x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 28, 2002

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Delaware
(State or other jurisdiction of incorporation or organization)

95-1492269
(I.R.S. employer identification no.)

150 North Orange Grove Boulevard, Pasadena, California
(Address of principal executive offices)

91103
(Zip code)

(626) 304-2000
(Registrant’s telephone number, including area code)

Yes

x

No

o

Page No.

Part I.      Financial Information (Unaudited):

Financial Statements:

Condensed Consolidated Balance Sheet
September 28, 2002 and December 29, 2001

3

Consolidated Statement of Income
Three and Nine Months Ended September 28, 2002 and September 29, 2001

4

Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 28, 2002 and September 29, 2001

5

Notes to Consolidated Financial Statements

6

Management’s Discussion and Analysis of Results of Operations and Financial Condition

17

Quantitative and Qualitative Disclosures About Market Risk

27

Controls and Procedures

28

Part II.      Other Information:

Exhibits and Reports on Form 8-K

29

Signatures

30

September 28, 2002

December 29, 2001

ASSETS

Current assets:

Cash and cash equivalents

$

28.9

$

19.1

Trade accounts receivable, net

742.0

569.1

Inventories, net

341.0

267.4

Deferred taxes

53.3

58.8

Other current assets

76.3

65.8

Total current assets

1,241.5

980.2

Property, plant and equipment, at cost

2,205.0

2,057.5

Accumulated depreciation

1,071.4

982.9

Property, plant and equipment, net

1,133.6

1,074.6

Goodwill, net

446.1

293.2

Other intangibles resulting from business acquisitions, net

129.2

120.0

Other assets

351.7

341.4

$

3,302.1

$

2,809.4

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Short-term and current portion of long-term debt

$

268.9

$

223.0

Accounts payable

388.6

316.4

Other current liabilities

559.4

409.6

Total current liabilities

1,216.9

949.0

Long-term debt

768.7

626.7

Non-current deferred taxes and other long-term liabilities

215.2

229.7

Other long-term obligation

81.1

74.6

Shareholders’ equity:

Common stock - $1 par value; authorized - 400,000,000 shares; issued - 124,126,624 shares at September 28, 2002 and December 29, 2001

124.1

124.1

Capital in excess of par value

740.2

707.2

Retained earnings

1,649.0

1,556.1

Cost of unallocated ESOP shares

(13.7

)

(13.7

)

Employee stock trusts, 11,304,840 shares at September 28, 2002 and 12,008,123 shares at December 29, 2001

(667.8

)

(674.5

)

Treasury stock at cost, 14,316,822 shares at September 28, 2002 and 14,235,871 shares at December 29, 2001

(638.4

)

(633.4

)

Accumulated other comprehensive loss

(173.2

)

(136.4

)

Total shareholders’ equity

1,020.2

929.4

$

3,302.1

$

2,809.4

Three Months Ended

Nine Months Ended

September 28, 2002

September 29, 2001

September 28, 2002

September 29, 2001

Net sales

$

1,114.5

$

966.7

$

3,101.6

$

2,890.7

Cost of products sold

761.3

653.9

2,093.0

1,947.1

Gross profit

353.2

312.8

1,008.6

943.6

Marketing, general and administrative expense

239.5

209.6

676.6

627.2

Interest expense

11.8

12.4

30.7

39.7

Other expense

15.2

—  

15.2

—  

Income before taxes

86.7

90.8

286.1

276.7

Taxes on income

23.6

29.1

84.4

91.4

Income before accounting change

63.1

61.7

201.7

185.3

Cumulative effect of accounting change, net of tax

—  

—  

—  

(.2

)

Net income

$

63.1

$

61.7

$

201.7

$

185.1

Per share amounts:

Net income per common share:

Before accounting change

$

.64

$

.63

$

2.05

$

1.89

Cumulative effect of accounting change

—  

—  

—  

—  

Net income per common share

$

.64

$

.63

$

2.05

$

1.89

Net income per common share, assuming dilution:

Before accounting change

$

.64

$

.63

$

2.03

$

1.88

Cumulative effect of accounting change

—  

—  

—  

—  

Net income per common share, assuming dilution

$

.64

$

.63

$

2.03

$

1.88

Dividends

$

.33

$

.30

$

.99

$

.90

Average shares outstanding:

Common shares

98.5

97.9

98.3

97.8

Common shares, assuming dilution

99.3

98.6

99.2

98.6

Nine Months Ended

September 28, 2002

September 29, 2001

Operating Activities:

