Avery Dennison Corporation (AVY) reported adjusted earnings per share (EPS) of 51 cents in its first quarter 2011, beating the Zacks Consensus Estimate of 47 cents. EPS in the quarter however posted a decline of 16% from the adjusted EPS of 61 cents in the prior-year quarter.
Both the adjusted EPS in the reported as well as year-ago quarter excluded the net effect of restructuring charges, asset impairment and lease cancellation charges, and gain/loss from legal settlements, of 9 cents and 10 cents respectively. Including these items, EPS in the quarter was 42 cents compared with 51 cents a year ago.
Total revenue of Avery was $1,659.3 million in the quarter, up 6.7% from $1,554.7 million in the prior-year quarter. Results outperformed the Zacks Consensus Estimate of $1,657 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 7% year over year in the quarter. Gross profit was $454.4 million in the quarter, up 3% from $440.8 million in the year-ago quarter. Gross margin however contracted 100 basis points to 27.4%.
Adjusted operating income of Avery was $89.9 million compared with $100.7 million in the year-ago quarter. Operating margin contracted 110 basis points year over year to 5.4%. Both the quarters’ results exclude certain one-time items including restructuring costs, asset impairment and lease cancellation charges, and loss/gains from legal settlements.
Segment Update
Pressure-sensitive Materials: Sales increased 10% year over year to $987 million in the quarter. Adjusted operating profit was $89.6 million, flat year over year. Operating margin was 9.1% in the quarter, down from 10% in the year-ago quarter as the benefits of pricing actions, increased volume, and productivity initiatives were more than offset by raw material inflation.
Retail Branding and Information Solutions: Sales increased 9% year over year to $375.1 million in the quarter reflecting increased demand from retailers and brands in the U.S. and Europe. Adjusted operating profit was $12.4 million, a substantial improvement from $2.9 million in the prior-year quarter. Operating margin expanded a whopping 250 basis points to 3.3% 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 that posted a revenue decline of 13.1% year over year clocked sales of $156.4 million in the quarter. More than half of the decline in sales was due to anticipated customer inventory reductions following a build-up in the sequentially preceding quarter. The balance of the decline was related to weak end market demand and last year’s distribution losses with one customer. Adjusted operating profit was $1.5 million, a 93% drop from $20.1 million in the prior-year quarter. Operating margin was 1% compared with 11.2% in the year-ago quarter primarily due to lower volume and raw material inflation.
Other specialty converting businesses: Sales improved 6% in the quarter to $140.8 1 million, reflecting increased demand for products for automotive and other specialty applications. The segment reported a loss of $0.2 million in the quarter compared with a profit of $3.1 million in the year-ago quarter, primarily due to expenses related to a warehouse fire in Brazil. The benefits from increased volume, pricing actions, and productivity initiatives more than offset the impact of raw material inflation. Excluding the impact of the fire, operating profit would have been in positive territory.
Financial Update
At the end of the first quarter, Avery’s cash and cash equivalents dropped to $120.4 million from $127 million at fiscal 2010 end. Long-term debt declined marginally to $955.4 million from $956.2 million at the end of fiscal 2010.
Net cash used for operations was $117.5 million during the quarter compared with $27.9 million in the year-ago quarter.
Full Year 2011 Guidance
Avery expects fiscal 2011 EPS to be in the band of $3.00 to $3.30. For fiscal 2011, Avery forecasts free cash flow of $325 million to $350 million.
Our Take
The company remains committed to research and development as well as in 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 economies coupled with a solid cash position and lower debt levels. However, weak results at the Office and Consumer Products segment and raw material inflation remain concerns. We currently have a Zacks #3 Rank (short-term Hold 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. Avery competes with Bemis Company Inc. (BMS) and Fortune Brands Inc. (FO).
AVERY DENNISON (AVY): Free Stock Analysis Report
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