<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 26, 1998
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)
<TABLE>
<S> <C>
DELAWARE 95-1492269
(State or other jurisdiction of incorporation or organization) (I.R.S. employer 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
</TABLE>
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 23,
1998: 116,257,543
<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 26, 1998 and December 27, 1997 3
Consolidated Statement of Income
Three and Nine Months Ended September 26, 1998
and September 27, 1997 4
Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 26, 1998
and September 27, 1997 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations
and Financial Condition 11
Part II. Other Information:
Quantitative and Qualitative Disclosures About Market Risk 18
Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 26, 1998 DECEMBER 27, 1997
----------------------- -----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4.9 $ 3.3
Trade accounts receivable, net 515.3 457.7
Inventories, net 231.9 230.1
Prepaid expenses 21.2 19.6
Other current assets 82.4 82.8
----------------------- -----------------------
Total current assets 855.7 793.5
Property, plant and equipment, at cost 1,869.1 1,790.5
Accumulated depreciation (868.3) (805.2)
----------------------- -----------------------
1,000.8 985.3
Intangibles resulting from business acquisitions, net 134.2 133.7
Other assets 144.0 134.0
----------------------- -----------------------
$ 2,134.7 $ 2,046.5
======================= =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 39.1 $ 43.6
Accounts payable 252.4 245.3
Other current liabilities 327.4 341.0
----------------------- -----------------------
Total current liabilities 618.9 629.9
Long-term debt 471.1 404.1
Deferred taxes and other long-term liabilities 183.7 175.3
Shareholders' equity:
Common stock - $1 par value - 400,000,000 authorized
shares; issued - 124,126,624 shares at September 26,
1998 and December 27, 1997 124.1 124.1
Capital in excess of par value 694.0 592.5
Retained earnings 1,157.0 1,063.6
Cumulative foreign currency translation adjustment (17.2) (21.4)
Cost of unallocated ESOP shares (19.3) (23.4)
Minimum pension liability (1.1) (1.1)
Employee stock benefit trusts, 15,289,269
at September 26, 1998 and 16,693,347 shares at
December 27, 1997 (793.0) (730.3)
Treasury stock at cost, 7,336,388 shares at September 26,
1998 and 5,053,046 shares at December 27, 1997 (283.5) (166.8)
----------------------- -----------------------
Total shareholders' equity 861.0 837.2
----------------------- -----------------------
$ 2,134.7 $ 2,046.5
======================= =======================
</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 26, 1998 September 27, 1997 September 26, 1998 September 27, 1997
------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Net Sales $860.2 $835.6 $2,575.3 $2,509.3
Cost of products sold 579.3 565.5 1,722.6 1,702.5
---------- --------- ----------- ------------
Gross profit 280.9 270.1 852.7 806.8
Marketing, general and
administrative expense 188.9 183.9 575.0 552.9
Interest expense 8.7 8.0 25.3 25.3
---------- --------- ----------- ------------
Income before taxes 83.3 78.2 252.4 228.6
Taxes on income 27.5 25.6 85.0 78.2
---------- --------- ----------- ------------
Net income $ 55.8 $ 52.6 $ 167.4 $ 150.4
========== ========= =========== ============
PER SHARE AMOUNTS:
Net income per common share $ .55 $ .51 $ 1.64 $ 1.46
========== ========= =========== ============
Net income per common share,
assuming dilution $ .54 $ .50 $ 1.60 $ 1.41
========== ========= =========== ============
Dividends $ .21 $ .17 $ .63 $ .51
========== ========= =========== ============
AVERAGE SHARES OUTSTANDING:
Common shares 101.7 103.1 101.9 103.3
Common shares, assuming dilution 104.2 106.1 104.6 106.3
</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 26, 1998 September 27, 1997
---------------------- ----------------------
<S> <C> <C>
OPERATING ACTIVITIES:
- --------------------
Net income $ 167.4 $ 150.4
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 84.2 78.5
Amortization 9.1 8.4
Deferred taxes 1.5 1.3
Net change in assets and liabilities, net of the effect of
foreign currency translation and business divestitures and
acquisitions (30.9) (28.2)
---------------------- ----------------------
Net cash provided by operating activities 231.3 210.4
---------------------- ----------------------
INVESTING ACTIVITIES:
- --------------------
Purchase of property, plant and equipment (102.1) (104.1)
Net payments from sale of assets, business divestitures
and acquisitions (3.1) (4.2)
Other (11.5) (16.6)
---------------------- ----------------------