Net income

$

201.7

$

185.1

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation

94.6

93.1

Amortization

16.6

23.9

Deferred taxes

4.8

1.9

Asset impairment and lease cancellation costs

15.2

—  

Changes in assets and liabilities

(12.2

)

(59.6

)

Net cash provided by operating activities

320.7

244.4

Investing Activities:

Purchase of property, plant and equipment

(71.3

)

(96.6

)

Proceeds from sale of assets

9.9

11.0

Payments for acquisitions

(220.9

)

(63.9

)

Purchase of software

(14.4

)

(42.3

)

Other

(10.3

)

(13.9

)

Net cash used in investing activities

(307.0

)

(205.7

)

Financing Activities:

Additional borrowings

404.8

416.5

Payments of debt

(326.0

)

(356.7

)

Dividends paid

(108.7

)

(99.1

)

Purchase of treasury stock

(5.0

)

(17.8

)

Proceeds from exercise of stock options

20.3

14.6

Other

11.4

9.9

Net cash used in financing activities

(3.2

)

(32.6

)

Effect of foreign currency translation on cash balances

(0.7

)

—  

Increase in cash and cash equivalents

9.8

6.1

Cash and cash equivalents, beginning of period

19.1

11.4

Cash and cash equivalents, end of period

$

28.9

$

17.5

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 the 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 2001 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 2001 Annual Report on Form 10-K.

The third quarters of 2002 and 2001 consisted of thirteen-week periods ending September 28, 2002 and September 29, 2001, respectively. The interim results of operations are not necessarily indicative of future financial results.

2.

Recent Acquisitions

On May 17, 2002, the Company acquired Jackstädt GmbH, a privately-held manufacturer of pressure-sensitive adhesive materials based in Germany. Jackstädt has a global customer base and had consolidated revenues of approximately $400 million in 2001.  The Jackstädt business is included in the Company’s Pressure-sensitive Adhesives and Materials segment.  Jackstädt complements the Company’s operations in North America, Asia, Latin America and Europe. Jackstädt enhances the Company’s global presence, including its capability to grow in Eastern Europe, and enables it to offer a broader selection of products and services.

The purchase price at closing was approximately $300 million, which included approximately $200 million in cash and assumed debt of approximately $100 million.  The Company assumed liabilities of approximately $203 million, including the assumed debt, accrued payroll and benefits, accounts payable, other accrued liabilities, long-term retirement benefits and other current and long-term liabilities. The Company funded the transaction with cash and short-term commercial paper.  The excess of the cost-basis over the fair value of net tangible assets acquired is currently estimated to be approximately $152 million, which includes estimated identified intangible assets of approximately $11 million, which are being amortized on a straight-line basis over 5 years.  The purchase price paid at closing was based on financial statement values at June 30, 2001, and is subject to adjustment based upon a formula in the purchase agreement and is subject to finalization after a review of the closing financial statements. Jackstädt’s results of operations have been included in the Company’s consolidated financial statements as of the acquisition date.

2.

Recent Acquisitions (continued)

The preliminary allocation of the purchase price as of September 28, 2002 has been made and recorded in these financial statements.  The Company has not finalized this allocation and is currently obtaining third-party valuations of assets and liabilities.  In addition, the Company is currently reviewing its plans with regard to facilities rationalization that may require adjustments to estimated amounts recorded for closure of certain facilities and carrying values of Jackstädt assets.  Review of the final valuations and ongoing assessments may impact the allocation of the purchase price, and changes to the preliminary allocation are likely to occur.

The following represents the unaudited pro forma results of operations for the Company and Jackstädt as though the acquisition of Jackstädt had occurred at the beginning of the periods shown.  The pro forma results include interest expense on additional debt that would have been needed to finance the purchase, amortization of intangibles that would have been acquired, and certain adjustments that would have been required to conform to the Company’s accounting policies.  The pro forma results of operations have been prepared based on the preliminary allocation of the purchase price and may require adjustment in accordance with the terms of the purchase agreement or as a result of the finalization of the purchase price allocation.  This pro forma information is for comparison purposes only, and is not necessarily indicative of the results that would have occurred had the acquisition been completed at the beginning of the periods presented, nor is it necessarily indicative of future results.

