Avery Dennison Corporation — Fiscal Q1 2023 Form 10-Q Summary
Business context and reporting period
The filing covers the 13-week quarter ended April 1, 2023, compared with the 13-week quarter ended April 2, 2022. Avery Dennison operates through its Materials Group and Solutions Group. Approximately 70% of first-quarter 2023 net sales were generated by international operations.
Financial performance and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $2,065.0 million | $2,349.3 million | Down 12% |
| Gross profit | $542.3 million | $641.3 million | Down 15% |
| Gross margin | 26.3% | 27.3% | Down 100 bps |
| Income before taxes | $168.3 million | $269.7 million | Down 38% |
| Net income | $121.2 million | $198.2 million | Down 39% |
| Diluted EPS | $1.49 | $2.39 | Down 38% |
| Effective tax rate | 28.0% | 26.5% | Up 150 bps |
| Cash flow from operations | $1.9 million | $126.2 million | Down $124.3 million |
| Free cash flow | $(71.2) million | $73.3 million | Down $144.5 million |
Reported sales declined 12%, including a 3% benefit from foreign currency translation. Organic sales declined 9%, primarily because of lower volume associated with customer inventory destocking, partly offset by pricing actions. The filing states that pricing, energy and raw-material benefits, productivity initiatives, and restructuring savings partly offset volume and mix pressure.
- Materials Group: Sales were $1,460.5 million, down from $1,670.3 million. Organic sales declined 9%; operating income fell to $160.5 million from $222.8 million.
- Solutions Group: Sales were $604.5 million, down from $679.0 million. Organic sales declined 9%; operating income fell to $51.5 million from $90.3 million. High-value-category sales increased at a low-single-digit rate, but base-business sales declined approximately 20%.
- Operating expenses: Marketing, general and administrative expense declined to $334.4 million from $355.0 million, primarily reflecting productivity and restructuring benefits and favorable currency translation.
- Unusual items: Other expense was $17.8 million versus other income of $1.6 million in the prior-year quarter, largely due to $17.6 million of restructuring charges. The company reduced approximately 340 positions.
Liquidity, cash flow, debt, and capital allocation
- Cash and cash equivalents were $351.3 million at April 1, 2023, compared with $167.2 million at December 31, 2022.
- Total debt carrying value increased approximately $457 million during the quarter to $3.56 billion. Long-term debt and finance leases were $2.91 billion; current debt and finance leases were $648.3 million.
- In March 2023, the company issued $400 million of 5.750% senior notes due March 15, 2033 and received net proceeds of $394.9 million. The proceeds were used to repay commercial paper and the $250 million of senior notes maturing April 15, 2023.
- The revolving credit facility was increased from $800 million to $1.20 billion and extended to February 13, 2026. No amount was outstanding, and the company was in compliance with its financial covenant at quarter-end.
- Investing cash outflows were $116.6 million, including $64.5 million of capital expenditures and approximately $44 million for the Thermopatch acquisition.
- The company paid $60.8 million of dividends and repurchased $50.7 million of common stock, or approximately 283,700 shares. Approximately $679.7 million remained authorized for repurchases.
- The quarterly dividend was increased after quarter-end from $0.75 to $0.81 per share, an increase of approximately 8%.
Material changes versus the prior comparable period
- Sales, gross profit, income before taxes, net income, diluted EPS, and operating cash flow all declined materially year over year.
- Customer inventory destocking reduced volumes across the business, while pricing actions and productivity initiatives provided partial mitigation.
- Restructuring charges increased to $17.6 million from $0.9 million, reflecting the 2023 cost-reduction program.
- Interest expense increased to $26.4 million from $19.6 million, primarily due to higher rates on short-term borrowings.
- Free cash flow changed from positive $73.3 million to negative $71.2 million, reflecting lower operating cash flow and higher capital expenditures.
- Operational working capital increased to 14.3% of annualized quarterly sales from 12.1%, and average inventory turnover declined to 5.8 from 7.1.
- The company completed the approximately $44 million Thermopatch acquisition on March 6, 2023. After quarter-end, it agreed to acquire Lion Brothers, with expected completion in the second quarter of 2023.
Guidance, outlook, commentary, and risks
- Management expects 2023 net sales to change between down 2% and flat, including a negligible foreign-currency effect.
- Management expects approximately $50 million of incremental savings from restructuring actions, net of transition costs.
- Management expects a full-year effective tax rate in the mid-twenty-percent range and fixed and IT capital expenditures of up to $350 million.
- Key risks include global economic and political conditions, customer demand and destocking, raw-material and energy costs, pricing execution, competition, foreign-exchange movements, interest rates, acquisition integration, cybersecurity, labor availability, debt covenant compliance, tax audits, environmental matters, and legal proceedings.
- In the Adasa RFID patent litigation, the company maintained a $26.6 million reserve and estimated potential outcomes ranging from approximately $5 million to $71 million. A retrial was scheduled to begin July 10, 2023, subject to ongoing proceedings.
- The company was designated as a potentially responsible party at 11 environmental sites. Environmental liabilities were $23.5 million at April 1, 2023, but the filing states that a range of potential future remediation costs cannot be reasonably estimated.
- Management stated that there were no material changes to the risk factors disclosed in the 2022 Form 10-K and that disclosure controls were effective as of quarter-end.
Important facts for investors to verify
- Whether destocking and lower volumes persist or reverse, particularly in the Materials Group and Solutions Group base business.
- Whether pricing, productivity, restructuring savings, and raw-material benefits offset continued volume, mix, inflation, and currency pressure.
- The timing and final purchase accounting for the Thermopatch acquisition and the completion, financing, and integration of the Lion Brothers acquisition.
- Debt levels, commercial paper usage, interest expense, covenant compliance, and liquidity following the 2033 notes issuance and April 2023 debt maturity.
- Progress toward the approximately $50 million restructuring savings target and the cash costs associated with the restructuring program.
- The outcome and financial exposure of the Adasa patent litigation and unresolved environmental matters.
- Actual full-year sales, tax rate, capital expenditures, cash generation, dividends, and share repurchases relative to management’s outlook.