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| AVY > SEC Filings for AVY > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
ORGANIZATION OF INFORMATION
Management's Discussion and Analysis provides a narrative concerning our
financial performance and condition that should be read in conjunction with the
accompanying financial statements. It includes the following sections:
Definition of Terms 22
Overview and Outlook 22
Analysis of Results of Operations for the Third Quarter 26
Results of Operations by Segment for the Third Quarter 27
Analysis of Results of Operations for the Nine Months Year-to-Date 29
Results of Operations by Segment for the Nine Months Year-to-Date 31
Financial Condition 33
Uses and Limitations of Non-GAAP Measures 38
Recent Accounting Requirements 38
Safe Harbor Statement 38
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DEFINITION OF TERMS
Our consolidated financial statements are prepared in conformity with generally
accepted accounting principles in the United States of America, or GAAP. Our
discussion of financial results includes several non-GAAP measures to provide
additional information concerning Avery Dennison Corporation's (the "Company's")
performance. These non-GAAP financial measures are not in accordance with, nor
are they a substitute for, GAAP financial measures. These non-GAAP financial
measures are intended to supplement our presentation of our financial results
that are prepared in accordance with GAAP. Refer to "Uses and Limitations of
Non-GAAP Measures."
We use the following terms:
• Organic sales growth (decline) refers to the change in sales excluding the
estimated impact of currency translation, acquisitions and divestitures;
• Segment operating income (loss) refers to income before interest and taxes;
• Free cash flow refers to cash flow from operations and net proceeds from sale of investments, less payments for capital expenditures, software and other deferred charges;
• Operational working capital refers to trade accounts receivable and inventories, net of accounts payable.
Change in Accounting Method
Beginning in the fourth quarter of 2007, we changed our method of accounting for
inventories for our U.S. operations from a combination of the use of the
first-in, first-out ("FIFO") and the last-in, first-out ("LIFO") methods to the
FIFO method. The inventories for our international operations continue to be
valued using the FIFO method. We believe the change is preferable as the FIFO
method better reflects the current value of inventories on the unaudited
Condensed Consolidated Balance Sheet; provides better matching of revenue and
expense in the unaudited Consolidated Statement of Income; provides uniformity
across our operations with respect to the method for inventory accounting; and
enhances comparability with peers. Furthermore, this application of the FIFO
method is consistent with our accounting of inventories for U.S. income tax
purposes.
The discussion that follows reflects our results that have been restated due to
the accounting change.
OVERVIEW AND OUTLOOK
Overview
Sales
Our sales increased 3% and 13% in the first three and nine months of 2008,
respectively, reflecting the factors summarized in the table below:
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Table of Contents
Avery Dennison Corporation
Three Months Ended Nine Months Ended
Estimated change in sales due to: September 27, 2008 September 29, 2007 September 27, 2008 September 29, 2007
Organic sales growth (decline) (2 )% - (2 )% 1 %
Foreign currency translation 5 4 6 4
Acquisitions, net of divestitures 1 15 9 5
Reported sales growth (1) 3 % 19 % 13 % 10 %
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(1) Totals may not sum due to rounding
On an organic basis, the decline of 2% in the three and nine months ended
September 27, 2008 was primarily due to declines in economic conditions in
mature markets, partially offset by growth in emerging markets.
Net Income
Net income decreased $0.6 million, or 0.3%, in the first nine months of 2008
compared to the same period in 2007.
Negative factors affecting the change in net income included:
• Cost inflation, including raw material and energy costs
• Incremental interest expense and amortization of intangibles related to the acquisition of Paxar Corporation ("Paxar")
• The carryover effect of a more competitive pricing environment in the roll materials business in the prior year, partially offset by current year price increases
Positive factors affecting the change in net income included:
• Cost savings from productivity improvement initiatives, including savings
from restructuring actions
• Benefit from foreign currency translation and acquisitions
• Lower transition costs related to the integration of Paxar
• Lower asset impairment and restructuring charges related to cost reduction actions
• Lower effective tax rate
Acquisitions
We completed the Paxar acquisition on June 15, 2007. The combination of the
Paxar business into our Retail Information Services segment increases our
presence in the retail information and brand identification market, combines
complementary strengths and broadens the range of our product and service
capabilities, improves our ability to meet customer demands for product
innovation and improved quality of service, and facilitates expansion into new
product and geographic segments. The integration of the acquisition into our
operations is also expected to result in significant cost synergies. Refer to
the "Outlook" section herein for further information.
We completed the acquisition of DM Label Group ("DM Label") on April 1, 2008. DM
Label operations are included in our Retail Information Services segment.