Net cash used in investing activities (116.7) (124.9)
---------------------- ----------------------
FINANCING ACTIVITIES:
- --------------------
Net increase in short-term debt 92.8 57.7
Net decrease in long-term debt (31.8) (30.6)
Dividends paid (74.0) (61.7)
Purchase of treasury stock (116.7) (57.6)
Proceeds from exercise of stock options 18.4 9.5
Other (1.8) 0.2
---------------------- ----------------------
Net cash used in financing activities (113.1) (82.5)
---------------------- ----------------------
Effect of foreign currency translation on cash balances 0.1 (0.5)
---------------------- ----------------------
Increase in cash and cash equivalents 1.6 2.5
---------------------- ----------------------
Cash and cash equivalents, beginning of period 3.3 3.8
---------------------- ----------------------
Cash and cash equivalents, end of period $ 4.9 $ 6.3
====================== ======================
</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 1997 annual
financial statements and notes.
The third quarters of 1998 and 1997 consisted of thirteen-week periods ending
September 26, 1998 and September 27, 1997, respectively. The interim results
of operations are not necessarily indicative of future financial results.
2. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", was adopted during the first quarter of 1998. The
standard establishes guidelines for the reporting and display of
comprehensive income and its components in financial statements.
Comprehensive income includes foreign currency translation adjustments and
adjustments to the minimum pension liability that are currently presented as
components of shareholders' equity. Companies are 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. The Company's total comprehensive income for
the three and nine months ended September 26, 1998 was $64.2 million and
$171.6 million, respectively. For the three and nine months ended September
27, 1997, total comprehensive income was $35.9 million and $104.4 million,
respectively.
3. FOREIGN CURRENCY TRANSLATION
Transactions in foreign currencies and translation of the financial
statements of subsidiaries which operate in hyperinflationary economies
during 1998 resulted in losses of $.7 million and $2.1 million, respectively,
during the three and nine months ended September 26, 1998. During 1997, the
Company recorded losses of $.5 million and $.9 million, respectively, during
the three and nine months ended September 27, 1997. Operations in
hyperinflationary economies consist of the Company's Mexican operations for
1998 and 1997 and Brazilian operations for 1997.
6
<PAGE>
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. FINANCIAL INSTRUMENTS
The Company enters into foreign exchange forward and option contracts and
interest rate contracts to manage exposure to fluctuations in foreign
currency exchange and interest rates. The Company does not hold or purchase
any foreign currency or interest rate contracts for trading purposes.
Foreign exchange forward and option contracts that hedge existing assets,
liabilities or firm commitments are measured at fair value and the related
gains and losses on these contracts are recognized in net income currently.
Foreign exchange forward and option contracts that hedge forecasted
transactions are measured at fair value and the related gains and losses on
these contracts are deferred and subsequently recognized in net income in the
period in which the underlying transaction is consummated. In the event that
an anticipated transaction is no longer likely to occur, the Company
recognizes the change in fair value of the instrument in net income
currently.
Gains and losses resulting from foreign exchange forward and option contracts
are recorded in the same category as the related item being hedged. Cash
flows from the use of financial instruments are reported in the same category
as the hedged item in the Condensed Consolidated Statement of Cash Flows.
Gains and losses on contracts used to hedge the value of investments in
certain foreign subsidiaries are included in 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.
5. INVENTORIES
Inventories consisted of (in millions):
<TABLE>
<CAPTION>
September 26, 1998 December 27, 1997
----------------------- -----------------------
<S> <C> <C>
Raw materials $ 68.1 $ 74.4
Work-in-progress 69.4 70.9
Finished goods 122.9 114.7
LIFO adjustment (28.5) (29.9)
----------------------- -----------------------
$231.9 $230.1
======================= =======================
</TABLE>
7
<PAGE>
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
Accumulated amortization of intangible assets at September 26, 1998 and
December 27, 1997 was $53.9 million and $49.4 million, respectively.
