<PAGE>
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 September 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 1-7685
AVERY DENNISON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-1492269
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
150 NORTH ORANGE GROVE BOULEVARD, PASADENA, CALIFORNIA 91103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (626) 304-2000
Indicate by a check [X] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No
--- ---
Number of shares of $1 par value common stock outstanding as of October 24,
1997: 119,710,031
<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
September 27, 1997 and December 28, 1996 3
Consolidated Statement of Income
Three and Nine Months Ended September 27, 1997
and September 28, 1996 4
Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 27, 1997
and September 28, 1996 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information:
Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
September 27, 1997 December 28, 1996
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6.3 $ 3.8
Trade accounts receivable, net 499.4 448.5
Inventories, net 227.1 244.4
Prepaid expenses 19.1 17.8
Other current assets 91.6 90.0
-------- --------
Total current assets 843.5 804.5
Property, plant and equipment, at cost 1,756.5 1,767.9
Accumulated depreciation (809.6) (805.2)
-------- --------
946.9 962.7
Intangibles resulting from business acquisitions, net 134.5 135.9
Other assets 135.8 133.6
-------- --------
$2,060.7 $2,036.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 58.2 $ 96.2
Accounts payable 215.2 230.7
Other current liabilities 357.7 367.0
-------- --------
Total current liabilities 631.1 693.9
Long-term debt 430.5 370.7
Deferred taxes and other long-term liabilities 173.0 140.1
Shareholders' equity:
Common stock - $1 par value:
Authorized - 400,000,000 shares at September 27, 1997
and 200,000,000 shares at December 28, 1996; Issued
- 124,126,624 shares at September 27, 1997 and
December 28, 1996 124.1 124.1
Capital in excess of par value 506.1 475.4
Retained earnings 1,034.3 945.6
Cumulative foreign currency translation adjustment (17.7) 28.3
Cost of unallocated ESOP shares (29.4) (29.4)
Minimum pension liability (0.2) (0.2)
Employee stock benefit trust, 17,077,207 shares
at September 27, 1997 and 17,959,358 shares at
December 28, 1996 (666.0) (644.3)
Treasury stock at cost, 4,039,570 shares at September 27,
1997 and 2,551,808 shares at December 28, 1996 (125.1) (67.5)
-------- --------
Total shareholders' equity 826.1 832.0
-------- --------
$2,060.7 $2,036.7
======== ========
</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 Nine Months Ended
--------------------------------------- ---------------------------------------
September 27, 1997 September 28, 1996 September 27, 1997 September 28, 1996
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net Sales $835.6 $819.3 $2,509.3 $2,413.6
Cost of products sold 565.5 558.8 1,702.5 1,658.0
--------------------------------------- ---------------------------------------
Gross profit 270.1 260.5 806.8 755.6
Marketing, general and
administrative expense 183.9 181.1 552.9 531.3
Net gain on divestitures and
restructuring charges -- 2.1 -- 2.1
Interest expense 8.0 10.1 25.3 28.4
--------------------------------------- ---------------------------------------
Income before taxes 78.2 71.4 228.6 198.0
Taxes on income 25.6 24.8 78.2 69.8
--------------------------------------- ---------------------------------------
Net income $ 52.6 $ 46.6 $ 150.4 $ 128.2
======================================= =======================================
PER SHARE AMOUNTS:
Net income per common share $ 0.51 $ 0.45 $ 1.46 $ 1.22
======================================= =======================================
Net income per fully diluted
common share $ 0.50 $ 0.43 $ 1.41 $ 1.18
======================================= =======================================
Dividends $ 0.17 $ 0.15 $ 0.51 $ 0.45
======================================= =======================================
AVERAGE SHARES OUTSTANDING:
Common shares 103.1 104.7 103.3 105.3
Fully diluted common shares 106.1 107.2 106.3 108.2
</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>
Nine Months Ended
----------------------------------------
September 27, 1997 September 28, 1996
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
- --------------------
Net income $ 150.4 $ 128.2
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 78.5 74.9
Amortization 8.4 9.4
Net gain on divestitures and restructuring charges -- (2.1)
Deferred taxes 1.3 (5.9)
Net change in assets and liabilities, net of the effect of
foreign currency translation and business divestitures (28.2) (36.5)
------- -------
Net cash provided by operating activities 210.4 168.0
------- -------
INVESTING ACTIVITIES:
- --------------------
Purchase of property, plant and equipment (104.1) (110.6)
Net (payments)/proceeds from sale of assets, business divestiture
and acquisitions (4.2) 12.1
Other (16.6) (3.7)
------- -------
Net cash used in investing activities (124.9) (102.2)
------- -------
FINANCING ACTIVITIES:
- --------------------
Net decrease in long-term debt (30.6) (1.5)
Net increase in short-term debt 57.7 27.6
Dividends paid (61.7) (47.3)
Purchase of treasury stock (57.6) (74.4)
Other 9.7 8.1
------- -------
Net cash used in financing activities (82.5) (87.5)
------- -------
Effect of foreign currency translation on cash balances (0.5) --
------- -------
Increase (decrease) in cash and cash equivalents 2.5 (21.7)
------- -------
Cash and cash equivalents, beginning of period 3.8 27.0
------- -------
Cash and cash equivalents, end of period $ 6.3 $ 5.3
======= =======
</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
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 1996 annual
financial statements and notes.
