Business Context and Reporting Period
This Form 8-K was filed by Avery Dennison Corporation on July 9, 2018. The report discloses significant corporate actions regarding the termination of the company's U.S. defined benefit pension plan and an update to its long-term financial leverage targets.
Key Financial Metrics and Actions
- Pension Plan Underfunding: The Avery Dennison Pension Plan is estimated to be underfunded by $240 million on a termination basis.
- Total Liability: The long-term liability to be settled is estimated at approximately $950 million.
- Planned Contributions: The company plans to borrow $200 million via commercial paper to contribute to the plan by August 15, 2018.
- Estimated Non-Cash Charge: Total charges associated with the plan termination are estimated between $575 million and $600 million.
- Charge Recognition: Approximately $100 million is expected in Q4 2018, with the remainder recognized in 2019 upon liability transfer.
- Leverage Target Update: The long-term target for the net debt to adjusted EBITDA ratio has been revised from 1.7 to 2.0 to a new range of 2.3 to 2.6.
Material Changes Versus Prior Period
The primary material change is the Board's approval to terminate the U.S. pension plan effective September 28, 2018. Additionally, the company has materially adjusted its long-term leverage guidance, increasing the target net debt to adjusted EBITDA ratio to reflect the costs and capital requirements associated with the pension settlement.
Guidance, Outlook, and Risks
Management Commentary: Management expects these actions to have no material impact on available capital or capital allocation strategy, as unfunded pension obligations were already reflected in their planning. The plan termination will be settled via lump-sum payments in 2018 and the purchase of group annuity contracts in 2019.
Risks and Contingencies: The actual liability amount and timing depend on participant settlement elections and prevailing market conditions. The Board reserved the right to change the termination date or revoke the decision, though there is no current intent to do so. Forward-looking statements regarding charges and leverage targets are subject to risks detailed in the company's 2017 Form 10-K.
Investor Verification Checklist
- Verify the final amount of the non-cash charge once the plan termination is executed in 2019.
- Monitor the company's ability to secure the $200 million commercial paper borrowing by the August 15, 2018 deadline.
- Assess the impact of the revised 2.3 to 2.6 leverage target on future debt covenants and credit ratings.
- Review the 2017 U.S. income tax return to confirm the deduction of the $200 million contribution.
- Track the selection of insurance companies for the group annuity contract in the first half of 2019.