Three Months Ended

Nine Months Ended

September 28, 2002

September 29, 2001

September 28, 2002

September 29, 2001

Net sales

$

1,114.5

$

1,061.9

$

3,252.5

$

3,189.2

Net income

$

63.1

$

60.2

$

202.2

$

184.7

Net income per common share

$

.64

$

.61

$

2.06

$

1.89

Net income per common share, assuming dilution

$

.64

$

.61

$

2.04

$

1.87

Other acquisitions during 2002 were not significant to the Company’s consolidated financial position or results of operations.

3.

Goodwill and Other Intangibles Resulting from Business Acquisitions

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” which supersedes Accounting Principles Board (APB) Opinion No. 16, “Business Combinations.” This Statement requires that all business combinations be accounted for by the purchase method and establishes specific criteria for the recognition of other intangible assets separately from goodwill. The provisions of the Statement apply to business combinations initiated after June 30, 2001. For business combinations accounted for using the purchase method before July 1, 2001, the provisions of this Statement were effective in the first quarter of 2002. As a result of this Statement, the Company discloses goodwill separately from other intangible assets on the Condensed Consolidated Balance Sheet.

3.

Goodwill and Other Intangibles Resulting from Business Acquisitions (continued)

In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which supersedes APB Opinion No. 17, “Intangible Assets.” This Statement addresses the accounting and reporting of goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that (i) goodwill and indefinite-lived intangible assets will no longer be amortized, (ii) impairment will be measured using various valuation techniques based on discounted cash flows, (iii) goodwill will be tested for impairment at least annually at the reporting unit level, (iv) intangible assets deemed to have an indefinite life will be tested for impairment at least annually and (v) intangible assets with finite lives will be amortized over their useful lives. The Statement provides specific guidance on testing goodwill and other intangible assets for impairment, and requires that reporting units be identified for the purpose of assessing potential future impairments.  All provisions of this Statement were effective at the beginning of fiscal 2002. Utilizing internal and external resources, the Company adopted SFAS No.142 in the first quarter of 2002.  The Company identified its reporting units and the amounts of goodwill, other intangible assets, other assets and liabilities allocated to those reporting units.

SFAS No. 142 requires that goodwill be tested for impairment upon adoption of the Statement, as well as annually thereafter.  The Company completed its goodwill impairment test during the first quarter of 2002 and had no impairment losses.  Other intangible assets deemed to have an indefinite life are tested for impairment by comparing the fair value of the asset to its carrying amount.  The Company does not have other intangible assets with indefinite lives.

The Company adopted SFAS No. 142 effective at the beginning of fiscal 2002 and as a result, ceased amortization of goodwill as of that date.  Changes in the net carrying amount of goodwill for the nine months ended September 28, 2002, by reportable segment, are as follows:

(In millions)

Consumer and
Converted
Products

Pressure-sensitive
Adhesives and
Materials

Total

Balance as of December 29, 2001

$

148.9

$

144.3

$

293.2

Goodwill acquired during the period

3.6

150.6

154.2

Impairment losses

—  

—  

—  

Translation adjustments and other

7.5

(8.8

)

(1.3

)

Balance as of September 28, 2002

$

160.0

$

286.1

$

446.1

3.

Goodwill and Other Intangibles Resulting from Business Acquisitions (continued)

The following table sets forth the Company’s acquired other intangible assets at September 28, 2002 and December 29, 2001, which will continue to be amortized:

September 28, 2002

December 29, 2001

(In millions)

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Amortizable other intangible assets:

Tradenames and trademarks

$

35.7

$

9.9

$

25.8

$

23.4

$

6.8

$

16.6

Patented technology

63.6

8.3

55.3

63.6

5.8

57.8

Customer relations

51.8

5.2

46.6

47.6

3.6

44.0

Other intangibles

2.7

1.2

1.5

2.3

.7

1.6

Total

$

153.8

$

24.6

$

129.2

$

136.9

$

16.9

$

120.0

Amortization expense on intangible assets resulting from business acquisitions was $2.8 million and $6.8 million for the three and nine months ended September 28, 2002, respectively, and $1.9 million and $5.5 million for the three and nine months ended September 29, 2001.  Amortization expense on goodwill was $3.8 million and $11.0 million for the three and nine months ended September 29, 2001.  Based on current information, estimated amortization expense for such acquired intangible assets for this fiscal year, and for each of the next four succeeding fiscal years, is expected to be approximately $10 million, $10 million, $9 million, $9 million and $9 million, respectively.