The third quarters of 1997 and 1996 consisted of thirteen-week periods ending
September 27, 1997 and September 28, 1996, 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 the financial
statements of subsidiaries which operate in hyperinflationary economies
during 1997 resulted in losses of $.5 million and $.9 million, respectively,
during the three and nine months ended September 27, 1997. During 1996, the
Company recorded losses of $.8 million and $1.9 million, respectively, during
the three and nine months ended September 28, 1996. Operations in
hyperinflationary economies consist of the Company's Brazilian operations for
1997 and 1996 and Mexican operations for 1997.
3. FINANCIAL INSTRUMENTS
The Company enters into forward foreign exchange contracts, interest rate
contracts and foreign exchange options to manage exposure to fluctuations in
foreign currency exchange and interest rates. The Company does not hold or
issue financial instruments for trading purposes.
Forward foreign exchange contracts and foreign exchange options 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. Forward foreign exchange contracts and foreign exchange
options 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.
6
<PAGE>
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. FINANCIAL INSTRUMENTS (CONTINUED)
Gains and losses resulting from forward foreign exchange contracts and
foreign exchange options are recorded in the same category as that arising
from 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
statement of cash flows. Gains and losses on contracts used to hedge the
value of investments in certain foreign subsidiaries are included in the
cumulative foreign currency translation adjustment component of shareholders'
equity.
The net amounts paid or received on interest rate agreements are recognized
as adjustments to interest expense over the terms of the agreements. Contract
premiums paid, if any, are amortized to interest expense over the terms of
the underlying instruments.
4. INVENTORIES
Inventories consisted of (in millions):
<TABLE>
<CAPTION>
September 27, 1997 December 28, 1996
------------------ -----------------
<S> <C> <C>
Raw materials $ 75.5 $ 82.7
Work-in-progress 69.9 72.4
Finished goods 114.4 123.4
LIFO adjustment (32.7) (34.1)
------ ------
$227.1 $244.4
====== ======
</TABLE>
5. INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
Accumulated amortization of intangible assets at September 27, 1997 and
December 28, 1996 was $47.6 and $46.6 million, respectively.
6. RESEARCH AND DEVELOPMENT
Research and development expense for the three and nine months ended
September 27, 1997 was $14.4 million and $45 million, respectively. For the
three and nine months ended September 28, 1996, research and development
expense was $12.8 million and $39.3 million, respectively.
7
<PAGE>
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. 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 17 waste disposal or waste recycling sites which are the
subject of separate investigations or proceedings concerning alleged soil
and/or groundwater contamination and for which no settlement of the Company's
liability has been agreed upon. Litigation has been initiated by a
governmental authority with respect to two of these sites, but the Company
does not believe that any such proceedings will result in the imposition of
monetary sanctions. The Company is participating with other PRPs at all such
sites, and anticipates that its share of cleanup costs will be determined
pursuant to remedial agreements entered into in the normal course of
negotiations with the EPA or other governmental authorities.
