Avery Dennison Corp. 2008 10-K Summary
Business Context and Reporting Period
This report covers the fiscal year ended December 27, 2008. Avery Dennison Corporation is a global manufacturer of pressure-sensitive materials, office products, and retail information services (including labels, tags, and RFID). The company operates in over 60 countries with approximately 36,000 employees. In 2008, the company completed the acquisition of DM Label Group and continued the integration of Paxar Corporation (acquired in 2007). International operations represented approximately 65% of total sales.
Key Financial Metrics
| Metric | 2008 | 2007 | Change |
|---|---|---|---|
| Net Sales | $6,710.4 million | $6,307.8 million | +6% |
| Net Income | $266.1 million | $303.5 million | -12% |
| Diluted EPS | $2.70 | $3.07 | -12% |
| Gross Margin | 25.7% | 27.3% | -160 bps |
| Operating Cash Flow | $539.7 million | $499.4 million | +8% |
| Free Cash Flow | $365.3 million | $244.6 million | +49% |
| Total Debt | $2.21 billion | $2.26 billion | -2% |
| Debt-to-Capital Ratio | 55.8% | 53.1% | +270 bps |
Segment Performance: The Pressure-sensitive Materials segment contributed 54% of sales, Retail Information Services 23%, and Office and Consumer Products 14%. Organic sales declined 3% in 2008 due to worsening global economic conditions, offset by a 7% increase from acquisitions and currency translation.
Material Changes vs. Prior Period
- Revenue: Reported sales grew 6% primarily due to the Paxar and DM Label acquisitions ($450 million combined impact) and favorable currency translation ($167 million). Organic sales declined 3%.
- Profitability: Net income decreased $37 million. Gross margin compression was driven by raw material inflation, negative product mix shifts, and reduced fixed cost leverage. These were partially offset by productivity savings and a significantly lower effective tax rate (1.7% in 2008 vs. 19.1% in 2007).
- Restructuring: The company recorded $29.8 million in restructuring costs in 2008, including charges for approximately 700 positions in Q4 alone. Total restructuring charges for the year were higher than 2007 ($21.6 million).
- Acquisitions: Completed the DM Label acquisition in April 2008. Integration of Paxar resulted in $88 million in incremental cost synergies in 2008.
Guidance, Outlook, and Risks
Outlook: Management is not providing a 2009 earnings forecast due to global economic uncertainty. The company expects unfavorable currency impacts on 2009 earnings. Capital and software expenditures are anticipated to range between $120 million and $150 million in 2009.
Cost Reduction: New restructuring actions initiated in Q4 2008 target approximately $150 million in annualized savings by 2010, with $70 million expected to benefit 2009. The company anticipates incurring approximately $120 million in restructuring charges in 2009.
Risks and Contingencies:
- Legal Proceedings: The company is a defendant in class actions alleging unlawful competitive practices (treble damages sought). Additionally, the company has reported potential violations of the U.S. Foreign Corrupt Practices Act (FCPA) involving employees in China and recently acquired companies, with potential fines or penalties.
- Environmental: Accrued liability for environmental remediation is approximately $60 million. Future costs could exceed current accruals.
- Goodwill Impairment: While no impairment was recorded in 2008, the fair value of the Retail Information Services reporting unit exceeded its carrying value by only 5%. Management noted that further declines in revenue or changes in assumptions in 2009 could trigger an impairment charge.
- Debt Covenants: In January 2009, the company amended debt covenants to exclude certain restructuring charges and adjust levels, reflecting the challenging economic environment.
Investor Verification Checklist
- Organic Sales Trend: Verify the sustainability of the 3% organic sales decline and the impact of the global recession on the Office and Consumer Products segment.
- Restructuring Execution: Monitor the realization of the targeted $150 million in annualized savings and the timing of the anticipated $120 million in 2009 restructuring charges.
- Legal Exposure: Track developments in the antitrust class actions and the FCPA investigations to assess potential financial penalties.
- Goodwill Valuation: Review Q1 and Q2 2009 results for the Retail Information Services segment to assess the risk of goodwill impairment given the narrow margin of safety in 2008.
- Debt Servicing: Confirm compliance with amended debt covenants and the company's ability to refinance or retire debt as scheduled.