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 March 29, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 1-7685
AVERY DENNISON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-1492269
(State or other jurisdiction of (I.R.S. employer identification no.)
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 (818) 304-2000
Indicate by a check 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 April 25, 1997: 120,850,132
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
INDEX TO FORM 10-Q
------------------
Page No.
--------
Part I. Financial Information (Unaudited):
Financial Statements:
Condensed Consolidated Balance Sheet
March 29, 1997 and December 28, 1996 3
Consolidated Statement of Income
Quarters Ended March 29, 1997 and March 30, 1996 4
Condensed Consolidated Statement of Cash Flows
Quarters Ended March 29, 1997 and March 30, 1996 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information:
Submission of Matters to a Vote of Security Holders,
Exhibits and Reports on Form 8-K 12
Signatures 13
2
PART I. FINANCIAL INFORMATION
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
March 29, 1997 December 28, 1996
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 5.5 $ 3.8
Trade accounts receivable, net 463.3 448.5
Inventories, net 236.8 244.4
Prepaid expenses 20.9 17.8
Other current assets 85.9 90.0
-------- --------
Total current assets 812.4 804.5
Property, plant and equipment, at cost 1,738.8 1,767.9
Accumulated depreciation (797.8) (805.2)
-------- --------
941.0 962.7
Intangibles resulting from business acquisitions, net 131.7 135.9
Other assets 134.3 133.6
-------- --------
$2,019.4 $2,036.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 97.3 $ 96.2
Accounts payable 215.0 230.7
Other current liabilities 319.5 367.0
-------- --------
Total current liabilities 631.8 693.9
Long-term debt 394.6 370.7
Deferred taxes and other long-term liabilities 177.6 140.1
Shareholders' equity:
Common stock - $1 par value:
Authorized - 200,000,000 shares; Issued - 124,126,624
shares at March 29, 1997 and December 28, 1996 124.1 124.1
Capital in excess of par value 540.2 475.4
Retained earnings 973.2 945.6
Cumulative foreign currency translation adjustment 2.8 28.3
Cost of unallocated ESOP shares (29.7) (29.4)
Minimum pension liability (0.2) (0.2)
Employee stock benefit trust, 17,588,646 shares at March 29,
1997 and 17,959,358 shares at December 28, 1996 (707.9) (644.3)
Treasury stock at cost, 3,080,692 shares at March 29,
1997 and 2,551,808 shares at December 28, 1996 (87.1) (67.5)
-------- --------
Total shareholders' equity 815.4 832.0
-------- --------
$2,019.4 $2,036.7
======== ========
See Notes to Consolidated Financial Statements
3
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
(Unaudited)
Quarter Ended
-------------------------------
March 29, 1997 March 30, 1996
-------------- --------------
Net Sales $828.9 $796.6
Cost of products sold 566.0 549.9
------ ------
Gross profit 262.9 246.7
Marketing, general and administrative expense 180.3 175.3
Interest expense 8.5 8.9
------ ------
Income before taxes 74.1 62.5
Taxes on income 25.9 22.5
------ ------
Net income $ 48.2 $ 40.0
====== ======
PER SHARE AMOUNTS:
Net income per common share $ 0.47 $ 0.38
Net income per fully-diluted common share 0.45 0.37
Dividends 0.17 0.15
AVERAGE SHARES OUTSTANDING:
Common shares 103.5 105.8
Fully-diluted common shares 106.8 108.6
See Notes to Consolidated Financial Statements
4
AVERY DENNISON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
Quarter Ended
--------------------------------
March 29, 1997 March 30, 1996
-------------- --------------
OPERATING ACTIVITIES:
- --------------------
Net income $ 48.2 $ 40.0
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 26.0 24.9
Amortization 2.8 2.6
Deferred taxes 1.7 6.4
Net change in assets and liabilities, net of the effect of
foreign currency translation (42.4) (74.6)
------ ------
Net cash provided by (used in) operating activities 36.3 (0.7)
------ ------
INVESTING ACTIVITIES:
- --------------------
Purchase of property, plant and equipment (31.7) (38.3)
Proceeds from sale of assets 5.0 3.8
Other 1.5 2.4
------ ------
Net cash used in investing activities (25.2) (32.1)
------ ------
FINANCING ACTIVITIES:
- --------------------
Net increase in short-term debt 82.2 49.7
Net decrease in long-term debt (52.0) (0.1)
Dividends paid (20.7) (15.9)
Purchase of treasury stock (19.6) (25.1)
Other 0.9 2.5
------ ------
Net cash (used in) provided by financing activities (9.2) 11.1
------ ------
Effect of foreign currency translation on cash balances (0.2) --
------ ------
Increase (decrease) in cash and cash equivalents 1.7 (21.7)
------ ------
Cash and cash equivalents, beginning of period 3.8 27.0
------ ------
Cash and cash equivalents, end of period $ 5.5 $ 5.3
====== ======
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 1996 annual financial statements and notes.