See Note 2, "Acquisitions," to the unaudited Condensed Consolidated Financial
Statements for further information.
Paxar Acquisition-related Actions
The following integration actions result in headcount reductions of
approximately 1,695 positions in our Retail Information Services segment:
Paxar
Acquisition- Headcount
(Dollars in millions) related costs(1) Reduction
2007 Restructuring (2) $ 31.2 200
2007 Transition costs (2) 43.0 -
2008 Restructuring (2) 5.6 130
2008 Transition costs (2) 17.9 -
2007 Purchase price adjustments 20.5 855
2008 Purchase price adjustments 6.0 510
Total Paxar integration actions $ 124.2 1,695
Change-in-control costs (Purchase price adjustment) 27.8
Total Paxar acquisition-related costs $ 152.0
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(1) Includes severance, asset impairment and lease cancellation charges, where applicable
(2) Recorded in the Consolidated Statement of Income
Avery Dennison Corporation
Cost synergies resulting from the integration of Paxar were approximately
$20 million in 2007 and approximately $52 million incrementally in the first
nine months of 2008. Incremental cost synergies expected to be achieved through
the balance of the integration are discussed in the "Outlook" section below.
Refer to Note 2, "Acquisitions" and Note 10, "Cost Reduction Actions," to the
unaudited Condensed Consolidated Financial Statements for further detail.
Cost Reduction Actions
In addition to cost synergies from the integration of Paxar discussed above,
cost reduction actions initiated from late 2006 through the end of 2007 (see
table below) are expected to yield annualized pretax savings of $45 million to
$50 million. Savings from these actions, net of transition costs, were
approximately $5 million in 2007 and approximately $28 million in the first nine
months of 2008. Incremental savings associated with these actions in the fourth
quarter of 2008 are expected to be approximately $4 million, with the balance
expected to be realized in 2009.
Accrued Headcount
(Dollars in millions) Expense(1) Reduction
Q4 2006 restructuring $ 5.1 140
2007 restructuring (excluding Paxar integration-related actions) 26.3 415
Total Q4 2006-2007 restructuring actions $ 31.4 555
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(1) Includes severance, asset impairment and lease cancellation charges, where applicable
We are undertaking additional restructuring actions in 2008, in addition to Paxar acquisition-related actions. The 2008 actions identified to date (see table below) are expected to yield annualized savings of approximately $20 million, most of which is expected to benefit 2009.
Accrued Headcount
(Dollars in millions) Expense(1) Reduction
Q1 2008 restructuring $ 4.3 105
Q2 2008 restructuring 6.0 230
Q3 2008 restructuring 12.5 310
Total 2008 restructuring actions $ 22.8 645
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(1) Includes severance, asset impairment and lease cancellation charges, where applicable
See Note 10, "Cost Reduction Actions," to the unaudited Condensed Consolidated
Financial Statements for further information.
Effective Rate of Taxes on Income
The effective tax rate for the first nine months of 2008 was approximately 8%,
compared with approximately 19% for the same period in 2007. The effective tax
rate for the first nine months of 2008 includes the recognition of tax benefits
of approximately $37 million due to discrete events. Discrete events include a
benefit of approximately $42 million for the increased realizability of deferred
tax assets, a net benefit of approximately $3 million of infrequent tax benefits
and return filing adjustments, and a detriment of approximately $8 million from
tax contingency accruals. Refer to Note 12, "Taxes Based on Income," to the
unaudited Condensed Consolidated Financial Statements for further information.
Free Cash Flow
Free cash flow, which is a non-GAAP measure, refers to cash flow from operating
activities and net proceeds from sale of investments, less spending on property,
plant, equipment, software and other deferred charges. We use free cash flow as
a measure of funds available for other corporate purposes, such as dividends,
debt reduction, acquisitions, and repurchases of common stock. Management
believes that this measure provides meaningful supplemental information to our
investors to assist them in their financial analysis of the Company. Management
believes that it is appropriate to measure cash flow (including net proceeds
from sale of investments) after spending on property, plant, equipment, software
and other deferred charges because such spending is considered integral to
maintaining or expanding our underlying business. This measure is not intended
to represent the residual cash available for discretionary purposes. Refer to
the "Uses and Limitations of Non-GAAP Measures" section for further information
regarding limitations of this measure.
