<PAGE>
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 July 2, 1994
------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 1-7685
AVERY DENNISON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-1492269
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER)
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
150 NORTH ORANGE GROVE BOULEVARD, PASADENA, CALIFORNIA 91103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (818) 304-2000
Indicate by a check (X) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No
----- -----
Number of shares of $1 par value common stock outstanding as of July 29,
1994: 55,353,399
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information (Unaudited):
Financial Statements:
Condensed Consolidated Balance Sheet
July 2, 1994 and January 1, 1994 3
Consolidated Statement of Income
Three and Six Months Ended July 2, 1994
and July 3, 1993 4
Condensed Consolidated Statement of Cash Flows
Six Months Ended July 2, 1994
and July 3, 1993 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information:
Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
July 2, 1994 January 1, 1994
------------- ----------------
<S> <C> <C>
ASSETS
- - ------
Current assets:
Cash and cash equivalents $ .9 $ 5.8
Trade accounts receivable 419.6 356.7
Inventories 214.9 184.1
Prepaid expenses 15.9 13.5
Deferred taxes and other current assets 56.4 54.5
-------- --------
Total current assets 707.7 614.6
Property, plant and equipment, at cost 1,467.4 1,412.7
Accumulated depreciation (693.5) (654.2)
-------- --------
773.9 758.5
Intangibles resulting from business acquisitions, net 129.4 129.2
Other assets 135.6 136.7
-------- --------
$1,746.6 $1,639.0
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ------------------------------------
Current liabilities:
Short-term debt and current portion of long-term debt $ 79.4 $ 86.5
Accounts payable 162.9 140.8
Accrued liabilities 255.5 245.7
-------- --------
Total current liabilities 497.8 473.0
Long term debt 347.7 311.0
Deferred taxes and other long-term liabilities 153.5 135.9
Shareholders' equity:
Common stock - $1 par value:
Authorized - 200,000,000 shares; Issued - 62,063,312
shares at July 2, 1994 and January 1, 1994 62.1 62.1
Capital in excess of par value 194.6 194.4
Retained earnings 724.9 698.9
Cumulative foreign currency translation adjustment 8.7 (10.1)
Cost of unallocated ESOP shares (52.7) (53.2)
Minimum pension liability (8.9) (8.9)
Treasury stock at cost, 6,436,685 shares at July 2,
1994 and 5,869,683 shares at January 1, 1994 (181.1) (164.1)
-------- --------
Total shareholders' equity 747.6 719.1
-------- --------
$1,746.6 $1,639.0
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- -------------------------------
July 2, 1994 July 3, 1993 July 2, 1994 July 3, 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $718.6 $662.2 $1,386.3 $1,328.7
Cost of products sold 490.9 455.0 946.1 911.5
------ ------ -------- --------
Gross profit 227.7 207.2 440.2 417.2
Marketing, general and
administrative expense 171.5 161.2 332.5 325.6
------ ------ -------- --------
Operating profit 56.2 46.0 107.7 91.6
Interest expense 11.9 10.4 23.4 20.2
------ ------ -------- --------
Income before taxes on income 44.3 35.6 84.3 71.4
Taxes on income 16.4 12.8 31.2 26.4
------ ------ -------- --------
Income before cumulative effect
of changes in accounting
principles 27.9 22.8 53.1 45.0
Cumulative effect of changes in
accounting principles -- -- -- 1.1
------ ------ -------- --------
Net income $ 27.9 $ 22.8 $ 53.1 $ 46.1
====== ====== ======== ========
Weighted average number of
common shares outstanding 56.0 58.5 56.1 58.6
====== ====== ======== ========
PER COMMON SHARE AMOUNTS:
Income before cumulative effect
of changes in accounting
principles $ .50 $ .39 $ .95 $ .77
Cumulative effect of changes in
accounting principles -- -- -- .02
------ ------ -------- --------
Net income $ .50 $ .39 $ .95 $ .79
====== ====== ======== ========
Dividends $ .24 $ .22 $ .48 $ .44