7. RESEARCH AND DEVELOPMENT
Research and development expense for the three and nine months ended
September 26, 1998 was $16.5 million and $50.1 million, respectively. For the
three and nine months ended September 27, 1997, research and development
expense was $14.4 million and $45 million, respectively.
8. CONTINGENCIES
The Company has been designated by the U.S. Environmental Protection Agency
(EPA) and/or other responsible state agencies as a potentially responsible
party (PRP) at 16 waste disposal or waste recycling sites which are the
subject of separate investigations or proceedings concerning alleged soil
and/or groundwater contamination and for which no settlement of the Company's
liability has been agreed upon. Litigation has been initiated by a
governmental authority with respect to two of these sites, but the Company
does not believe that any such proceedings will result in the imposition of
monetary sanctions. The Company is participating with other PRPs at all such
sites, and anticipates that its share of cleanup costs will be determined
pursuant to remedial agreements entered into in the normal course of
negotiations with the EPA or other governmental authorities.
The Company has accrued liabilities for all sites, including sites in which
governmental agencies have designated the Company as a PRP, where it is
probable that a loss will be incurred and the minimum cost or amount of loss
can be reasonably estimated. However, because of the uncertainties associated
with environmental assessment and remediation activities, future expense to
remediate the currently identified sites, and sites which could be identified
in the future for cleanup, could be higher than the liability currently
accrued. Based on current site assessments, management believes that the
potential liability over the amounts currently accrued would not materially
affect the Company.
The Company and its subsidiaries are involved in various other lawsuits,
claims and inquiries, most of which are routine to the nature of the
business. In the opinion of management, the resolution of these matters will
not materially affect the Company.
8
<PAGE>
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. NET INCOME PER SHARE
SFAS No. 128, "Earnings Per Share", was adopted in the fourth quarter of 1997
and supersedes the Company's previous standards for computing net income per
share under Accounting Principles Board No. 15. The new standard requires
dual presentation of net income per common share and net income per common
share, assuming dilution, on the face of the income statement. All prior year
net income per share data has been restated for 1997 in accordance with the
new standard.
In accordance with SFAS No. 128, net income per common share amounts were
computed as follows:
<TABLE>
<CAPTION>
(In millions, except per share amounts)
Three Months Ended Nine Months Ended
---------------------------------------------- ----------------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
---------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
(A) Net income available to common
shareholders $ 55.8 $ 52.6 $ 167.4 $ 150.4
========== ========== =========== ===========
(B) Weighted average number of common
shares outstanding 101.7 103.1 101.9 103.3
Additional common shares issuable
under employee stock options using
the treasury stock method 2.5 3.0 2.7 3.0
---------- ---------- ----------- -----------
(C) Weighted average number of common
shares outstanding assuming the
exercise of stock options 104.2 106.1 104.6 106.3
========== ========== =========== ===========
Net income per common share (A) / (B) $ .55 $ .51 $ 1.64 $ 1.46
========== ========== =========== ===========
Net income per common share,
assuming dilution (A) / (C) .54 .50 1.60 1.41
========== ========== =========== ===========
</TABLE>
9
<PAGE>
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. FUTURE ACCOUNTING REQUIREMENTS
In June 1997, the Financial Accounting Standards Board (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
standard will be effective for the 1998 fiscal year. Abbreviated quarterly
disclosure will be required beginning first quarter of 1999, and will
include 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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives will be recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. The new rules will be effective the first quarter
of 2000. The Company is in the process of determining the impact of this new
standard and anticipates that it will not have a material impact on the
Company's financial results when effective.
11. SUBSEQUENT EVENTS
On October 6, 1998, the Company acquired Spartan International, Inc., a
privately held specialty converting operation based in Holt, Michigan.
Spartan International, Inc. supplies pressure-sensitive products to the
commercial graphics, sign making, vehicle marking and automotive markets.
