Avery Dennison Corp. 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the fiscal second quarter and first six months ended July 4, 2009. Avery Dennison Corporation is a global manufacturer of pressure-sensitive materials, retail information services, and specialty converting products. The 2009 fiscal year includes a 53-week period, with the extra week reflected in the first quarter.
Key Financial Metrics
| Metric (in millions) | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Net Sales | $1,455.4 | $1,828.9 | $2,881.6 | $3,474.1 |
| Gross Profit | $390.3 | $490.3 | $735.4 | $914.3 |
| Net Income (Loss) | $39.8 | $92.4 | $(859.1) | $160.8 |
| Diluted EPS | $0.38 | $0.93 | $(8.41) | $1.62 |
| Cash from Operations (YTD) | $132.8 (vs. $188.7 YTD 2008) | |||
| Total Debt (Carrying Value) | $1.93 billion (as of July 4, 2009) | |||
| Cash and Equivalents | $91.9 million (as of July 4, 2009) |
Margins: Gross profit margin for Q2 2009 was 26.8%, flat compared to 26.8% in Q2 2008. YTD 2009 gross margin was 25.5% compared to 26.3% in YTD 2008.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 20% in Q2 2009 and 17% YTD 2009 compared to the prior year. Organic sales declined 14% in both periods due to volume reductions across all segments and regions (except Asia) driven by the global economic downturn. Foreign currency translation had an unfavorable impact of approximately $147 million in Q2 and $261 million YTD.
- Significant Impairment Charges: The YTD 2009 net loss was primarily driven by a non-cash impairment charge of $832 million recorded in Q1 2009. This consisted of $820 million in goodwill and $12 million in indefinite-lived intangible assets related to the Retail Information Services reporting unit. No additional impairment charges were recorded in Q2 2009.
- Restructuring and Other Costs: YTD 2009 included $42.9 million in restructuring costs (eliminating ~1,930 positions), $25.2 million in asset impairment charges, a $37 million legal settlement, and a $21.2 million loss on debt extinguishment.
- Dividend Reduction: On July 30, 2009, the company declared a Q3 dividend of $0.20 per share, reduced from the previous $0.41 per share, to preserve cash and reduce debt.
Guidance, Outlook, and Risks
- Outlook: Management anticipates continued unfavorable effects from exchange rates and higher pension contributions ($200-$300 million expected from Q3 2009 through 2013). Capital expenditures for 2009 are projected at $115-$130 million.
- Debt Reduction Target: The company targets a debt reduction of at least $350 million from the end of Q2 2009 through 2010.
- Legal Proceedings: The company settled a class action regarding alleged anticompetitive practices for $36.5 million (accrued in Q1). A final court approval hearing is scheduled for September 17, 2009. The DOJ declined to take action regarding prior FCPA violations voluntarily disclosed by the company.
- Risks: Key risks include the impact of economic conditions on demand, raw material costs, credit market volatility, and the ability to achieve targeted cost reductions.
Investor Verification Checklist
- Verify the sustainability of the $832 million goodwill impairment charge and its impact on future tax benefits.
- Monitor the execution of the $350 million debt reduction target and compliance with amended credit facility covenants (Leverage Ratio max 4.25% for Q3/Q4 2009).
- Assess the progress of cost reduction actions targeting $160 million in annualized savings by mid-2010.
- Review the status of the $36.5 million antitrust settlement and potential exposure in remaining indirect purchaser class actions.
- Track the impact of foreign currency fluctuations on future earnings, given 65% of sales are international.