounts receivable at the end
of the quarter.
14
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financial Condition (continued)
- -------------------------------
Net cash flows provided by operating activities totaled $29.6 million for the
first quarter of 2002 and $48.3 million for the first quarter of 2001. The
decrease in net cash flows provided by operating activities was primarily due to
the changes in working capital, specifically the increase in accounts receivable
and inventories. In addition to cash flows from operations, the Company has more
than adequate financing arrangements, at competitive rates, to conduct its
operations.
Capital expenditures for the quarter were $17.5 million compared to $35.8
million a year ago. Capital expenditures for 2002 are expected to be
approximately $150 million, as compared to $135.4 million in 2001. The Company's
major capital projects this year are focused on the international markets, with
expansions planned in Asia, Australia and France.
Other expenditures in investing activities declined compared to the prior year
primarily due to a reduction in spending for software.
During the first quarter of 2002, total debt increased $26.9 million to $876.6
million from year end 2001. The increase in debt was due primarily to fund
capital purchases and for other general purposes. Total debt to total capital
was 48 percent as of the end of the first quarter of 2002 and 47.8 percent at
year end 2001. In the first quarter of 1999, the Company recorded an obligation
associated with the transaction with Steinbeis Holding GmbH, which combined
substantially all of the Company's office products businesses in Europe with
Zweckform Buro-Produkte GmbH, a German office products supplier. The obligation
is reported in the "Other long-term obligation" line on the Condensed
Consolidated Balance Sheet and is scheduled to be paid in 2004.
In the third quarter of 2001, the Company filed a shelf registration statement
with the Securities and Exchange Commission to permit the issuance of up to $600
million in debt and equity securities. Proceeds from the shelf offering may be
used for general corporate purposes, including repaying, redeeming or
repurchasing existing debt, and for working capital, capital expenditures and
acquisitions. No securities have been issued since the filing.
Shareholders' equity increased to $950.9 million from $929.4 million at year end
2001. During the first quarter of 2002, the Company purchased approximately
32,000 shares of common stock at a cost of $2 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 $38.8 million to
$713.3 million from year end 2001. Dividends paid for the first quarter of 2002
totaled $36.3 million compared to $33.1 million a year ago.
Cost Reduction Program
- ----------------------
The Company recorded a charge in the fourth quarter of 2001 relating to cost
reduction actions. The 2001 charge involves cost reduction programs and the
reorganization of manufacturing and administrative facilities in both of the
Company's operating segments. The cost reduction efforts resulted in a pretax
charge of $19.9 million, which consisted of employee severance and related costs
of $13.1 million for approximately 400 positions worldwide, and asset
write-downs of $6.8 million. The positions included approximately 170 employees
in the Pressure-sensitive Adhesives and Materials segment, 210 employees in the
Consumer and Converted Products segment and 20 Corporate employees. Severance
and related costs represent cash paid or to be paid to employees terminated
under the program. Asset write-downs represent non-cash charges required to
reduce the carrying value of assets to be disposed of to net realizable value as
of the planned date of disposal. At the end of the first quarter of 2002, $7.8
million remained accrued for severance and related costs (included in "Other
current liabilities") and $3.1 million remained accrued for asset write-downs
(included in "Other current liabilities") in the Condensed Consolidated Balance
Sheet. At the end of the first quarter, of the 400 positions under these
actions, approximately 260 employees had left the Company. The Company expects
to complete this cost reduction program in 2002.
15
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Pending Acquisition
- -------------------
On September 7, 2001, the Company announced an agreement to acquire the
Jackstadt GmbH pressure-sensitive adhesive materials business. Jackstadt is a
privately-held manufacturer of pressure-sensitive adhesive materials based in
Germany. Jackstadt, with consolidated revenues of approximately $400 million in
2000, has a global customer base and generates approximately 80 percent of its
sales outside of Germany. On May 2, 2002, the German Federal Cartel Office
issued a ruling clearing the Company's announced acquisition. The Company is
proceeding to complete the transaction, which remains subject to satisfaction of
other closing conditions, and expects to finalize the acquisition of Jackstadt
during the second quarter of 2002. At the end of the first quarter of 2002, the
Company had capitalized approximately $10 million for direct costs related to
this pending acquisition.
Future Accounting Requirements
- ------------------------------
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This
Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, FASB Statement No.
64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement amends FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The provisions of this Statement related to the rescission of
Statement No. 4 are effective beginning in 2003. All other provisions are
effective after May 15, 2002. The Company is in the process of determining the
impact of this standard on the Company's financial results when effective.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. All provisions of this Statement will be effective at
the beginning of fiscal 2003. The Company is in the process of determining the
impact of this standard on the Company's financial results when effective.
16
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Outlook
- -------
The Company's results for the first three months of 2002 reflect the challenging
economic environment in the U.S. and international markets. Although strong
sales growth was noticed in several of the Company's businesses during the month
of March, the Company remains cautious about ongoing improvement in business
conditions.