On October 26, 1998, the Company signed a definitive agreement with
Steinbeis Holding GmbH to combine Avery Dennison's office products
businesses in Europe with Zweckform Buro-Produckte GmbH (Zweckform), a
German office products supplier. Zweckform produces labels, films and
specialty papers for use with personal computers, desktop printers and
copiers. Zweckform products had sales of approximately $120 million in 1997.
The transaction is expected to close in the first quarter of 1999, pending
regulatory approvals and due diligence.
10
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS: FOR THE QUARTER
- --------------------------------------
Quarterly sales increased to $860.2 million, a 2.9 percent increase over third
quarter 1997 sales of $835.6 million. Excluding changes in foreign currency
rates, sales increased 3.9 percent.
Gross profit margin increased to 32.7 percent for the quarter compared to 32.3
percent for the third quarter of 1997. The increase was primarily due to ongoing
cost reduction programs, increased manufacturing efficiency and improved product
mix.
Marketing, general and administrative expense, as a percent of sales, was
comparable to third quarter of 1997 at 22 percent.
Interest expense increased to $8.7 million for the third quarter of 1998
compared to $8 million a year ago, due to higher average debt. Income before
taxes, as a percent of sales, increased to 9.7 percent for the quarter from 9.4
percent as a result of the improvement in gross profit. The effective tax rate
for the quarter was 33 percent in 1998 and 32.7 percent in the same period last
year.
Net income increased 6.1 percent to $55.8 million compared to $52.6 million in
the third quarter of 1997. Net income per common share for the quarter was $.55
compared to $.51 in the same period last year, a 7.8 percent increase. Net
income per common share, assuming dilution was $.54 for the third quarter of
1998 and $.50 for the same period last year, an 8 percent increase.
Results of Operations by Business Sector
The Pressure-sensitive adhesives and materials sector reported increased sales
for the third quarter of 1998 compared to the same period last year. Profits for
the sector decreased slightly primarily due to higher indirect manufacturing
expenses from plant start-ups. U.S. operations' reported sales growth was
primarily led by increased unit volume in its materials business. Profits for
U.S. operations decreased slightly primarily due to costs associated with new
start-ups. International operations' reported sales growth, which was partially
offset by changes in foreign currency rates, was primarily due to increased
demand for film materials, specialty tapes and graphics businesses in Europe.
Profits for international operations increased for the third quarter of 1998
compared to the same period last year primarily due to higher unit volume in
Europe and geographic expansion.
11
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Consumer and converted products sector reported increased sales and profits
for the third quarter of 1998 compared to the same period last year. Increased
sales in U.S. operations were led by growth of its Avery-brand products, and
industrial and automotive products. While the Company achieved sales growth in
its office products business, several of its major retailers have communicated
inventory reduction programs. The Company experienced some impact from this in
the third quarter of 1998 and expects these programs to continue into the fourth
quarter of 1998 and into the early part of 1999. However, point-of-sale data
obtained from these customers showed no change in demand for Avery-brand
products during the third quarter. U.S. operations' profit growth was primarily
due to improved performance in its consumer packaging, industrial and
automotive, and office products businesses. Increased sales in international
operations were primarily due to its office products business in Europe, and its
ticketing businesses, which were partially offset by changes in foreign currency
rates. Increased profits in international operations, which were partially
offset by changes in foreign currency rates, were primarily due to improved
performance in its European converting and office products businesses.
RESULTS OF OPERATIONS: NINE MONTHS YEAR-TO-DATE
- -----------------------------------------------
Sales for the first nine months of 1998 were up 2.6 percent to $2.6 billion
compared to the corresponding period of 1997. Excluding changes in foreign
currency rates, sales increased 4.7 percent.
The gross profit margin for the first nine months was 33.1 percent compared to
32.2 percent in the prior year. The increase was primarily due to ongoing cost
reduction programs, increased manufacturing efficiency and improved product mix.
Marketing, general and administrative expense, as a percent of sales, for the
first nine months was 22.3 percent compared to 22 percent for the same period
last year. The increase was primarily due to increases in marketing and research
and development expenses, reflecting the Company's focus on marketing promotion
and new product development expenses.
Interest expense for the first nine months for both periods was $25.3 million.
