Avery Dennison Corp. Q1 2009 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the fiscal first quarter ended April 4, 2009. The period consisted of 14 weeks due to a 53-week fiscal year, compared to 13 weeks in the prior year. Avery Dennison Corporation is a global manufacturer of pressure-sensitive materials, retail information services, and office and consumer products. The company operates in a challenging macroeconomic environment characterized by significant declines in retail apparel and construction markets.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Sales | $1,426.2 million | $1,645.2 million |
| Gross Profit | $345.1 million | $424.0 million |
| Gross Margin | 24.2% | 25.8% |
| Net (Loss) Income | $(898.9) million | $68.4 million |
| Diluted EPS | $(8.99) | $0.69 |
| Cash from Operations | $16.0 million | $56.0 million |
| Free Cash Flow | $(7.3) million | $1.1 million |
| Total Debt (Short + Long Term) | $1,951.6 million | $2,209.8 million |
| Cash and Equivalents | $83.0 million | $105.5 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 13% year-over-year. Organic sales declined 15% due to volume drops across all segments, partially offset by an extra week in the fiscal quarter and the DM Label acquisition.
- Significant Impairment Charges: The company recorded a non-cash impairment charge of $832 million related to the Retail Information Services reporting unit. This includes $820 million for goodwill and $12 million for indefinite-lived intangible assets. This charge was driven by a sustained decline in stock price and reduced revenue projections for the retail apparel market.
- Restructuring and Legal Costs: "Other expense" increased to $97.3 million from $5.6 million. This includes $39.1 million in cost reduction charges (severance and asset impairments) and a $37 million accrual for a legal settlement regarding antitrust allegations.
- Debt Extinguishment: The company recorded a $21.2 million loss on the exchange of HiMEDS units, involving the issuance of common stock and cash payments.
- Balance Sheet Impact: Shareholders' equity decreased from $1.75 billion to $1.09 billion, primarily due to the net loss and impairment charges. Total debt decreased by approximately $258 million due to the HiMEDS exchange and commercial paper repayments.
Guidance, Outlook, and Risks
- Outlook: Management anticipates continued unfavorable effects from foreign currency trends and higher pension/employee-related expenses in 2009. Capital expenditures are expected to range between $120 million and $150 million for the full year.
- Impairment Finalization: The goodwill impairment test is preliminary; the second step is expected to be completed in Q2 2009, which could result in additional non-cash adjustments.
- Restructuring: The company expects to incur approximately $160 million in total restructuring charges associated with actions initiated in late 2008, with the majority occurring in 2009. Targeted annualized savings are over $150 million by mid-2010.
- Legal Contingencies: A $36.5 million settlement regarding antitrust class actions was agreed upon in May 2009 (accrued in Q1). The company is also addressing potential violations of the Foreign Corrupt Practices Act (FCPA) in China and other regions, with fines or penalties possible but unpredictable.
- Liquidity: The company maintains a $1 billion revolving credit facility and believes it has sufficient liquidity to fund operations despite market volatility. Credit ratings remain stable (S&P BBB, Moody's Baa1 under review).
Investor Verification Checklist
- Verify the finalization of the goodwill impairment test for the Retail Information Services segment in the upcoming Q2 filing.
- Monitor the status of the $36.5 million antitrust settlement and the outcome of the FCPA investigations regarding potential fines.
- Track progress on the $160 million restructuring plan and the realization of targeted cost savings.
- Assess the impact of foreign currency fluctuations on future earnings, given 65% of sales are international.
- Review the company's ability to maintain compliance with financial covenants (Leverage and Interest Coverage ratios) under amended credit agreements.