Avery Dennison Corp. 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the fiscal third quarter and nine months ended October 3, 2009. Avery Dennison Corporation is a global manufacturer of pressure-sensitive materials, retail information services, and specialty converting businesses. The 2009 fiscal year includes a 53-week period, with the extra week reflected in the first quarter.
Key Financial Metrics
| Metric | Three Months Ended Oct 3, 2009 | Nine Months Ended Oct 3, 2009 |
|---|---|---|
| Net Sales | $1,549.3 million | $4,430.9 million |
| Gross Profit | $436.0 million (28.1% margin) | $1,171.4 million (26.4% margin) |
| Net Income (Loss) | $62.5 million | $(796.6) million |
| Diluted EPS | $0.59 | $(7.73) |
| Cash and Equivalents | $91.9 million (Oct 3, 2009) | N/A |
| Total Debt | $1.79 billion (Oct 3, 2009) | N/A |
| Operating Cash Flow (9mo) | N/A | $316.9 million |
| Free Cash Flow (9mo) | N/A | $250.1 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 10% in the third quarter and 15% in the first nine months of 2009 compared to 2008. Organic sales declined 6% (Q3) and 11% (9mo) due to volume reductions across all segments and geographic regions, exacerbated by unfavorable foreign currency translation.
- Significant Impairment: The nine-month net loss was primarily driven by a non-cash goodwill and indefinite-lived intangible asset impairment charge of $832 million recorded in the first quarter, related to the Retail Information Services reporting unit.
- Restructuring Costs: The company recorded $102.2 million in restructuring charges for the nine months ended October 3, 2009, including $69.9 million in severance and $29.9 million in asset impairments, associated with the elimination of approximately 2,420 positions.
- Legal Settlements: The company settled a federal class action regarding label stock pricing for $36.5 million and state class actions for $2 million, totaling $39 million in legal settlement costs recorded in the first nine months.
- Debt Extinguishment: A $21.2 million loss was recorded in the first quarter due to the exchange of Corporate HiMEDS units.
Guidance, Outlook, and Risks
- Outlook: Management anticipates continued weakness in market conditions. The fiscal calendar change is expected to reduce fourth-quarter sales by approximately $50 million compared to the third quarter. Foreign currency trends are expected to have an unfavorable effect on 2009 earnings.
- Pension Funding: The company expects to make pension contributions in the range of $200 million to $300 million from the end of the second quarter of 2009 through 2013.
- Debt Reduction: The company targets a debt reduction of at least $350 million from the end of the second quarter of 2009 through the end of 2010. Debt was reduced by approximately $140 million in the third quarter.
- Dividends: The quarterly dividend was reduced to $0.20 per share from $0.41 per share to focus on debt reduction and pension funding.
- Risks: Key risks include the impact of economic conditions on demand, the ability to achieve targeted cost reductions, fluctuations in raw material costs, and potential adverse outcomes from ongoing legal proceedings and environmental remediation liabilities.
Investor Verification Checklist
- Verify the sustainability of the $160 million in annualized savings targeted from the 2008-2009 restructuring actions.
- Monitor the execution of the debt reduction plan, specifically the target of reducing debt by $350 million by the end of 2010.
- Assess the impact of the $200-$300 million pension funding requirement on future liquidity and cash flow.
- Review the status of the remaining California class action lawsuit regarding label stock pricing, as the company intends to defend it vigorously.
- Track the recovery of the Retail Information Services segment, which suffered the $832 million impairment, to determine if fair value assumptions have improved.