Interest expense was $9.3 million for the first quarter of 2002, reflecting
lower interest rates on the Company's short-term, floating rate debt. The
Company expects interest expense to increase to the range of $10 million to $11
million in the second quarter, and to the range of $15 million to $16 million
per quarter in the second half of the year as the Company issues long-term debt
in place of a portion of the current floating rate debt, and enters into
expected financing arrangements relating to the pending Jackstadt acquisition.
The effective tax rate was 31 percent for the first quarter of 2002. Due to the
change in accounting for goodwill and both structural and operational changes,
the Company believes, subject to changes in the geographic mix of income, the
effective tax rate going forward will be approximately 31 percent.
The further devaluation of the Argentine peso would continue to negatively
impact revenues and earnings from the Company's operations in Argentina.
Political, regulatory, economic, currency and other business issues in Argentina
are likely to continue to negatively impact those operations for the remainder
of 2002 as compared to 2001. Operations in Argentina (primarily reported in the
Pressure-sensitive Adhesives and Materials segment) represented less than $25
million in sales in 2001 and are not significant to the Company's financial
results.
Other international operations, principally in Western Europe, constitute a
significant portion of the Company's business. The Company is exposed to foreign
currency exchange rate risk, and changes to foreign exchange rates will impact
the Company's financial results.
The adoption of SFAS No. 142 benefited earnings per share, assuming dilution, by
approximately $.03 in the first quarter of 2002. Under the new accounting
standard, the Company no longer amortizes goodwill. The Company expects the new
accounting rule to benefit earnings per share, assuming dilution, by
approximately $.13 for 2002, as compared to 2001. However, the Company
anticipates that increased amortization expense related to capitalized software
will partially offset the benefit from the accounting change for goodwill
amortization.
In this period of challenging worldwide economic conditions, the Company is
focused on cost management efforts and believes it is well positioned to resume
previous growth trends once economic conditions improve. The Company has reduced
costs and expects to continue to benefit from the implementation of productivity
improvement initiatives. In addition to driving down costs, the Company
continues to pursue long-term growth initiatives. These initiatives include
acquisitions, entry into new markets, development of new products and geographic
expansion.
17
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Safe Harbor Statement
- ---------------------
Except for historical information contained herein, the matters discussed in the
Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this Form 10-Q contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements, which are not statements of historical fact, may
contain estimates, assumptions, projections and/or expectations regarding future
events. Words such as "anticipate," "assume," "believe," "estimate," "expect,"
"plan," "project," "will," and other expressions, which refer to future events
and trends, identify forward-looking statements. Such forward-looking
statements, and financial or other business targets, are subject to certain
risks and uncertainties which could cause actual results to differ materially
from future results, performance or achievements of the Company expressed or
implied by such forward-looking statements.
Certain of such risks and uncertainties are discussed in more detail in the
Company's Annual Report on Form 10-K for the year ended December 29, 2001 and
include, but are not limited to, risks and uncertainties relating to investment
in development activities and new production facilities, timely development and
successful market acceptance of new products, price and availability of raw
materials, impact of competitive products and pricing, business mix shift,
credit risks, successful integration of new acquisitions, customer and supplier
and manufacturing concentrations, financial condition and inventory strategies
of customers, changes in customer order patterns, increased competition, loss of
significant contract(s) or customer(s), legal proceedings, fluctuations in
foreign exchange rates and other risks associated with foreign operations,
changes in economic or political conditions, acts of war, terrorism, natural
disasters, and other factors.
Any forward looking statement should also be considered in light of the factors
detailed in Exhibit 99 to the Company's Annual Report on Form 10-K for the year
ended December 29, 2001.
The Company's forward-looking statements represent its judgment only on the
dates such statements were made. By making any forward-looking statements, the
Company assumes no duty to update them to reflect new, changed or unanticipated
events or circumstances, other than as may be required by law.
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 December 29, 2001.
19
PART II. OTHER INFORMATION
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
ITEM 1.
- -------
There are no material changes in the information provided in Item 3 of the
Company's Form 10-K for the fiscal year ended December 29, 2001.
ITEMS 2 and 3.
- --------------
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The registrant held its annual stockholders' meeting on April 25, 2002. The
stockholders voted to reelect three directors to the Board of Directors as
follows:
Number of Shares Votes/1/
-------------------------------------
For Withheld
---------------- ----------------
Charles D. Miller 100,419,978 1,878,197
Richard M. Ferry 100,696,927 1,601,248
Kent Kresa 100,405,799 1,892,376
/1/There were no abstentions or shares otherwise not voted by brokers.
Additional information concerning continuing directors called for by this Item
is incorporated by reference from pages 3 and 4 of the registrant's 2002 Proxy
Statement.
ITEM 5.
- -------
Not Applicable
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
a. Exhibits 12: Computation of Ratio of Earnings to Fixed Charges
b. Reports on Form 8-K: There were no reports on Form 8-K filed for three
months ended March 30, 2002.
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/ Daniel R. O'Bryant
------------------------------------
Daniel R. O'Bryant
Senior Vice President, Finance, and
Chief Financial Officer
(Principal Financial Officer)
/s/ Michael A. Skovran
------------------------------------
Michael A. Skovran
Vice President and Controller
(Chief Accounting Officer)
May 9, 2002
21