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AVY > SEC Filings for AVY > Form 10-Q on 5-May-2014All Recent SEC Filings

Show all filings for AVERY DENNISON CORP

Form 10-Q for AVERY DENNISON CORP


5-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ORGANIZATION OF INFORMATION

"Management's Discussion and Analysis of Financial Condition and Results of Operations," or MD&A, provides management's views on our financial condition and results of operations, and should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and notes thereto. It includes the following sections:

  Non-GAAP Financial Measures                                         17
  Overview and Outlook                                                18
  Analysis of Results of Operations for the First Quarter             20

Results of Operations by Reportable Segment for the First Quarter 21 Financial Condition 23 Recent Accounting Requirements 26

NON-GAAP FINANCIAL MEASURES

We report financial results in conformity with accounting principles generally accepted in the United States of America, or GAAP, and also communicate with investors using certain non-GAAP financial measures. These non-GAAP financial measures are not in accordance with, nor are they a substitute for or superior to, the comparable GAAP financial measures. These non-GAAP financial measures are intended to supplement presentation of our financial results that are prepared in accordance with GAAP. Based upon feedback from investors and financial analysts, we believe that supplemental non-GAAP financial measures provide information that is useful to the assessment of our performance and operating trends, as well as liquidity.

Our non-GAAP financial measures exclude the impact of certain events, activities or strategic decisions. By excluding certain accounting effects, both positive and negative, of certain items, we believe that we are providing meaningful supplemental information to facilitate an understanding of our core operating results and liquidity measures. These non-GAAP financial measures are used internally to evaluate trends in our underlying business, as well as to facilitate comparison to the results of competitors for a single period. While some of the items excluded from GAAP financial measures may recur, they tend to be disparate in amount, frequency, or timing.

We use the following non-GAAP financial measures in this MD&A:

Organic sales change refers to the increase or decrease in sales excluding the estimated impact of currency translation, product line exits, acquisitions and divestitures, and, where applicable, the extra week in the fiscal year. The estimated impact of currency translation is calculated on a constant currency basis, with prior period results translated at current period average exchange rates to exclude the effect of currency fluctuations. We believe organic sales change assists investors in evaluating the underlying sales growth from the ongoing activities of our businesses and provides improved comparability of results period to period.

Free cash flow refers to cash flow from operations, less payments for property, plant and equipment, software and other deferred charges, plus proceeds from sale of property, plant and equipment, plus (minus) net proceeds from sales (purchases) of investments, plus discretionary contributions to pension plans and charitable contribution to Avery Dennison Foundation utilizing proceeds from divestitures. Free cash flow excludes uses of cash that do not directly or immediately support the underlying business, such as discretionary debt reductions, dividends, share repurchases, and certain effects of acquisitions and divestitures (e.g., cash flow from discontinued operations, taxes, transaction costs).

Operational working capital refers to trade accounts receivable and inventories, net of accounts payable, and excludes cash and cash equivalents, short-term borrowings, deferred taxes, other current assets and other current liabilities, as well as current assets and current liabilities of held-for-sale businesses. We use this non-GAAP financial measure to assess our working capital (deficit) requirements because it excludes the impact of fluctuations attributable to our financing and other activities (which affect cash and cash equivalents, deferred taxes, other current assets, and other current liabilities) that tend to be disparate in amount, frequency, or timing, and that may increase the volatility of the working capital as a percentage of sales from period to period. Additionally, the excluded items are not significantly influenced by our day-to-day activities managed at the operating level and may not reflect the underlying trends in our operations.


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                                                      Avery Dennison Corporation



OVERVIEW AND OUTLOOK



Overview



Sales

Our sales increased 3% in the first three months of 2014 compared to the same
period last year.



                                         Three Months Ended
(In millions)                      March 29, 2014   March 30, 2013
Estimated change in sales due to
Organic sales change                            5 %              4 %
Foreign currency translation                   (1 )              -
Reported sales change (1)                       3 %              4 %

(1) Totals may not sum due to rounding and other factors.

Income from Continuing Operations

Income from continuing operations increased approximately $5 million in the first three months of 2014 compared to the same period last year. Major factors affecting the change in income from continuing operations in the first three months of 2014 compared to the same period last year included:

Positive factors:

Benefits from productivity initiatives, including savings from restructuring actions

Higher volume

Offsetting factors:

          Higher employee-related costs

          Higher interest expense and provision for income taxes

          Foreign currency transaction net losses

          Raw material inflation

          Higher manufacturing expenses in North America, due in large part to
extreme cold weather conditions during the quarter

Divestitures

In July 2013, we completed the sale of our former Office and Consumer Products ("OCP") and Designed and Engineered Solutions ("DES") businesses and entered into an amendment to the purchase agreement, which, among other things, increased the target net working capital amount and amended provisions related to employee matters and indemnification. We continue to be subject to certain indemnification provisions under the terms of the purchase agreement. In addition, the tax liability associated with the sale is subject to completion of tax return filings in the jurisdictions in which the OCP and DES businesses operated.

