Avery Dennison Beats on Revs - Analyst Blog

Avery Dennison Corporation (AVY) reported adjusted earnings per share (EPS) of 98 cents in its fourth quarter 2010, matching the Zacks Consensus Estimate of 98 cents. The EPS in the quarter was more than double the adjusted EPS of 44 cents in the prior year quarter.

Both the adjusted EPS in the reported quarter and year ago quarter excluded the net effect of restructuring charges, asset impairment and lease cancellation charges, loss from curtailment and settlement of pension obligations, loss from debt extinguishments, legal settlements, and gain on sale of investment, of 8 cents and 3 cents respectively. Including these items, EPS in the quarter was $1.06 compared with 47 cents in the year ago quarter.

Total revenue of Avery was $1.6 billion in the quarter, up 7.6% from $1.5 billion in the prior-year quarter. Results outperformed the Zacks Consensus Estimate of $1.59 billion. Increase in revenue in three segments, partially offset by a decline at Office and Consumer Product: led to the overall revenue climb.

Avery's Cost of Products Sold increased 8% year-over-year and marketing, general & administrative expense also increased 1% year-over-year in the quarter. Adjusted operating income of Avery was $96.8 million compared with $73.7 in the year ago quarter.

Operating margin expanded 110 basis points to 5.9% from the prior year quarter. Both the quarters' results exclude certain one-time items including restructuring costs, asset impairment and lease cancellation charges, Loss from debt extinguishments and legal settlement charges.

Segment Update

Pressure-sensitive Materials: Sales increased 8.9% year-over-year to $922 million in the quarter. Adjusted operating profit was $71.5 million compared with $63.7 million in fourth-quarter 2009. Operating margin expanded 30 basis points year over year to 7.8% as benefits of increased volume, pricing actions, and productivity initiatives more than offset raw material inflation.

Retail Information Services: Sales increased 10.2% year-over-year to $386.3 million in the quarter reflecting increased demand from retailers and brands in the U.S. and Europe. Adjusted operating profit was $18.5 million, a substantial improvement from $2.7 million in the prior year quarter.

Operating margin expanded a whopping 400 basis points to 5% year over year in the quarter driven by increased volume and restructuring and productivity initiatives, partially offset by higher employee costs.

Office and Consumer Product: The only segment to post a revenue decline of 4.1% year-over-year to $196.7 million in the quarter affected by weak end-market demand and increased competition in the label category.

Adjusted operating profit was $20.3 million, a 27% drop from $27.7  million in the prior year quarter. Operating margin was 10.3%, a 320-basis point contraction year over year, due to increased investment in demand creation, consumer promotions, and innovation, raw material inflation, and lower volume.

Other specialty converting businesses: Sales improved 11% in the quarter to $132.1 million reflecting increased demand for specialty tapes. The segment's loss of $2.5 million in the quarter was narrower than the year ago loss of $5.1 million as benefits of increased volume and productivity actions more than offset raw material inflation.

Fiscal 2010 Performance

Avery's fiscal 2010 adjusted EPS of $3.15, matching the Zacks Consensus Estimate, and up 60% from $1.97 in the prior year. Adjusted EPS was in line with the company's guidance range of $3.10 to $3.20 per share.

Adjusted EPS in fiscal 2010 and 2009 excluded the net effect of restructuring charges, asset impairment and lease cancellation charges, loss from curtailment and settlement of pension obligations, loss from debt extinguishments, legal settlements, and gain on sale of investment, of 18 cents and $1.34 respectively.

Fiscal 2009 EPS also excluded goodwill and intangible asset impairment charges of $7.84 per share. Including these items, EPS in fiscal 2010 was $2.97 compared with a loss per share of $7.21 in the prior year.

Fiscal 2010 revenues upped 9.4% year over year and to $6.51 billion and beat the Zacks Consensus Estimate of $6.47 billion. The year-over-year growth was a tad higher than management's expected revenue growth of 9%.

Financial Update

Cash and cash equivalents of Avery dropped to $127 million at fiscal 2010 end from $138.1 million at the end of fiscal 2009. Long-term debt declined to $956.2 million from $1.09 billion at the end of fiscal 2009.

Net cash from operations of Avery was $486.7 million during the year, down from $569 million last year. Free Cash Flow during fiscal 2010 decreased to $378.9 million from $468.2 million in the prior year. Free cash flow generated during the year was above management's projected range of $350 million - $375 million. For fiscal 2011, Avery expects free cash flow to be in the range of $325 to $350 million.

During the fourth quarter, Avery had repurchased approximately three million shares for  $109 million and contributed $78 million to pension obligations. Avery's Board of Directors authorized an additional share repurchase of 5 million shares. The Board also announced a 25% hike in the first quarter 2011 dividend to 25 cents per share.

Full Year 2011 Guidance

Avery expects fiscal 2011 EPS to be in the band of $3.00 to $3.30. The company expects first quarter 2011 EPS to be at the low end of the historical range of 15% to 20% of the full year EPS, reflecting normal seasonality as well as the timing of inflation and pricing actions.

Peer Comparison

Avery competes with Bemis Company, Inc. (BMS) and Fortune Brands Inc. (FO). Bemis recently reported its fourth-quarter 2010 adjusted EPS of 49 cents, falling short of the Zacks Consensus Estimate of 59 cents, but in line with management's guidance of 48 to 53 cents per share. Total revenue of Bemis for the quarter was $1.25 billion, a 38% increase from the year-ago quarter, but failed to meet the Zacks Consensus Estimate of $1.28 billion.

Our Take

The company remains committed to research and development as well as  discovering new markets for its products. We believe Avery is well positioned to fare well in the upcoming quarters based on its dominant market share in emerging markets coupled with solid cash position and lower debt levels. We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock.

Pasadena, California-based Avery Dennison produces pressure-sensitive materials, office products and a variety of tickets, tags, labels and other converted products. Avery is a Fortune 500 company operating over 200 manufacturing and distribution facilities with roughly 32,000 employees in more than 60 countries.

 
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