Avery Dennison Corporation — Fiscal 2010 Form 10-K Summary
Business context and reporting period
Avery Dennison filed its Form 10-K for the fiscal year ended January 1, 2011, filed February 25, 2011. The company manufactures pressure-sensitive materials, labels, tags, tickets, office and consumer products, specialty tapes, films, RFID products, and related converted products.
- Reporting segments: Pressure-sensitive Materials, Retail Information Services, and Office and Consumer Products.
- 2010 sales mix: approximately 56% Pressure-sensitive Materials, 23% Retail Information Services, and 13% Office and Consumer Products; other specialty converting businesses accounted for the remainder.
- International operations represented approximately 68% of sales.
- The company operated approximately 200 manufacturing and distribution facilities in more than 60 countries and employed approximately 32,000 people at year-end.
Financial metrics and liquidity
The filing incorporates the primary statements and Management’s Discussion and Analysis by reference to the 2010 Annual Report. The supplied filing text does not provide clear consolidated values for revenue, operating income, net income, earnings per share, gross or operating margins, operating cash flow, capital expenditures, cash balances, total debt, or liquidity ratios.
- Research and development expense was $95.6 million in 2010, compared with $90.7 million in 2009 and $94.0 million in 2008.
- Variable-rate borrowings were approximately $380 million at January 1, 2011.
- Environmental remediation liabilities accrued were approximately $46 million at year-end.
- Allowance for doubtful accounts was $38.9 million, sales-return allowance was $12.5 million, inventory reserve was $59.2 million, and deferred-tax-asset valuation allowance was $115.6 million at year-end.
- The company repurchased 2.683 million shares during the fourth quarter at an average price of $40.50 per share.
- On January 27, 2011, the board authorized repurchase of up to 5 million additional shares, increasing shares available for repurchase to approximately 6 million.
Material changes versus prior comparable periods
- R&D spending increased approximately 5% from 2009 to 2010.
- The company identified recurring and continuing inflationary pressure in raw materials, labor, and energy costs during 2010 and into early 2011.
- Management continued productivity initiatives involving facility closures, headcount reductions, restructuring, process standardization, and manufacturing relocation.
- The company highlighted a significant goodwill impairment charge related to Retail Information Services in 2009; no 2010 goodwill impairment amount is provided in the supplied text.
- California label-stock antitrust litigation was resolved in 2010 through a $2.5 million payment, following final court approval and dismissal with prejudice. Related settlement costs had been recorded in 2009 and 2010.
- Dean A. Scarborough became Chairman, President, and Chief Executive Officer effective April 22, 2010. Mitchell R. Butier became Senior Vice President and Chief Financial Officer, and Lori J. Bondar became Vice President, Controller, and Chief Accounting Officer.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide a specific quantitative earnings, revenue, margin, or cash-flow forecast. Management’s outlook emphasizes continued cost inflation, productivity actions, international exposure, and the ability to recover higher input costs through pricing and operating improvements.
- Key operating risks include volatile paper, film, resin, chemical, labor, and energy costs; supply-chain interruptions; competitive pressure; customer order changes; and weaker global economic conditions.
- Approximately 68% of sales were international, creating exposure to foreign-currency fluctuations, political and economic conditions, tax changes, trade regulations, and differing market conditions.
- Office and Consumer Products sales are concentrated among several major customers, increasing customer, credit, and bad-debt risk, although no individual customer represented 10% or more of sales or year-end trade receivables in 2010 or 2009.
- Goodwill impairment remains a risk because valuations depend on projected sales, margins, growth rates, discount rates, and future cash flows.
- The company was a potentially responsible party at 14 waste-disposal or recycling sites. Accrued environmental liabilities may not cover all future remediation costs.
- Pending and potential litigation, intellectual-property disputes, regulatory matters, tax examinations, pension obligations, information-technology disruptions, and product-quality issues could adversely affect results.
- The company stated that environmental compliance costs were not expected to materially affect consolidated capital expenditures, financial position, or results of operations based on current information.
- Disclosure controls and internal control over financial reporting were assessed as effective as of January 1, 2011, and PricewaterhouseCoopers LLP audited management’s internal-control assessment.
Most important facts for investors to verify
- Obtain the incorporated 2010 Annual Report and verify consolidated revenue, profitability, margins, earnings per share, cash flow, capital expenditures, cash, debt, and segment results.
- Review the debt footnote for total borrowings, maturities, covenants, available credit facilities, and the effect of approximately $380 million of variable-rate debt.
- Assess the impact of raw-material and energy inflation and determine whether pricing actions and productivity initiatives offset those costs.
- Review the 2009 Retail Information Services goodwill impairment and the 2010 impairment testing assumptions and results.
- Evaluate customer concentration in Office and Consumer Products and the adequacy of receivable, sales-return, and inventory reserves.
- Review environmental remediation obligations, the 14 PRP sites, and other litigation and regulatory contingencies.
- Confirm the timing, cost, and strategic rationale of the 2010 share repurchases and the additional authorization announced in January 2011.