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 June 29, 1996
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 incorporation (I.R.S. employer
or organization) identification no.)
150 NORTH ORANGE GROVE BOULEVARD, PASADENA, CALIFORNIA 91103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (818) 304-2000
Indicate by a check [X] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes [X] No _____
-----
Number of shares of $1 par value common stock outstanding as of July 26,
1996: 52,448,787
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
INDEX TO FORM 10-Q
------------------
Page No.
--------
Part I. Financial Information (Unaudited):
Financial Statements:
Condensed Consolidated Balance Sheet
June 29, 1996 and December 30, 1995 3
Consolidated Statement of Income
Three and Six Months Ended June 29, 1996 and July 1, 1995 4
Condensed Consolidated Statement of Cash Flows
Six Months Ended June 29, 1996 and July 1, 1995 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information:
Exhibits and Reports on Form 8-K 11
Signatures 12
2
PART I. FINANCIAL INFORMATION
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
June 29, 1996 December 30, 1995
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 5.1 $ 27.0
Trade accounts receivable, net 451.7 444.1
Inventories, net 230.4 223.2
Prepaid expenses 21.9 21.9
Other current assets 75.3 83.9
-------- --------
Total current assets 784.4 800.1
Property, plant and equipment, at cost 1,686.1 1,652.1
Accumulated depreciation (770.0) (744.7)
-------- --------
916.1 907.4
Intangibles resulting from business acquisitions, net 121.3 124.3
Other assets 138.4 131.8
-------- --------
$1,960.2 $1,963.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 111.6 $ 115.4
Accounts payable 147.8 169.9
Accrued liabilities 329.2 387.2
-------- --------
Total current liabilities 588.6 672.5
Long-term debt 404.6 334.0
Deferred taxes and other long-term liabilities 151.6 141.3
Shareholders' equity:
Common stock - $1 par value:
Authorized - 200,000,000 shares; Issued - 62,063,312
shares at June 29, 1996 and December 30, 1995 62.1 62.1
Capital in excess of par value 189.5 191.6
Retained earnings 887.8 837.8
Cumulative foreign currency translation adjustment 29.3 33.8
Cost of unallocated ESOP shares (27.0) (27.0)
Minimum pension liability (2.6) (2.6)
Treasury stock at cost, 9,474,274 shares at June 29,
1996 and 9,003,763 shares at December 30, 1995 (323.7) (279.9)
-------- --------
Total shareholders' equity 815.4 815.8
-------- --------
$1,960.2 $1,963.6
======== ========
See Notes to Consolidated Financial Statements
3
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
---------------------------- --------------------------------
June 29, 1996 July 1, 1995 June 29, 1996 July 1, 1995
------------- ------------ ------------- ------------
Net Sales $797.7 $780.5 $1,594.3 $1,553.7
Cost of products sold 549.3 541.5 1,099.2 1,069.9
------ ------ -------- --------
Gross profit 248.4 239.0 495.1 483.8
Marketing, general and
administrative expense 174.9 172.3 350.2 352.3
Interest expense 9.4 11.7 18.3 21.7
------ ------ -------- --------
Income before taxes 64.1 55.0 126.6 109.8
Taxes on income 22.5 19.3 45.0 39.6
------ ------ -------- --------
Net income $ 41.6 $ 35.7 $ 81.6 $ 70.2
====== ====== ======== ========
Weighted average number of
common shares outstanding 52.7 53.2 52.8 53.3
====== ====== ======== ========
PER COMMON SHARE AMOUNTS:
Net income $ 0.79 $ 0.67 $ 1.55 $ 1.32
====== ====== ======== ========
Dividends $ 0.30 $ 0.27 $ 0.60 $ 0.54
====== ====== ======== ========
See Notes to Consolidated Financial Statements
4
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
Six Months Ended
-----------------------------
June 29, 1996 July 1, 1995
------------- ------------
OPERATING ACTIVITIES:
- --------------------
Net income $ 81.6 $ 70.2
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 49.8 45.5
Amortization 5.6 6.5
Deferred taxes 10.5 5.7
Net change in assets and liabilities, net of the effect of
foreign currency translation and business divestitures (88.1) (75.7)
------ ------
Net cash provided by operating activities 59.4 52.2
------ ------
INVESTING ACTIVITIES:
- --------------------
Purchase of property, plant and equipment (73.9) (75.1)
Proceeds from sale of assets and business divestitures 3.8 0.2
Other (1.0) (9.6)
------ ------
Net cash used in investing activities (71.1) (84.5)
------ ------
FINANCING ACTIVITIES:
- --------------------
Net decrease in short-term debt (3.3) (20.9)
Net increase in long-term debt 70.6 103.4
Dividends paid (31.7) (28.8)
Purchase of treasury stock (50.1) (23.0)
Other 4.3 1.1
------ ------
Net cash (used in) provided by financing activities (10.2) 31.8
