<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 July 1, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 1-7685
AVERY DENNISON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-1492269
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
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 July 28,
2000: 111,538,800
<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 1, 2000 and January 1, 2000 3
Consolidated Statement of Income
Three and Six Months Ended July 1, 2000 and July 3, 1999 4
Condensed Consolidated Statement of Cash Flows
Six Months Ended July 1, 2000 and July 3, 1999 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations and
Financial Condition 12
Quantitative and Qualitative Disclosures About Market Risk 19
Part II. Other Information:
Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
<PAGE>
PART I. ITEM 1. FINANCIAL INFORMATION
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
July 1, 2000 January 1, 2000
------------ ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6.4 $ 6.9
Trade accounts receivable, net 610.8 542.4
Inventories, net 308.0 279.8
Prepaid expenses 25.6 23.7
Deferred tax assets 76.6 79.4
Other current assets 26.8 23.8
---------- ----------
Total current assets 1,054.2 956.0
Property, plant and equipment, at cost 1,970.4 1,934.7
Accumulated depreciation 913.5 891.2
---------- ----------
1,056.9 1,043.5
Intangibles resulting from business acquisitions, net 415.4 397.0
Other assets 205.6 196.0
---------- ----------
$ 2,732.1 $ 2,592.5
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 43.9 $ 68.2
Accounts payable 363.0 316.8
Other current liabilities 429.4 465.4
---------- ----------
Total current liabilities 836.3 850.4
Long-term debt 739.1 617.5
Deferred taxes and other long-term liabilities 241.0 231.4
Long-term obligation 77.4 83.3
Shareholders' equity:
Common stock - $1 par value authorized - 400,000,000 shares;
issued - 124,126,624 shares at July 1, 2000 and
January 1, 2000 124.1 124.1
Capital in excess of par value 857.8 962.3
Retained earnings 1,370.9 1,288.5
Cost of unallocated ESOP shares (16.8) (16.8)
Employee stock benefit trusts, 13,164,687 shares at
July 1, 2000 and 13,914,515 shares at January 1, 2000 (882.8) (1,014.0)
Treasury stock at cost, 12,268,824 shares at July 1, 2000
and 11,453,728 shares at January 1, 2000 (534.0) (481.3)
Accumulated other comprehensive loss (80.9) (52.9)
---------- ----------
Total shareholders' equity 838.3 809.9
---------- ----------
$ 2,732.1 $ 2,592.5
=========== ==========
</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 Six Months Ended
July 1, 2000 July 3, 1999 July 1, 2000 July 3, 1999
------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Net sales $ 993.4 $ 928.5 $ 1,958.7 $ 1,862.4
Cost of products sold 649.7 614.3 1,280.9 1,236.3
------------------- ------------------ ------------------ -------------------
Gross profit 343.7 314.2 677.8 626.1
Marketing, general and
administrative expense 218.7 207.3 432.9 415.6
Restructuring charge - - - 65.0
Interest expense 14.6 9.2 26.9 19.6
------------------- ------------------ ------------------ -------------------
Income before taxes 110.4 97.7 218.0 125.9
Taxes on income 37.6 34.0 75.0 43.8
------------------- ------------------ ------------------ -------------------
Net income $ 72.8 $ 63.7 $ 143.0 $ 82.1
=================== ================== ================== ===================
PER SHARE AMOUNTS:
Net income per common share $ .74 $ .64 $ 1.45 $ .83
Net income per common share, .73 .81
assuming dilution .63 1.42
Dividends .27 .24 .54 .48
AVERAGE SHARES OUTSTANDING:
Common shares 98.7 99.4 98.8 99.4
Common shares, assuming dilution 100.4 101.7 100.6 101.6
</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 1, 2000 July 3, 1999
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 143.0 $ 82.1
Adjustments to reconcile net income to net cash provided
by operating activities:
Restructuring charge - 65.0
Depreciation 63.5 62.8
Amortization 15.1 9.6
Deferred taxes 3.7 (13.2)
Changes in assets and liabilities, net of the effect of
foreign currency translation, business divestitures,
acquisitions and restructuring charge (54.9) (23.6)
--------- ---------
Net cash provided by operating activities 170.4 182.7
--------- ---------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (77.3) (58.6)
Payments for acquisitions, net of divestitures (76.9) (32.5)
Other (13.6) 1.3
--------- ---------