Income before taxes, as a percent of sales, was 9.8 percent for the first nine
months of 1998 compared to 9.1 percent for 1997. The year-to-date effective tax
rate declined to 33.7 percent in 1998 compared to 34.2 percent in 1997 due to an
increase in U.S. tax credits for research and experimentation.
Net income was $167.4 million for the first nine months of 1998 compared to
$150.4 million for the first nine months of 1997, an 11.3 percent increase. Net
income per common share increased 12.3 percent to $1.64 for the first nine
months of 1998 compared to $1.46 for the same period last year. Net income per
common share, assuming dilution was $1.60 for the first nine months of 1998
compared to $1.41 for the same period last year, a 13.5 percent increase year
over year.
12
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations by Business Sector
The Pressure-sensitive adhesives and materials sector reported increased sales
and profits for the first nine months of 1998 compared to the same period last
year. U.S. operations' sales and profit growth primarily led by increased demand
for film applications and digital graphics products. Increased sales in
international operations, which were partially offset by changes in foreign
currency rates, were primarily due to increased demand for specialty tapes and
digital graphics businesses in Europe, and geographic expansion. Profits for
international operations decreased slightly primarily due to changes in foreign
currency rates.
The Consumer and converted products sector reported increased sales and profits
for the first nine months of 1998 compared to 1997. Increased sales in U.S.
operations were led by growth of its Avery-brand products, and industrial and
automotive products. Profits increased in the U.S. primarily due to improved
performance in its office products, consumer packaging, and industrial and
automotive businesses. Increased sales in international operations were
primarily due to its office products and ticketing businesses, which were
partially offset by changes in foreign currency rates. Profits increased in
international operations primarily due to improved performance in its European
converting and office products divisions, and its ticketing businesses.
FINANCIAL CONDITION
- -------------------
Average working capital, excluding short-term debt, as a percentage of sales,
decreased to 8 percent for the quarter compared to 8.1 percent a year ago.
Average inventory turnover for the third quarter was 10 inventory turns for both
periods; the average number of days of sales outstanding in accounts receivable
was 55 days compared to 54 days a year ago.
Net cash flows provided by operating activities totaled $231.3 million for the
first nine months of 1998 compared to $210.4 million for the same period in
1997. The increase in net cash flows provided by operating activities is
primarily due to the increase in net income.
Capital spending for the quarter was $27.7 million compared to $36.5 million a
year ago. For the nine months, capital spending totaled $102.1 million compared
to $104.1 million a year ago. Total capital spending for 1998 is expected to
come in at the low end of the $175 to $200 million range. In addition to cash
flow from operations, the Company has more than adequate financing arrangements
to conduct its operations.
During the first nine months of 1998, total debt increased $62.5 million to
$510.2 million from year end 1997. During the fourth quarter of 1996, the
Company registered with the Securities and Exchange Commission, $150 million in
principal amount of medium-term notes, of which $60 million in notes had been
issued as of year end 1997. No notes were issued for the first nine months of
1998. Proceeds from the medium-term notes have been used to reduce debt and for
other general corporate purposes.
13
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION (CONTINUED)
- -------------------------------
Shareholders' equity increased to $861 million from $837.2 million at year end
1997. During the third quarter of 1998, the Company purchased approximately .5
million shares of common stock at a cost of $24.9 million. For the first nine
months of 1998, the Company purchased 2.3 million shares of common stock at a
cost of $116.7 million. The market value of shares held in the employee stock
benefit trusts, after the issuance of shares under the Company's stock and
incentive plans, increased by $62.7 million to $793 million from year end. Total
debt to total capital was 37.2 percent as of the end of third quarter 1998 and
34.8 percent at year end 1997. Dividends paid for the first nine months of 1998
totaled $74 million compared to $61.7 million a year ago.
FUTURE ACCOUNTING REQUIREMENTS
- ------------------------------
In June 1997, the Financial Accounting Standards Board (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 standard will be effective
for the 1998 fiscal year. Abbreviated quarterly disclosure will be required
beginning first quarter of 1999, and will include 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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives will be recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
new rules will be effective the first quarter of 2000. The Company is in the
process of determining the impact of this new standard and anticipates that it
will not have a material impact on the Company's financial results when
effective.