Cost Reduction Actions

2014 Actions

During the first three months of 2014, we recorded $7.3 million in restructuring charges, related to restructuring actions we initiated in 2014 ("2014 Actions"), consisting of severance and related costs for the reduction of approximately 340 positions and asset impairment charges. We anticipate approximately $8 million in annualized savings from these restructuring actions, of which approximately $6 million is expected to be realized in 2014, and the remainder in 2015.

2012 Program

In 2013, we recorded $40.3 million in restructuring charges, net of reversals, related to the restructuring program we initiated in 2012 ("2012 Program"), which consisted of severance and related costs for the reduction of approximately 1,400 positions, lease and other contract cancellation costs, and asset impairment charges.

In 2012, we recorded $56.4 million in restructuring charges, net of reversals, related to our 2012 Program, which consisted of severance and related costs for the reduction of approximately 1,060 positions, lease cancellation costs, and asset impairment charges.

Restructuring costs were included in "Other expense, net" in the unaudited Consolidated Statements of Income. Refer to Note 9, "Cost Reduction Actions," to the unaudited Condensed Consolidated Financial Statements for more information.


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                                                      Avery Dennison Corporation



Free Cash Flow



                                                               Three Months Ended
(In millions)                                          March 29, 2014      March 30, 2013
Net cash used by operating activities                  $       (108.0 )    $        (65.7 )
Purchases of property, plant and equipment                      (38.7 )             (22.0 )
Purchases of software and other deferred charges                 (8.9 )              (7.8 )
Proceeds from sale of property, plant and
equipment                                                          .1                  .9
Sale of investments, net                                           .1                  .1
Plus divestiture-related payments and free cash
outflow from discontinued operations                                -                36.9
Free cash flow                                         $       (155.4 )    $        (57.6 )

Free cash flow in the first three months of 2014 decreased compared to 2013 primarily due to the timing of collection of accounts receivable, longer payment terms with customers, and higher incentive compensation paid in 2014, partially offset by higher net income and lower pension contributions.

2014 Outlook

Certain factors that we believe may contribute to results for 2014 compared to results for 2013 are described below.

We expect organic sales growth of 3.5% to 5% in 2014.

The extra week in our 2014 fiscal year is anticipated to increase sales and have a modest positive impact on earnings.

We expect earnings to increase in 2014.

We estimate cash restructuring costs of approximately $45 million in 2014.

We expect our full year 2014 tax rate to be comparable to 2013.

We anticipate our capital and software expenditures in 2014 to be approximately $185 million.


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                                                      Avery Dennison Corporation



ANALYSIS OF RESULTS OF OPERATIONS FOR THE FIRST QUARTER



Income from Continuing Operations before Taxes



                                                         Three Months Ended
(In millions)                                      March 29, 2014     March 30, 2013
Net sales                                           $     1,550.1    $       1,498.9
Cost of products sold                                     1,142.9            1,097.2
Gross profit                                                407.2              401.7
Marketing, general and administrative expense               296.7              300.9
Interest expense                                             15.4               12.2
Other expense, net                                            7.3                7.5
Income from continuing operations before taxes      $        87.8    $          81.1
As a Percent of Sales
Gross profit                                                 26.3 %             26.8 %
Marketing, general and administrative expense                19.1               20.1
Income from continuing operations before taxes                5.7                5.4

Sales

Sales from continuing operations increased 3% in the first quarter of 2014 compared to the same period last year, reflecting higher sales on an organic basis, partially offset by the unfavorable impact of foreign currency translation. On an organic basis, sales increased 5% due to higher volume.

Refer to "Results of Operations by Reportable Segment for the First Quarter" for further information.

Gross Profit Margin

Gross profit margin for the first quarter of 2014 decreased compared to the same period last year due to higher employee-related costs, changes in product mix, the impact of foreign currency transaction net losses, and modest impact of raw material inflation and pricing, partially offset by the benefits from productivity initiatives, including savings from restructuring.

Marketing, General and Administrative Expense

Marketing, general and administrative expense decreased in the first quarter of 2014 compared to the same period last year primarily due to the impact of higher savings from restructuring.

Other Expense, net



                                            Three Months Ended
(In millions)                         March 29, 2014      March 30, 2013
Other expense, net by type
Restructuring costs:
Severance and related costs            $         7.0       $         6.8
Asset impairment charges                          .3                 1.3
Other items:
Gain on sale of assets                             -                (1.3 )
Divestiture-related costs(1)                       -                  .7
Other expense, net                     $         7.3       $         7.5


(1) Represents only the portion allocated to continuing operations.