The first quarters of 1997 and 1996 consisted of thirteen-week periods
ending March 29, 1997 and March 30, 1996, respectively. The interim results
of operations are not necessarily indicative of future financial results.
2. FOREIGN CURRENCY TRANSLATION
Transactions in foreign currencies and translation of financial statements
operating in hyperinflationary economies, Brazilian operations for 1997 and
1996 and Mexican operations for 1997, resulted in losses of $.6 million for
the first quarters ended 1997 and 1996.
3. INVENTORIES
Inventories consisted of (in millions):
March 29, 1997 December 28, 1996
-------------- -----------------
Raw materials $ 79.3 $ 82.7
Work-in-progress 70.5 72.4
Finished goods 120.1 123.4
LIFO adjustment (33.1) (34.1)
------ ------
$236.8 $244.4
====== ======
4. INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
Accumulated amortization of intangible assets at March 29, 1997 and
December 28, 1996 was $45.6 and $46.6 million, respectively.
5. RESEARCH AND DEVELOPMENT
Research and development expense for the first quarters of 1997 and 1996
was $14.5 million and $13.3 million, respectively.
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 17 waste disposal or waste recycling sites which are the
subject of separate investigations or proceedings concerning alleged soil
and/or groundwater contamination and for which no settlement of the
Company's liability has been agreed upon. Litigation has been initiated by
a governmental authority with respect to four 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.
7. NET INCOME PER SHARE
Net income per common share is computed by dividing net income by the
weighted-average number of common shares outstanding. Common share
equivalents outstanding were excluded from the computation as they were not
dilutive. Net income per fully-diluted common share is computed by dividing
net income by the weighted-average number of common shares and common share
equivalents outstanding. Common share equivalents include shares issuable
upon the assumed exercise of outstanding stock options.
8. SUBSEQUENT EVENTS
On April 24, 1997, the shareholders approved an amendment to the Company's
Certificate of Incorporation to increase the number of authorized common
shares which may be issued from 200 million to 400 million.
7
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share"
(EPS). The standard will require the Company to present both "basic" and
"diluted" EPS. The new requirements will be effective the fourth quarter of
1997; earlier adoption is not allowed. At the present time, the impact of
the new standard is not expected to be material.
8
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 $828.9 million, a 4.1 percent increase over first
quarter 1996 sales of $796.6 million. Excluding changes in foreign currency
rates, sales increased 5.6 percent.
The gross profit margin increased to 31.7 percent for the quarter compared to 31
percent for the first quarter of 1996. The improvement was due to new products,
a better product mix and increased capacity utilization.
Marketing, general and administrative expense, as a percent of sales, declined
to 21.8 percent from 22 percent for the first quarter of 1996 primarily due to
continued cost control.
Interest expense decreased to $8.5 million for the quarter compared to $8.9
million a year ago due to lower interest rates. Income before taxes, as a
percent of sales, increased to 8.9 percent from 7.8 percent a year ago primarily
as a result of improved gross profit margins. The effective tax rate was 35
percent for the first quarter of 1997 compared to 36 percent for the first
quarter of 1996.
Net income increased 21 percent to $48.2 million compared to $40 million in the
first quarter of 1996. Net income, as a percent of sales, increased to 5.8
percent from 5 percent a year ago. Net income per common share for the quarter
was $.47 compared to $.38 in the same period last year, a 24 percent increase.
