Avery Dennison Corporation — Fiscal First Quarter 2016
Reporting period: Thirteen weeks ended April 2, 2016, compared with thirteen weeks ended April 4, 2015. Results are unaudited. Prior-year amounts were revised for identified pension, cash classification, tax, and out-of-period adjustment errors.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $1,485.5 million | $1,528.0 million | (2.8%) |
| Gross profit | $422.6 million | $430.0 million | (1.7%) |
| Gross margin | 28.4% | 28.1% | +0.3 pts |
| Income before taxes | $123.5 million | $100.0 million | +23.5% |
| Net income | $89.6 million | $71.9 million | +24.6% |
| Diluted EPS | $0.98 | $0.78 | +25.6% |
| Effective tax rate | 27.4% | 28.1% | (0.7 pts) |
| Net cash from operations | $(6.3) million | $4.6 million | $(10.9) million |
| Free cash flow | $(37.2) million | $(19.7) million | $(17.5) million |
Net margin improved to approximately 6.0% from 4.7%; pretax margin improved to approximately 8.3% from 6.5%. Marketing, general and administrative expense declined to $278.2 million from $300.4 million, while interest expense was unchanged at $15.3 million. Other expense declined to $5.6 million from $14.3 million, primarily because restructuring and other unusual charges were lower.
Cash and cash equivalents were $169.6 million at April 2, 2016, compared with $158.8 million at January 2, 2016. Total debt was approximately $1.23 billion, up approximately $169 million during the quarter, primarily from commercial paper and short-term borrowings used to fund repurchases, dividends, capital expenditures, and operations. The $700 million revolving credit facility had no balance outstanding, and the company was in compliance with its debt covenants. A new $500 million Euro-commercial paper program had no outstanding balance.
Material changes versus the prior period
- Reported sales decreased 3%, consisting of approximately 4% organic growth, a 6% adverse currency effect, and a 1% product-line divestiture effect. Higher volume drove organic growth.
- Pressure-sensitive Materials sales declined 3% to $1,092.0 million, while operating income increased to $138.5 million from $122.9 million.
- Retail Branding and Information Solutions sales declined 3% to $378.1 million, while operating income increased to $26.1 million from $19.2 million; organic growth was approximately 4%, led in part by RFID products.
- Vancive Medical Technologies sales declined 20% to $15.4 million; its operating loss narrowed to $0.9 million from $2.1 million.
- Restructuring charges declined to $5.6 million from $13.9 million. Management attributed profit improvement principally to productivity initiatives, restructuring savings, and higher volume, partly offset by higher employee-related costs, unfavorable geographic mix, and currency effects.
- Operating cash flow was negative because of higher incentive compensation payments and operational working capital. Operational working capital rose to $701.7 million, or 11.8% of annualized sales, from $671.8 million, or 11.0%.
- The company repurchased approximately 1.5 million shares for $95.6 million, compared with approximately 0.6 million shares for $33.8 million in the prior-year quarter. Approximately $271.6 million remained authorized for repurchase.
- In April 2016, the quarterly dividend was increased from $0.37 to $0.41 per share, an 11% increase.
Guidance, outlook, risks, and unusual items
- For 2016, management expects organic sales growth of 3% to 4.5% and increased earnings.
- Based on April 2016 exchange rates, currency translation was expected to reduce full-year sales by approximately 2% and pretax income by approximately $15 million.
- The proposed acquisition of MACtac’s European business for €200 million, including assumed debt, was expected to close within three months subject to customary and regulatory approvals. Management expected approximately 1% of additional full-year reported sales and an immaterial net-income impact, funded with cash and existing credit facilities.
- Other full-year expectations included a low-to-mid-thirties effective tax rate, approximately $200 million of capital and software expenditures, and approximately $25 million of cash restructuring charges.
- Management anticipated a one-time non-cash pretax pension settlement charge of approximately $40 million in the second quarter of 2016 related to approximately $70 million of obligations.
- Management expected approximately $75 million of 2016 savings, net of transition costs, from the 2014/2015 and 2015/2016 cost-reduction actions, with carryover savings in 2017.
- Key risks include demand and economic conditions, foreign currency, competition and pricing, raw-material costs, productivity execution, customer concentration, acquisitions and divestitures, cybersecurity and information technology disruptions, tax and regulatory matters, pension costs, environmental liabilities, and access to financing.
- The company was a potentially responsible party at 13 environmental sites. Environmental liabilities were $17.3 million at April 2, 2016; management could not estimate a range of potential additional costs.
- The filing states that there were no material changes to previously reported risk factors or market-risk disclosures, and that disclosure controls were effective.
Investor verification points
- Verify the sustainability of organic volume growth and the extent to which productivity savings offset employee, raw-material, mix, and currency pressures.
- Monitor operating working capital, receivable days, inventory turnover, and the effect of seasonality on operating cash flow and commercial paper borrowings.
- Assess leverage and liquidity after the MACtac acquisition, continued share repurchases, dividends, and anticipated capital spending.
- Confirm the timing and final accounting impact of the MACtac transaction and the approximately $40 million pension settlement charge.
- Reconcile reported results using the revised 2015 comparatives and distinguish GAAP results from management’s non-GAAP organic sales and free-cash-flow measures.