Avery Dennison Corp. Q1 2010 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the fiscal first quarter ended April 3, 2010. Avery Dennison Corporation is a large accelerated filer incorporated in Delaware. The company operates in four primary segments: Pressure-sensitive Materials, Retail Information Services, Office and Consumer Products, and Other specialty converting businesses. The quarter consisted of a 13-week period.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Sales | $1,554.7 million | $1,426.2 million |
| Gross Profit | $440.8 million | $345.1 million |
| Gross Margin | 28.4% | 24.2% |
| Net Income | $54.7 million | $(898.9) million |
| Diluted EPS | $0.51 | $(8.99) |
| Operating Cash Flow | $(27.9) million | $16.0 million |
| Free Cash Flow | $(46.8) million | $(6.6) million |
| Total Debt | $1.70 billion | $1.62 billion |
| Cash and Equivalents | $143.6 million | $83.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 9% year-over-year, driven by 7% organic growth and a 5% favorable foreign currency impact. The prior year comparison was negatively impacted by an extra week in the 2009 fiscal year.
- Profitability Turnaround: The company returned to profitability with $54.7 million in net income, a significant improvement from the $898.9 million loss in Q1 2009. The prior year loss was heavily influenced by a non-cash goodwill and intangible asset impairment charge of $832 million.
- Margin Expansion: Gross margin improved to 28.4% from 24.2%, attributed to higher volume and benefits from restructuring and productivity initiatives.
- Cash Flow: Operating cash flow turned negative ($27.9 million outflow) compared to a positive $16.0 million in the prior year. This was due to working capital changes, including higher inventory purchases to support sales growth and timing of receivables/payables.
- Restructuring: Restructuring charges decreased significantly to $4.7 million in Q1 2010 compared to $17.1 million in Q1 2009. The company continues to execute cost reduction actions initiated in late 2008.
Guidance, Outlook, and Risks
- 2010 Outlook: Management expects revenue and earnings to increase in 2010, subject to global economic conditions. They anticipate realizing an incremental $70 million in restructuring savings.
- Cost Expectations: The company anticipates restructuring charges of $15 million to $20 million for the remainder of 2010 and incremental pension expenses of approximately $10 million.
- Capital Expenditures: Capital and software expenditures are expected to range between $125 million and $150 million for the full year.
- Debt Management: Interest expense is expected to be lower (approximately $75 million reduction) due to debt retirements. Subsequent to the quarter end, the company issued $250 million in senior notes to repay a term loan.
- Risks: Key risks include global economic conditions affecting demand, raw material cost fluctuations, foreign currency exchange rates, and the ability to pass on cost increases to customers.
Investor Verification Checklist
- Verify the sustainability of the 7% organic sales growth across all segments, particularly in emerging markets.
- Monitor the execution of the remaining restructuring charges ($15M-$20M) and the realization of the projected $70M in savings.
- Assess the impact of the negative operating cash flow ($27.9M) and whether working capital management improves in subsequent quarters.
- Review the status of the $250 million senior note issuance completed in April 2010 and its effect on the debt maturity profile.
- Track the effective tax rate, which was 29% in Q1 2010, and potential variances due to discrete events or geographic income mix.