Avery Dennison Corporation (AVY) reported adjusted income of 62 cents per share in third-quarter 2010, beating the Zacks Consensus Estimate of 61 cents by a penny.  Results, however, lagged third-quarter 2009’s adjusted earnings of 82 cents per share. Adjusted income was $66.0 million in the quarter, down 24% from $86.8 million in third-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, of $1.8 million or 2 cents per share, Avery reported a net income of $64.2 million or 60 cents per share, compared with $62.5 million or 59 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 and legal settlements of $24.3 million or 23 cents per share.

Total revenue of Avery was $1.6 billion in the quarter, up 6% from $1.5 billion in the prior-year quarter. Results were in line with the Zacks Consensus Estimate. 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 7% year-over-year while marketing, general & administrative expense also increased 7% year-over-year.

Adjusted operating income of Avery was $16.6 million or 6.5% of sales compared with $112.9 million or 7.3% of sales in the prior-year quarter. The quarter’s result excludes certain one-time items including restructuring costs of $5.8 million, asset impairment and lease cancellation charges of $2.3 million, loss from curtailment and settlement of a pension obligation of $2.4 million.

Segment Update

Pressure-sensitive Materials: Sales increased 5% year-over-year to $896.7 million in the quarter.

Operating profit was $74.5 million or 8.3% of sales compared with $84.0 million or 9.9% of sales in third-quarter 2009. Including restructuring costs, impairment and lease cancellation charges and loss from curtailment of a pension obligation of $2.3 million, operating income was $72.2 million or 8.1% of sales compared with $75.5 million or 8.9% of sales in the prior year quarter.

Retail Information Services: Sales increased 17% year-over-year to $378.7 million in the quarter. Operating profit was $13.2 million or 3.5% of sales compared with a loss of $6.7 million or (2.1%) of sales in the prior year quarter.

Including restructuring costs, impairment and lease cancellation charges and loss from curtailment of a pension obligation of $1.8 million, reported operating income was $11.4 million or 3.0% of sales compared with an operating loss of $29.0 million or negative 8.9% of sales in the prior year quarter.

Office and Consumer Product: The segment sales declined 5% year-over-year to $229.7 million in the quarter. Operating profit was $26.2 million or 11.4% of sales compared with $40.8 million or 16.8% of sales in the prior year quarter.

Including restructuring costs, impairment and lease cancellation charges and loss from curtailment of a pension obligation of $5.8 million, the operating income was $20.4 million or 8.9% of sales compared with $41.0 million or 16.9% of sales in the prior-year quarter.

Other specialty converting businesses: Sales improved 3% in the quarter to $135.7 million. Operating profit was $3.1 million or 2.3% of sales compared with $5.9 million or 4.5% of sales in the prior-year quarter.

Including restructuring costs, impairment and lease cancellation charges and loss from curtailment of a pension obligation of $0.6 million, reported operating income was $2.5 million or 1.8% of sales compared with $0.8 million or 0.6% of sales in the prior-year quarter.

Financial Update

Cash and cash equivalents of Avery increased to $157 million at quarter-end from $91.9 million at the end of third-quarter 2009. Long-term debt declined to $1.07 billion from $1.12 billion at the end of third-quarter 2009.

Net cash from operations of Avery was $283.6 million during the first nine months of 2010, down from $316.9 million in the same period last year. Capital expenditure totaled $50.1 million; lower than $45.7 million in the year-ago period. Free Cash Flow during the first nine months of 2010 decreased $216.6 from $251.1 million in the year-ago period.

Full Year 2010 Guidance

Management expects revenue to grow 9%. It estimates adjusted earnings in the range of $3.10 to $3.20 per share. Earnings include 40 cents per share from a discrete tax planning event expected in the fourth quarter of 2010.

Free cash flow is projected in the range of $350 million – $375 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 solid cash position 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 #4 Rank (short-term Sell rating) for the company indicates downward pressure on the stock over the near term.

 
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