Avery Dennison Corporation (AVY) reported adjusted income of 94 cents per share in second-quarter 2010, beating the Zacks Consensus Estimate of 66 cents by 28 cents. Results were substantially ahead of second-quarter 2009 adjusted earnings of 56 cents per share. Adjusted income reached $99.9 million in the quarter, a substantial increase of 68.5% from $59.3 million in second-quarter 2009.
Including the after-tax effect of charges for restructuring costs, asset impairment and lease cancellation charges, loss from curtailment and settlement of a pension obligation, loss from debt extinguishment, legal settlements and gain on sale of investment of $16.1 million or 16 cents per share, Avery reported a net income of $83.8 million or 78 cents per share, compared with $39.8 million or 38 cents per share in the prior-year quarter.
The prior-year quarter also includes the after-tax effect of charges for restructuring costs, asset impairment and lease cancellation charges, loss from curtailment and settlement of a pension obligation, loss from debt extinguishment, legal settlements and gain on sale of investment of $19.5 million or 18 cents per share.
Total revenue of Avery was $1.7 billion in the quarter, up 15.4% from $1.6 billion in the prior-year quarter. Results also compare favorably with the Zacks Consensus Estimate of $1.6 billion. An increase in revenue in three segments, partially offset by a softer result at another, led to the overall revenue climb.
Avery’s cost of products sold increased 11.7% year-over-year while marketing, general & administrative expenses increased 12.9% year-over-year.
Adjusted operating income for Avery was $151.5 million or 9.0% of sales, compared with $90.2 million or 6.2% of sales in the prior-year quarter. The quarter’s result was affected by certain one-time items. Including restructuring costs of $1.9 million, asset impairment and lease cancellation charges of $0.6 million, loss from curtailment and settlement of a pension obligation of $1.9 million, loss from debt extinguishment of $1.2 million, legal settlement credits of $0.5 million and gain on sale of investment of $0.5 million, Avery reported operating income of $146.9 million or 8.7% of sales, compared with $60.6 million or 4.2% of sales a year ago. The prior-year quarter results included restructuring costs of $25.8 million and asset impairment and lease cancellation charges of $3.8 million.
Interest expense of Avery increased 3.4% year-over-year in second-quarter 2010.
Segment Update
Pressure-sensitive Materials: Sales increased 16.4% year-over-year to $923.9 million in the quarter.
Operating profit was $89.0 million or 9.6% of sales, compared with $64.4 million or 8.1% of sales in second-quarter 2009. Including restructuring costs of $2.0 million and a legal settlement credit of $0.5 million, operating income was $87.5 million or 9.5% of sales compared with $50.6 million or 6.4% of sales in the prior-year quarter.
Retail Information Services: Sales increased 24.5% year-over-year to $411.9 million in the quarter. Operating profit was $36.2 million or 8.8% of sales. Including impairment and lease cancellation charges of $0.6 million, reported operating income was $35.6 million or 8.6% of sales compared with an operating loss of $5.1 million or negative 1.5% of sales in the prior year quarter.
Office and Consumer Product: The segment sales declined 3.7% year-over-year to $208.9 million in the quarter. Operating profit was $33.3 million or 15.9% of sales compared with $37.5 million or 17.3% of sales in the prior-year quarter. Including restructuring costs of $0.1 million and loss from curtailment and settlement of a pension obligation of $1.9 million, reported operating income was $31.5 million or 15.1% of sales compared with $34.5 million or 15.9% of sales in the prior-year quarter.
Other specialty converting businesses: Sales improved 18.8% in the quarter to $135.4 million. Operating profit was $4.2 million or 3.4% of sales compared with a loss of $3.5 million or a negative 3.1% of sales in the prior year quarter.
Financial Update
Cash and cash equivalents of Avery increased to $148.9 million at quarter end from $91.9 million at the end of second-quarter 2009. Long-term debt declined to $1.06 billion from $1.13 billion at the end of second-quarter 2009.
Net cash from operations of Avery were $143.1 million during the first half of 2010, up from $132.8 million in the first half of 2009. Capital expenditure totaled $27.4 million; lower than $29.7 million in the year-ago period. Free cash flow during the first half of 2010 increased $105.7 from $88.3 million in the year-ago period.
Full Year 2010 Guidance
Management expects revenue to grow in the range of 7% to 8%. It estimates adjusted earnings in the range of $2.60 to $2.80 per share. Free cash flow is projected to be $350 million.
Avery is well positioned to fare well in the upcoming quarter based on strong performance across all segments and its dominant market share in emerging markets, coupled with strong cash generation ability and lower debt levels.
On the flip side, Avery faces rising raw material costs and is heavily invested in innovation and demand creation of Office Products. We maintain our Neutral recommendation on Avery. The quantitative Zacks #3 Rank (Hold) for the company indicates no clear directional pressure on the stock over the near term.
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