====== ====== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
July 2, 1994 July 3, 1993
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
- - ---------------------
Net income $ 53.1 $ 46.1
Depreciation 42.5 40.8
Amortization of intangibles 6.4 4.6
Deferred taxes and other long-term liabilities 20.7 5.0
Cumulative effect of changes in accounting
principles -- (1.1)
Net change in assets and liabilities net of
the effect of foreign currency translation
and divested operations (65.2) (33.0)
------ -----
Net cash provided by operating activities 57.5 62.4
------ -----
INVESTING ACTIVITIES:
- - ---------------------
Purchase of property, plant and
equipment (52.6) (38.4)
Proceeds from sale of assets and business
divestitures 11.8 .5
Other (.3) (.1)
------ -----
Net cash used in investing activities (41.1) (38.0)
------ -----
FINANCING ACTIVITIES:
- - ---------------------
Net increase in debt 26.4 25.1
Dividends paid (27.0) (25.8)
Purchase of treasury stock (20.6) (27.2)
------ -----
Net cash used by financing activities (21.2) (27.9)
------ -----
Effect of foreign currency
translation on cash balances (.1) --
------ -----
Decrease in cash and cash equivalents (4.9) (3.5)
------ -----
Cash and cash equivalents,
beginning of period 5.8 3.9
------ -----
Cash and cash equivalents, end of period $ .9 $ .4
====== ======
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
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
to the current period's 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 1993 annual financial statements and
notes.
The second quarters of 1994 and 1993 consisted of thirteen-week periods
ending July 2, 1994 and July 3, 1993, respectively. The interim results of
operations are not necessarily indicative of future financial results.
2. FOREIGN CURRENCY TRANSLATION
Transactions in foreign currencies and translation of financial statements of
subsidiaries operating in hyperinflationary economies during the three and
six months ended July 2, 1994 and July 3, 1993 resulted in losses of $.7
million and $2.1 million, respectively, during 1994 and losses of $.9 million
and $1.9 million, respectively, during 1993.
3. INVENTORIES
Inventories consisted of (in millions):
<TABLE>
<CAPTION>
July 2, 1994 January 1, 1994
------------ ---------------
<S> <C> <C>
Raw materials $ 80.7 $ 75.7
Work in progress 49.4 43.2
Finished goods 121.8 101.9
LIFO adjustment (37.0) (36.7)
------ ------
$214.9 $184.1
====== ======
</TABLE>
Certain inventories were reduced resulting in the liquidation of LIFO
inventory. The effect was to reduce cost of products sold by approximately
$2.5 million and $3.5 million for the three and six months ended July 3,
1993, respectively. The liquidation of LIFO inventory was not material for
the three and six months ended July 2, 1994.
6
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
Accumulated amortization of intangible assets at July 2, 1994 and January 1,
1994 was $33.0 million and $30.4 million, respectively.
5. RESEARCH AND DEVELOPMENT
Research and development expense for the three and six months ended July 2,
1994 and July 3, 1993, was $12.3 million and $23.8 million, respectively,
during 1994 and $12.5 million and $24.1 million, respectively, during 1993.
6. CHANGES IN ACCOUNTING PRINCIPLES
During the first quarter of 1993, the Company adopted three accounting
standards issued by the Financial Accounting Standards Board which had a one-
time cumulative effect on net income of (in millions):
<TABLE>
<CAPTION>
Income
(Expense)
---------
<S> <C>
Accounting for Income Taxes (SFAS No. 109) $ 16.3
Accounting for Postretirement Benefits (SFAS No. 106) (14.2)
Accounting for Postemployment Benefits (SFAS No. 112) ( 1.0)
------
Increase in Net Income $ 1.1
======
</TABLE>
7
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
- - -------------------
During the first six months of 1994, total debt increased $29.6 million to
$427.1 million. Total debt to total capital was 36.4 percent at July 2, 1994
and 35.6 percent at year end 1993.