The Company has accrued liabilities for all sites, including sites in which
governmental agencies have designated the Company as a PRP, where it is
probable that a loss will be incurred and the minimum cost or amount of loss
can be reasonably estimated. However, because of the uncertainties associated
with environmental assessment and remediation activities, future expense to
remediate the currently identified sites, and sites which could be identified
in the future for cleanup, could be higher than the liability currently
accrued. Based on current site assessments, management believes that the
potential liability over the amounts currently accrued would not materially
affect the Company.
The Company and its subsidiaries are involved in various other lawsuits,
claims and inquiries, most of which are routine to the nature of the
business. In the opinion of management, the resolution of these matters will
not materially affect the Company.
8. NET INCOME PER SHARE
Net income per common share is computed by dividing net income by the
weighted-average number of common shares outstanding. Net income per fully
diluted common share is computed by dividing net income by the weighted-
average number of common shares and common share equivalents outstanding.
Common share equivalents include shares issuable upon the assumed exercise of
outstanding stock options.
8
<PAGE>
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share (EPS). The standard will require the Company to present both "basic"
and "diluted" EPS. The new requirements will be effective the fourth quarter
of 1997; earlier adoption is not allowed. At the present time, the impact of
the new standard is not expected to be material.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". The standard establishes guidelines for the reporting and display
of comprehensive income and its components in financial statements.
Comprehensive income includes items such as foreign currency translation
adjustments and adjustments to the minimum pension liability that are
currently presented as components of shareholders' equity. Companies will be
required to report total comprehensive income for interim periods beginning
first quarter of 1998. Disclosure of comprehensive income and its components
will be required beginning fiscal year end 1998.
Also in June 1997, the FASB issued SFAS No 131, "Disclosures About Segments
of an Enterprise and Related Information". The standard establishes
guidelines for reporting information on operating segments in interim and
annual financial statements. The new rules will be effective for the 1998
fiscal year. Abbreviated quarterly disclosure will be required beginning
first quarter of 1999, with both 1999 and 1998 information. The Company does
not believe that the new standard will have a material impact on the
reporting of its segments.
10. DIVESTITURE, RESTRUCTURING AND ASSET IMPAIRMENTS
During the third quarter of 1996, a divestiture, business restructuring
actions and a charge for impairment of long-lived assets resulted in a net
pretax gain of $2.1 million. The Company sold its joint venture converting
operation in Japan for $28.4 million, resulting in a pretax gain of $17.9
million. The Company also recorded a charge for an impairment of long-lived
assets and restructuring actions, which, combined, had an estimated cost of
$15.8 million. An asset impairment write-down of $6.3 million was recognized
for long-lived assets held in the Company's Consumer and converted products
sector. The restructuring actions included the reorganization of certain
manufacturing, distribution and administrative sites. These costs consisted
of severance and related costs for approximately 200 positions worldwide
($7.4 million) and the discontinuance of product lines and related asset
disposals ($2.1 million). The Company's restructuring program was completed
as of the third quarter of 1997 and is likely to result in estimated annual
savings of approximately $9 million to $11 million.
9
<PAGE>
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. SUBSEQUENT EVENT
On October 23, 1997, the Board of Directors declared a quarterly cash
dividend, one cent of which related to the redemption of the Preferred Stock
Purchase Rights previously issued on each outstanding share of common stock.
The dividend is payable on December 17, 1997 to stockholders of record at
the close of business on December 3, 1997. In connection with the dividend
declaration and the redemption of the existing rights (which were scheduled
to expire on June 30, 1998), the Company adopted a new rights plan with
terms substantially similar to the existing rights. The new rights are
scheduled to expire on October 31, 2007.
10
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: FOR THE QUARTER
- --------------------------------------
Quarterly sales increased to $835.6 million, a 2 percent increase over third
quarter 1996 sales of $819.3 million. Excluding changes in foreign currency
rates, sales increased 5.4 percent.
The gross profit margin increased to 32.3 percent for the quarter compared to
31.8 percent for the third quarter of 1996. The increase was due primarily to
increased productivity, cost control and an improved product mix. Marketing,
general and administrative expense, as a percent of sales, was 22 percent
compared to 22.1 percent for the third quarter of 1996.
During the third quarter of 1996, a charge for an impairment of long-lived
assets and business restructuring actions was taken which resulted in a net
pretax gain of $2.1 million. The Company sold its joint venture operation in
Japan for $28.4 million, resulting in a pretax gain of $17.9. The Company also
recorded a charge for an impairment of long-lived assets and a restructuring
program, which combined, had a cost of $15.8 million. An asset impairment write-
down of $6.3 million was recognized for long-lived assets held in the Company's
Consumer and converted products sector. The restructuring program included the
reorganization of certain manufacturing, distribution and administrative sites.