------ ------
Effect of foreign currency translation on cash balances -- 0.1
------ ------
Decrease in cash and cash equivalents (21.9) (0.4)
------ ------
Cash and cash equivalents, beginning of period 27.0 3.1
------ ------
Cash and cash equivalents, end of period $ 5.1 $ 2.7
====== ======
See Notes to Consolidated Financial Statements
5
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The accompanying unaudited consolidated financial statements include normal
recurring adjustments necessary for a fair presentation of the Company's interim
results. Certain prior year amounts have been reclassified to conform with
current year presentation. The condensed financial statements and notes in this
Form 10-Q are presented as permitted by Regulation S-X, and as such, they do not
contain certain information included in the Company's 1995 annual financial
statements and notes.
The second quarters of 1996 and 1995 consisted of thirteen-week periods ending
June 29, 1996 and July 1, 1995, 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
for our Brazilian subsidiaries which operate in a hyperinflationary economy
during the three and six months ended June 29, 1996 and July 1, 1995 resulted in
losses of $.6 million and $1.2 million, respectively, during 1996, and losses of
$.3 million and $.7 million, respectively, during 1995.
3. INVENTORIES
Inventories consisted of (in millions):
June 29, 1996 December 30, 1995
------------- -----------------
Raw materials $ 79.0 $ 78.5
Work in progress 64.1 72.4
Finished goods 123.6 109.6
LIFO adjustment (36.3) (37.3)
------ ------
$230.4 $223.2
====== ======
4. INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
Accumulated amortization of intangible assets at June 29, 1996 and December 30,
1995 was $42.4 and $40.3 million, respectively.
5. RESEARCH AND DEVELOPMENT
Research and development expense for the three and six months ended June 29,
1996 and July 1, 1995 was $13.2 million and $26.5 million, respectively, during
1996 and $13.4 million and $25.7 million, respectively during 1995.
6
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. 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 15 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 financial
position of the Company.
The Company and its subsidiaries are involved in various other lawsuits, claims
and inquiries, most of which are routine to the nature of the business. In the
opinion of management, the resolution of these matters will not materially
affect the financial position, results of operations or liquidity of the
Company.
7. NEW ACCOUNTING STANDARDS
During the first quarter of 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 121 on accounting for the impairment of long-
lived assets and certain identifiable intangibles to be disposed of. SFAS No.
121 establishes guidance for recognizing and measuring impairment losses. If it
is determined the carrying amount of an asset is not recoverable, the Company is
required to recognize an impairment loss. The Company's implementation of the
new standard had no effect on the 1996 financial statements.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". The standard encourages a fair value
based method of accounting for an employee stock option or similar equity
instrument, but allows continued use of the intrinsic value based method of
accounting prescribed by Accounting Principles Board (APB) No. 25, "Accounting
for Stock Issued to Employees". The Company will continue to follow the
provisions set forth in APB No. 25 and will therefore make the pro forma
disclosures that will be required by SFAS No. 123 in its financial statements
for the year ended December 28, 1996.
7
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 $797.7 million, a 2.2 percent increase over second
quarter 1995 sales of $780.5 million. Excluding the impact of sales from the
divested label converting businesses and changes in foreign currency rates,
sales increased 6.2 percent.
The gross profit margin for the quarter was 31.1 percent compared to 30.6
percent for the second quarter of 1995. The improvement was primarily due to
cost reduction and control programs, and increased capacity utilization.
Marketing, general and administrative expense, as a percent of sales, was 21.9
percent compared to 22.1 percent for the second quarter of 1995. The improvement
was the result of increased sales and cost reduction actions taken in the
current and previous years.
Interest expense, as a percent of sales, was 1.2 percent for the second quarter
of 1996 compared to 1.5 percent for the second quarter of 1995. The decrease was
due primarily to the expiration of interest rate swap agreements during the
fourth quarter of 1995.