Avery Dennison Corporation
Nine Months Ended
(In millions) September 27, 2008 September 29, 2007
Net cash provided by operating activities $ 382.3 $ 305.6
Purchase of property, plant and equipment (97.8 ) (136.3 )
Purchase of software and other deferred charges (49.2 ) (39.9 )
Proceeds from sale of investments, net (1) 16.2 -
Free cash flow $ 251.5 $ 129.4
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(1) Net proceeds from sale of investments are related to the sale of securities held by our captive insurance company and other investments.
In the first nine months of 2008, free cash flow increased primarily due to
increased cash flow provided by operating activities and reduced capital
spending targets consistent with current economic conditions. See "Analysis of
Results of Operations" and "Liquidity" sections below for more information.
Investigations
We previously announced that we had been notified by the European Commission
("EC"), the United States Department of Justice ("DOJ"), the Competition Law
Department of the Department of Justice of Canada and the Australian
Competition & Consumer Commission of their respective investigations into
competitive practices in the label stock industry. We cooperated with all of
these investigations, and all have been terminated without further action by the
authorities.
We are a named defendant in purported class actions in the U.S. seeking treble
damages and other relief for alleged unlawful competitive practices, which were
filed after the announcement of the DOJ investigation.
As disclosed, we have discovered instances of conduct by certain employees that
potentially violate the U.S. Foreign Corrupt Practices Act. We reported that
conduct to authorities in the U.S. and we believe it is possible that fines or
other penalties may be incurred.
We are unable to predict the effect of these matters at this time, although the
effect could be adverse and material. These and other matters are reported in
Note 16, "Commitments and Contingencies," to the unaudited Condensed
Consolidated Financial Statements.
Outlook
Certain statements contained in this section are "forward-looking statements"
and are subject to certain risks and uncertainties. Refer to our "Safe Harbor
Statement" herein.
Recent market and economic conditions have been volatile and challenging with
tighter credit conditions and slower growth through the third quarter of 2008.
We are not able to predict the duration and severity of the current disruption
in financial markets and adverse economic conditions in the U.S. and other
countries.
For the full year of 2008, we expect high single-digit revenue growth, including
the benefit from our recent acquisitions and a favorable effect from foreign
currency translation based on current exchange rates. On an organic basis, we
expect sales to decline approximately 2% for the full year of 2008. On an
organic basis, we expect sales in the fourth quarter to decline at a rate
greater than the decline in the first nine months of 2008.
We estimate the total annual cost synergies associated with the Paxar
integration to be approximately $120 million, of which $20 million benefited
2007 and an incremental $52 million benefited the first nine months of 2008. To
accomplish our synergy target, we expect to incur aggregate pretax cash costs in
the range of $165 million to $180 million, of which approximately $75 million
was incurred in 2007 and approximately $50 million was incurred in the first
nine months of 2008.
In addition to the synergies resulting from the Paxar integration described
above, we anticipate our prior year restructuring and business realignment
efforts to yield incremental savings in 2008 of $30 million to $35 million, net
of transition costs. Restructuring actions implemented in the first nine months
of 2008 are expected to yield savings of approximately $20 million, most of
which is expected to benefit 2009.
Avery Dennison Corporation
We expect the above benefits to be more than offset by higher costs, including
those related to raw material and energy, as well as investments for future
growth.
We anticipate price increases and productivity improvements in 2008 to partially
offset raw material and other cost inflation.
We estimate interest expense in 2008 to be in the range of $115 million to
$120 million, approximately $10 million to $15 million higher than 2007, due to
acquisition-related debt. Our estimate is subject to changes in average debt
outstanding and changes in market rates associated with the portion of our debt
tied to variable interest rates.
The annual effective tax rate, expected to be in the range of 8% to 10% for
2008, will be impacted by future events including changes in tax laws,
geographic income mix, tax audits, closure of tax years, legal entity
restructuring, and the release of valuation allowances on deferred tax assets.
The effective tax rate can potentially have wide variances from quarter to
quarter, resulting from interim reporting requirements and the recognition of
discrete events.
We anticipate our capital and software expenditures to be approximately
$180 million in 2008. This includes one-time cash costs associated with capital
expenditures to integrate Paxar (included in the cash cost estimate discussed
above), of which approximately $14 million was incurred in the first nine months
of 2008.
Reflecting the foregoing assumptions, we expect an increase in annual earnings
and free cash flow in 2008 in comparison with 2007.