As required by SFAS No. 142, the results for the prior year’s quarters have not been restated.  Had the Company  accounted for its goodwill under SFAS No. 142 for all periods presented, the Company’s net income and earnings per share would have been as follows:

Three Months Ended

Nine Months Ended

(In millions, except per share amounts)

September
28, 2002

September
29, 2001

September
28, 2002

September
29, 2001

Reported net income

$

63.1

$

61.7

$

201.7

$

185.1

Goodwill amortization, net of tax

—  

3.6

—  

10.4

Adjusted net income

$

63.1

$

65.3

$

201.7

$

195.5

Basic earnings per share:

As reported

$

.64

$

.63

$

2.05

$

1.89

Goodwill amortization

—  

.04

—  

.11

Adjusted basic earnings per share

$

.64

$

.67

$

2.05

$

2.00

Diluted earnings per share:

As reported

$

.64

$

.63

$

2.03

$

1.88

Goodwill amortization

—  

.03

—  

.10

Adjusted diluted earnings per share

$

.64

$

.66

$

2.03

$

1.98

4.

Net Income Per Share

Net income per common share amounts were computed as follows:

Three Months Ended

Nine Months Ended

(In millions, except per share amounts)

September
28, 2002

September
29, 2001

September
28, 2002

September
29, 2001

(A)

Net income available to common shareholders

$

63.1

$

61.7

$

201.7

$

185.1

(B)

Weighted average number of  common shares outstanding

98.5

97.9

98.3

97.8

Additional common shares issuable under employee stock options using the treasury stock method

.8

.7

.9

.8

(C)

Weighted average number of common shares outstanding assuming the exercise of stock options

99.3

98.6

99.2

98.6

Net income per common share (A) ÷ (B)

$

.64

$

.63

$

2.05

$

1.89

Net income per common share, assuming dilution (A) ÷ (C)

$

.64

$

.63

$

2.03

$

1.88

Certain employee stock options were not included in the computation of net income per common share, assuming dilution, because these options would not have had a dilutive effect.  The number of antidilutive stock options (which are options that have exercise prices greater than the average market price for the period) excluded from the computation were 0.1 million for the three and nine months ended September 28, 2002, and 2.1 million and 1.7 million for the three and nine months ended September 29, 2001, respectively.

5.

Comprehensive Income

Comprehensive income for the Company included net income, foreign currency translation adjustments and the effective portion of cash flow hedges that are currently presented as a component of shareholders’ equity.  There was no change in the minimum pension liability for the three and nine months ended September 28, 2002.  The Company’s total comprehensive income for the three and nine months ended September 28, 2002 was $12.5 million and $164.9 million, respectively.  For the three and nine months ended September 29, 2001, total comprehensive income was $79.5 million and $182.7 million, respectively.  As of September 28, 2002, the foreign currency translation adjustment, minimum pension liability, net loss on derivative instruments designated as cash flow hedges and total accumulated other comprehensive loss balances were $(126.4) million, $(14.3) million, $(32.5) million and $(173.2) million, respectively.  As of December 29, 2001, the foreign currency translation adjustment, minimum pension liability, net gain on derivative instruments designated as cash flow hedges and total accumulated other comprehensive loss balances were $(123.1) million, $(14.3) million, $1 million and $(136.4) million respectively.

5.

Comprehensive Income (continued)

The table below details the cash flow hedging instrument activity in other comprehensive income (loss) for the first nine months of 2002:

(In millions)

September 28, 2002

Beginning accumulated derivative gain

$

1.0

Net gain reclassified to earnings

(.6

)

Net change in revaluation of hedging transactions

(32.9

)

Ending accumulated derivative loss

$

(32.5

)

The Company entered into a forward starting interest rate swap in May 2002 to hedge the interest cost associated with the Company’s anticipated long-term debt issuance.  The principal amount of the hedge was $250 million.  Because of a shift in interest rates, an unrealized loss of approximately $33 million was included in other comprehensive income as of the end of the third quarter 2002.  The forward starting interest rate swap is revalued monthly in accordance with applicable accounting standards.  Upon issuance of the long-term debt, the gain or loss, if any, will be amortized to interest expense over 10 years.

6.

Foreign Currency

Translation of financial statements of subsidiaries operating in hyperinflationary economies and transactions in foreign currencies resulted in losses, net of tax, of $0.7 million and $2.8 million, during the three and nine months ended September 28, 2002, respectively.  For the three and nine months ended September 29, 2001, the Company recorded losses of $0.6 million and $0.4 million, respectively.  Operations in hyperinflationary economies consist of the Company’s operations in Turkey for 2001 and 2002.

7.