Net income per fully-diluted common share was $.45 for the first quarter of 1997
and $.37 for the first quarter of 1996, a 22 percent increase year over year.
Results of Operations by Business Sector
- ----------------------------------------
The Pressure-sensitive adhesives and materials sector reported increased sales
and profitability for the first quarter of 1997 compared to the same period last
year. The U.S. operations reported sales and profitability growth for the
quarter led by increased sales volume in its film businesses. The international
businesses reported increased sales led by higher unit volume and geographic
expansion, which was partially offset by changes in foreign currency rates.
Profitability also increased internationally.
The Consumer and converted products sector also reported increased sales and
profitability for the quarter. Increased sales in the U.S. operations were led
by sales growth of its Avery-brand products and at its on-battery label
business. Profitability improved primarily as a result of new products, an
improved mix in business and benefits from restructuring. Sales for the
international businesses were impacted by changes in foreign currency rates and
sales declines at certain European operations. Profitability for the
international businesses declined primarily due to operations in France and
decreased sales at selected European operations due to the softness of certain
economies.
9
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
FINANCIAL CONDITION
- -------------------
Average working capital, excluding short-term debt, as a percentage of sales,
decreased to 8.4 percent from 10 percent a year ago. The decrease was primarily
due to a reduction in the average number of days sales outstanding in accounts
receivable and an increase in current liabilities. The average number of days
sales outstanding in accounts receivable declined to 51 days compared to 55 days
a year ago; average inventory turns for the first quarter of 1997 and 1996 was
9.6 turns.
Net cash flows provided by operating activities totaled $36.3 million for the
first quarter of 1997 compared to $.7 million in net cash flows used in
operating activities for the first quarter of 1996. The increase in net cash
flows provided by operating activities is primarily due to a change in working
capital requirements and the Company's improved profitability.
Capital spending for the quarter was $31.7 million compared to $38.3 million a
year ago. Total capital spending for 1997 is expected to be approximately $180
to $200 million. In addition to cash flows from operations, the Company has more
than adequate financing arrangements to conduct its operations.
During the first quarter of 1997, total debt increased $25 million to $491.9
million from year end 1996. During the fourth quarter of 1996, the Company
registered with the Securities and Exchange Commission, $150 million in
principal amount of medium-term notes. As of the end of the first quarter of
1997, no notes had been issued. Proceeds from the medium-term notes, if issued,
will be used to reduce debt and for other general corporate purposes.
Shareholders' equity decreased to $815.4 million from $832 million at year end
1996. During the first quarter of 1997, the Company purchased 529,000 shares of
common stock at a cost of $19.6 million. The value of shares held in the
employee stock benefit trust, net of shares reissued under the Company's stock
and incentive plans and adjusted for fair market value, increased during the
quarter by $63.6 million to $707.9 million from year end 1996. Total debt to
total capital was 37.6 percent as of the end of the first quarter of 1997 and
35.9 percent at year end 1996.
During the first quarter of 1997, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". The standard revised the
guidelines for recognition, measurement and disclosure of transfers and
servicing of financial assets and extinguishment of debt. The Company's
implementation of the new standard had no effect on the first quarter 1997
financial statements.
FUTURE ACCOUNTING REQUIREMENTS
- ------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" (EPS). The
standard will require the Company to present both "basic" and "diluted" EPS. The
new requirements will be effective beginning the fourth quarter of 1997; earlier
adoption is not allowed. At the present time, the impact of the new standard
is not expected to be material.
10
AVERY DENNISON CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
SAFE HARBOR STATEMENT
- ---------------------
The matters described or referred to in this Form 10-Q include forward-looking
statements regarding future events. Factors which could cause actual results to
differ materially from those projected include risks and uncertainties relating
to investment in new production facilities, timely development and successful
marketing of new products, impact of competitive products and pricing,
fluctuations in foreign exchange rates, general economic conditions, and other
factors, including those described or referred to in the Company's SEC filings,
including its Form 10-K for the year ended December 28, 1996.
