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Avery Dennison Corporation (AVY - Analyst Report) reported adjusted earnings of 71 cents per share in the second quarter of 2013, up 34% from 53 cents per share reported in the year-ago quarter and ahead of the Zacks Consensus Estimate of 69 cents. Results benefited from the company’s restructuring and other productivity actions that were initiated last year.

Including restructuring costs and other items, earnings from continuing operations were 70 cents per share in the quarter compared with 47 cents in the year-ago quarter.

Total revenue increased 4.2% to $1.552 billion from $1.490 billion in the prior-year quarter, ahead of the Zacks Consensus Estimate of $1.54 billion. On an organic basis, revenues increased approximately 5%.

Cost of sales in the reported quarter rose 3% to $1.13 billion. Gross profit increased 8% to $417 million from $388 million in the prior-year quarter. Gross margin expanded 90 basis points to 26.9%.

Marketing, general & administrative expenses were $293 million versus $285 million in the year-ago quarter. Adjusted operating profit increased 20% to $124 million. Adjusted operating margin improved 110 basis points to 8%.

Segmental Performance

Total revenue in the Pressure-sensitive Materials segment increased 3% to $1.11 billion. Label and Packaging Materials sales increased in mid-single digits, while sales for Graphics, Reflective, and Performance Tapes increased in low-single digits. Adjusted operating profit increased 17% to $119 million in the quarter. Adjusted operating margin expanded 130 basis points to 10.7%, driven by benefit of productivity initiatives and higher volume, which helped mitigate changes in product mix.

Total revenue from Retail Branding and Information Solutions increased 7% to $419.6 million from $390.9 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 rose 25% to $29.6 million with adjusted operating margin expanding 110 basis points to 7.1% on productivity initiatives and higher volumes, partially offset by employee related expenses.

Other specialty converting businesses segment reported net sales of $18.8 million, down 1% from $19 million in the year-ago quarter. The segment reported an operating loss of $2.8 million, flat year over year.

Financial Position

As of Jun 29, 2013, Avery Dennison had cash and cash equivalents of $211.6 million versus $161.4 million as of Jun 30, 2012. Long-term debt was $951.4 million as of Jun 29, 2013, compared with $703.2 million as of Jun 30, 2012.

Cash flow from operating activities was $46.7 million during the first half of 2013 compared with $41 million in the prior-year period. Avery repurchased 3.5 million shares during the first half of fiscal 2013 for $149 million.

Cost Reduction Actions

The company had initiated a restructuring program in the first half of 2012 to trim down costs across all its segments; owing to which the company incurred restructuring costs of approximately $56 million in 2012 and net cost of $4 million in the first half of 2013. Avery expects to incur restructuring costs, net of gain on sale of assets, of $15 million in 2013. So far the company has achieved annualized savings of $105 million from this program.

Fiscal 2013 Outlook

The company expects adjusted earnings in the range of $2.40 to $2.60 per share. Free cash flow from continuing operations is expected between $275 million and $315 million in 2013.

Sale of Businesses

In the fourth quarter of 2012, Avery had 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.

On Jul 1, 2013, Avery completed the sale, subject to customary closing adjustments expected to be finalized by Oct 1, 2013. The net proceeds of approximately $400 million will be utilized to repurchase shares, reduce debt and make an additional pension contribution.

Our Take

Avery continues to deliver healthy organic growth in both 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, Calif.-based Avery Dennison manufactures pressure-sensitive materials and tickets, tags, labels and other converted products. Avery has over 200 manufacturing and distribution facilities across more than 60 countries.

Avery currently holds a Zacks Rank #3 (Hold).

Peer Performance

An Avery Dennison peer, United Stationers Inc. (USTR - Snapshot Report) reported second quarter earnings of 86 cents a share, up 30% from 66 cents earned in the year-ago quarter, ahead of the Zacks Consensus Estimate of 79 cents. Among other peers, The Standard Register Co. and ACCO Brands Corp. (ACCO - Snapshot Report) are yet to announce their second quarter results.

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