During the first quarter of 1994, the Company registered with the Securities and
Exchange Commission $100 million in principal amount of medium-term notes. As
of August 11, 1994, the Company had issued $80.0 million of these notes, in
increments of $500,000 to $10.0 million. The medium-term notes have an average
interest rate of 7.7 percent and will mature during 2004.
Average working capital, excluding short-term debt, as a percentage of sales
decreased to 11.1 percent compared to 13.7 percent in the second quarter of
1993. The decrease was primarily due to an improvement in inventory turnover
and higher sales and current liabilities. Average inventory turnover for the
quarter ended July 2, 1994 was 9.1 compared to 8.3 in the corresponding period
of the prior year; the average number of days sales outstanding in accounts
receivable was 57 days for the second quarter of both 1994 and 1993.
Net cash provided by operating activities during the first six months of 1994
was $57.5 million compared to $62.4 million in the corresponding period of 1993.
The decrease in net cash flow from operating activities was due primarily to
changes in various components of working capital. In addition to cash flow from
operations, the Company has more than adequate financing arrangements available
to conduct its business.
Capital spending for the second quarter was $33.4 million compared to $22.9
million a year ago. For the six months, capital spending totalled $52.6 million
compared to $38.4 million for the first half of 1993. Total capital spending
for 1994 is expected to be between $130.0 million to $140.0 million.
Shareholders' equity increased to $747.6 million from $719.1 million at year
end 1993. During the second quarter of 1994, the Company repurchased 634,000
shares. The cost of treasury stock held, net of shares reissued under the
Company's stock option and incentive plans, increased $17.0 million to $181.1
million at July 2, 1994 from year end 1993.
Results of Operations: For the Quarter
- - ---------------------------------------
Sales for the second quarter of 1994 were up 9 percent compared to the
corresponding period of 1993. Excluding the impact of foreign currency
translation, sales increased 10 percent.
The gross profit margin for the quarter was 31.7 percent compared to 31.3
percent for the second quarter of 1993. The gross profit margin increased
despite the absence of benefits from LIFO inventory reductions in the second
quarter of 1994 compared to the same period a year ago. The improved gross
profit margin was primarily due to productivity improvements throughout the
Company and an improved product mix.
Marketing, general and administrative expense, as a percent of sales, declined
to 23.9 percent for the second quarter of 1994, compared to 24.3 percent for the
second quarter of 1993. The decrease was primarily attributable to cost
reduction efforts throughout the Company on increased sales.
8
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations: For the Quarter (Continued)
- - ---------------------------------------------------
Interest expense, as a percent of sales, was 1.7 percent compared to 1.6 percent
during the second quarter of 1993. The increase was primarily due to higher
interest expense in Brazil.
Income before taxes, as a percent of sales, was 6.2 percent for the current
quarter and 5.4 percent for the second quarter of 1993. The increase was
primarily due to improved gross profit margins and lower operating expenses as a
percent of sales. The effective tax rate for the quarter was 37 percent
compared to 36 percent for the second quarter of 1993.
Net income was $27.9 million, or $.50 per share, compared to $22.8 million, or
$.39 per share, for the second quarter of 1993. Improvements for the quarter
were primarily a result of increased sales and lower operating expenses as a
percent of sales.
The pressure-sensitive adhesives and materials sector reported solid sales and
significant profitability improvements over the corresponding period of the
prior year. The U.S. materials businesses reported significant sales and
profitability increases for the quarter. The increases were primarily due to
unit volume and revenue growth as a result of new products, improved economic
conditions in major markets, and cost reduction programs. The European
materials businesses experienced solid sales growth which was partially offset
by the effects of foreign currency translation; profitability increased
significantly for the quarter. The European operations benefitted from pricing
actions, productivity improvements and cost reduction programs.
