Avery Dennison Corp annual report, FY2018

Full document

Avery Dennison Corporation — Fiscal 2018 Form 10-K Summary

Business context and reporting period

The filing covers the fiscal year ended December 29, 2018; the Form 10-K was filed February 27, 2019. Avery Dennison manufactures pressure-sensitive materials, labels, tags, tapes, fasteners, RFID products, medical materials, and related solutions. Its reportable segments were Label and Graphic Materials (LGM), Retail Branding and Information Solutions (RBIS), and Industrial and Healthcare Materials (IHM).

  • Approximate 2018 sales mix: LGM 68%, RBIS 22%, and IHM 10%.
  • International operations represented approximately 77% of sales.
  • The company operated approximately 180 manufacturing and distribution facilities in more than 50 countries and had approximately 30,000 employees.

Financial metrics, liquidity, and capital structure

The filing incorporates the consolidated financial statements and management’s discussion from the 2018 Annual Report. The supplied filing text does not provide clear values for fiscal 2018 revenue, net income, operating income, margins, operating cash flow, free cash flow, cash balances, or comparable-period changes.

  • Debt was approximately $1.97 billion at December 29, 2018, including $500 million of senior notes issued in December 2018.
  • Average variable-rate borrowings during 2018 were approximately $453 million.
  • Goodwill was $941.8 million at year-end.
  • In the fourth quarter, the company repurchased 2.346 million shares at an average price of $92.85, leaving approximately $232.4 million available under the repurchase authorization.
  • The company stated that its disclosure controls and internal control over financial reporting were effective as of December 29, 2018.

Material changes versus the prior comparable period

  • The company reported raw-material inflation across most worldwide markets. Product re-engineering, procurement savings, and price increases largely offset the inflation during 2018.
  • No acquisitions were completed in 2018, following acquisitions in 2017 totaling approximately $340 million and the 2016 acquisition of Mactac Europe for $220 million.
  • The company began restructuring the European footprint of its LGM business in 2018, with actions continuing into 2019.
  • In September 2018, Avery Dennison terminated its U.S. pension plan. It contributed $200 million in August 2018, settled approximately $152 million of liabilities through fourth-quarter lump-sum payments, and recorded approximately $85 million of related non-cash settlement charges.
  • The remaining U.S. pension liability was approximately $792 million and was expected to be settled through group annuity contracts in the first half of 2019.
  • The filing states that local economic conditions negatively affected results in China during 2018, although China and other emerging markets continued to contribute positively overall.

Outlook, risks, contingencies, and unusual items

  • Management continued to focus on productivity, pricing, product re-engineering, restructuring, capacity expansion, innovation, and growth in emerging markets.
  • Key operating risks include global economic weakness, foreign-exchange volatility, tariffs and trade restrictions, raw-material and energy inflation, supply-chain disruptions, customer credit risk, competition, changing demand for plastic packaging, and execution risk from restructuring and infrastructure investments.
  • International exposure, particularly in China and Europe, creates additional currency, regulatory, political, tax, and geopolitical risks. Brexit remained an uncertainty, while the reported effect of 2018 U.S. tariffs was insignificant to date.
  • The Tax Cuts and Jobs Act and changes in foreign tax benefits could materially affect the effective tax rate. A fourth-quarter tax-planning action was undertaken to address the phase-out of a foreign tax benefit historically worth approximately 5% to 6% of the effective tax rate, but the ultimate success of the strategy was uncertain.
  • The company identified cybersecurity, information-technology modernization, product liability, environmental compliance, intellectual property, labor, and regulatory risks.
  • Avery Dennison was a potentially responsible party at 13 environmental sites and had accrued $20 million for environmental remediation at year-end. Management stated that the range of additional potential costs could not be reasonably estimated.
  • The filing states that, based on current information, other lawsuits, claims, inquiries, and regulatory matters were not expected to be material individually or in the aggregate.

Important facts for investors to verify

  1. Obtain the incorporated 2018 Annual Report tables to verify revenue, earnings, margins, operating cash flow, free cash flow, segment results, and prior-year comparisons.
  2. Review the debt maturity schedule, interest rates, credit facilities, covenant requirements, and liquidity available after the $500 million senior-notes issuance.
  3. Assess the cash and financing effects of the U.S. pension-plan termination, including the expected annuity purchase for the remaining approximately $792 million liability.
  4. Evaluate the sustainability of pricing and productivity actions against raw-material, labor, energy, tariff, and foreign-exchange pressures.
  5. Monitor execution of LGM European restructuring, RBIS transformation, information-technology upgrades, and capacity investments.
  6. Review the tax footnote for the TCJA impacts, uncertain tax positions, and the replacement strategy for expiring foreign tax benefits.
  7. Review environmental accruals and contingencies, including the 13 identified sites and the inability to estimate a range of additional remediation costs.