YEAR 2000
- ---------
The Year 2000 (Y2K) issue is the result of computer programs being written for,
or microprocessors using, two digits (rather than four) to define the applicable
year. Company computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000, which could result
in system failures or miscalculations. The Company is currently working to
mitigate the Y2K issue and has established processes for assessing the risks and
associated costs.
14
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
YEAR 2000 (CONTINUED)
- ---------------------
The Company categorizes its Y2K efforts as follows: hardware, software, embedded
processors, vendors and customers. Progress in assessing and remediating
information technology systems (hardware and software) and non-information
technology systems (embedded processors) will be tracked in phases including
assessment, identification of non-compliant systems, remediation, testing and
verification. Hardware, software and embedded processors have been assessed and
remediation is in progress. The Company's Y2K projects are progressing and the
Company expects that a large portion of its internal remediation work will be
completed by year end 1998. The Company is using internal and external resources
to remediate and test its systems.
The Company has initiated communications with significant vendors and customers
to coordinate the Y2K issue, and is in the process of determining the Company's
vulnerability if these companies fail to remediate their Y2K issues. There can
be no guarantee that the systems of other companies will be timely remediated,
or that other companies' failure to remediate Y2K issues would not have a
material adverse effect on the Company. The Company intends to develop
contingency plans to mitigate risks associated with the Y2K issue.
Costs incurred to date in addressing the Y2K issue have not been significant and
are being funded through operating cash flows. Based on current information,
costs to remediate and test the Company's systems are not expected to be
material.
The Company presently believes that with remediation, Y2K risks can be
mitigated. However, although the Company is not currently aware of any material
internal operational or financial Y2K related issues, the Company cannot provide
assurances that the computer systems, products, services or other systems upon
which the Company depends will be Y2K ready on schedule, that the costs of its
Y2K program will not become material or that the Company's contingency plans
will be adequate. The Company is currently unable to evaluate accurately the
magnitude, if any, of the Y2K related issues arising from the Company's vendors
and customers. If any such risks (either with respect to the Company or its
vendors or customers) materialize, the Company could experience serious
consequences to its business which could have material adverse effects on the
Company's financial condition, results of operations and liquidity.
EURO CONVERSION
- ---------------
On January 1, 1999, a single currency called the euro will be introduced in
Europe. Eleven of the fifteen member countries of the European Union have agreed
to adopt the euro as their common legal currency on that date. Fixed conversion
rates between these countries' existing currencies (legacy currencies) and the
euro will be established as of that date. The legacy currencies are scheduled to
remain legal tender in these participating countries between January 1, 1999 and
January 1, 2002 (not later than July 1, 2002). During this transition period,
parties may settle transactions using either the euro or a participating
country's legacy currency.
15
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
EURO CONVERSION (CONTINUED)
- ---------------------------
The Company has established a steering committee to plan for and determine the
impact of the euro conversion. The Company expects that its facilities that will
be affected by the conversion will be able to do business in the euro beginning
January 1999. The Company does not expect the cost of system modifications to be
material.
Based on currently available information, management does not believe that the
euro conversion will have a material adverse impact on the Company's business or
financial condition. The Company will continue to evaluate the impact of the
euro conversion.
FUTURE GROWTH AND OUTLOOK
- -------------------------
On October 6, 1998, the Company acquired Spartan International, Inc., a
privately held specialty converting operation based in Holt, Michigan. Spartan
International, Inc. supplies pressure-sensitive products to the commercial
graphics, sign making, vehicle marking and automotive markets.
On October 26, 1998, the Company signed a definitive agreement with Steinbeis
Holding GmbH to combine Avery Dennison's office products businesses in Europe
with Zweckform Buro-Produckte GmbH (Zweckform), a German office products
supplier. Zweckform produces labels, films and specialty papers for use with
personal computers, desktop printers and copiers. Zweckform products had sales
of approximately $120 million in 1997. The transaction is expected to close in
the first quarter of 1999, pending regulatory approvals and due diligence.
