AVY

Avery Dennison Corp. 2005 10-K Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2005. Avery Dennison Corporation is a global manufacturer of pressure-sensitive materials, office products, and retail information services. The company operates approximately 140 facilities in over 40 countries, with 55% of sales generated internationally. Key reporting segments include Pressure-sensitive Materials (57% of sales), Office and Consumer Products (21%), and Retail Information Services (12%).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Sales increased 3% to $5.47 billion, driven by a 2% positive impact from pricing and product mix and 2% from foreign currency translation. This growth was offset by a 1% decline in core unit volume due to market share loss in North American roll materials following price increases and accelerated customer purchases in 2004.
• Profitability: Net income decreased 19% to $226.4 million. Negative factors included restructuring and asset impairment charges ($63.6 million in other expense), higher pension and medical costs, and inventory write-offs. These were partially offset by a lower effective tax rate and cost savings from productivity initiatives.
• Segment Performance: Pressure-sensitive Materials operating income rose 17% to $259.6 million. Office and Consumer Products operating income fell 10% to $168.0 million due to lower volume and inventory write-offs. Retail Information Services operating income declined 11% to $42.7 million.
• Discontinued Operations: The company recorded a $74 million pretax impairment charge related to the raised reflective pavement markers business, which is being sold and classified as discontinued operations.

Guidance, Outlook, and Risks

2006 Outlook: Management anticipates unit volume growth of 2% to 3%. They expect restructuring efforts to yield $80 million to $90 million in annualized pretax savings, with 60-70% realized in 2006. Free cash flow is projected at $300 million to $350 million. Capital expenditures are expected to range from $175 million to $200 million.

Significant Risks and Contingencies:

• Antitrust Investigations: The company is subject to criminal and civil investigations by the U.S. DOJ, European Commission (EC), Canada, and Australia regarding competitive practices in the label stock industry. The company expects a material fine from the EC but cannot estimate the amount.
• FCPA Violations: The company voluntarily disclosed potential violations of the Foreign Corrupt Practices Act involving impermissible payments in China. Fines or penalties are expected but amounts are unpredictable.
• Legal Proceedings: Multiple class-action lawsuits are pending in the U.S. seeking treble damages related to alleged anticompetitive practices.
• Market Risks: Exposure to raw material cost fluctuations, foreign currency exchange rates, and credit rating downgrades (S&P outlook is negative).

Investor Verification Checklist

• Verify the status and potential financial impact of the DOJ and EC antitrust investigations and the expected EC fine.
• Confirm the resolution of the Foreign Corrupt Practices Act issues in China and any associated penalties.
• Monitor the execution of the $80-$90 million cost reduction plan and the timeline for achieving savings.
• Assess the impact of the divestiture of the raised reflective pavement markers business and the two low-margin product lines.
• Review the company's ability to pass on raw material cost increases without further market share loss in North America.
• Track the adoption of SFAS 123(R) for stock-based compensation, expected to impact 2006 earnings by approximately $0.12 per share.