11
PART II. OTHER INFORMATION
AVERY DENNISON CORPORATION
AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
The registrant held its annual stockholders' meeting on April 24, 1997. The
stockholders voted to reelect three directors to the Board of Directors as
follows:
Number of Shares Votes/1/
------------------------------
For Withheld
----------- ---------
John C. Argue 106,540,835 1,832,837
Sidney R. Petersen 106,644,745 1,828,927
John B. Slaughter 106,540,649 1,833,023
/1/There were no abstentions or shares otherwise not voted by brokers.
The result of the voting on the following additional item was as follows:
For Against Abstained Broker
Non-Votes
---------- --------- -------- ----------
Amendment to the Company's 99,423,716 8,534,978 414,978 --
Certificate of Incorporation to
increase the number of authorized
common shares from 200 million to
400 million
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
a. Exhibits: 3 Amendment to Certificate of Incorporation, filed April 10,
1984 with Office of Delaware Secretary of State
11 Computation of Net Income Per Share Amounts
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
b. Reports on Form 8-K: There were no reports on Form 8-K filed for the three
months ended March 29, 1997.
12
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)
May 9, 1997
13
AVERY DENNISON CORPORATION
Amendment to Certificate of Incorporation, filed April 10, 1984
with Office of Delaware Secretary of State
ARTICLE IV
(a) The Corporation is authorized to issue two classes of shares to be
designated, respectively, "Common Stock" and "Preferred Stock". The total number
of shares which the Corporation shall have authority to issue is Four Hundred
Five Million (405,000,000) shares, and the aggregate par value of all shares
which are to have a par value is Four Hundred Five Million Dollars
($405,000,000). The total number of shares of Preferred Stock which the
Corporation shall have authority to issue is Five Million (5,000,000) shares,
and the par value of each share of Preferred Stock is One Dollar ($1.00). The
total number of shares of Common Stock which the Corporation shall have
authority to issue is Four Hundred Million (400,000,000) shares, and par value
of each share of Common Stock is One Dollar ($1.00).
EXHIBIT 3
AVERY DENNISON CORPORATION
COMPUTATION OF NET INCOME PER SHARE AMOUNTS
(In millions, except per share amounts)
Quarter Ended
---------------------------------------
March 29, 1997 March 30, 1996
-------------- --------------
(A) Weighted average number of common shares outstanding 103.5 105.8
Additional common shares issuable under employee stock
options using the treasury stock method 3.3 2.8
------ ------
(B) Weighted average number of common shares outstanding
assuming the exercise of stock options 106.8 108.6
====== ======
(C) Net income applicable to common stock $ 48.2 $ 40.0
====== ======
Net income per share as reported (C / A) $ 0.47 $ 0.38
====== ======
Net income per share giving effect to the exercise of
outstanding stock options (C / B) $ 0.45 $ 0.37
====== ======
Exhibit 11
AVERY DENNISON CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
Three Months Ended
--------------------------------
March 29, 1997 March 30, 1996
-------------- --------------
Earnings:
Income before taxes $74.1 $62.5
Add: Fixed Charges* 13.1 13.4
Amortization of capitalized interest 1.3 1.2
Less: Capitalized interest (0.8) (0.8)
----- -----
$87.7 $76.3
===== =====
*Fixed Charges:
Interest expense $ 8.5 $ 8.9
Capitalized interest 0.8 0.8
Amortization of debt issuance costs 0.1 0.1
Interest portion of leases 3.7 3.6
----- -----
$13.1 $13.4
===== =====
Ratio of Earnings to Fixed Charges 6.7 5.7
===== =====
The ratios of earnings to fixed charges were computed by dividing earnings by
fixed charges. For this purpose, "earnings" consist of income before taxes plus
fixed charges (excluding capitalized interest), and "fixed charges" consist of
interest expense, capitalized interest, amortization of debt issuance costs and
the portion of rent expense (estimated to be 35%) on operating leases deemed
representative of interest.
Exhibit 12
5
3-MOS
DEC-27-1997
DEC-29-1997
MAR-29-1997
5,500
0
463,300
0
236,800
812,400
1,738,800
797,800
2,019,400
631,800
394,600
0
0
124,100
691,300
2,019,400
828,900
828,900
566,000
566,000
180,300
0
8,500
74,100
25,900
48,200
0
0
0
48,200
.47
.45
Accounts receivable are shown net of any allowances.
