Avery Dennison Corporation — Fiscal Q1 2021 Form 10-Q
Business context and reporting period
The filing covers the 13 weeks ended April 3, 2021, compared with the 13 weeks ended March 28, 2020. Avery Dennison operates through Label and Graphic Materials, Retail Branding and Information Solutions, and Industrial and Healthcare Materials. Results remained subject to COVID-19 uncertainty, tight supply chains, raw-material cost pressure, foreign-exchange effects, and changing demand conditions.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $2,051.3 million | $1,723.0 million | 19% |
| Gross profit | $597.0 million | $485.1 million | 23% |
| Gross profit margin | 29.1% | 28.2% | +0.9 percentage points |
| Income before taxes | $268.9 million | $180.9 million | 48% |
| Net income | $209.5 million | $134.2 million | 56% |
| Diluted EPS | $2.50 | $1.60 | 56% |
| Effective tax rate | 21.6% | 25.6% | Lower by 4.0 points |
| Cash flow from operations | $209.3 million | $4.4 million | Increase of $204.9 million |
| Free cash flow | $182.0 million | $(35.3) million | Increase of $217.3 million |
Net income margin was approximately 10.2%, compared with 7.8% in the prior-year quarter. Management attributed earnings growth primarily to higher volume and mix, lower credit-loss allowances, productivity benefits, and restructuring savings. These benefits were partly offset by higher employee-related costs and the net impact of pricing and raw-material costs.
- Label and Graphic Materials sales were $1,377.0 million, up 17%; operating income was $226.2 million versus $172.5 million.
- Retail Branding and Information Solutions sales were $482.7 million, up 20%; operating income was $60.0 million versus $30.9 million.
- Industrial and Healthcare Materials sales were $191.6 million, up 30%; operating income was $23.5 million versus $14.9 million.
- Company-wide organic sales increased 9%, excluding currency, acquisitions, product-line exits, and calendar effects. Intelligent Labels sales increased approximately 20% organically.
Liquidity, balance sheet, and capital allocation
- Cash and cash equivalents were $328.0 million at April 3, 2021, up from $252.3 million at January 2, 2021. Most cash was held by foreign subsidiaries.
- Total debt had a carrying value of approximately $2.14 billion and a fair value of $2.30 billion. Debt increased approximately $26 million during the quarter, primarily from higher commercial-paper borrowings.
- The $800 million revolving credit facility had no outstanding balance, and the company was in compliance with its financial covenant. The facility matures in February 2025.
- Current assets were $2.63 billion versus current liabilities of $2.06 billion. Shareholders’ equity was $1.58 billion.
- The company paid $51.6 million in dividends and repurchased $55.6 million of common stock, or approximately 327,000 shares. Approximately $484.8 million remained available under the repurchase authorization at quarter-end.
- The quarterly dividend was increased after quarter-end from $0.62 to $0.68 per share, an increase of approximately 10%.
Material changes versus the prior comparable period
- Reported sales increased 19%; sales change excluding currency was 11%, and organic sales increased 9%. The comparison was affected by a four-percentage-point extra-week impact in the 2020 period and a two-percentage-point negative acquisition/product-line-exit impact.
- Operating cash flow improved substantially because of higher net income and more favorable working-capital changes. Free cash flow changed from an outflow of $35.3 million to an inflow of $182.0 million.
- Operational working capital declined to 11.1% of annualized current-quarter sales from 13.3% in the prior-year quarter. Days sales outstanding improved to 58 days from 65 days.
- Interest expense declined to $16.2 million from $18.8 million because of lower borrowing rates.
- The effective tax rate declined primarily because of a $14.1 million return-to-provision benefit related to an amended 2018 U.S. tax return election, partly offset by other tax charges.
Outlook, commentary, risks, and unusual items
- Management expected fiscal 2021 net sales to increase approximately 10% to 12%, including a 2% benefit from foreign-currency translation and a 1% negative calendar-shift effect.
- Based on recent exchange rates, foreign-currency translation was expected to increase operating income by approximately $25 million.
- Incremental savings from restructuring actions, net of transition costs, were expected to be approximately $70 million. The full-year effective tax rate was expected to be in the mid-twenty-percent range.
- The company completed the acquisitions of ZippyYum and JDC for aggregate consideration of approximately $42 million. One seller may receive earn-out payments of up to approximately $13 million; approximately $12 million was accrued.
- Restructuring charges were $2.7 million for the quarter, related primarily to the reduction of approximately 100 positions. The company also recorded a $2.1 million outcome-of-legal-proceedings expense, $0.7 million of transaction costs, and a $4.8 million gain on sale of a product line.
- Environmental liabilities were $20.7 million at quarter-end. Avery Dennison was designated as a potentially responsible party at 12 waste-disposal or recycling sites; the company stated that potential additional remediation costs could exceed accrued amounts but could not reasonably estimate a range.
- The company faces ordinary-course litigation and regulatory matters, including an RFID patent-infringement lawsuit that management assessed as having a remote probability of a material unfavorable outcome.
- Principal risks include COVID-19 and global economic conditions, supply-chain and raw-material availability, pricing execution, competition, foreign currency, acquisitions and integration, cyber and information-technology disruptions, indebtedness, tax audits, environmental matters, and goodwill impairment.
Most important facts for investors to verify
- Whether the projected 10%–12% full-year sales growth and approximately $70 million of restructuring savings are achieved.
- Whether pricing actions offset inflation in raw materials, energy, freight, and employee-related costs without materially reducing volumes.
- The sustainability of the strong first-quarter operating cash flow and free cash flow, particularly as inventories increased to $786.7 million from $717.2 million at year-end.
- Post-acquisition performance, valuation adjustments, and earn-out obligations related to ZippyYum and JDC.
- Future effective tax rates, including the outcome of tax elections, audits, and uncertain tax positions.
- Developments in COVID-19 conditions, supply-chain constraints, environmental remediation, litigation, foreign exchange, and debt-market access.