Net cash used in investing activities (167.8) (89.8)
--------- ---------
FINANCING ACTIVITIES:
Net increase in short-term debt 100.6 4.0
Net decrease in long-term debt (1.5) (.3)
Dividends paid (60.6) (54.7)
Purchase of treasury stock (52.7) (65.6)
Proceeds from exercise of stock options 13.0 11.9
Other (1.6) -
--------- ---------
Net cash used in financing activities (2.8) (104.7)
--------- ---------
Effect of foreign currency translation on cash balances (.3) (.4)
--------- ---------
Decrease in cash and cash equivalents (.5) (12.2)
--------- ---------
Cash and cash equivalents, beginning of period 6.9 18.5
--------- ---------
Cash and cash equivalents, end of period $ 6.4 $ 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 1999 annual financial statements and
notes. This Form 10-Q should be read in conjunction with the Company's
consolidated financial statements and notes included in the Company's
1999 Annual Report on Form 10-K.
The second quarters of 2000 and 1999 consisted of thirteen-week periods
ending July 1, 2000 and July 3, 1999, respectively. The interim results of
operations are not necessarily indicative of future financial results.
2. RESTRUCTURING
In the first quarter of 1999, the Company announced a major realignment of
its cost structure designed to increase operating efficiencies and improve
profitability. The realignment resulted in a pretax restructuring charge
of $65 million, or $.42 per diluted share on an after-tax basis.
The restructuring involves the consolidation of manufacturing and
distribution capacity in both of the Company's operating segments. The $65
million charge reflects the costs to close manufacturing and distribution
facilities, the elimination of approximately 1,500 positions (principally
in manufacturing), and other initiatives to exit activities.
The significant components of the restructuring charge and the remaining
balance as of July 1, 2000 (included within "Other current liabilities")
were as follows:
<TABLE>
<CAPTION>
Amounts
(In millions) Charge Utilized Balance
------ --------- ---------
<S> <C> <C> <C>
Severance and related costs $ 35.1 $ 27.7 $ 7.4
Asset write-downs 29.9 26.1 3.8
------ ------- --------
$ 65.0 $ 53.8 $ 11.2
====== ======= ========
</TABLE>
Severance and related costs represent cash paid or to be paid to employees
being terminated under the program. Asset write-downs identified as part
of the restructuring program, principally related to equipment, represent
non-cash charges required to reduce the carrying value of the assets to be
disposed of to net realizable value as of the planned date of disposal.
Seven plant closures had been initiated, six of which had been completed,
by the end of the second quarter 2000 and approximately 1,160 employees
had left the Company. The Company expects to complete the restructuring
program in 2000.
6
<PAGE>
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. NET INCOME PER SHARE
Net income per common share amounts were computed as follows:
<TABLE>
<CAPTION>
(In millions, except per share amounts)
Three Months Ended Six Months Ended
------------------------------- ------------------------------
July 1, 2000 July 3, 1999 July 1, 2000 July 3, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(A) Net income available to common
shareholders $ 72.8 $ 63.7 $ 143.0 $ 82.1
========== =========== =========== =============
(B) Weighted average number of
common shares outstanding 98.7 99.4 98.8 99.4
Additional common shares issuable
under employee stock options using
the treasury stock method 1.7 2.3 1.8 2.2
----------- ----------- ----------- -------------
(C) Weighted average number of
common shares outstanding
assuming the exercise of stock
options 100.4 101.7 100.6 101.6
========== =========== =========== =============
Net income per common share (A) / (B) $ .74 $ .64 $ 1.45 $ .83
========== =========== =========== =============
Net income per common share, assuming
dilution (A) / (C) $ .73 $ .63 $ 1.42 $ .81
========== =========== =========== =============
</TABLE>
4. COMPREHENSIVE INCOME
Comprehensive income includes net income and foreign currency translation
adjustments that are currently presented as a component of shareholders'
equity. The Company's total comprehensive income for the three and six
months ended July 1, 2000 was $52.9 million and $115 million,
respectively. For the three and six months ended July 3, 1999 total
comprehensive income was $53.6 million and $47.2 million, respectively.
