AVY

Avery Dennison Corp. 2002 Annual Report (10-K) Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 28, 2002. 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 and Consumer and Converted Products. International operations account for approximately 45% of the business. The company employs approximately 20,500 people across 42 countries.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 10.6% to $4.21 billion, driven primarily by acquisitions (contributing ~$270 million) and organic growth in Roll Materials and international markets.
• Acquisitions:
  • Jackstädt GmbH (May 2002): A German pressure-sensitive manufacturer with ~$400 million in 2001 revenue. Purchase price net of cash was ~$311 million.
  • RVL Packaging & L&E (Nov 2002): Brand identification products provider. Combined 2001 revenue ~$175 million. Purchase price net of cash was ~$222 million.
• Restructuring Charges: The company recorded $32.1 million in pretax charges in 2002, including $10.7 million for severance, $17.5 million for asset impairments, and $3.9 million for lease cancellations. These were largely related to Jackstädt integration and cost reduction programs.
• Profitability: Net income increased 5.8% to $257.2 million despite the restructuring charges, aided by the elimination of goodwill amortization (SFAS 142) and lower interest rates.
• Debt Levels: Total debt increased by $294.5 million to fund acquisitions. The debt-to-capital ratio rose to 52%.

Guidance, Outlook, and Risks

• Outlook: Management expects continued growth in 2003 driven by new product introductions and the integration of 2002 acquisitions. Cost management initiatives are expected to improve margins.
• Capital Expenditures: Projected to be between $175 million and $200 million in 2003, funded by operating cash flows.
• Interest Rate & Credit Rating:
  • Moody's downgraded the company's long-term rating from A2 to A3 and short-term from P1 to P2. S&P maintained an "A" long-term rating with a "negative" outlook.
  • The downgrade is estimated to increase after-tax interest costs by $1 million to $3 million annually starting in 2003.
  • In January 2003, the company refinanced $400 million of commercial paper with long-term notes, settling an interest rate swap at a loss of $32.5 million (to be amortized over 10 years).
• Pension Assumptions: Continued weakness in equity markets and lower interest rates are expected to negatively impact pretax operating income by approximately $10 million in 2003 relative to 2002.
• Risks: Key risks include foreign currency fluctuations (45% of business is international), raw material pricing, integration of acquisitions, and environmental liabilities at eight designated waste sites (though accrued amounts are not currently significant).

Investor Verification Checklist

• Acquisition Integration: Verify the progress of Jackstädt integration and the realization of projected synergies, given the significant restructuring charges taken.
• Debt Service: Monitor the impact of the credit rating downgrade on borrowing costs and the company's ability to service the increased debt load ($1.14 billion).
• Margin Pressure: Assess whether gross margins can recover from the 32.2% level, considering the lower-margin mix from new acquisitions and raw material costs.
• Pension Liability: Track the impact of changing pension assumptions on future earnings, as a $10 million hit is forecast for 2003.
• Customer Concentration: Review the financial health of the nine major retail customers representing 17% of trade receivables in the Office Products business.