Avery Dennison Corporation — Fiscal 2017 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 30, 2017, including the thirteen-week fourth quarter. Avery Dennison produces pressure-sensitive materials, labels, tags, tapes, fasteners, RFID products, medical materials, and related converted products.
- Reportable segments: Label and Graphic Materials (LGM), Retail Branding and Information Solutions (RBIS), and Industrial and Healthcare Materials (IHM).
- Approximate 2017 sales mix: LGM 68%, RBIS 23%, and IHM 9%.
- International operations represented approximately 76% of sales; the company operated in more than 50 countries, with approximately 180 manufacturing and distribution facilities and 30,000 employees.
Financial metrics and capital structure
The supplied filing text incorporates the primary income statement, balance sheet, cash flow statement, selected financial data, segment information, and detailed Management’s Discussion and Analysis by reference to the 2017 Annual Report. It does not provide clear values in the supplied text for revenue, net income, operating income, cash flow from operations, margins, total debt, cash and equivalents, or liquidity ratios.
- Research and development expense was $93.4 million in 2017, compared with $89.7 million in 2016 and $91.9 million in 2015.
- Average variable-rate borrowings were approximately $256 million in 2017.
- The company issued €500 million of senior notes in 2017 and designated them as a net investment hedge of foreign operations.
- A fourth amended and restated credit agreement was entered into in November 2017. The supplied text does not state the available commitment, outstanding borrowings, or covenant headroom.
- Fourth-quarter 2017 share repurchases totaled approximately 229,000 shares at an average price of $108.81 per share. Approximately $625.2 million remained available under the repurchase authorization at quarter-end.
Material changes versus the prior comparable period
- The company completed 2017 acquisitions totaling approximately $360 million, including Yongle Tape Ltd., Finesse Medical Ltd., and Hanita Coatings-related assets and subsidiaries.
- Finesse Medical, acquired in May 2017, expanded IHM’s wound-care and skin-care product offerings.
- Management announced targeted LGM price increases across regions to address expected raw-material inflation.
- RBIS continued a multiyear transformation involving a more regional operating model, management simplification, manufacturing-footprint consolidation, and productivity actions.
- The Tax Cuts and Jobs Act, enacted December 22, 2017, resulted in an estimated material noncash charge for remeasurement of net deferred tax assets and a material transition-tax charge in the fourth quarter. The supplied text does not provide the amounts of these charges.
- Management continued investments in information technology, including systems affecting RBIS order management, pricing, shipping, purchasing, accounting, and planning.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide a clear quantitative earnings, revenue, margin, or cash-flow outlook in the supplied text.
- Key operating exposures include raw-material, labor, and energy cost inflation; foreign-exchange volatility; international economic and political conditions; tariffs and trade restrictions; supply-chain disruptions; and competitive pressure.
- Acquisition integration, RBIS transformation, restructuring, productivity initiatives, and infrastructure investments may require significant resources and may not achieve expected returns.
- The company identified substantial exposure to foreign markets and emerging economies, particularly China, and noted risks from Brexit, changing trade policies, and local regulatory requirements.
- Tax effects from the Tax Cuts and Jobs Act remained subject to further interpretation and potential adjustments under SEC Staff Accounting Bulletin No. 118 during 2018.
- Environmental liabilities were accrued for remediation matters. As of December 30, 2017, the accrued environmental remediation liability was $21.1 million; the company was identified as a potentially responsible party at 13 sites, and potential additional costs could exceed accrued amounts.
- The company reported that routine lawsuits, claims, inquiries, and regulatory matters were not expected to be material individually or in aggregate based on information then available, although future outcomes remain uncertain.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 30, 2017. Yongle Tape, acquired during 2017, was excluded from the internal-control assessment and represented 3% of consolidated assets and 2% of consolidated revenue.
Facts an investor should verify
- Verify 2017 and 2016 revenue, operating income, net income, EPS, cash flow from operations, free cash flow, and segment margins in the incorporated Annual Report.
- Verify year-end cash, total debt, maturity schedule, revolver availability, interest expense, credit ratings, and covenant compliance.
- Quantify the fourth-quarter Tax Cuts and Jobs Act deferred-tax and transition-tax charges and determine their effect on reported and adjusted earnings.
- Assess organic growth, acquisition contributions, price realization, raw-material inflation, and foreign-currency effects by segment.
- Review acquisition purchase-price allocations, goodwill and intangible balances, and integration performance for Yongle Tape, Finesse Medical, and Hanita Coatings.
- Evaluate the remaining costs, expected benefits, and execution risks associated with the RBIS transformation and other restructuring actions.
- Review environmental, litigation, product-liability, cybersecurity, pension, and tax contingencies, including amounts not reasonably estimable at year-end.