Avery Dennison Corporation — Fiscal Q1 2022 Form 10-Q
Business context and reporting period
Unaudited results cover the 13 weeks ended April 2, 2022, compared with the 13 weeks ended April 3, 2021. Avery Dennison operates primarily through Label and Graphic Materials (LGM), Retail Branding and Information Solutions (RBIS), and Industrial and Healthcare Materials (IHM). Approximately 72% of first-quarter 2022 sales were generated by international operations.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $2,349.3 million | $2,051.3 million | +14.5% |
| Gross profit | $641.3 million | $597.0 million | +7.4% |
| Gross margin | 27.3% | 29.1% | Down 180 bps |
| Income before taxes | $269.7 million | $268.9 million | +0.3% |
| Net income | $198.2 million | $209.5 million | Down 5.4% |
| Diluted EPS | $2.39 | $2.50 | Down 4.4% |
| Effective tax rate | 26.5% | 21.6% | Up 490 bps |
| Operating cash flow | $126.2 million | $209.3 million | Down $83.1 million |
| Free cash flow | $73.3 million | $182.0 million | Down $108.7 million |
Net sales increased 15% as reported, 18% excluding currency, and 13% organically. Pricing actions and higher volume/mix drove organic growth. The filing does not provide a consolidated operating-income figure or consolidated operating margin.
At April 2, 2022, cash and cash equivalents were $147.1 million, total debt was approximately $3.27 billion on a carrying-value basis, and the $800 million revolving credit facility was undrawn. The company was in compliance with its debt covenant. Current liabilities were $2.72 billion versus current assets of $2.89 billion. Operational working capital increased to 12.1% of annualized current-quarter sales from 11.1%.
Segment performance
| Segment | Q1 2022 sales | Sales change | Q1 2022 operating income | Prior-year operating income |
|---|---|---|---|---|
| LGM | $1,480.2 million | +8% reported; +12% organic | $207.2 million | $226.2 million |
| RBIS | $679.0 million | +41% reported; +20% organic | $90.3 million | $60.0 million |
| IHM | $190.1 million | Down 1% reported; +1% organic | $15.6 million | $23.5 million |
Material changes versus the prior comparable period
- Revenue benefited from pricing and volume/mix, while reported growth included a 3% foreign-currency benefit and acquisitions.
- Gross margin declined because higher selling prices did not fully offset higher raw-material, freight, and employee-related costs.
- Net income declined despite essentially flat pretax income, primarily because the prior-year period included a $14.1 million return-to-provision tax benefit and the current-year effective tax rate was higher.
- Interest expense increased to $19.6 million from $16.2 million, primarily due to additional $800 million senior notes issued in August 2021.
- Operating cash flow and free cash flow declined because of working-capital changes, incentive compensation and payroll timing, and higher capital spending.
- RBIS benefited from acquisitions and strong organic growth. LGM and IHM operating income declined.
- The company completed the acquisitions of TexTrace and Rietveld for aggregate consideration of approximately $35 million, funded with cash and commercial paper. Potential earn-out payments of up to $30 million remain tied to performance targets.
Guidance, outlook, commentary and risks
- Management expected full-year 2022 net sales growth of approximately 12% to 14%, including an approximately 3% foreign-currency headwind and 3% benefit from acquisitions.
- Based on recent exchange rates, foreign-currency translation was expected to reduce operating income by approximately $40 million.
- Management expected a full-year effective tax rate in the mid-twenties and fixed and IT capital spending of up to $350 million.
- Key risks include inflation, raw-material and freight costs, supply availability, labor constraints, demand volatility, pricing execution, foreign exchange, interest rates, acquisition integration, cybersecurity, tax matters, and legal and environmental contingencies.
- The company ceased shipments to Russia following the invasion of Ukraine and related sanctions. Russia represented approximately 1% of 2021 net sales; broader effects on supply chains, demand and financial markets remain uncertain.
- The company maintained a $26.6 million contingent liability for the Adasa RFID patent litigation while appealing the judgment. Management believes the patent is invalid or not infringed, but potential future expenses could exceed the accrued amount.
- Environmental liabilities were $22.1 million at April 2, 2022, involving 12 sites at which the company has been designated a potentially responsible party.
- The company recorded $0.9 million of restructuring charges related to approximately 20 position reductions. It also recognized a $3.7 million gain on a venture investment.
- In April 2022, after quarter-end, the board increased the quarterly dividend to $0.75 per share from $0.68 and authorized an additional $750 million for share repurchases.
Most important facts for investors to verify
- Whether pricing actions continue to offset raw-material, freight, labor and other inflationary costs without materially reducing volume.
- The sustainability of RBIS growth and the financial contribution, integration costs and earn-out exposure associated with TexTrace, Rietveld and prior acquisitions, including Vestcom.
- Working-capital performance, inventory levels and the resulting conversion of earnings into operating and free cash flow.
- Leverage, commercial-paper dependence, interest costs, credit ratings and continued compliance with the revolving-credit covenant.
- The outcome and potential financial exposure of the Adasa patent litigation and environmental matters.
- The impact of foreign exchange, COVID-19 effects, the Russia-Ukraine conflict, sanctions, tariffs and supply-chain disruptions on demand and profitability.
- Whether the stated 2022 sales, tax-rate and capital-spending outlook is maintained as market conditions change.