Avery Dennison Corporation — Fiscal First Quarter 2012 Form 10-Q
Reporting period: Thirteen weeks ended March 31, 2012, compared with thirteen weeks ended April 2, 2011. Financial statements are unaudited.
Business Context and Reporting Period
Avery Dennison operates primarily through Pressure-sensitive Materials, Retail Branding and Information Solutions, and other specialty converting businesses. The Office and Consumer Products business was classified as discontinued operations following the December 2011 agreement to sell it to 3M for gross cash proceeds of $550 million, subject to adjustments and customary closing conditions. Closing was expected in the second half of 2012.
Financial Performance and Liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $1,483.3 million | $1,526.5 million | Down 3% |
| Gross profit | $387.6 million | $399.5 million | Down 3% |
| Gross margin | 26.1% | 26.2% | Broadly stable |
| Income from continuing operations | $46.3 million | $36.9 million | Up $9.4 million |
| Continuing operations pretax income | $65.1 million | $62.6 million | Up $2.5 million |
| Net income | $43.9 million | $44.8 million | Down 2% |
| Diluted EPS | $0.41 | $0.42 | Down 2% |
| Operating cash flow | $10.7 million | $(117.5) million | Improved $128.2 million |
| Free cash flow | $(22.6) million | $(150.0) million | Improved $127.4 million |
Continuing-operations pretax margin was 4.4%, compared with 4.1% in the prior-year quarter. Net income margin was approximately 3.0%, compared with 2.9%. The effective tax rate on continuing operations declined to approximately 29% from 41%, including a $3.7 million discrete benefit in 2012 versus a $3.0 million discrete expense in 2011.
Cash and cash equivalents were $190.7 million at March 31, 2012, compared with $178.0 million at December 31, 2011. Total debt was approximately $1.32 billion, up about $136 million from year-end, primarily due to higher commercial paper and foreign short-term borrowings. The $625 million revolving credit facility had no outstanding balance and matures in December 2016. The company was in compliance with its financial covenants.
Capital and software expenditures were $36.0 million in the quarter. Dividends paid were $28.4 million, and the company repurchased 2.4 million shares for $72.2 million. The quarterly dividend increased 8% to $0.27 per share.
Material Changes Versus the Prior Comparable Period
- Sales declined 3%, comprising a 1% organic decline and a 2% unfavorable foreign-currency effect.
- Pressure-sensitive Materials sales declined 2%, but operating income increased to $87.4 million from $83.5 million due to productivity and pricing benefits.
- Retail Branding and Information Solutions sales declined 5%, including a 4% organic decline, while operating income fell to $7.2 million from $12.2 million.
- Other specialty converting sales declined 4%; the operating loss narrowed to $0.1 million from $2.0 million.
- Productivity initiatives, pricing actions, and lower marketing, general and administrative expense offset lower volume and raw-material inflation, leaving gross margin essentially unchanged.
- Operating cash flow improved substantially due to lower bonus payments and tighter working-capital management.
- Discontinued operations generated a $2.4 million after-tax loss versus $7.9 million of income in the prior-year quarter.
Guidance, Outlook, Risks, and Unusual Items
- Management expected 2012 organic sales and income from continuing operations to increase.
- Expected 2012 pension contributions were at least $75 million, excluding any additional contributions funded with OCP sale proceeds.
- Restructuring costs and other items were estimated at approximately $25 million for 2012. The company recorded $7.6 million of 2012 restructuring charges in the quarter, associated with approximately 210 position reductions, and expected approximately $6 million of annualized savings, with about three-quarters realized in 2012.
- The company expected approximately $150 million of 2012 capital and software expenditures and anticipated completing the OCP sale in the second half of 2012. Net proceeds were intended for short-term debt repayment, pension contributions, and share repurchases.
- Key risks include demand and economic conditions, raw-material costs and availability, the ability to pass through cost inflation, competitive pricing, customer and supplier concentration, foreign exchange, tax audits, pension costs, financing access, legal and environmental matters, and execution of the OCP divestiture.
- The company was a potentially responsible party at 14 environmental sites. Environmental liabilities totaled $37.3 million at March 31, 2012, including approximately $11 million classified as short-term; management could not estimate a range of potential additional costs.
- The company entered into a 15-year Netherlands lease commitment totaling approximately $60 million, expected to commence in 2014, and had guarantees relating to subsidiary credit lines and supplier obligations.
- Cash balances were predominantly held by foreign subsidiaries, creating potential repatriation, tax, currency, and liquidity considerations.
Most Important Facts to Verify
- Whether the OCP transaction closed on the expected timetable and the final cash proceeds, taxes, transaction costs, and gain recognized.
- Whether organic sales and continuing-operations earnings increased as projected for 2012, particularly in Retail Branding and Information Solutions.
- The pace and sustainability of productivity savings and the remaining restructuring costs and cash payments.
- Debt reduction following the OCP sale, commercial-paper access, covenant compliance, and liquidity under the revolving credit facility.
- Actual pension contributions and any resulting effect on cash flow and leverage.
- Changes in environmental, legal, tax, and other contingent liabilities, including the 14 identified environmental sites.
- The effect of foreign exchange, raw-material inflation, customer demand, and pricing actions on margins and cash generation.