These costs consisted of severance and related costs for approximately 200
positions worldwide ($7.4 million) and the discontinuance of product lines and
related asset write-offs ($2.1 million). The Company's restructuring program was
completed as of the third quarter of 1997 and is likely to result in estimated
annual savings of approximately $9 million to $11 million.
Interest expense declined to $8 million for the third quarter of 1997 compared
to $10.1 million a year ago, due to lower weighted-average interest rates and
lower average borrowings. Income before taxes, as a percent of sales, increased
to 9.4 percent for the quarter from 8.7 percent. The effective tax rate for the
quarter was 32.7 percent in 1997 and 34.7 percent in the same period last year.
The change reflects an increase in U.S. tax credits for research and
experimentation.
Net income increased 12.9 percent to $52.6 million compared to $46.6 million in
the third quarter of 1996. Net income per common share for the quarter was $.51
compared to $.45 in the same period last year, a 13.3 percent increase. Net
income per fully diluted common share was $.50 for the third quarter of 1997 and
$.43 for the same period last year, a 16.3 percent increase.
11
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations by Business Sector
The Pressure-sensitive adhesives and materials sector reported increased sales
and profitability for the third quarter of 1997 compared to the same period last
year. The U.S. operations' sales growth was primarily led by increased sales
volume for North American roll paper and films. Profitability for the U.S.
operations increased primarily due to improved inventory management, capacity
utilization and expenditures made in the prior year to enhance operating
efficiency. The international businesses reported increased sales and
profitability. The improvements were primarily due to higher unit volume and
geographic expansion, which was partially offset by changes in foreign currency
rates.
The Consumer and converted products sector reported increased sales and
profitability for the third quarter of 1997 compared to the same period last
year. Increased sales in the U.S. operations continue to be led by growth of new
products and its Avery-brand products. The increase in sales growth in the U.S.
was impacted by inventory adjustments by certain major retailers during July and
August. However, sales to these customers rebounded in September and point-of-
sale data obtained from these customers indicated no fundamental change in
demand for Avery-brand products. Profitability in the U.S. increased primarily
due to an improved product mix. In addition, during the third quarter of 1996,
the U.S. operations reported an asset impairment write-down of $6.3 million and
the discontinuance of a product line and its related assets for $2.1 million.
Sales for the international businesses increased primarily due to geographic
expansion, but were partially offset by sales declines at certain European
operations. Profitability for the international businesses was primarily
impacted by decreased European sales and investment for the market expansion of
new products.
RESULTS OF OPERATIONS: NINE MONTHS YEAR-TO-DATE
- -----------------------------------------------
Sales for the first nine months of 1997 were up 4 percent to $2.5 billion
compared to the corresponding period of 1996. Excluding changes in foreign
currency rates, sales increased 6.4 percent.
The gross profit margin for the first nine months was 32.2 percent compared to
31.3 percent in the prior year. The increase was primarily due to increased
productivity, cost control and an improved product mix. Marketing, general and
administrative expense, as a percent of sales, for the first nine months was 22
percent for both periods.
A divestiture, business restructuring actions and an impairment for long-lived
assets were taken during the third quarter of 1996 resulting in a net pretax
gain of $2.1 million.
12
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: NINE MONTHS YEAR-TO-DATE (CONTINUED)
- -----------------------------------------------------------
Interest expense declined to $25.3 million for the first nine months compared to
$28.4 million for the first nine months of 1996. The decrease was primarily due
to lower weighted-average interest rates and lower average borrowings. Income
before taxes, as a percent of sales, was 9.1 percent for the first nine months
of 1997 compared to 8.2 percent for 1996. The year-to-date effective tax rate
declined to 34.2 percent in 1997 compared to 35.3 percent in 1996 due to an
increase in U.S. tax credits for research and experimentation.
Net income was $150.4 million for the first nine months of 1997 compared to
$128.2 million for the first nine months of 1996, a 17.3 percent increase. Net
income per common share increased 19.7 percent to $1.46 for the first nine
months of 1997 compared to $1.22 for the same period last year. Net income per
fully diluted common share was $1.41 for the first nine months of 1997 compared
to $1.18 for the same period last year, a 19.5 percent increase year over year.