ANALYSIS OF RESULTS OF OPERATIONS FOR THE THIRD QUARTER
Income Before Taxes
(In millions) 2008 2007
Net sales $ 1,724.8 $ 1,680.4
Cost of products sold 1,290.5 1,214.2
Gross profit 434.3 466.2
Marketing, general and administrative expense 325.5 330.4
Interest expense 29.0 35.7
Other expense, net 12.5 33.6
Income before taxes $ 67.3 $ 66.5
As a Percent of Sales:
Gross profit (margin) 25.2 % 27.7 %
Marketing, general and administrative expense 18.9 19.7
Income before taxes 3.9 4.0
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Sales
Sales increased 3% in the third quarter of 2008 compared to the same period last
year. Foreign currency translation had a favorable impact on the change in sales
of approximately $76 million in the third quarter of 2008. The acquisition of DM
Label increased sales by approximately $10 million in the third quarter of 2008.
On an organic basis, the decline of approximately 2% in the third quarter of
2008 compared to the same period last year was primarily due to declines in
economic conditions in mature markets, partially offset by growth in emerging
markets.
Refer to "Results of Operations by Segment" for further information on segments.
Gross Profit
Gross profit margin for the third quarter of 2008 declined compared to the same
period in 2007, as savings from prior year restructuring and other sources of
productivity and benefits from pricing actions were more than offset by raw
material and other cost inflation and reduced fixed cost leverage on an organic
basis.
Marketing, General and Administrative Expenses
The decrease in marketing, general and administrative expense in the third
quarter of 2008 compared to the same period last year primarily reflected
benefits from productivity improvements and lower net transition costs
associated with the Paxar integration, partially offset by the negative effects
of foreign currency (approximately $10 million), higher employee costs, costs
associated with the recently acquired DM Label business and related integration
costs (totaling approximately $5 million), and incremental amortization of
intangibles (approximately $2 million).
Avery Dennison Corporation
Other Expense, net
(In millions, pretax) 2008 2007
Restructuring costs $ 8.7 $ 7.5
Asset impairment and lease cancellation charges 3.8 12.4
Asset impairment charges - acquisition integration-related - 8.9
Other - 4.8
Other expense, net $ 12.5 $ 33.6
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In the third quarter of 2008, "Other expense, net" consisted of severance and
other employee-related costs of $8.7 million and asset impairment and lease
cancellation charges of $3.8 million (primarily in the Pressure-sensitive
Materials segment). Restructuring costs in the third quarter of 2008 relate to a
reduction in headcount of approximately 310 positions across all segments and
geographic regions.
In the third quarter of 2007, "Other expense, net" consisted of asset impairment
charges of $21.3 million (including $8.9 million related to the integration of
Paxar) and severance and other employee-related costs of $7.5 million, as well
as certain non-recurring financing costs of $4.8 million. The restructuring
costs in the third quarter of 2007 related to a reduction in headcount of
approximately 230 positions across all segments and geographic regions.
Refer to Note 10, "Cost Reduction Actions," to the unaudited Condensed
Consolidated Financial Statements for more information.
Net Income and Earnings per Share
(In millions, except per share) 2008 2007
Income before taxes $ 67.3 $ 66.5
Provision for income taxes 4.6 7.7
Net income $ 62.7 $ 58.8
Net income per common share $ .64 $ .60
Net income per common share, assuming dilution $ .63 $ .59
Net income as a percent of sales 3.6 % 3.5 %
Percent change in:
Net income 6.6 % (31.5 )%
Net income per common share 6.7 (30.2 )
Net income per common share, assuming dilution 6.8 (30.6 )
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Provision for Income Taxes
The effective tax rate for the third quarter of 2008 was approximately 7%,
compared with approximately 12% for the same period in 2007. The effective tax
rate for the third quarter of 2008 includes the recognition of tax benefits of
approximately $9 million due to discrete events. Discrete events include a
benefit of approximately $9 million for the increased realizability of deferred
tax assets, a net benefit of approximately $3 million of infrequent tax benefits
and return filing adjustments, and a detriment of approximately $3 million from
tax contingency accruals. Refer to Note 12, "Taxes Based on Income," to the
unaudited Condensed Consolidated Financial Statements for further information.
RESULTS OF OPERATIONS BY SEGMENT FOR THE THIRD QUARTER Pressure-sensitive Materials Segment (In millions) 2008 2007 Net sales including intersegment sales $ 982.3 $ 911.4 Less intersegment sales 46.1 43.1 Net sales $ 936.2 $ 868.3 Operating income (1) 60.6 68.3 (1) Includes lease cancellation charges in 2008 and restructuring costs and asset impairment charges in both years $ 4.1 $ 14.0 |
Retail Information Services Segment (In millions) 2008 2007 Net sales including intersegment sales $ 379.6 $ 389.3 Less intersegment sales .5 .6 . . . |
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