Avery Dennison Corp. 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Avery Dennison Corporation for the period ended September 28, 2002. The company operates in two primary segments: Pressure-sensitive Adhesives and Materials, and Consumer and Converted Products. The reporting period includes the impact of the May 2002 acquisition of Jackstädt GmbH, a German manufacturer of pressure-sensitive adhesive materials.
Key Financial Metrics
| Metric | Three Months Ended Sep 28, 2002 | Nine Months Ended Sep 28, 2002 |
|---|---|---|
| Net Sales | $1,114.5 million | $3,101.6 million |
| Gross Profit | $353.2 million (31.7% margin) | $1,008.6 million (32.5% margin) |
| Net Income | $63.1 million | $201.7 million |
| Diluted EPS | $0.64 | $2.03 |
| Operating Cash Flow (9mo) | $320.7 million | |
| Total Debt | $1,037.6 million ($268.9m short-term + $768.7m long-term) | |
| Cash and Equivalents | $28.9 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 15.3% for the quarter and 7.3% for the nine-month period compared to 2001. Excluding currency impacts, sales grew 12.9% (quarter) and 7.3% (nine months). The Jackstädt acquisition contributed approximately $93 million in sales for the quarter.
- Profitability: Net income increased slightly to $63.1 million for the quarter (from $61.7 million) and $201.7 million for the nine months (from $185.1 million). Gross margins decreased slightly due to the lower margin profile of the acquired Jackstädt business.
- One-Time Charges: The company recorded a $15.2 million pretax charge in the third quarter for asset impairments and lease cancellation costs related to the integration of Jackstädt and other facility closures. Approximately 60% of this charge relates to Jackstädt integration.
- Accounting Changes: The adoption of SFAS No. 142 eliminated goodwill amortization, providing a benefit of approximately $0.03 to $0.10 per share depending on the period.
- Debt Levels: Total debt increased by $187.9 million to $1.04 billion, primarily to fund the Jackstädt acquisition.
Outlook, Risks, and Management Commentary
- Future Charges: Management plans to record an additional $17 million charge in the fourth quarter of 2002 for severance costs related to the elimination of Avery Dennison positions due to the Jackstädt integration. No further severance or asset impairment charges related to this integration are expected after 2002.
- Subsequent Acquisitions: On November 5, 2002, the company acquired RVL Packaging and L&E Packaging for approximately $220 million, funded by short-term borrowings and stock.
- Interest Rates and Ratings: Moody's downgraded the company's long-term rating from A2 to A3 and short-term from P1 to P2. This is expected to increase interest costs by $1 million to $3 million annually starting in 2003. Interest expense is expected to rise to $13–$15 million in Q4 following anticipated refinancing.
- Geographic Risks: Management cites uncertainty regarding economic conditions in Europe and potential currency devaluation in Argentina and Brazil as risks to future results.
- Capital Expenditures: Expected to range between $140 million and $150 million for fiscal 2002, with a focus on international markets.
Investor Verification Checklist
- Verify the integration progress and cost synergies of the Jackstädt acquisition against the $15.2 million Q3 charge and the projected $17 million Q4 severance charge.
- Monitor the impact of the Moody's credit rating downgrade on future borrowing costs and liquidity.
- Assess the revenue contribution and margin profile of the subsequent RVL and L&E Packaging acquisitions ($220 million purchase price).
- Review the company's exposure to foreign currency fluctuations, particularly in Europe, Argentina, and Brazil.
- Confirm the timeline for the refinancing of short-term debt to long-term debt and its effect on interest expense.