Results of Operations by Business Sector
The Pressure-sensitive adhesives and materials sector reported increased sales
and profitability for the first nine months of 1997 compared to the same period
last year. The U.S. operations' sales growth was primarily led by increased
sales volume for new products. Profitability for the U.S. operations increased
primarily due to improved inventory management, capacity utilization and
expenditures made in the prior year to enhance operating efficiency. The
international businesses reported increased sales and profitability primarily
due to higher unit volume and geographic expansion, which was partially offset
by changes in foreign currency rates.
The Consumer and converted products sector reported increased sales and
profitability for the first nine months of 1997 compared to 1996. Increased
sales in the U.S. operations continue to be led by growth of its Avery-brand
products, new products and other consumer products. Profitability in the U.S.
businesses improved primarily as a result of new products and an improved
product mix. In 1996, the U.S. operations recorded an asset impairment writedown
of $6.3 million and the discontinuance of a product line and its related assets
for $2.1 million. Sales for the international businesses were impacted by
changes in foreign currency and sales declines at certain European operations,
but were partially offset by growing sales from geographic expansion businesses.
Profitability for the international businesses was primarily impacted by
operations in France, decreased sales at selected European operations due to the
softness of certain economies, and investment for the market expansion of new
products.
13
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
- -------------------
Average working capital, excluding short-term debt, as a percentage of sales,
decreased to 8.1 percent for the quarter from 9 percent a year ago. This
improvement was a result of reduced days sales outstanding in accounts
receivable, improved inventory turnover and better payables management. Average
inventory turnover for the third quarter was 10 inventory turns compared to 9.2
inventory turns a year ago; the average number of days sales outstanding in
accounts receivable was 54 days compared to 57 days a year ago.
Net cash flows provided by operating activities totaled $210.4 million for the
first nine months of 1997 compared to $168 million for the same period in 1996.
The increase in net cash flows provided by operating activities is primarily due
to an increase in net income and changes in working capital requirements.
Capital spending for the quarter was $36.5 million compared to $36.7 million a
year ago. For the nine months, capital spending totaled $104.1 million compared
to $110.6 million a year ago. Total capital spending for 1997 is expected to be
approximately $170 to $180 million.
During the first nine months of 1997, total debt increased $21.8 million to
$488.7 million from year end 1996. During the fourth quarter of 1996, the
Company registered with the Securities and Exchange Commission, $150 million in
principal amount of medium-term notes. During the third quarter of 1997 and
early October, $60 million in notes were issued. Proceeds from the medium-term
notes were used to reduce debt and for other general corporate purposes.
Shareholders' equity decreased to $826.1 million from $832 million at year end
1996. During the third quarter of 1997, the Company purchased approximately
401,000 shares of common stock at a cost of $16.9 million. For the first nine
months of 1997, the Company purchased 1.5 million shares of common stock at a
cost of $57.6 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 $21.7 million to $666 million from year end 1996.
Total debt to total capital was 37.2 percent as of the end of third quarter 1997
and 35.9 percent at year end 1996.
During the first quarter of 1997, the Company adopted SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". The standard revised the guidelines for recognition, measurement
and disclosure of transfers and servicing of financial assets and
extinguishments of debt. The Company's implementation of the new standard had no
effect on the first quarter of 1997 financial statements.
14
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FUTURE ACCOUNTING REQUIREMENTS
- ------------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share"
(EPS). The standard will require the Company to present both "basic" and
"diluted" EPS. The new requirements will be effective the fourth quarter of
1997; earlier adoption is not allowed. At the present time, the impact of the
new standard is not expected to be material.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
The standard establishes guidelines for the reporting and display of
comprehensive income and its components in financial statements. Comprehensive
income includes items such as foreign currency translation adjustments and
adjustments to the minimum pension liability that are currently presented as
components of shareholders' equity. Companies will be required to report total
comprehensive income for interim periods beginning first quarter of 1998.
Disclosure of comprehensive income and its components will be required beginning
fiscal year end 1998.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information". The standard establishes guidelines for
reporting information on operating segments in interim and annual financial
statements. The new rules will be effective for the 1998 fiscal year.
