Avery Dennison Corporation — Fiscal 2020 Form 10-K Summary
Business context and reporting period
Avery Dennison manufactures pressure-sensitive materials, labels, tags, tickets, tapes, fasteners, RFID inlays and related solutions. Reportable segments were Label and Graphic Materials (LGM), Retail Branding and Information Solutions (RBIS), and Industrial and Healthcare Materials (IHM), representing approximately 68%, 23% and 9% of 2020 net sales, respectively.
The filing covers the fiscal year ended January 2, 2021. The fourth quarter comprised 14 weeks. International operations generated approximately 76% of 2020 net sales, and the company operated approximately 190 manufacturing and distribution facilities in more than 50 countries.
Financial performance, liquidity and capital structure
- Full-year net sales declined by more than 1% from 2019, primarily reflecting COVID-19 impacts. The filing text provided does not include a clear consolidated revenue, operating income, net income, EPS, gross margin or operating margin value; those data are incorporated by reference from the 2020 Annual Report.
- Foreign-currency translation reduced 2020 net sales by approximately $67 million.
- COVID-19 caused the sharpest disruption in the second quarter, when net sales declined approximately 15% year over year. Sequential improvement occurred during the second half of the year.
- At January 2, 2021, total debt was approximately $2.12 billion. Average variable-rate borrowings were approximately $338 million, while approximately $59 million of outstanding debt bore variable interest rates at year-end.
- The company maintained an $800 million revolving credit facility. It drew $500 million during the first quarter when commercial paper market access was disrupted, then repaid the draw in the second quarter.
- Temporary COVID-related cost reductions of approximately $135 million partially offset lower volume. Restructuring actions generated incremental savings, net of transition costs, of approximately $65 million in 2020.
- Research and development expense was $113 million in 2020.
- The company repurchased approximately $104.3 million of common stock during fiscal 2020 and had approximately $540.4 million remaining under its repurchase authorization at year-end. Fourth-quarter repurchases totaled 357,700 shares at an average price of $145.70.
- The quarterly dividend rate was increased approximately 7% in October 2020 after being maintained earlier in the year because of COVID-19 conditions.
Material changes versus the prior comparable period
- COVID-19 reduced demand across all reportable segments. LGM label and packaging materials benefited from essential-product consumption and e-commerce, while graphics and reflective products declined.
- RBIS experienced a significant second-quarter decline followed by sequential improvement, including growth in RFID solutions. IHM was adversely affected by reduced industrial and automotive demand, followed by improvement later in the year.
- The company increased its allowance for credit losses by approximately 65%, from approximately $27 million to approximately $45 million, reflecting pandemic-related credit risk.
- Fiscal 2020 included acquisitions of Smartrac’s Transponder Division for approximately $255 million and ACPO, Ltd. for approximately $88 million.
- Restructuring included LGM facility and graphics-business consolidation and RBIS global headcount and footprint reductions. Some temporary cost reductions are expected to reverse as markets recover.
- Unlike 2019, when termination and settlement of the U.S. pension plan resulted in approximately $444 million of pretax charges, the provided filing text does not identify a comparable 2020 pension charge.
Outlook, risks and unusual items
Management expected the pandemic’s effects to continue into 2021 but to improve as economies gradually recover. The filing does not provide a clear numerical 2021 revenue, earnings or cash-flow guidance figure. Management stated that the duration and severity of COVID-19, containment measures and macroeconomic effects prevent reliable prediction of 2021 results.
- Key risks include prolonged or renewed COVID-19 effects, facility or supply-chain disruptions, reduced customer demand, inflation in raw materials and labor, and the reversal of temporary cost savings.
- International exposure creates sensitivity to foreign exchange, tariffs, trade restrictions, political conditions, emerging-market volatility and tax-law changes.
- Debt, commercial-paper access, credit ratings, variable interest rates and restrictive debt covenants could affect liquidity and financing costs.
- Acquisition integration, restructuring execution, infrastructure investments and goodwill impairment are material execution risks. Goodwill was approximately $1.14 billion at year-end; no impairment was identified in 2020.
- Environmental regulation, plastic-packaging trends, climate-related requirements, cybersecurity incidents, intellectual-property disputes and environmental remediation obligations could adversely affect results.
- The company identified twelve U.S. hazardous-waste sites at which governmental agencies had designated it as a potentially responsible party; accrued liabilities existed where losses were probable and reasonably estimable, but ultimate remediation costs could be higher.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of January 2, 2021. PricewaterhouseCoopers LLP audited internal control effectiveness.
Most important facts for investors to verify
- Verify consolidated 2020 and 2019 revenue, operating income, net income, diluted EPS, margins and segment results in the incorporated 2020 Annual Report.
- Verify operating, investing and financing cash flows, cash balances, free cash flow, debt maturities and liquidity headroom.
- Assess the sustainability of the approximately $135 million of temporary cost reductions and the approximately $65 million of recurring restructuring savings.
- Review acquisition purchase-price allocations, integration costs and the contribution of Smartrac and ACPO to 2021 results.
- Evaluate the sensitivity of earnings and cash flow to COVID-19 recovery, foreign exchange, raw-material prices, tariffs and automotive and apparel demand.
- Review Note 8 contingencies for quantified environmental, legal and other potential liabilities.
- Confirm the outlook and capital-allocation priorities, including dividends, share repurchases, acquisitions and debt reduction.