Avery Dennison Corporation — Fiscal Q1 2015 Form 10-Q
Reporting period: Thirteen weeks ended April 4, 2015, compared with thirteen weeks ended March 29, 2014. Results are unaudited. Avery Dennison operates through Pressure-sensitive Materials, Retail Branding and Information Solutions, and Vancive Medical Technologies.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $1,528.0 million | $1,550.1 million | (1.4%) |
| Gross profit | $430.0 million | $407.2 million | +5.6% |
| Gross margin | 28.1% | 26.3% | +180 bps |
| Income from continuing operations | $71.6 million | $71.6 million | Flat |
| Net income | $71.6 million | $71.2 million | +0.6% |
| Diluted EPS | $0.77 | $0.73 | +5.5% |
| Operating cash flow | $8.3 million | $(108.0) million | Improved |
| Free cash flow | $(16.0) million | $(155.4) million | Improved |
Marketing, general and administrative expense was $300.9 million, or 19.7% of sales, versus $296.7 million, or 19.1%, in the prior-year quarter. Pretax income increased to $99.5 million from $87.8 million, while the effective tax rate increased to 28.0% from 18.4%. The 2015 rate included discrete benefits totaling approximately $4.9 million; the 2014 rate included larger discrete benefits.
Cash and cash equivalents were $212.5 million at April 4, 2015, compared with $227.0 million at January 3, 2015. Total debt increased approximately $61 million during the quarter to approximately $1.21 billion, primarily from commercial paper borrowings. The fair value of total debt was $1.3 billion. No borrowings were outstanding under the $700 million revolving credit facility, which matures in 2019, and the company was in compliance with its debt covenants.
Capital expenditures and software spending totaled $26.7 million in Q1 2015. The company paid $31.8 million of dividends and repurchased approximately 0.6 million shares for $33.8 million. The quarterly dividend was increased from $0.35 to $0.37 per share in April 2015.
Material changes versus the prior comparable period
- Reported sales declined 1%, reflecting approximately 3% organic growth and a 3% negative impact from the extra week in the prior year, partly offset by a 7% unfavorable foreign-currency impact.
- Gross margin expanded due to productivity initiatives, restructuring savings, higher volume, and improved product mix, partly offset by higher employee-related costs.
- Income from continuing operations was flat despite higher pretax income because of the higher effective tax rate.
- Foreign currency translation reduced sales by approximately $106 million and continuing-operations income by approximately $7 million.
- Restructuring charges increased to $13.9 million from $7.3 million. The company reduced approximately 245 positions during the quarter and expects related charges and payments to be substantially completed in 2015.
- Goodwill declined approximately $25 million to $697 million, primarily because of currency translation. Accumulated other comprehensive loss increased to $613.7 million from $547.3 million, principally from a $72.1 million after-tax foreign-currency translation loss.
Segment results
| Segment | Q1 2015 sales | Q1 2015 pretax/operating result | Reported change |
|---|---|---|---|
| Pressure-sensitive Materials | $1,120.6 million | $122.9 million | Sales down approximately 2%; operating income up from $112.0 million |
| Retail Branding and Information Solutions | $388.1 million | $19.2 million | Sales approximately flat; operating income up from $16.6 million |
| Vancive Medical Technologies | $19.3 million | $(2.1) million | Sales up approximately 2%; operating loss improved from $(2.6) million |
Guidance, outlook, risks and unusual items
- Management expects 2015 organic sales growth of approximately 3% to 4% and earnings growth versus 2014.
- Expected 2015 cash restructuring costs are approximately $50 million. Management expects at least $70 million of 2015 savings, net of transition costs, from the 2014/2015 actions, with carryover savings in 2016.
- Management expects a full-year 2015 tax rate in the low- to mid-thirty-percent range and capital and software expenditures of approximately $175 million.
- In February 2015, the company agreed to sell certain assets and transfer liabilities related to a product line in Retail Branding and Information Solutions. The transaction was expected to close in Q2 2015, subject to customary conditions and closing adjustments. A $2.0 million impairment charge was recorded.
- Other expense included restructuring charges, the asset-held-for-sale impairment, divestiture-related costs, a legal settlement benefit of $0.5 million, and a $1.7 million gain on asset sale.
- The company identifies demand and economic conditions, foreign-currency movements, competitive pricing, raw-material costs, productivity execution, customer and supplier concentration, cyber and information-technology risks, tax matters, legal and environmental proceedings, and access to financing as key risks.
- Environmental liabilities were $25.4 million at April 4, 2015, including potential obligations at 15 waste-disposal or recycling sites. Management could not reasonably estimate a range of possible additional costs.
- The company guaranteed collection of approximately $17 million of receivables and had approximately $47 million of unused letters of credit outstanding.
Most important facts for investors to verify
- Whether organic growth and restructuring savings offset currency pressure, higher employee costs, and competitive or raw-material cost inflation.
- The timing and proceeds of the planned product-line divestiture and any additional impairment or closing adjustments.
- Progress toward the $50 million cash restructuring-cost estimate and at least $70 million of 2015 savings.
- Commercial paper balances, seasonal borrowing needs, covenant compliance, and continued access to the commercial paper market.
- Conversion of improved operating cash flow into positive full-year free cash flow, given Q1 free cash flow remained negative.
- Changes in the tax rate, uncertain tax positions, foreign-currency exposure, pension obligations, environmental liabilities, and other contingencies.