Refer to Note 9, "Cost Reduction Actions," to the unaudited Condensed Consolidated Financial Statements for more information regarding costs associated with restructuring.


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                                                      Avery Dennison Corporation



Net Income and Earnings per Share



                                                                Three Months Ended
(In millions, except per share amounts)                 March 29, 2014        March 30, 2013
Income from continuing operations before taxes           $        87.8         $        81.1
Provision for income taxes                                        16.2                  14.3
Income from continuing operations                                 71.6                  66.8
Loss from discontinued operations, net of tax                      (.4 )                (9.0 )
Net income                                               $        71.2         $        57.8
Net income per common share                              $         .74         $         .58
Net income per common share, assuming dilution                     .73                   .57

Net income as a percent of sales                                   4.6 %                 3.9 %
Effective tax rate for continuing operations                      18.4                  17.6

Provision for Income Taxes

The effective tax rate for continuing operations for the first quarter of 2014 included a discrete tax benefit of $9.5 million as a result of changes in certain tax reserves and valuation allowances and a $4.8 million benefit from out-of-period adjustments to properly state deferred taxes related to acquisitions completed in 2002 and 2003. The effective tax rate for the first quarter of 2013 reflected discrete tax benefits of $10.3 million related to changes in tax law, including a $4.2 million benefit attributable to the retroactive reinstatement of the federal research and development tax credit and a $5.1 million benefit for revaluation of deferred tax balances due to a change in the municipal statutory tax rate in Luxembourg. Refer to Note 11, "Taxes Based on Income," to the unaudited Condensed Consolidated Financial Statements for further information.

Our effective tax rate can vary widely from quarter to quarter, resulting from interim reporting requirements, the recognition of discrete events and the timing of repatriation of foreign earnings.

RESULTS OF OPERATIONS BY REPORTABLE SEGMENT FOR THE FIRST QUARTER

Operating income refers to income from continuing operations before interest and taxes.

Pressure-sensitive Materials



                                                             Three Months Ended
(In millions)                                           March 29, 2014   March 30, 2013
Net sales including intersegment sales                   $     1,159.7        $ 1,114.5
Less intersegment sales                                          (16.2 )          (16.5 )
Net sales                                                $     1,143.5        $ 1,098.0
Operating income (1)                                             112.0            104.9
(1) Included costs associated with restructuring
in both quarters                                         $         1.3        $     3.6

Net Sales

In the first quarter of 2014, sales in our Pressure-sensitive Materials segment increased approximately 4% compared to the same period last year, reflecting higher sales on an organic basis, partially offset by the unfavorable impact of foreign currency translation. On an organic basis, sales increased 6% due to higher volume. On an organic basis, sales increased 10% in emerging markets, at a mid-single digit rate in Western Europe, and slightly in North America.

In our label and packaging materials business, sales on an organic basis increased in the three months ended March 29, 2014 at a mid-single digit rate. Combined sales on an organic basis for our graphics, reflective, and performance tapes businesses also increased in the three months ended March 29, 2014 at a mid-single digit rate.

Operating Income

Operating income increased in the first quarter of 2014 compared to the same period last year primarily reflecting higher volume, the benefits from productivity initiatives, including savings from restructuring, as well as lower restructuring costs, partially offset by higher employee-related costs, modest impact of raw material inflation and pricing, the impact of foreign currency transaction net losses, and higher manufacturing expenses in North America, due in large part to extreme cold weather conditions during the quarter.


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                                                      Avery Dennison Corporation



Retail Branding and Information Solutions



                                                               Three Months Ended
(In millions)                                           March 29, 2014       March 30, 2013
Net sales including intersegment sales                   $       388.5         $      383.1
Less intersegment sales                                            (.8 )                (.4 )
Net sales                                                $       387.7         $      382.7
Operating income (1)                                              16.6                 14.6
(1) Included costs associated with restructuring
in both quarters, and gain on sale of assets in
2013                                                     $         6.0         $        3.0

Net Sales

In the first quarter of 2014, sales in our Retail Branding and Information Solutions segment increased approximately 1% compared to the same period last year, reflecting higher sales on an organic basis, partially offset by the unfavorable impact of foreign currency translation. On an organic basis, sales grew approximately 2% primarily due to higher volume from increased demand from Europe-based retailers and brands.

Operating Income

Operating income increased in first quarter of 2014 primarily reflecting savings from restructuring and higher volume, partially offset by higher employee-related costs, higher restructuring costs, and the impact of a gain on sale of assets in the same period last year.

