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Avery Dennison: 1Q Earnings Beat

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Avery Dennison Corporation (AVY - Free Report) reported adjusted earnings of 59 cents per share in the first-quarter 2013, up 37% from the 43 cents per share in the year-ago quarter and ahead of the Zacks Consensus Estimate of 57 cents. Including restructuring costs and other items, earnings from continuing operations were 66 cents per share in the quarter compared with 42 cents in the year-ago quarter.

Total revenue increased 4% to $1.499 billion from $1.443 billion in the prior-year quarter, but way short of the Zacks Consensus Estimate of $1.53 billion. On an organic basis, revenues increased approximately 4%.

Cost of sales in the reported quarter rose 3% to $1.1 billion. Gross profit increased 7% to $4028 million from $377 million in the prior-year quarter. Gross margin expanded 70 basis points to 26.8%.

Marketing, general & administrative expenses were $301 million versus $289 million in the year-ago quarter. Adjusted operating profit increased 14% to $101 million. Adjusted operating margin improved 60 basis points to 6.7%.

Segmental Performance

Total revenue in the Pressure-sensitive Materials segment increased 3% to $1.1 billion. Label and Packaging Materials sales increased in low-single digits while sales for Graphics, Reflective, and Performance Tapes increased slightly. Adjusted operating profit increased 6% to $108.5 million in the quarter. Adjusted operating margin expanded 30 basis points to 9.9%, driven by benefit of productivity initiatives and higher volume which helped mitigate changes in product mix and higher employee-related expenses.

Total revenue from Retail Branding and Information Solutions increased 6% to $382.7 million from $360.1 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 59% to $17.6 million with adjusted operating margin expanding 150 basis points to 4.6% on productivity initiatives, higher volumes, partially offset by employee related expenses.

Other specialty converting businesses segment reported net sales of $18.2 million, up 2% from $18 million in the year-ago quarter. The segment reported an operating loss of $2.7 million, narrower than the year ago quarter’s loss of $3.2 million.

Financial Position

As of Mar 31, 2013, Avery Dennison had cash and cash equivalents of $208 million versus $191 million as of Mar 31, 2012. Long-term debt was at $702 million as of Mar 31, 2013 compared with $703.7 million as of Mar 31, 2012. Cash flow from operating activities was a usage of $65.7 million during the quarter compared with an inflow of 10.7 million in the prior year quarter. Avery repurchased 1.5 million shares during the quarter for $62 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. In this regard, the company has incurred restructuring costs of approximately $56 million in 2012, and expects to incur $25 million in 2013. In the first quarter of 2013, Avery incurred restructuring costs, net of gain on sale of assets, of approximately $7 million. 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 $2.75 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, 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 businesses have been classified as discontinued operations in the first quarter earnings results. Avery has received all regulatory clearances for the sale and expects it to be completed by 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 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. Avery currently retains a short-term Zacks Rank #2 (Buy).

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.

Peer Performance

An Avery Dennison peer, United Stationers Inc. reported first quarter earnings of 56 cents, up 24% from 45 cents earned in the year-ago quarter but way short of the Zacks Consensus Estimate of 77 cents. Among other peers, The Standard Register Company (SR - Free Report) and ACCO Brands Corporation (ACCO - Free Report) are yet to announce their first quarter results.

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