Avery Dennison Corporation — Fiscal 2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended January 2, 2016, including a 13-week fourth quarter. Avery Dennison manufactures pressure-sensitive materials and converted products, including labels, tags, tapes, graphics, reflective products, RFID products, and medical adhesive technologies.
- Reportable segments: Pressure-sensitive Materials (PSM), Retail Branding and Information Solutions (RBIS), and Vancive Medical Technologies.
- Approximate 2015 sales mix: PSM 73% and RBIS 26%; the filing does not provide the remaining segment percentage in the supplied text.
- International operations represented approximately 74% of sales, with operations in more than 50 countries and approximately 180 manufacturing and distribution facilities.
- Office and Consumer Products and Designed and Engineered Solutions were sold in 2013 and are reported as discontinued operations. Certain indemnification and tax obligations remain.
Financial metrics, liquidity, debt, and capital allocation
The supplied filing text incorporates the primary financial statements and Management’s Discussion and Analysis by reference to the 2015 Annual Report, but does not include their numerical detail. Consequently, the filing text provided does not give clear values for revenue, operating income, net income, earnings per share, cash flow from operations, free cash flow, balance-sheet cash, total debt, liquidity, or margins.
- Research and development expense was $91.9 million in 2015, compared with $102.5 million in 2014 and $96.0 million in 2013.
- Average variable-rate borrowings were approximately $175 million in 2015. A 40-basis-point increase in applicable rates would have increased 2015 interest expense by approximately $0.7 million.
- The company repurchased approximately 1.938 million shares during the fourth quarter at an average price of $63.84 per share. Approximately $367.2 million remained available under the applicable repurchase authorization at quarter-end.
- As of January 30, 2016, 89.43 million common shares were outstanding.
- The company reported that its disclosure controls and internal control over financial reporting were effective as of January 2, 2016.
Material changes versus the prior comparable period
- R&D expense declined by approximately $10.6 million, or 10.3%, from 2014 to 2015.
- In 2015, Avery Dennison announced a multi-year RBIS plan emphasizing a more regionally driven business model, simplified go-to-market operations, management efficiencies, and manufacturing-footprint consolidation.
- The company initiated restructuring and investment actions across its businesses to improve profitability.
- During the fourth quarter, management decided to exit an anticipated growth platform in Vancive and redirect resources toward more profitable strategic alternatives.
- The company completed a September 2015 expansion of its Kunshan, China manufacturing facility, including a new coater intended to support projected demand for pressure-sensitive tapes.
- A product line in RBIS was sold in May 2015 at a loss, with related impairment and exit costs, including severance.
- A new transactional system implementation in RBIS, begun in 2014, was expected to continue through 2017 and affected order management, pricing, shipping, accounting, and planning processes.
Outlook, risks, contingencies, and unusual items
- Key exposures include global economic conditions, weaker growth in China and parts of South America, European economic uncertainty, foreign-exchange volatility, raw-material and energy costs, supply-chain interruptions, and competitive pressure.
- International sales and operations create material exposure to currency translation and transaction effects, political and regulatory developments, tax changes, trade restrictions, and difficulties repatriating foreign earnings.
- Restructuring, footprint consolidation, the RBIS system implementation, the Vancive exit, and infrastructure investments could generate additional costs, production disruption, asset impairments, or lower-than-expected returns.
- As of January 2, 2016, the company had been identified as a potentially responsible party at 13 environmental sites and had accrued $17.7 million for environmental remediation. Management could not reasonably estimate a range of potential additional costs.
- The company remains subject to indemnification and tax-related obligations associated with the 2013 divestiture of OCP and DES.
- Other litigation, regulatory, compliance, product-liability, intellectual-property, tax, pension, cybersecurity, and environmental matters are described as ordinary-course or uncertain; management stated that their expected aggregate impact was not material based on current information.
- Debt agreements contain restrictive covenants and financial requirements. Higher debt, credit-rating downgrades, reduced commercial-paper access, or higher interest rates could increase financing costs and constrain flexibility.
- RBIS is seasonal, with higher volumes generally preceding spring, back-to-school, and holiday shipping periods. PSM is generally less seasonal, although some outdoor graphics, reflective products, and European operations have seasonal patterns.
Most important facts for an investor to verify
- Obtain the incorporated 2015 Annual Report and verify consolidated revenue, operating income, net income, EPS, cash flow, margins, cash, total debt, and liquidity.
- Reconcile reported results with the 2014 comparable period, including the effects of foreign exchange, restructuring, impairment, divestitures, discontinued operations, and the Vancive exit.
- Review segment sales and operating income for PSM, RBIS, and Vancive, including the impact of the RBIS transformation plan and Kunshan expansion.
- Review debt maturities, covenant headroom, credit ratings, commercial-paper availability, and the company’s interest-rate and foreign-currency hedging disclosures.
- Assess the remaining share-repurchase authorization, repurchase pace, dividend policy, and the effect of buybacks on per-share results.
- Review the $17.7 million environmental accrual, unresolved site obligations, divestiture indemnifications, tax contingencies, and other litigation disclosures.
- Evaluate execution risk related to RBIS restructuring and systems implementation, international operations, raw-material pricing, supply-chain resilience, cybersecurity, and emerging-market growth investments.