5. FOREIGN CURRENCY TRANSLATION
Transactions in foreign currencies and translation of financial statements
of subsidiaries operating in hyperinflationary economies during 2000
resulted in losses of $1.1 million and $1.2 million, respectively, during
the three and six months ended July 1, 2000. For the three and six months
ended July 3, 1999, the Company recorded a loss of $1.1 million.
Operations in hyperinflationary economies consist of the Company's
operations in Turkey.
7
<PAGE>
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. FINANCIAL INSTRUMENTS
The Company enters into foreign exchange forward, option and swap
contracts and interest rate contracts to manage exposure to fluctuations
in foreign currency exchange and interest rates. The Company does not hold
or purchase any foreign currency or interest rate contracts for trading
purposes.
Foreign exchange forward, option and swap contracts that hedge existing
assets, liabilities or firm commitments are measured at fair value and the
related gains and losses on these contracts are recognized in net income
currently. Foreign exchange forward and option contracts that hedge
forecasted transactions are measured at fair value, and the related gains
and losses on these contracts are deferred and subsequently recognized in
net income in the period in which the underlying transaction is
consummated. In the event that an anticipated transaction is no longer
likely to occur, the Company recognizes the change in fair value of the
instrument in net income currently.
Gains and losses resulting from foreign exchange forward, option and swap
contracts are recorded in the same category as the related item being
hedged. Cash flows from the use of financial instruments are reported in
the same category as the hedged item in the Condensed Consolidated
Statement of Cash Flows. Gains and losses on contracts used to hedge the
value of investments in certain foreign subsidiaries are included in a
component of other comprehensive income.
The net amounts paid or received on interest rate agreements are
recognized as adjustments to interest expense over the terms of the
agreements. Contract premiums paid, if any, are amortized to interest
expense over the terms of the underlying instruments.
7. INVENTORIES
Inventories consisted of (in millions):
<TABLE>
<CAPTION>
July 1, 2000 January 1, 2000
------------ ---------------
<S> <C> <C>
Raw materials $ 91.7 $ 86.2
Work-in-progress 76.1 77.0
Finished goods 165.9 144.0
LIFO adjustment (25.7) (27.4)
--------- -----------
$ 308.0 $ 279.8
========= ===========
</TABLE>
8
<PAGE>
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. BUSINESS ACQUISITIONS
During the first half of 2000, the Company acquired two companies for
approximately $80 million. The acquisitions represent additions to the
Company's materials and converting operations and were accounted for
using the purchase method of accounting. Operating results have been
included in the consolidated financial statements since acquisition,
and the assets and liabilities of the entities have been recorded using
a preliminary estimate of fair value. The excess of the purchase price
over the fair value of the net assets acquired is approximately $32
million and is being amortized over its expected useful life. These
businesses are not significant in relation to the consolidated
financial position and results of operations.
Accumulated amortization of intangible assets at July 1, 2000 and January
1, 2000 was $74.7 million and $67 million, respectively.
9. RESEARCH AND DEVELOPMENT
Research and development expense for the three and six months ended July
1, 2000 was $17.5 million and $34 million, respectively. For the three and
six months ended July 3, 1999, research and development expense was $14.9
million and $30.5 million, respectively.
