AVY

Avery Dennison Corp. 2006 10-K Summary

Business Context and Reporting Period

Company: Avery Dennison Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 30, 2006
Headquarters: Pasadena, California
Operations: The Company manufactures pressure-sensitive materials, office products, and retail information services (tickets, tags, labels). It operates approximately 120 facilities in over 40 countries with 22,700 employees. International operations accounted for approximately 55% of sales.

Key Financial Metrics

Note: Total debt decreased approximately $120 million in 2006. Free cash flow is defined as operating cash flow less capital expenditures and software/deferred charges.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 2% to $5.58 billion. Organic sales growth was 3%, driven by expansion in Asia, Latin America, and Eastern Europe. U.S. sales were flat due to slow market conditions and the exit of low-margin private label business.
• Profitability: Net income increased $141 million (62%) to $367.2 million. This was driven by higher sales, reduced restructuring charges compared to 2005, cost savings from productivity initiatives, and a lower effective tax rate (17.2% in 2006 vs. 20.4% in 2005).
• Segment Performance:
  • Pressure-sensitive Materials: Sales up 4%; Operating income up 17%.
  • Office and Consumer Products: Sales down 6% (due to divestitures and exiting private label business); Operating income up 7%.
  • Retail Information Services: Sales up 6%; Operating income up 19%.
• Restructuring: The Company implemented cost reduction actions in late 2005 and 2006, reducing headcount by approximately 1,150 positions. These actions are expected to yield $90-$100 million in annualized pretax savings.

Guidance, Outlook, and Risks

2007 Outlook:

• Revenue: Expected low to mid single-digit growth.
• Costs: Anticipated additional cost reductions of $45 million compared to 2006, partially offset by $12-$15 million in IT investments.
• Earnings: Expect an increase in annual earnings and free cash flow compared to 2006.
• Capital Expenditures: Estimated at $160-$165 million (or $210-$225 million including software).
• Tax Rate: Anticipate an increase in the effective tax rate for 2007.

Key Risks and Contingencies:

• Legal Proceedings: The U.S. Department of Justice and European Commission closed their investigations into competitive practices in the label stock industry without action in late 2006. However, investigations by Canadian and Australian authorities remain open. The Company is also defending class action lawsuits related to these practices.
• FCPA Violations: The Company voluntarily disclosed potential violations of the Foreign Corrupt Practices Act involving employees in China. While sales involved were minor ($7 million in 2005), fines or penalties are expected.
• Environmental: The Company accrued an additional $13 million in Q3 2006 for environmental remediation costs at a former facility. Total estimated range is $15-$17 million.
• Market Risks: Exposure to foreign currency fluctuations (55% of sales are international) and raw material price volatility.

Investor Verification Checklist

• Legal Exposure: Monitor the status of ongoing antitrust investigations in Canada and Australia and the potential financial impact of class action lawsuits.
• FCPA Penalties: Verify the final settlement amount or penalties resulting from the disclosed Foreign Corrupt Practices Act violations in China.
• Restructuring Savings: Track the realization of the projected $90-$100 million in annualized pretax savings from cost reduction actions.
• Organic Growth: Assess the sustainability of organic growth in emerging markets (Asia, Latin America) versus the flat performance in the U.S.
• Environmental Liabilities: Review future updates on the $15-$17 million environmental remediation estimate and potential costs at other designated sites.