Avery Dennison Corporation — Fiscal 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. Fiscal 2022 and 2021 each comprised 52 weeks. The filing reports full-year results, not a standalone fourth-quarter filing. In the fourth quarter, the company reorganized its reporting structure into Materials Group and Solutions Group and recast prior periods accordingly.
Business Context
Avery Dennison is a global materials science and digital identification solutions company serving packaging, apparel, e-commerce, logistics, food and grocery, pharmaceuticals, automotive, and other markets. Its principal offerings include pressure-sensitive materials, graphics and reflective products, performance tapes, RFID inlays and tags, branding solutions, and data and identification solutions.
- Materials Group represented approximately 72% of 2022 net sales.
- Solutions Group represented approximately 28% of 2022 net sales.
- Approximately 72% of net sales originated outside the United States and approximately 40% originated in emerging markets.
- The company operated nearly 200 manufacturing and distribution facilities in more than 50 countries and employed approximately 36,000 people at year-end.
Key Financial Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $9,039.3 million | $8,408.3 million | 8% reported; 10% organic |
| Gross profit | $2,404.2 million | $2,312.8 million | 4% |
| Gross margin | 26.6% | 27.5% | Down 90 basis points |
| Income before taxes | $999.3 million | $992.6 million | 1% |
| Net income | $757.1 million | $740.1 million | 2% |
| Diluted EPS | $9.21 | $8.83 | 4% |
| Operating cash flow | $961.0 million | $1,046.8 million | Down $85.8 million |
| Free cash flow | $667.3 million | $797.7 million | Down $130.4 million |
| Effective tax rate | 24.2% | 25.0% | Down 80 basis points |
Net sales growth was driven primarily by pricing actions, partially offset by lower volume and mix. Foreign-currency translation reduced reported 2022 net sales by approximately $417 million.
Segment Performance
| Segment | 2022 Net Sales | 2022 Operating Income | Key Trend |
|---|---|---|---|
| Materials Group | $6,495.1 million | $859.3 million | Sales increased 5% reported and 11% organically; operating income declined from $883.3 million. |
| Solutions Group | $2,544.2 million | $302.3 million | Sales increased 16% reported and 5% organically; operating income increased from $257.2 million. |
Solutions Group organic growth reflected mid-teens growth in high-value categories, including Intelligent Labels, while its base business declined at a low-single-digit rate. Materials Group organic growth reflected pricing, partly offset by lower volume and mix.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $167.2 million at December 31, 2022, compared with $162.7 million at the prior year-end.
- Total debt was approximately $3.10 billion; the carrying value decreased approximately $3 million year over year.
- Current borrowings and the current portion of long-term debt increased to $598.6 million from $318.8 million, primarily reflecting the $250 million senior notes maturity in 2023.
- The company had no borrowings outstanding under its $800 million revolving credit facility at year-end. In January 2023, the facility was extended to February 2026 and increased to $1.2 billion.
- The company expects to use operating cash flow, commercial paper, or other financing to repay approximately $250 million of senior notes maturing in the second quarter of 2023.
- Capital expenditures were $298.5 million, including fixed assets and information technology.
- Dividends paid were $238.9 million, or $2.93 per share, compared with $220.6 million, or $2.66 per share, in 2021.
- Share repurchases were $379.5 million for approximately 2.2 million shares. Approximately $730 million remained authorized for repurchase at year-end.
Material Changes Versus 2021
- Revenue increased, but growth was principally pricing-driven; volume and mix declined as customers destocked inventory.
- Gross margin contracted because higher selling prices did not fully offset raw material, freight, energy, and employee-related cost increases.
- Net income and diluted EPS increased modestly, helped by pricing, acquisition income, lower transaction costs, and a lower effective tax rate.
- Operating cash flow and free cash flow declined due to working-capital changes, higher incentive compensation payments, payroll timing, and higher capital spending.
- Interest expense increased by approximately $13.9 million due to additional debt issued for the Vestcom acquisition and higher short-term borrowing rates.
- 2022 acquisitions of TexTrace and Rietveld required aggregate purchase consideration of approximately $35 million. The acquisitions were not material individually or in aggregate.
- Restructuring charges declined to approximately $7.7 million from $13.6 million, while incremental restructuring savings, net of transition costs, were approximately $26 million versus $65 million in 2021.
- Foreign-currency translation produced a $96.6 million after-tax loss in other comprehensive income, compared with a $30.7 million gain in 2021.
Guidance, Outlook and Management Commentary
- Management expected 2023 net sales to increase approximately 0% to 4%, including an estimated 1% unfavorable impact from foreign-currency translation.
- Expected incremental restructuring savings, net of transition costs, were approximately $45 million.
- Management expected a full-year effective tax rate in the mid-twenty-percent range.
- Expected 2023 fixed and information-technology capital expenditures were approximately $350 million.
- Management continued to focus on pricing, productivity, material re-engineering, Intelligent Labels growth, sustainability initiatives, and acquisition integration.
Risks, Contingencies and Unusual Items
- Key risks include global economic weakness, inflation, raw material and energy costs, supply-chain disruptions, foreign-currency volatility, competitive pricing, customer inventory destocking, and changing environmental regulations.
- The company ceased shipments for the Russian market in the second quarter of 2022 following Russia’s invasion of Ukraine. Russian sales were approximately 1% of 2021 net sales.
- COVID-19-related lockdowns in China caused production limitations and facility closures during 2022; future effects remain uncertain.
- A patent dispute with ADASA concerning certain RFID products remained unresolved. The company maintained a $26.6 million reserve and estimated potential outcomes ranging from approximately $5 million to $71 million after an appellate ruling remanded the case for retrial.
- Environmental liabilities were $24.3 million at year-end, and the company was identified as a potentially responsible party at eleven waste sites. The ultimate remediation cost could exceed accrued liabilities.
- Goodwill was $1.86 billion at year-end. The company reported no goodwill or indefinite-lived intangible-asset impairment in 2022.
- Unrecognized tax benefits were approximately $69.5 million, of which approximately $65 million would reduce the annual effective tax rate if recognized.
- The company had approximately $290 million of raw-material purchase commitments for 2023.
- Price, supply, and demand assumptions remain important because the company may not fully offset inflation through pricing and productivity measures.
Investor Verification Checklist
- Verify that the reported 2023 sales outlook and planned $350 million capital-expenditure level remain achievable amid currency, demand, and macroeconomic volatility.
- Assess whether pricing and productivity actions can offset raw material, freight, energy, labor, and interest-cost inflation without further volume loss.
- Monitor inventory, receivables, and working capital: operational working capital rose to 12.9% of annualized fourth-quarter sales from 11.8%, days sales outstanding increased to 62 days, and inventory turnover declined to 6.0.
- Review the ability to refinance or repay the $250 million of senior notes due in 2023 while continuing dividends, share repurchases, acquisitions, and capital investments.
- Track the ADASA patent litigation, environmental remediation obligations, tax audits, and other contingencies for changes in reserves or cash requirements.
- Evaluate the contribution, integration, and amortization burden of Vestcom and the newer TexTrace and Rietveld acquisitions.
- Consider the effect of the 2022 segment reorganization and recast prior periods when comparing historical segment performance.