The office products sector reported a solid increase in sales and a decline in
profitability from the second quarter of 1993. Solid sales growth for the U.S.
office product businesses was primarily attributable to new product
introductions and the impact from successful promotional programs introduced
over the past 12 months. A decline in profitability at the U.S. businesses was
primarily due to the absence of benefits from LIFO inventory reductions in 1994
as compared to 1993 and costs related to the divestiture of a non-core business
unit. The European businesses reported lower profitability and significantly
lower sales due primarily to the pruning of non-core products and costs related
to the shut down of a non-core business. The impact of lower sales on
profitability was largely offset by cost reduction programs.
The converted products sector reported modest sales growth for the quarter.
Profitability increased significantly despite the absence of benefits from LIFO
inventory reductions in 1994 compared to 1993. The Soabar and Fastener
businesses reported solid sales increases and significantly improved
profitability due to strong volume growth and cost reduction measures. The
international converting businesses reported a slight decline in sales due
primarily to the effects of product pruning and foreign currency translation,
but increased profitability through cost reduction programs. The U.S. label
businesses reported increased sales and profitability for the quarter primarily
due to increased sales to the automotive and durable goods markets and cost
reduction actions.
Results of Operations: Six Months Year-To-Date
- - -----------------------------------------------
Sales for the first six months of 1994 were up 4 percent compared to the
corresponding period of 1993. Excluding the impact of changes in foreign
currency translation, sales increased 7 percent.
9
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations: For the Six Months Year-to-Date (Continued)
- - -------------------------------------------------------------------
The gross profit margin for the first six months was 31.8 percent compared to
31.4 percent for the first six months of 1993. The gross profit margin
increased despite significantly lower LIFO benefits in 1994 compared to 1993.
The improved gross profit margin was primarily due to productivity improvements
throughout the Company and an improved product mix.
Marketing, general and administrative expense, as a percent of sales, declined
to 24.0 percent for the first six months of 1994 compared to 24.5 percent for
the first six months of 1993. The decrease was primarily attributable to cost
reduction efforts throughout the Company on increased sales.
Interest expense, as a percent of sales, was 1.7 percent for the year compared
to 1.5 percent during the corresponding period of the prior year. The increase
was primarily due to higher interest expense in Brazil.
Income before taxes, as a percent of sales, was 6.1 percent for the first six
months of 1994 compared to 5.4 percent for the first six months of 1993. The
increase was primarily due to improved gross profit margins and lower operating
expenses as a percent of sales. The year-to-date effective tax rate was 37
percent for 1994 and 1993.
Net income was $53.1 million, or $.95 per share, for the first six months of
1994 compared to $46.1 million, or $.79 per share, for the first six months of
1993. Excluding the effect of accounting changes, net income for the first six
months of 1993 was $45.0 million, or $.77 per share.
The pressure-sensitive adhesives and materials sector reported increased sales
and significantly improved profitability for the first six months of 1994
compared to 1993. The U.S. operations reported solid sales and profitability
improvements primarily due to unit volume and revenue growth as a result of new
products, improved economic conditions in major markets and cost reduction
programs. Solid sales growth for the foreign materials businesses was offset by
the effects of foreign currency translation. Productivity improvements and cost
reduction programs resulted in significant profitability increases for the
foreign operations.
The office products sector reported a modest growth in sales and flat
profitability for the six months ended July 2, 1994 compared to the prior year.
In the United States, sales and profitability increased primarily due to
successful new product introductions, an improved product mix and lower
operating costs as a percent of sales. Profitability improved at the U.S.
operations despite significantly lower LIFO benefits in 1994 compared to 1993
and costs related to the divestiture of a non-core business unit. The European
office product businesses reported significantly lower sales due primarily to
the weak French economy and the effects of non-core product pruning.