10. CONTINGENCIES
The Company has been designated by the U.S. Environmental Protection
Agency (EPA) and/or other responsible state agencies as a potentially
responsible party (PRP) at 11 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.
9
<PAGE>
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. CONTINGENCIES (continued)
The Company and its subsidiaries are involved in various other lawsuits,
claims and inquiries, most of which are routine to the nature of the
business. In the opinion of management, the resolution of these matters
will not materially affect the Company.
11. SEGMENT INFORMATION
Financial information by reportable operating segment is set forth below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ -------------------------------
(In millions) July 1, 2000 July 3, 1999 July 1, 2000 July 3, 1999
------------ ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
NET SALES:
Pressure-sensitive Adhesives and Materials $ 549.8 $ 492.1 $ 1,087.2 $ 993.0
Consumer and Converted Products 480.2 471.2 940.7 936.3
Intersegment (36.6) (36.4) (69.2) (70.4)
Divested operations - 1.6 - 3.5
--------- --------- ----------- ---------
Net sales $ 993.4 $ 928.5 $ 1,958.7 $ 1,862.4
========= ========= =========== =========
INCOME (LOSS) FROM OPERATIONS BEFORE
INTEREST AND TAXES:
Pressure-sensitive Adhesives and Materials $ 57.0 $ 50.8 $ 118.0 $ 77.9
Consumer and Converted Products 74.6 64.3 140.2 87.3
Corporate administrative and research and
development expenses (6.6) (7.6) (13.3) (18.6)
Divested operations - (.6) - (1.1)
--------- --------- ----------- ---------
$ 125.0 $ 106.9 $ 244.9 $ 145.5
Interest expense (14.6) (9.2) (26.9) (19.6)
--------- --------- ----------- ---------
Income before taxes $ 110.4 $ 97.7 $ 218.0 $ 125.9
========= ========= =========== =========
</TABLE>
Results for the six months ended July 3, 1999 include a pretax
restructuring charge of $65 million. The charge was allocated as follows:
$25.1 million to the Pressure-sensitive Adhesives and Materials segment,
$37.6 million to the Consumer and Converted Products segment, and $2.3
million to Corporate. See Note 2 for additional information regarding the
Company's first quarter 1999 restructuring charge.
10
<PAGE>
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. FUTURE ACCOUNTING REQUIREMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on applying generally
accepted accounting principles to revenue recognition issues in
financial statements and will be effective the fourth quarter of 2000.
The Company is in the process of determining the impact of this
standard and anticipates that it will not have a material impact on the
Company's financial results when effective.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires that all
derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives will be recorded each
period in current earnings or other comprehensive income. The new rules
will be effective the first quarter of 2001. The Company is in the process
of determining the impact of this new standard and, based on current market
conditions, anticipates that the new rules will not have a material impact
on the Company's financial results when effective.
11
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS: FOR THE QUARTER
Quarterly sales increased to $993.4 million, a 7 percent increase over second
quarter 1999 sales of $928.5 million. Excluding the impact of currency, sales
grew 10.7 percent. Acquisitions contributed 5.2 percentage points of sales
growth.
Gross profit margin increased to 34.6 percent for the quarter compared to 33.8
percent for the second quarter of 1999. The improvement was primarily due to
manufacturing cost reductions and improved productivity.
Marketing, general and administrative expense, as a percent of sales, improved
to 22 percent compared to 22.3 percent for the second quarter of 1999.
Interest expense increased to $14.6 million for the quarter, compared to $9.2
million a year ago, primarily reflecting increased debt to fund acquisitions and
share repurchases.
Income before taxes, as a percent of sales, increased to 11.1 percent from 10.5
percent a year ago, primarily as a result of manufacturing cost reductions and
improved productivity. The effective tax rate decreased to 34.1 percent for the
quarter compared to 34.8 percent for the second quarter of 1999, primarily due
to a different geographic mix of income.