As a result of the above, income before taxes, as a percent of sales, increased
to 8 percent for the quarter as compared to 7 percent for the second quarter of
1995. The effective tax rate was 35.1 percent for both quarters.
Net income increased 17 percent to $41.6 million compared to $35.7 million in
the second quarter of 1995. Earnings per share for the quarter reached $.79
compared to $.67 in the same period last year, an 18 percent increase.
Results of Operations by Business Sector
The pressure-sensitive adhesives and materials sector reported increased sales
and profitability for the second quarter of 1996 compared to the same period
last year. The U.S. operations reported increased sales primarily from increased
unit volume and new products. Profitability also improved primarily due to raw
material cost reductions and increased capacity utilization. The international
businesses reported increased sales from geographic expansion and volume growth.
Profitability improved primarily due to sales growth, but was partially offset
by costs related to continued investments in geographic expansion.
The office products sector reported increased sales and profitability for the
quarter. Increased sales in the U.S. operations were led by sales growth for
Avery-brand labels and indexes. Profitability improved as a result of new
products, improved logistics, and restructuring actions. The international
office products businesses reported higher sales due to geographic expansion and
growth in its label businesses; however, this increase in sales was partially
offset by the Company's French operations. Profitability for these international
businesses declined primarily due to lower sales in France and start-up costs
related to geographic expansion.
8
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The converted products sector reported increased sales while profitability
declined due to the softness in the U.S. and Europe retail markets and costs
associated with investments in new products. The U.S. operations reported
increased sales due to the growth in its stamp and battery label businesses.
Lower volume in the retail markets had a negative impact on profitability for
the U.S. businesses. A general slowdown in certain markets served resulted in
lower sales and profitability for the European converting businesses.
RESULTS OF OPERATIONS: SIX MONTHS YEAR-TO-DATE
- ----------------------------------------------
Sales for the first six months of 1996 were up 2.6 percent to $1.59 billion
compared to the corresponding period of 1995. Excluding the impact of sales from
the divested label converting businesses and changes in foreign currency rates,
sales increased 5.5 percent.
The gross profit margin for the first six months was 31.1 percent for both
periods. Marketing, general and administrative expense, as a percent of sales,
declined to 22 percent for the first six months of 1996 compared to 22.7 percent
for the first six months of 1995. The decrease was primarily attributable to
cost control and cost reduction programs.
Interest expense, as a percent of sales, was 1.1 percent for the year compared
to 1.4 percent during the corresponding period of the prior year. The decrease
was primarily due to the expiration of interest rate swap agreements during the
fourth quarter of 1995.
Income before taxes, as a percent of sales, was 7.9 percent for the first six
months of 1996 compared to 7.1 percent for 1995. The increase was primarily due
to lower operating and interest expenses as a percent of sales. The year-to-date
effective tax rate was 35.5 percent for 1996 and 36.1 percent for 1995. The
decrease reflects recognition of benefits from tax loss carryforwards in Europe.
Net income was $81.6 million for the first six months of 1996 compared to $70.2
million for the first six months of 1995. Earnings per share increased 17
percent to $1.55 for the first six months of 1996 compared to $1.32 for the same
period last year.
Results of Operations by Business Sector
The pressure-sensitive adhesives and materials sector reported increased sales
for the first six months of 1996 compared to the same period last year.
Excluding the impact of significant geographic and capacity expansions, sector
profitability improved over the prior year. The U.S. operations reported sales
growth for the period primarily due to increased unit volume and new products.
Raw material cost reductions and increased capacity utilization were more than
offset by costs associated with investments in capacity capabilities and new
products which impacted profitability. The international businesses reported
increased sales primarily due to geographic expansion and volume growth.
Profitability improved at the international businesses due to increased sales
volume, but was partially offset by costs related to continued investments in
geographic expansion.
9
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The office products sector reported sales and profitability growth for the first
six months of 1996 compared to the prior year. The U.S. operations reported
increased sales and profitability. The U.S. operations were led by sales growth
for Avery-brand labels and indexes, while profitability improved as a result of
improved logistics, restructuring actions, and new products. The international
office products businesses reported higher sales due to geographic expansion and
growth in its label businesses; however, this increase in sales was partially
offset by the Company's French operations. Profitability for these international
businesses declined primarily due to lower sales in France and start-up costs
related to geographic expansion.
