Avery Dennison Corp. Q1 2003 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the fiscal first quarter ended March 29, 2003. Avery Dennison Corporation operates in two primary segments: Pressure-sensitive Adhesives and Materials, and Consumer and Converted Products. The quarter included the integration of recent acquisitions (Jackstädt GmbH, RVL Packaging, and L&E Packaging) and was impacted by a general weakening of consumer confidence.
Key Financial Metrics
| Metric | Q1 2003 | Q1 2002 |
|---|---|---|
| Net Sales | $1,150.6 million | $930.8 million |
| Gross Profit | $364.1 million | $308.9 million |
| Gross Margin | 31.6% | 33.2% |
| Net Income | $70.8 million | $64.8 million |
| Diluted EPS | $0.71 | $0.66 |
| Operating Cash Flow | $38.3 million | $29.6 million |
| Total Debt | $1,249.5 million | $1,144.2 million |
| Cash and Equivalents | $33.2 million | $16.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 23.6% year-over-year. Approximately 60% of the incremental sales were attributed to acquisitions (Jackstädt, RVL, L&E), and 20% to favorable foreign currency exchange rates.
- Margin Compression: Gross profit margin declined to 31.6% from 33.2%, primarily due to lower margins in the acquired Jackstädt business and $2 million in transition costs related to a plant closure.
- Interest Expense: Interest expense rose to $14.9 million from $9.3 million due to higher debt levels from acquisitions and the refinancing of $400 million in variable short-term borrowings into long-term Senior Notes in January 2003.
- Segment Performance: The Pressure-sensitive Adhesives segment saw a 31.6% sales increase, while the Consumer and Converted Products segment grew 12.7%.
Guidance, Outlook, and Risks
- Outlook: Management expects sales growth in 2003 driven by new product introductions and emerging markets (Asia, Latin America, Eastern Europe). Capital expenditures are projected between $175 million and $200 million for the year.
- Antitrust Investigation: The U.S. Department of Justice (DOJ) has initiated a criminal investigation into competitive practices in the label stock industry. The Company has been notified of a pending subpoena and is a named defendant in related class action lawsuits alleging unlawful competitive practices and disclosure violations. The Company states the effect may be adverse and material but intends to cooperate and defend vigorously.
- Financial Risks: The Company faces exposure to foreign currency fluctuations (45% of sales are international) and pension expense increases due to adjusted assumptions (expected to negatively impact pretax income by ~$10 million in 2003).
- Contingent Payments: Potential additional payments of up to $5 million for the Dunsirn acquisition and up to $2 million for the RVL/L&E acquisition may be required in 2004/2005 if performance targets are met.
Investor Verification Checklist
- Verify the status and potential financial impact of the DOJ criminal investigation and related class action lawsuits regarding the label stock industry.
- Monitor the integration progress and margin performance of the Jackstädt, RVL, and L&E acquisitions.
- Review the amortization schedule of the $32.5 million loss from the settled interest rate swap, which will impact earnings over the life of the related debt.
- Assess the impact of foreign currency exchange rates on future earnings, given the significant international exposure.
- Track the execution of cost reduction programs and the associated severance accruals ($8 million remaining for 2002 program).