Vancive Medical Technologies



                                                  Three Months Ended
(In millions)                              March 29, 2014      March 30, 2013
Net sales including intersegment sales      $        21.2       $        18.8
Less intersegment sales                              (2.3 )               (.6 )
Net sales                                   $        18.9       $        18.2
Operating loss                                       (2.6 )              (2.7 )

Net Sales

In the first quarter of 2014, sales in our Vancive Medical Technologies segment increased approximately 4% compared to the same period last year, reflecting higher sales on an organic basis and the favorable effect of foreign currency translation. On an organic basis, sales increased approximately 2% due to higher volume.

Operating Loss

Operating loss in the first quarter of 2014 was comparable to the same period last year.


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                                                      Avery Dennison Corporation



FINANCIAL CONDITION



Liquidity



Cash Flow from Operating Activities



                                                                 Three Months Ended
(In millions)                                            March 29, 2014        March 30, 2013
Net income                                               $         71.2        $         57.8
Depreciation and amortization                                      50.0                  51.5
Provision for doubtful accounts and sales returns                   7.3                   5.5
Net loss from asset impairments and sale/disposal
of assets                                                            .8                    .4
Stock-based compensation                                            6.0                   9.2
Other non-cash items                                               11.8                  14.7
Change in assets and liabilities and other
adjustments                                                      (255.1 )              (204.8 )
Net cash used in operating activities                    $       (108.0 )      $        (65.7 )

For cash flow purposes, changes in assets and liabilities and other adjustments exclude the impact of foreign currency translation (discussed below in "Analysis of Selected Balance Sheet Accounts").

During the first three months of 2014, cash flow used in operating activities increased compared to the same period last year due to the timing of collection of accounts receivable, longer payment terms with customers, and higher incentive compensation paid in 2014. These factors were partially offset by the impact of cash outflow related to the OCP and DES businesses in the prior year, as well as higher net income and lower pension contributions in the current year.

Cash Flow from Investing Activities



                                                                 Three Months Ended
(In millions)                                             March 29, 2014       March 30, 2013
Purchases of property, plant and equipment                 $       (38.7 )       $      (22.0 )
Purchases of software and other deferred charges                    (8.9 )               (7.8 )
Proceeds from sale of property, plant and equipment                   .1                   .9
Sales of investments, net                                             .1                   .1
Net cash used in investing activities                      $       (47.4 )       $      (28.8 )

Capital and Software Spending

During the first three months of 2014, we invested in new equipment primarily in Asia, the U.S. and Europe. During the first three months of 2013, we invested in new equipment primarily in the U.S. and Asia.

Information technology investments in the first three months of both 2014 and 2013 were primarily associated with standardization initiatives.

Cash Flow from Financing Activities



                                                         Three Months Ended
(In millions)                                     March 29, 2014      March 30, 2013
Net change in borrowings and payments of debt      $        90.0      $        134.8
Dividends paid                                             (27.8 )             (27.1 )
Share repurchases                                          (59.2 )             (61.8 )
Proceeds from exercise of stock options, net                12.5                26.4
Other                                                       (3.2 )              (6.2 )
Net cash provided by financing activities          $        12.3      $         66.1

Borrowings and Repayment of Debt

During the first three months of 2014 and 2013, our commercial paper and foreign short-term borrowings were used mainly to fund share repurchase activity (given the seasonality of our cash flow during the year) and support operational requirements. Refer to "Share Repurchases" below for more information.

Dividend Payments

Our dividend per share was $.29 in the first quarter of 2014 compared to $.27 per share in the same period last year.


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Avery Dennison Corporation

On April 24, 2014, subsequent to the end of the first quarter of 2014, we increased our quarterly dividend to $.35 per share, representing a 21% increase from our previous dividend rate of $.29 per share.

Share Repurchases

During the first three months of 2014, we repurchased approximately 1.2 million shares of our common stock at an aggregate cost of $59.2 million. During the first three months of 2013, we repurchased approximately 1.5 million shares of our common stock at an aggregate cost of $61.8 million.

As of March 29, 2014, shares of our common stock in the aggregate amount of approximately $396 million remained authorized for repurchase under our July 2013 Board authorization.

Analysis of Selected Balance Sheet Accounts

Long-lived Assets

In the three months ended March 29, 2014, goodwill increased by approximately $9 million to $760 million, which reflected the impact of acquisition adjustments and foreign currency translation.

In the three months ended March 29, 2014, other intangibles resulting from business acquisitions, net, decreased by approximately $6 million to $90 million, which primarily reflected current year amortization expense.

Refer to Note 4, "Goodwill and Other Intangibles Resulting from Business Acquisitions," to the unaudited Condensed Consolidated Financial Statements for more information.

In the three months ended March 29, 2014, other assets increased by approximately $2 million to $488 million, which reflected increases in the cash . . .

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