Avery Dennison Corp annual report, FY2012

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Avery Dennison Corporation — Fiscal 2012 Form 10-K Summary

Business context and reporting period

The filing covers the fiscal year ended December 29, 2012. Avery Dennison manufactures pressure-sensitive materials, labels, tags, tickets, RFID products, tapes, graphics products, office products, and other converted materials. Operations covered more than 50 countries, approximately 200 manufacturing and distribution facilities, and approximately 30,000 employees.

Reportable segments were Pressure-sensitive Materials (PSM) and Retail Branding and Information Solutions (RBIS). The company realigned segment reporting in the fourth quarter, moving Performance Tapes into PSM and RFID inlay manufacturing into RBIS; prior-period amounts were reclassified.

Key financial metrics and liquidity

  • International operations represented approximately 72% of 2012 sales.
  • PSM and RBIS represented approximately 71% and 25% of total 2012 sales, respectively.
  • Research and development expense was $105.1 million in 2012, compared with $96.2 million in 2011 and $88.4 million in 2010.
  • Variable-rate borrowings totaled $268.1 million at December 29, 2012.
  • Environmental remediation liabilities accrued at year-end totaled $32.5 million.
  • The filing text provided does not include clear consolidated values for revenue, net income, operating income, cash flow, margins, total debt, cash, or liquidity ratios; these financial statements and MD&A were incorporated by reference from the 2012 Annual Report to Shareholders.
  • The company authorized up to $400 million of additional common-stock repurchases. It repurchased 219,700 shares in the fourth quarter at an average price of $31.64 per share, leaving approximately $338.2 million available under the authorization.
  • Management concluded that disclosure controls and internal control over financial reporting were effective as of December 29, 2012. PricewaterhouseCoopers LLP audited the controls assessment.

Material changes versus prior comparable periods

  • Segment reporting and corporate cost allocations were changed in the fourth quarter of 2012, with prior periods reclassified for comparability.
  • An agreement to sell the Office and Consumer Products business to 3M was terminated by mutual agreement on October 3, 2012.
  • On January 29, 2013, Avery Dennison agreed to sell its Office and Consumer Products and Designed and Engineered Solutions businesses to CCL Industries for $500 million in cash, subject to customary adjustments, closing conditions, and regulatory approvals. The transaction was expected to close in mid-2013.
  • Office and Consumer Products was reported as discontinued operations in the filing. Designed and Engineered Solutions was expected to be classified as discontinued operations beginning in the first quarter of 2013.
  • Research and development expense increased by approximately 9% from 2011 and approximately 19% from 2010.

Outlook, risks, contingencies, and unusual items

  • No specific numerical earnings, revenue, margin, or cash-flow guidance was provided in the supplied filing text.
  • Management intended to pursue productivity and cost-reduction initiatives, including facility closures, reductions in square footage and headcount, organizational restructuring, process standardization, and manufacturing relocation.
  • Principal risks included global economic weakness, customer demand and competitive pressure, raw-material and energy inflation, supply-chain interruptions, foreign-currency volatility, interest-rate exposure, debt and covenant restrictions, pension funding requirements, tax changes, information-technology and cybersecurity incidents, product quality issues, environmental obligations, litigation, and intellectual-property claims.
  • The proposed divestiture of OCP and DES was subject to execution and regulatory risk. Delays, failure to close, separation costs, transition-service requirements, or inability to realize expected economic or tax benefits could adversely affect results.
  • Avery Dennison had accrued environmental liabilities for identified remediation matters but stated that future costs could exceed accrued amounts and that a reasonable range of additional expenses could not be estimated.
  • The company was identified as a potentially responsible party at 14 waste-disposal or recycling sites. Management stated that other pending lawsuits, claims, inquiries, and regulatory matters were not expected to be material based on information then available.

Most important facts for an investor to verify

  1. Retrieve the incorporated 2012 Annual Report financial statements and MD&A to verify revenue, earnings, cash flow, margins, cash balances, total debt, and segment results.
  2. Review the accounting and presentation of OCP and the planned DES classification as discontinued operations.
  3. Confirm the status, closing terms, purchase-price adjustments, and proceeds from the $500 million CCL transaction.
  4. Assess debt maturities, available credit facilities, covenant compliance, variable-rate exposure, and liquidity after planned divestiture and repurchases.
  5. Evaluate the effect of segment realignment and corporate cost-allocation changes on year-over-year comparisons.
  6. Review environmental, tax, litigation, pension, foreign-exchange, and raw-material exposures, including amounts not reasonably estimable at filing date.