Abbreviated quarterly disclosure will be required beginning first quarter of
1999, with both 1999 and 1998 information. The Company does not believe that the
new standard will have a material impact on the reporting of its segments.
SAFE HARBOR STATEMENT
- ---------------------
The matters described or referred to in the Form 10-Q include forward-looking
statements regarding future events. Factors which could cause actual results to
differ materially from those projected include risks and uncertainties relating
to investment in new production facilities, timely development and successful
marketing of new products, impact of competitive products and pricing,
fluctuations in foreign exchange rates, changes in economic conditions, and
other factors, including those described or referred to in the Company's SEC
filings, including its Form 10-K for the year ended December 28, 1996
15
<PAGE>
PART II. OTHER INFORMATION
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
a. Exhibits: 11 Computation of Net Income Per Share Amounts
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
b. Reports on Form 8-K: There were no reports on Form 8-K filed for the three
months ended September 27, 1997. However, Registrant filed the Current Report
on Form 8-K dated October 24, 1997, in connection with the declaration of a
dividend of one preferred share purchase right for each outstanding share of
common stock payable on December 17, 1997 to stockholders of record on
December 3, 1997.
16
<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/ 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 10, 1997
17
<PAGE>
AVERY DENNISON CORPORATION
COMPUTATION OF NET INCOME PER SHARE AMOUNTS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- --------------------------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(A) Weighted average number of common shares
outstanding 103.1 104.7 103.3 105.3
Additional common shares issuable under
employee stock options using the treasury stock
method 3.0 2.5 3.0 2.9
------ ------ ------ ------
(B) Weighted average number of common shares
outstanding assuming the exercise of stock
options 106.1 107.2 106.3 108.2
====== ====== ====== ======
(C) Net income applicable to common stock $ 52.6 $ 46.6 $150.4 $128.2
====== ====== ====== ======
Net income per share as reported (C divided by A) $ 0.51 $ 0.45 $ 1.46 $ 1.22
====== ====== ====== ======
Net income per share giving effect to the exercise of
outstanding stock options (C divided by B) $ 0.50 $ 0.43 $ 1.41 $ 1.18
====== ====== ====== ======
</TABLE>
Exhibit 11
<PAGE>
AVERY DENNISON CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Earnings:
Income before taxes $78.2 $71.4 $228.6 $198.0
Add: Fixed charges* 12.3 14.9 38.7 42.3
Amortization of capitalized interest 0.4 0.3 1.0 1.0
Less: Capitalized interest (0.5) (1.0) (1.8) (2.6)
----- ----- ------ ------
$90.4 $85.6 $266.5 $238.7
===== ===== ====== ======
*Fixed charges:
Interest expense $ 8.0 $10.1 $ 25.3 $ 28.4
Capitalized interest 0.5 1.0 1.8 2.6
Amortization of debt issuance costs 0.1 0.1 0.4 0.4
Interest portion of leases 3.7 3.7 11.2 10.9
----- ----- ------ ------
$12.3 $14.9 $ 38.7 $ 42.3
===== ===== ====== ======
Ratio of Earnings to Fixed Charges 7.3 5.7 6.9 5.6
===== ===== ====== ======
</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.
Exhibit 12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> SEP-27-1997
<CASH> 6,300
<SECURITIES> 0
<RECEIVABLES> 499,400<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 227,100
<CURRENT-ASSETS> 843,500
<PP&E> 1,756,500
<DEPRECIATION> 809,600
<TOTAL-ASSETS> 2,060,700
<CURRENT-LIABILITIES> 631,100
<BONDS> 430,500
0
0
<COMMON> 124,100
<OTHER-SE> 702,000
<TOTAL-LIABILITY-AND-EQUITY> 2,060,700
<SALES> 2,509,300
<TOTAL-REVENUES> 2,509,300
<CGS> 1,702,500
<TOTAL-COSTS> 1,702,500
<OTHER-EXPENSES> 552,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,300
<INCOME-PRETAX> 228,600
<INCOME-TAX> 78,200
<INCOME-CONTINUING> 150,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 150,400
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.41
<FN>
<F1>ACCOUNTS RECEIVABLE ARE SHOWN NET OF ANY ALLOWANCES.
</FN>
</TABLE>
