Avery Dennison Corporation — Fiscal Q3 2012 Form 10-Q
Reporting period: Thirteen weeks ended September 29, 2012, compared with the thirteen weeks ended October 1, 2011. The filing is unaudited. Results include continuing operations and the Office and Consumer Products (OCP) business as discontinued operations.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | First nine months 2012 | First nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,487.8 million | $1,500.4 million | $4,503.4 million | $4,571.7 million |
| Gross profit | $392.0 million | $366.9 million | $1,179.4 million | $1,162.8 million |
| Gross margin | 26.3% | 24.5% | 26.2% | 25.4% |
| Income from continuing operations | $38.1 million | $35.4 million | $135.7 million | $125.4 million |
| Net income | $58.3 million | $49.8 million | $166.4 million | $167.9 million |
| Diluted earnings per share | $0.57 | $0.47 | $1.60 | $1.57 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $214.1 million | $120.0 million |
| Free cash flow | Not provided for quarter | Not provided for quarter | $125.9 million | $23.8 million |
- Q3 sales declined 1%, while organic sales increased 6%; foreign currency translation reduced reported sales by approximately 6%.
- For the first nine months, sales declined 1%, with 3% organic growth offset by a 4% foreign-currency headwind.
- Q3 income from continuing operations before taxes increased to $58.2 million from $46.1 million. The pretax margin improved to 3.9% from 3.1%.
- Net income benefited from $20.2 million of discontinued-operations income in Q3 and $30.7 million year to date. Discontinued-operations income declined year to date from $42.5 million in the prior period.
- Cash and cash equivalents were $190.7 million at September 29, 2012, compared with $178.0 million at December 31, 2011.
- Total debt was approximately $1.38 billion at September 29, 2012, up approximately $196 million from year-end 2011. Current borrowings and current maturities were $674.4 million; long-term debt was $702.7 million.
- The $675 million revolving credit facility matures December 22, 2016; no balance was outstanding at quarter-end. Management stated that available facilities and bank lines should fund operations for the next 12 months.
- Operational working capital was $757.2 million, or 12.6% of annualized sales, versus $925.8 million, or 13.7%, in the prior comparable period.
Material changes versus the prior comparable period
- Gross margin improved by 180 basis points in Q3 and 80 basis points year to date, primarily from productivity initiatives and higher volume, partly offset by product mix and employee-related costs.
- Q3 income from continuing operations increased approximately 8%; year-to-date income from continuing operations increased approximately 8%.
- Year-to-date net income decreased 0.9% because lower discontinued-operations income largely offset the improvement in continuing operations.
- Operating cash flow increased $94.1 million year to date, and free cash flow increased $102.1 million, reflecting lower bonus payments and improved working-capital management.
- The Company repurchased approximately 7.7 million shares for $228.2 million year to date and paid $83.5 million of dividends. The quarterly dividend was increased 8% to $0.27 per share in January 2012.
- Shareholders’ equity declined $73 million to $1.59 billion, primarily because of share repurchases and dividends.
- Pressure-sensitive Materials sales declined 1% in Q3 and year to date; operating income was $73.2 million in Q3 and $245.0 million year to date, both slightly below the prior period.
- Retail Branding and Information Solutions sales increased 4% in Q3 but declined 1% year to date. Q3 operating income increased to $10.3 million from $2.6 million, while year-to-date operating income declined to $36.2 million from $39.9 million.
- Other specialty converting businesses reported Q3 operating income of $2.5 million versus a $1.8 million loss, and year-to-date operating income of $6.3 million versus a $0.4 million loss.
Outlook, unusual items, and risks
- Management expected 2012 organic sales and income from continuing operations to increase versus 2011.
- The 2012 cost-reduction program reduced approximately 770 positions and generated $38.1 million of restructuring charges through the first nine months. Management expected total 2012 restructuring and other costs of approximately $55 million, more than $100 million of annualized savings from the program, and completion in 2013.
- Management expected approximately $75 million of pension contributions and up to $150 million of capital and software expenditures in 2012.
- The proposed $550 million sale of OCP to 3M was mutually terminated on October 3, 2012, after quarter-end. The Company continued to pursue a divestiture, but disclosed no assurance that a sale would occur on satisfactory terms or at all.
- OCP assets and liabilities remained classified as held for sale at September 29, 2012: $475.0 million of assets and $147.0 million of liabilities.
- Q3 included $19.1 million of continuing-operations restructuring and other expense, including $17.6 million of severance, $1.5 million of impairment and lease-cancellation charges, $0.7 million of OCP divestiture costs, and $2.1 million of costs to exit product lines.
- The Q3 effective tax rate was 34.5%, versus 23.2% in the prior year, including discrete tax expense. The nine-month rate was 32.3%, versus 36.0%.
- Key risks include demand and economic conditions, competition and pricing, raw-material costs, foreign currency exposure, execution of restructuring and divestitures, access to financing, tax audits, environmental matters, litigation, and impairment of goodwill or other assets.
- The Company had environmental liabilities of $34.5 million at quarter-end and was a potentially responsible party at 14 sites. Management could not estimate a range of potential additional costs.
- The Company guaranteed approximately $471 million of subsidiaries’ credit lines, up to $9 million of supplier obligations, and approximately $17 million under receivable-financing programs.
Important facts for investors to verify
- Whether the OCP business is ultimately divested, on what terms, and how the transaction affects debt, liquidity, earnings, and held-for-sale classifications.
- Whether restructuring actions deliver the targeted annualized savings and whether additional restructuring costs remain consistent with management’s estimates.
- Debt maturity and refinancing exposure, particularly the $674.4 million of current borrowings and the use of commercial paper to fund repurchases and operations.
- The sustainability of organic growth and gross-margin improvement after removing foreign-currency benefits or headwinds and restructuring effects.
- Future tax-rate volatility, tax-audit settlements, and the expected cash payments related to uncertain tax positions.
- Potential changes in environmental, legal, lease-guarantee, and other contingent liabilities, for which the filing does not provide a clear range of possible additional expense.