Net income increased 14.3 percent to $72.8 million compared to $63.7 million in
the second quarter of 1999. Net income per common share for the quarter was $.74
compared to $.64 in the same period last year, a 15.6 percent increase. Net
income per common share, assuming dilution, was $.73 for the second quarter of
2000 and $.63 for the second quarter of 1999, a 15.9 percent increase year over
year.
RESULTS OF OPERATIONS BY REPORTABLE OPERATING SEGMENT
Pressure-sensitive Adhesives and Materials:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
(In millions) July 1, 2000 July 3, 1999
------------ ------------
<S> <C> <C>
Net sales $ 549.8 $ 492.1
Income from operations before interest and taxes 57.0 50.8
------- -------
</TABLE>
12
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS: FOR THE QUARTER (CONTINUED)
The Pressure-sensitive Adhesives and Materials segment reported increased
sales and income for the second quarter of 2000 compared to the same period
last year. Increased sales in the U.S. operations were primarily driven by
the acquisition of Stimsonite and growth in the graphics materials business.
Domestic sales growth was negatively impacted by what the Company believes to
be a temporary slowdown for the U.S. roll materials business. This slowdown
in growth was driven primarily by two factors: packaging and graphics changes
planned by consumer product companies, which resulted in transitional
inventory reductions by the Company's converting customers; and some loss of
sales on certain price-competitive, lower margin products. The Company
expects to regain sales related to these factors by the end of the year. The
slowdown and the resulting shift in product mix in the U.S. tempered
increases achieved by international operations. Total international
operations in the segment reported increased sales, driven by strong volume
growth in Asia, Latin America and Europe, as well as the recent acquisition
of Adespan in Europe. Sales growth in Europe was partially offset by changes
in foreign currency rates. Income from international operations increased
primarily due to volume growth and improved profitability in the Asian and
Latin American businesses.
Consumer and Converted Products:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
(In millions) July 1, 2000 July 3, 1999
------------ ------------
<S> <C> <C>
Net sales $ 480.2 $ 471.2
Income from operations before interest and taxes 74.6 64.3
------- -------
</TABLE>
The Consumer and Converted Products segment reported increased sales and
income for the second quarter of 2000 compared to the same period last year.
Sales in the U.S. operations improved primarily due to sales growth for most
Avery-brand office products. Income from U.S. operations increased due to the
sales growth in the office products business and manufacturing cost
reductions and improved productivity related to the prior year's
restructuring. Both sales and income were partially impacted by decreased
volume in some of the Company's consumer packaging businesses. Total
international operations in the segment reported increased sales primarily
due to growth in the worldwide ticketing business. Solid sales growth in
Europe was offset by changes in foreign currency rates. Income for the
international operations increased due to strong volume growth and improved
profitability in the worldwide ticketing business.
RESULTS OF OPERATIONS: SIX MONTHS YEAR-TO-DATE
Sales for the first six months of 2000 increased 5.2 percent to $1.96 billion
compared to $1.86 billion in the corresponding period of 1999. Excluding the
impact of currency, sales grew 8.8 percent. Acquisitions contributed 3.5
percentage points of sales growth.
13
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS: SIX MONTHS YEAR-TO-DATE (CONTINUED)
Gross profit margin for the first six months increased to 34.6 percent compared
to 33.6 percent for the first six months of 1999. The improvement was due to
manufacturing cost reductions and improved productivity.
Marketing, general and administrative expense, as a percent of sales, for the
first six months improved to 22.1 percent compared to 22.3 percent for the first
six months of 1999.