Financial Instruments

The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, in the first quarter of 2001 and recorded a transition adjustment reducing net income by $0.2 million (net of tax). This Statement requires that all derivative instruments be recorded on the balance sheet at their fair value.

The Company enters into foreign exchange forward, option and swap contracts to reduce its risk from exchange rate fluctuations associated with receivables, payables, loans and firm commitments denominated in foreign currencies. The Company also enters into interest rate contracts to manage its exposure to interest rate fluctuations.

During the three and nine months ended September 28, 2002 changes in fair market value related to fair value hedges and the ineffectiveness related to cash flow hedges were not significant.  The Company expects to reclassify from other comprehensive income to earnings a loss of approximately $1.9 million over the next twelve months.  A loss of approximately $2.7 million related to a net investment hedge is included in the foreign currency translation adjustment reported in accumulated other comprehensive loss.

The Company entered into a forward starting interest rate swap in May 2002 to hedge the interest cost associated with the Company’s anticipated long-term debt issuance.  The principal amount of the hedge was $250 million.  Because of a shift in interest rates, an unrealized loss of approximately $33 million was included in other comprehensive income as of the end of the third quarter 2002.  The forward starting interest rate swap is revalued monthly in accordance with applicable accounting standards. Upon issuance of the long-term debt, the gain or loss, if any, will be amortized to interest expense over 10 years.

8.

Inventories

Inventories consisted of:

(In millions)

September 28, 2002

December 29, 2001

Raw materials

$

100.1

$

82.9

Work-in-progress

81.5

67.6

Finished goods

175.6

134.6

LIFO adjustment

(16.2

)

(17.7

)

$

341.0

$

267.4

9.

Software

The Company capitalizes software costs in accordance with American Institute of Certified Public Accountants’ Statement of Position 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Capitalized software costs are included in the “Other assets” line on the Condensed Consolidated Balance Sheet. Capitalized software is amortized on a straight-line basis over the estimated useful life of the software, not to exceed 10 years.

10.

Research and Development

Research and development expense for the three and nine months ended September 28, 2002 was $18.4 million and $53.4 million, respectively.  For the three and nine months ended September 29, 2001, research and development expense was $16.6 million and $51.9 million, respectively.

11.

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 9 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.  The Company is participating with other PRPs at 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 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.  Amounts currently accrued are not significant to the consolidated financial position of the Company and, based upon current information, management believes that it is unlikely the final resolution of these matters will significantly impact the consolidated financial position and operations 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 is not expected to materially affect the Company.

12.

Other Expense and Cost Reduction Program

In the third quarter of 2002, the Company recorded a $15.2 million pretax charge for the planned disposition of fixed assets (land, buildings, machinery and equipment) and lease cancellation costs associated with the integration of Jackstädt operations, as well as the planned closure of a plant facility, costs to exit leases and other fixed asset impairments related to other businesses.  Approximately 60 percent of the charge relates to the integration of Jackstädt. The charge, shown in the “Other expense” line in the Consolidated Statement of Income, relates entirely to assets and leases owned by the Company prior to the acquisition of Jackstädt. Of the $15.2 million charge, approximately $11.3 million relates to asset write-downs for property, plant and equipment and $3.9 million relates to lease cancellation costs.

The Company recorded a charge in the fourth quarter of 2001 relating to cost reduction actions.  The 2001 charge involves cost reduction programs and the reorganization of manufacturing and administrative facilities in both of the Company’s operating segments.  The cost reduction efforts resulted in a pretax charge of $19.9 million, which consisted of employee severance and related costs of $13.1 million for approximately 400 positions worldwide, and asset write-downs of $6.8 million.  The positions included approximately 170 employees in the Pressure-sensitive Adhesives and Materials segment, 210 employees in the Consumer and Converted Products segment and 20 Corporate employees.  Severance and related costs represent cash paid or to be paid to employees terminated under the program. Asset write-downs represent non-cash charges required to reduce the carrying value of assets to be disposed of to net realizable value as of the planned date of disposal.  At the end of the third quarter of 2002, $3.1 million remained accrued for severance and related costs (included in “Other current liabilities”) in the Condensed Consolidated Balance Sheet, and all amounts related to asset write-downs had been utilized.  At the end of the third quarter, of the 400 positions under these actions, approximately 370 employees had left the Company.  The Company expects to complete this cost reduction program in 2002, with the exception of some payments under long-term severance contracts, which will be paid beyond 2002.

13.

Segment Information

Financial information by reportable operating segment is set forth below:

Three Months Ended

Nine Months Ended