Avery Dennison Corporation: Fiscal 2023 Form 10-K Summary
Business context and reporting period
Avery Dennison is a global materials science and digital identification solutions company operating through Materials Group and Solutions Group. Products include pressure-sensitive label and functional materials, tapes, graphics, RFID inlays and tags, branding products, and software-enabled information solutions. The fiscal year ended December 30, 2023, comprised 52 weeks; the filing is an annual report rather than a quarterly filing.
- Materials Group represented approximately 69% of 2023 net sales; Solutions Group represented approximately 31%.
- International operations generated approximately 69% of net sales, with approximately 40% originating in emerging markets.
- The company operated more than 200 manufacturing and distribution facilities in over 50 countries and had approximately 35,000 employees at year-end.
Financial performance and liquidity
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net sales | $8,364.3 million | $9,039.3 million | Down 8% |
| Gross profit | $2,277.5 million | $2,404.2 million | Down 5% |
| Gross margin | 27.2% | 26.6% | Up 60 basis points |
| Income before taxes | $694.7 million | $999.3 million | Down 30% |
| Net income | $503.0 million | $757.1 million | Down 34% |
| Diluted earnings per share | $6.20 | $9.21 | Down 33% |
| Operating cash flow | $826.0 million | $961.0 million | Down 14% |
| Adjusted free cash flow | $591.9 million | $667.3 million | Down 11% |
Gross margin improved despite lower volume because of productivity initiatives, temporary cost savings, material re-engineering, restructuring savings, and the net impact of pricing and raw-material costs. Net income was pressured by lower volume, higher restructuring charges, a higher accrual for the Adasa patent matter, higher employee-related costs, the Argentine peso remeasurement loss, and growth investments. The effective tax rate increased to 27.6% from 24.2%.
- Materials Group net sales declined 11% to $5,811.3 million; operating income declined to $700.9 million from $859.3 million.
- Solutions Group net sales were broadly flat at $2,553.0 million; operating income declined to $165.7 million from $302.3 million.
- Organic sales declined 8% company-wide, primarily because of lower volume associated with customer inventory destocking, partly offset by pricing actions.
- Intelligent Label solutions grew organically at a low-double-digit rate; Solutions Group high-value categories grew at a high-single-digit rate, while its base business declined at a low-double-digit rate.
Balance sheet, debt, and capital allocation
- Cash and cash equivalents were $215.0 million at year-end, compared with $167.2 million a year earlier. Most cash was held by foreign subsidiaries.
- Total debt was approximately $3.24 billion, up approximately $142 million year over year. The fair value of total debt was $3.11 billion.
- The company issued $400 million of 5.75% senior notes due 2033 and used the proceeds partly to repay commercial paper and $250 million of notes maturing in April 2023.
- $300 million of 0.85% senior notes mature in the third quarter of 2024. Management expects to use operating cash flow and commercial paper borrowings for repayment.
- The revolving credit facility was expanded from $800 million to $1.2 billion and extended to February 2026. No amount was outstanding at year-end, and the company was in compliance with its leverage covenant.
- Dividends paid increased to $256.7 million, or $3.18 per share. The quarterly dividend was increased approximately 8% in April 2023 to $0.81 per share.
- The company repurchased approximately 0.8 million shares for $137.5 million. Approximately $592.8 million remained authorized for future repurchases at year-end.
Material changes versus the prior comparable period
- Net sales declined 8% in 2023 after increasing 8% in 2022, reflecting inventory destocking and lower volume.
- Net income declined $254.1 million, while diluted EPS declined $3.01.
- Operating cash flow declined $135.0 million; adjusted free cash flow declined $75.4 million.
- Restructuring charges increased to $79.4 million from approximately $7.7 million. The company recorded approximately $69 million of restructuring savings, net of transition costs, in 2023.
- In 2023, the company acquired Silver Crystal, Lion Brothers, and Thermopatch for aggregate consideration of approximately $231 million, primarily expanding the Solutions Group portfolio. The acquisitions were not material individually or in aggregate to the consolidated financial statements.
- Other expense included $64.3 million from legal proceedings, including an additional $56.3 million accrual for the Adasa matter, and a $29.9 million Argentine peso remeasurement loss.
- Interest expense increased to $119.0 million from $84.1 million because of higher interest rates and higher debt levels.
Guidance, outlook, commentary, and risks
Management expects 2024 net sales to increase as markets recover from downstream inventory destocking, with higher volume potentially partly offset by deflation-related pricing actions. Management also expects incremental restructuring savings, an insignificant full-year operating-income impact from foreign-currency translation based on recent rates, and a full-year effective tax rate in the mid-twenty-percent range.
- The 2023 European Materials Group restructuring plan involves reducing approximately 210 positions and is expected to be substantially completed by mid-2025.
- Key risks include global economic weakness, geopolitical disruptions, customer demand and inventory patterns, raw-material and energy costs, pricing pressure, foreign currency volatility, supply-chain interruptions, competition, acquisitions and integration, cybersecurity, tax-law changes, labor availability, environmental regulation, and pension and goodwill valuation risk.
- The company maintained no shipments to the Russian market during 2023. Operations in Israel experienced some disruption following the Israel-Hamas war, and sales in Israel had represented less than 1% of 2022 net sales.
- The Adasa RFID patent matter remained subject to appeal. The recorded liability was $82.9 million at year-end 2023. The district court later reduced a sanctions component to approximately $5.2 million, consistent with the accrued amount, and the company planned further appeals.
- Environmental liabilities were $24.5 million at year-end. The company was designated a potentially responsible party at eleven waste-disposal or recycling sites, but could not reasonably estimate a range of potential additional remediation costs.
- No cybersecurity event had materially affected operations, results, or financial condition; however, management identified cybersecurity threats that could materially affect the company if realized.
Most important facts for an investor to verify
- Whether volume recovery following inventory destocking occurs as projected and whether deflationary pricing offsets reduce revenue or margins.
- The sustainability of productivity and restructuring savings relative to employee, raw-material, freight, and energy costs.
- Liquidity and refinancing plans for the $300 million of senior notes maturing in 2024, including commercial paper-market access and interest-rate exposure.
- The ultimate outcome and cash impact of the Adasa litigation and any other legal or environmental contingencies.
- Execution and financial contribution of the 2023 acquisitions, particularly within Solutions Group and Intelligent Labels.
- Foreign currency exposure, especially the Argentine peso, Chinese renminbi, and euro, and the sensitivity of earnings and cash flow to further currency movements.
- Reconciliation of adjusted free cash flow and other non-GAAP measures to GAAP results when assessing performance and capital allocation.