In the first quarter of 1999, the Company announced a major realignment of its
cost structure designed to increase operating efficiencies and improve
profitability. The realignment resulted in a pretax restructuring charge of $65
million, or $.42 per diluted share on an after-tax basis, in the first quarter
of 1999. The restructuring involves the consolidation of manufacturing and
distribution capacity in both of the Company's operating segments. The $65
million charge reflects the costs to close manufacturing and distribution
facilities, the elimination of approximately 1,500 positions (principally in
manufacturing), and other initiatives to exit activities. The restructuring
charge includes severance and related costs for approximately 1,500 positions
($35.1 million), and asset write-downs ($29.9 million). Severance and related
costs represent cash paid or to be paid to employees being terminated under the
program. Asset write-downs identified as part of the restructuring program,
principally related to equipment, represent non-cash charges required to reduce
the carrying value of the assets to be disposed of to net realizable value as of
the planned date of disposal. Seven plant closures had been initiated, six of
which had been completed, by the end of the second quarter 2000 and
approximately 1,160 employees had left the Company. In addition, $27.7 million
had been paid for severance and related costs and $26.1 million had been
utilized in asset write-downs. The Company expects to complete the restructuring
program in 2000. The Company expects cumulative 2000 pretax savings in the range
of $38 million to $40 million. When fully implemented, the Company estimates
annual savings of approximately $58 million to $62 million.
Interest expense increased to $26.9 million for the first six months compared to
$19.6 million for the first six months of 1999, primarily reflecting increased
debt to fund acquisitions, capital expenditures and share repurchases.
Income before taxes, as a percent of sales, was 11.1 percent compared to 6.8
percent for 1999, reflecting the $65 million restructuring charge. Excluding the
restructuring charge, income before taxes, as a percent of sales, was 10.3
percent for the first six months of 1999. The increase reflects the benefits of
manufacturing cost reductions and improved profitability. The year-to-date
effective tax rate decreased to 34.4 percent for 2000 from 34.8 percent for 1999
primarily due to a different geographic mix of income.
Net income totaled $143 million compared to $82.1 million in the first six
months of 1999. Excluding the restructuring charge in the first quarter of 1999,
net income increased 14.9 percent from $124.5 million. Net income, as a percent
of sales, was 7.3 percent for the first six months of 2000 and 4.4 percent for
the same period last year. Excluding the restructuring charge, net income, as a
percent of sales, was 6.7 percent for the first six months of 1999.
14
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS: SIX MONTHS YEAR-TO-DATE (CONTINUED)
Net income per common share for the first six months was $1.45 compared to $.83
for the same period last year. Excluding the restructuring charge, net income
per common share for the first six months increased 16 percent from $1.25 for
the same period last year. Net income per common share, assuming dilution, was
$1.42 for the first six months of 2000 and $.81 for the first six months of
1999. Excluding the restructuring charge, net income per common share, assuming
dilution, increased 15.4 percent from $1.23 for the same period last year.
RESULTS OF OPERATIONS BY REPORTABLE OPERATING SEGMENT
<TABLE>
<CAPTION>
Pressure-sensitive Adhesives and Materials: Six Months Ended
-------------------------------------------------
(In millions) July 1, 2000 July 3, 1999
------------------------------------------------------------------- ----------------------- ------------------------
<S> <C> <C>
Net sales $ 1,087.2 $ 993.0
Income from operations before interest and taxes 118.0 77.9
------------------------------------------------------------------- ----------------------- ------------------------
</TABLE>
The Pressure-sensitive Adhesives and Materials segment reported increased
sales and income for the first six months of 2000 compared to the same period
last year. The segment's income results for the first six months of 1999
include a pretax restructuring charge of $25.1 million ($15.4 million in the
U.S. operations and $9.7 million in the international operations). Increased
sales in the U.S. operations were primarily driven by the acquisition of
Stimsonite and solid unit volume growth in the graphics materials business.
Domestic sales growth was negatively impacted by what the Company believes to
be a temporary slowdown in the U.S. roll materials business in the second
quarter. This slowdown in growth was driven primarily by two factors:
packaging and graphics changes planned by consumer product companies, which
resulted in transitional inventory reductions by the Company's converting
customers; and some loss of sales on certain price-competitive, lower margin
products. The Company expects to regain sales related to these factors by the
end of the year. The slowdown and the resulting shift in product mix in the
U.S. tempered increases achieved by international operations. Total
international operations in the segment reported increased sales and income.