The converted products sector reported increased sales and profitability for the
first six months of 1996 compared to 1995. The U.S. operations reported
increased sales due to the growth in its stamp and battery label businesses.
Profitability also improved modestly primarily due to increased sales volume and
operating improvements at the Company's stamp operations, which was partially
offset by the softness in retail markets. Sales and profitability for the first
six months of 1996 increased at the international converting businesses due to
new products and product pruning.
FINANCIAL CONDITION
- -------------------
Total debt increased $66.8 million to $516.2 million from year end 1995 as a
result of increased working capital needed to fund the Company's sales growth
and stock repurchases. Total debt to total capital was 38.8 percent as of the
end of the second quarter of 1996 and 35.5 percent at year end 1995.
Average working capital, excluding short-term debt, as a percentage of sales,
remained consistent at 10.9 percent for the quarter from 10.8 percent a year
ago. Average inventory turnover for the quarter ended June 29, 1996 was 9.5
compared to 8.2 in the corresponding period of the prior year; the average
number of days sales outstanding in accounts receivable was 56 days compared to
57 days a year ago.
Capital spending for the quarter was $35.6 million compared to $38.4 million a
year ago. For the six months, capital spending totaled $73.9 million compared to
$75.1 million a year ago. Total capital spending for 1996 is expected to be
approximately $190 to $200 million which is comparable to last year.
Net cash flows provided by operating activities totaled $59.4 for the first six
months of 1996 and $52.2 million for the first half of 1995. In addition to cash
flows from operations, the Company has more than adequate financing arrangements
to conduct its operations.
Shareholders' equity was $815.4 million and $815.8 million at June 1996 and year
end 1995, respectively. During the second quarter of 1996, the Company purchased
439,000 shares of common stock at a cost of $25 million. For the first six
months of 1996, the Company purchased 913,000 shares of common stock at a cost
of $50.1 million. The cost of treasury stock held, net of shares reissued under
the Company's stock and incentive plans, increased to $323.7 million from $279.9
million at year end 1995.
10
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
27 Financial Data Schedule
b. Reports on Form 8-K: There were no reports on Form 8-K filed for the three
months ended June 29, 1996.
11
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AVERY DENNISON CORPORATION
--------------------------
(Registrant)
/s/ R. Gregory Jenkins
-----------------------------------
R. Gregory Jenkins
Senior Vice President, Finance, and
Chief Financial Officer
(Principal Financial Officer)
/s/ Thomas E. Miller
-----------------------------------
Thomas E. Miller
Vice President and Controller
(Chief Accounting Officer)
August 12, 1996
12
AVERY DENNISON CORPORATION
COMPUTATION OF NET INCOME PER SHARE AMOUNTS
Three Months Ended Six Months Ended
----------------------------- --------------------------------
June 29, 1996 July 1, 1995 June 29, 1996 July 1, 1995
------------- ------------ ------------- ------------
(A) Weighted average number of common
shares outstanding 52,705,562 53,220,848 52,808,644 53,336,086
Additional common shares issuable under
employee stock options using the
treasury stock method 1,304,217 1,033,351 1,372,150 1,058,056
----------- ----------- ----------- -----------
(B) Weighted average number of common
shares outstanding assuming the exercise
of stock options 54,009,779 54,254,199 54,180,794 54,394,142
=========== =========== =========== ===========
(C) Net income applicable to common stock $41,648,000 $35,688,000 $81,640,000 $70,200,000
=========== =========== =========== ===========
Net income per share as reported (C / A) $0.79 $0.67 $1.55 $1.32
===== ===== ===== =====
Net income per share giving effect to the
exercise of outstanding stock options (C / B) $0.77 $0.66 $1.51 $1.29
===== ===== ===== =====
Exhibit 11
5
6-MOS
DEC-28-1996
DEC-31-1995
JUN-29-1996
5,100
0
451,700
0
230,400
784,400
1,686,100
770,000
1,960,200
588,600
404,600
0
0
62,100
753,300
1,960,200
1,594,300
1,594,300
1,099,200
1,099,200
350,200
0
18,300
126,600
45,000
81,600
0
0
0
81,600
1.55
0
Accounts receivable are shown net of any allowances.
