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Good Quarter for Avery Dennison

Avery Dennison Corporation (AVY) reported adjusted earnings of 54 cents per share in the fourth-quarter 2012, up 50% from the 36 cents per share in the year-ago quarter and ahead of the Zacks Consensus Estimate of 49 cents. Including restructuring costs and other items, earnings from continuing operations were 33 cents per share in the quarter compared with 27 cents in the year-ago quarter.

Total revenue increased 5.3% to $1.532 billion from $1.454 billion in the prior-year quarter. Revenues were ahead of the Zacks Consensus Estimate of $1.472 billion. On an organic basis, revenues increased approximately 7%.

Cost of sales in the reported quarter rose 3.5% to $1.134 billion. Gross profit increased 11% to $398 million from $359 million in the prior-year quarter. Gross margin expanded 130 basis points to 26%.

Marketing, general & administrative expenses were $296.3 million versus $287.7 million in the year-ago quarter. Adjusted operating profit jumped 43% to $101 million. Adjusted operating margin improved 170 basis points to 6.6%.

Segmental Performance

Total revenue in the Pressure-sensitive Materials segment increased 4% to $1.06 billion. On an organic basis, revenues increased 6%. Adjusted operating profit increased 17% to $92.2 million in the quarter. Adjusted operating margin expanded 100 basis points to 8.7%

Total revenue from Retail Branding and Information Solutions increased 10% to $406.6 million from $370.5 million in the year-earlier quarter. The improvement was driven by increased demand from U.S. and European retailers and brands.

The segment’s adjusted operating income shot up 96% to $25.3 million with adjusted operating margin expanding 270 basis points to 6.2% on productivity initiatives, higher volumes, partially offset by employee related expenses.

Other specialty converting businesses segment reported net sales of $65.5 million, up 9% from $60 million in the year-ago quarter based on higher volume. Adjusted operating profit was $4.2 million compared with a loss of $3.7 million in the prior-year quarter. Adjusted operating margin was 6.4% in the quarter.

Fiscal 2012 Performance

Avery reported adjusted EPS of $2.08 in fiscal 2012, up 20% from $1.74 in fiscal 2011. Fiscal results outperformed the Zacks Consensus Estimate of $2.03 as well as the company’s guided range of $2.00 to $2.05 per share. Including one-time items, EPS from continuing operations in the year stood at $1.63, up 12% from $1.45 in the prior year.

Revenues inched up 0.2% year over year to $6.036 billion in 2012 and surpassed the Zacks Consensus Estimate of $5.976 billion in 2011.

Financial Position

As of 2012 end, cash and cash equivalents of the company were $235 million versus $178 million as of 2011 end. Long-term debt decreased to $702.7 million as of 2012 end from $954.2 million as of 2011 end.

Cash flow from operating activities was $513.4 million during the year compared with $422.7 million in the prior fiscal. Avery repurchased 7.9 million shares during the year for $235 million.

Cost Reduction Actions

The company had initiated a restructuring program in the first half of 2012 to reduce costs across all segments of the business. In this regard, the company has incurred restructuring costs of approximately $56 million in 2012, and expects to incur $25 million in 2013. Avery expects to realize more than $100 million in annualized savings from this program by mid-2013.

Fiscal 2013 Outlook

The company expects adjusted earnings in the range of $2.40 to $2.80 per share. Free cash flow from continuing operations is expected between $275 million and $325 million in 2013.

Sale of Businesses

Avery announced that it has entered into an agreement with CCL Industries Inc., a global leader in specialty packaging solutions to divest its Office and Consumer Products and Designed and Engineered Solutions businesses, for $500 million in cash.

The transaction, pursuant to customary closing conditions, is expected to be completed in mid-2013. The net proceeds of approximately $400 million will be utilized to repurchase shares and make an additional pension contribution.

Avery continues to deliver healthy organic growth in both of the core segments - Pressure-Sensitive Materials and Retail Branding and Information Solutions. Now, with the divestiture of the underperforming Office and Consumer Products unit, the company will be able to focus on these core segments and increase its growth profile.

Pasadena, California-based Avery Dennison manufactures pressure-sensitive materials, and tickets, tags, labels other converted products. Avery has over 200 manufacturing and distribution facilities encompassing more than 60 countries.

Avery currently retains a short-term Zacks Rank #3 (Hold). Its peers The Standard Register Company (SR), United Stationers Inc. (USTR) and ACCO Brands Corporation (ACCO) are yet to announce their fourth quarter results.

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