AVY

Avery Dennison Corp. 2003 10-K Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 27, 2003. Avery Dennison Corporation is a global manufacturer of pressure-sensitive adhesives, materials, and consumer/converted products. The company operates in two primary segments: Pressure-sensitive Adhesives and Materials (base materials, tapes, graphic films) and Consumer and Converted Products (office products, labels, tags). International operations represent approximately 50% of sales. In October 2003, the company sold its European package label converting business, which is reported as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Sales Growth: Net sales increased 15% to $4.76 billion, driven by acquisitions (Jackstädt, RVL, L&E), favorable foreign currency translation ($235 million benefit), and organic growth in Asia and Latin America.
• Margin Compression: Gross profit margin declined from 32.1% to 30.6%. This was caused by a shift toward lower-margin product lines, a competitive pricing environment, start-up costs for new European equipment, and the weakening of the British Pound against the Euro.
• Restructuring Charges: The company recorded $34.3 million in charges in Q4 2003 for productivity improvements, including severance for ~420 positions and asset impairments. This compares to $32.1 million in charges in 2002.
• Discontinued Operations: The sale of the European package label business resulted in a $19.7 million after-tax gain in 2003.
• Cash Flow: Free cash flow dropped significantly to $133.5 million from $360.6 million due to higher capital expenditures ($201.4 million vs. $150.4 million) and working capital changes.

Guidance, Outlook, and Risks

• 2004 Outlook: Management anticipates improved global economic conditions and higher earnings in the second half of 2004 due to cost-saving initiatives. Revenue growth is expected to be constrained by continued declines in the office products business.
• Cost Initiatives: Productivity programs and the integration of the Jackstädt acquisition are expected to yield annualized savings of $25–$30 million, with further restructuring charges of $30–$35 million expected in the first half of 2004.
• Legal Proceedings (Critical Risk): The U.S. Department of Justice (DOJ) initiated a criminal investigation into competitive practices in the label stock industry in April 2003. The company is a named defendant in multiple class-action lawsuits alleging antitrust violations and disclosure failures. The company states the effect may be "adverse and material" but cannot predict the outcome.
• Environmental: The company is a potentially responsible party (PRP) at 11 waste sites. While accrued liabilities are not currently significant, future remediation costs could exceed estimates.
• Customer Concentration: Sales and receivables in the U.S. consumer products business are concentrated among a small number of major customers (discount superstores and mass marketers).

Investor Verification Checklist

• Antitrust Investigation Status: Verify the current status of the DOJ criminal investigation and related class-action lawsuits, as these pose a material risk to future earnings and reputation.
• Office Products Segment: Monitor the decline in the office products business, specifically the loss of market share to private labels and the impact of the $35 million annualized sales loss from a major customer.
• Restructuring Execution: Track the realization of the projected $25–$30 million in annualized savings from the 2003 productivity initiatives and the timing of the expected 2004 restructuring charges.
• Currency Exposure: Assess the impact of foreign exchange rates, particularly the GBP/Euro relationship, on European operating margins.
• Capital Allocation: Review the 2004 capital spending plan ($175–$200 million) and its funding sources, given the significant drop in free cash flow in 2003.