The Company expects 1998 to be another successful year. However, the Company
sees an uncertain economic environment impacting many of our customers which
could affect sales. As a result, the Company is intensifying efforts to reduce
manufacturing and operating expenses and improve productivity throughout all of
its businesses. At the same time, the Company intends to continue to pursue
long-term growth opportunities in its key markets.
SAFE HARBOR STATEMENT
- ---------------------
Except for historical information contained herein, the matters discussed in the
Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this Form 10-Q contain "forward-looking
statements" within the meaning of the Private Securities Reform Act of 1995.
These statements, which are not statements of historical fact, may contain
estimates, assumptions, projections and/or expectations regarding future events.
Such forward-looking statements, and financial or other business targets, are
subject to certain risks and uncertainties which could cause actual results to
differ materially from any future results, performance or achievements of the
Company expressed or implied by such forward-looking statements. Certain of such
risks and uncertainties are discussed in more detail in the Company's Annual
Report on Form 10-K for the year ended December 27, 1997 and include, but are
not limited to, risks and uncertainties relating to investment in new production
facilities, timely development and successful marketing of new products, impact
of competitive products and pricing, customer and supplier and manufacturing
concentrations, changes in customer order patterns and inventory levels,
increased competition, impact of Year 2000 issues and the euro conversion,
litigation risks, fluctuations in foreign exchange rates or other risks
associated with foreign operations, changes in economic or political conditions,
and other factors.
16
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SAFE HARBOR STATEMENT (CONTINUED)
- ---------------------------------
Any forward looking statements should also be considered in light of the factors
detailed in Exhibit 99 in the Company's Annual Report on Form 10-K for the year
ended December 27, 1997.
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.
17
<PAGE>
PART II. OTHER INFORMATION
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
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 27, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
a. Exhibits 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 26, 1998.
18
<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 6, 1998
19
<PAGE>
EXHIBIT 12
AVERY DENNISON CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------- ----------------------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Earnings:
Income before taxes $83.3 $78.2 $252.4 $228.6
Add: Fixed charges* 12.7 12.3 38.9 38.7
Amortization of capitalized interest .4 .4 1.1 1.0
Less: Capitalized interest (.3) (.5) (2.6) (1.8)
------------------ ------------------ ------------------ -----------------
$96.1 $90.4 $289.8 $266.5
================== ================== ================== ==================
*Fixed charges:
Interest expense $ 8.7 $ 8.0 $ 25.3 $ 25.3
Capitalized interest .3 .5 2.6 1.8
Amortization of debt issuance costs .1 .1 .3 .4
Interest portion of leases 3.6 3.7 10.7 11.2
------------------ ------------------ ------------------ -----------------
$12.7 $12.3 $ 38.9 $ 38.7
================== ================== ================== =================
Ratio of Earnings to Fixed Charges 7.6 7.3 7.4 6.9
================== ================== ================== ==================
</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.
<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> JAN-02-1999
<PERIOD-START> DEC-28-1997
<PERIOD-END> SEP-26-1998
<CASH> 4,900
<SECURITIES> 0
<RECEIVABLES> 515,300<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 231,900
<CURRENT-ASSETS> 855,700
<PP&E> 1,869,100
<DEPRECIATION> 868,300
<TOTAL-ASSETS> 2,134,700
<CURRENT-LIABILITIES> 618,900
<BONDS> 471,100
0
0
<COMMON> 124,100
<OTHER-SE> 736,900
<TOTAL-LIABILITY-AND-EQUITY> 2,134,700
<SALES> 2,575,300
<TOTAL-REVENUES> 2,575,300
<CGS> 1,722,600
<TOTAL-COSTS> 1,722,600
<OTHER-EXPENSES> 575,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,300
<INCOME-PRETAX> 252,400
<INCOME-TAX> 85,000
<INCOME-CONTINUING> 167,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 167,400
<EPS-PRIMARY> 1.64<F2>
<EPS-DILUTED> 1.60
<FN>
<F1>ACCOUNTS RECEIVABLE ARE SHOWN NET OF ANY ALLOWANCES.
<F2>REPRESENTS EPS BASIC
</FN>
</TABLE>