Increased sales were driven by strong volume growth in Asia, Latin America
and Europe, as well as the recent acquisition of Adespan in Europe. Sales
growth in Europe was offset by changes in foreign currency rates. Income from
international operations increased compared to the first six months of 1999,
excluding the restructuring charge, primarily due to volume growth and
improved profitability in the Asian and Latin American businesses.
<TABLE>
<CAPTION>
Consumer and Converted Products: Six Months Ended
-------------------------------------------------
(In millions) July 1, 2000 July 3, 1999
------------------------------------------------------------------- ----------------------- ------------------------
<S> <C> <C>
Net sales $ 940.7 $ 936.3
Income from operations before interest and taxes 140.2 87.3
------------------------------------------------------------------- ----------------------- ------------------------
</TABLE>
15
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS: SIX MONTHS YEAR-TO-DATE (CONTINUED)
The Consumer and Converted Products segment reported increased sales and
income for the first six months of 2000 compared to the same period last
year. The segment's income results for the first six months of 1999 include a
pretax restructuring charge of $37.6 million ($24.3 million in the U.S.
operations and $13.3 million in the international operations). Increased
sales in the U.S. operations were primarily led by sales growth for most
Avery-brand office products. Income from U.S. operations increased compared to
the first six months of 1999, excluding the restructuring charge, due to the
sales growth in the office products business and manufacturing cost
reductions and improved productivity related to the prior year's
restructuring. Both sales and income were impacted by decreased volume and an
unfavorable product mix shift in the Company's consumer packaging businesses.
In the prior year, a key customer in the battery labels business made a
product mix change in its battery lines, resulting in a partial shift from
higher-priced tester labels to standard battery labels. Sales in the
international operations decreased slightly due to changes in foreign
currency rates. The impact of currency on European operations offset strong
sales growth in the Asian and Latin American businesses. Income from
international operations increased compared to the first six months of 1999,
excluding the restructuring charge, due to improved profitability in the
European office products business and growth in the worldwide ticketing
business.
FINANCIAL CONDITION
Average working capital, excluding short-term debt, as a percentage of sales,
increased to 6.6 percent for the quarter from 4.9 percent a year ago,
partially reflecting a decrease in current liabilities related to prior
year's restructuring. Average inventory turnover for the second quarter was
8.4 inventory turns compared to 9.8 inventory turns a year ago. The decrease
in inventory turns was primarily due to higher inventory levels associated
with recently acquired companies, as well as an increase in certain office
products inventories to maintain service levels as production moves to other
manufacturing facilities as a result of the restructuring. The average number
of days of sales outstanding in accounts receivable increased to 56 days
compared to 53 days a year ago, reflecting longer payment terms associated
with increased international sales and recent acquisitions.
Net cash flows provided by operating activities totaled $170.4 million for the
first six months of 2000 and $182.7 million for the first half of 1999. The
decrease in net cash flows provided by operating activities was primarily due to
an increase in working capital. In addition to cash flows from operations, the
Company has more than adequate financing arrangements, at competitive rates, to
conduct its operations.
Capital spending for the quarter was $44.5 million compared to $34.7 million a
year ago. For the first six months of 2000, capital spending totaled $77.3
million compared to $58.6 million a year ago. This increase was due to
investment in capacity to support volume growth. Total capital spending for 2000
is expected to be in the range of $180 million to $200 million.
16
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION (CONTINUED)
During the first six months of 2000, total debt increased $97.3 million to
$783 million from year end 1999. The increase in debt was primarily due to
the debt issuance to fund acquisitions, capital expenditures and share
repurchases. Total debt to total capital was 48.3 percent as of the end of
the second quarter of 2000 and 45.8 percent at year end 1999. The Company
previously registered with the Securities and Exchange Commission $150
million in principal amount of uncollateralized medium-term notes, of which
$110 million in notes had been issued as of year end 1999. No notes were
issued during the first six months of 2000. Proceeds from the medium-term
notes have been used to refinance short-term debt and for other general
corporate purposes.