Profitability decreased primarily due to lower sales and the cost of on-going
restructuring programs, including the shut down of a non-core business. The
impact on profitability was partially offset by cost reduction actions.
The converted products sector reported significant profitability improvements on
flat sales for the first six months of 1994 compared to 1993. Profitability
increased despite significantly lower LIFO benefits in 1994 compared to 1993.
The Soabar and Fastener businesses reported a modest increase in sales due to
volume growth which was partially offset by the effects of product pruning.
10
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations: Six Months Year-To-Date (Continued)
- - -----------------------------------------------------------
Profitability was up significantly primarily due to the elimination of
unprofitable product lines and cost reduction actions. The international
converting businesses reported a decline in sales due to the negative effects of
foreign currency translation and product pruning, but increased profitability
through cost reduction programs. The U.S. label businesses reported a modest
increase in sales and profitability primarily due to increased sales to the
automotive and durable goods markets and cost reduction actions.
11
<PAGE>
PART II. OTHER INFORMATION
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
- - ------------------------------------------------------------
The registrant held its annual stockholders' meeting on April 28, 1994. The
stockholders voted to re-elect four directors to the Board of Directors as
follows:
<TABLE>
<CAPTION>
Number of Shares Voted/1/
--------------------------
For Withheld
----------- --------
<S> <C> <C>
Charles D. Miller 47,476,946 543,770
Sidney R. Petersen 47,498,146 522,570
John C. Argue 47,498,808 521,908
John B. Slaughter 47,476,433 544,283
</TABLE>
/1/ There were no abstentions or shares otherwise not voted by brokers.
The results of the voting on the following additional items were as follows:
<TABLE>
<CAPTION>
Broker
For Opposed Abstained Non-Votes
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Amendments to the 1990 Stock Option and
Incentive Plan for Key Employees 38,424,930 9,084,323 474,475 36,988
Senior Executive Incentive Compensation Plan 43,244,937 2,866,789 1,849,979 64,011
Amended and Restated Key Executive Long-
Term Incentive Plan 44,075,140 2,078,563 1,862,503 4,510
</TABLE>
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: None.
12
<PAGE>
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/ R. Gregory Jenkins
------------------------------------
R. Gregory Jenkins
Senior Vice President - Finance
and Chief Financial Officer
(Principal Financial Officer)
/s/ Thomas E. Miller
-------------------------------------
Thomas E. Miller
Vice President and Controller
(Chief Accounting Officer)
August 11, 1994
13
<PAGE>
EXHIBIT 12
AVERY DENNISON CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
Second Quarter Ended Year-to-Date
--------------------- ---------------------
1994 1993 1994 1993
------ ------ ------- ------
<S> <C> <C> <C> <C>
Earnings:
Income before income taxes $44.3 $35.6 $ 84.3 $71.4
Add: Fixed charges* 16.4 14.5 32.5 28.7
Amortization of capitalized interest .2 .3 .5 .5
Less: Capitalized interest (.6) (.6) (1.3) (1.0)
----- ----- ------ -----
$60.3 $49.8 $116.0 $99.6
===== ===== ====== =====
*Fixed charges:
Interest expense 11.9 10.4 23.4 20.2
Capitalized interest .6 .6 1.3 1.0
Amortization of debt issuance .1 .1 .2 .2
Interest portion of leases 3.8 3.4 7.6 7.3
----- ----- ------ -----
$16.4 $14.5 $ 32.5 $28.7
===== ===== ====== =====
Ratio of Earnings to Fixed Charges 3.7 3.4 3.6 3.5
===== ===== ====== =====
</TABLE>
The ratios of earnings to fixed charges were computed by dividing earnings by
fixed charges. For this purpose, "earnings" consist of income before taxes plus
fixed charges (excluding capitalized interest), and "fixed charges" consist of
interest expense, capitalized interest, amortization of debt issuance costs and
the portion of rent expense (estimated to be 35%) on operating leases deemed
representative of interest.