On March 31, 2000, the Company acquired the Adespan pressure-sensitive materials
operation of Panini S.p.A., a European printing and publishing company based in
Italy. Adespan had sales of approximately $75 million in 1999. The Adespan
business will continue to operate as a division within the Company's Fasson roll
materials business in Europe.
On January 12, 1999, the Company completed a transaction with Steinbeis Holding
GmbH to combine substantially all of the Company's office products businesses in
Europe with Zweckform Buro-Produkte GmbH (Zweckform), a German office products
supplier. The Company's aggregate cost basis in this venture was financed
through available cash resources and the assumption of an obligation as reported
in the "Long-term obligation" line on the Condensed Consolidated Balance Sheet.
The entire obligation is scheduled to be paid in 2004.
Shareholders' equity increased to $838.3 million from $809.9 million at year
end 1999. During the second quarter of 2000, the Company purchased
approximately .4 million shares of common stock at a cost of $23.6 million.
During the first six months of 2000, the Company purchased .8 million shares
of common stock at a cost of $52.7 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, decreased by $131.2 million to $882.8
million from year end 1999. Dividends paid for the first six months of 2000
totaled $60.6 million compared to $54.7 million a year ago.
FUTURE ACCOUNTING REQUIREMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements
and will be effective the fourth quarter of 2000. The Company is in the
process of determining the impact of this standard and anticipates that it
will not have a material impact on the Company's financial results when
effective.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives will be recorded each period in
current earnings or other comprehensive income. The new rules will be
effective the first quarter of 2001. The Company is in the process of
determining the impact of this new standard and, based on current market
conditions, anticipates that the new rules will not have a material impact on
the Company's financial results when effective.
17
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SAFE HARBOR STATEMENT
Except for historical information contained herein, the matters discussed in the
Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this Form 10-Q contain "forward-looking
statements" within the meaning of the Private Securities Reform Act of 1995.
These statements, which are not statements of historical fact, may contain
estimates, assumptions, projections and/or expectations regarding future events.
Such forward-looking statements, and financial or other business targets, are
subject to certain risks and uncertainties which could cause actual results to
differ materially from any future results, performance or achievements of the
Company expressed or implied by such forward-looking statements. Certain of such
risks and uncertainties are discussed in more detail in the Company's Annual
Report on Form 10-K for the year ended January 1, 2000 and include, but are not
limited to, risks and uncertainties relating to investment in new production
facilities, timely development and successful marketing of new products, impact
of competitive products and pricing, customer and supplier and manufacturing
concentrations, changes in customer order patterns and inventory levels,
increased competition, loss of significant contract(s) or customer(s), the euro
conversion, legal proceedings, fluctuations in foreign exchange rates or other
risks associated with foreign operations, changes in economic or political
conditions, and other factors.
Any forward looking statements should be considered in light of the factors
detailed in Exhibit 99 in the Company's Annual Report on Form 10-K for the year
ended January 1, 2000.
The Company's forward-looking statements represent its judgment only on the
dates such statements were made. By making any forward-looking statements, the
Company assumes no duty to update them to reflect new, changed or unanticipated
events or circumstances.
18
<PAGE>
AVERY DENNISON CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes in the information provided in Item 7A of the
Company's Form 10-K for the fiscal year ended January 1, 2000.
19
<PAGE>
PART II. OTHER INFORMATION
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
ITEMS 1, 2, 3 AND 4. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 12: Computation of Ratio of Earnings to Fixed Charges
b. Reports on Form 8-K: There were no reports on Form 8-K filed for the three
months ended July 1, 2000.
20
<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)
August 14, 2000
21
