PASADENA, Calif.--Oct. 25, 2005-- Avery Dennison Corporation today reported third quarter diluted earnings per share of $0.86 compared with $0.75 a year ago, a 15 percent increase. Profits increased due to improved pricing and product mix, as well as a reduction in operating expenses and the tax rate. The Company also announced actions to increase operating efficiencies and improve its profitability, targeting $60 million to $70 million of annual savings when fully implemented in 2007.
"We are very pleased with the profit improvement we have achieved over the past six months," said Dean A. Scarborough, president and chief executive officer of Avery Dennison. "The actions we announced today will further improve our global operating efficiencies, driving margin expansion and helping to fund our investments for top-line growth."
Planned cost reduction actions could result in cumulative pre-tax, cash charges of approximately $20 million to $30 million, to be incurred primarily during the fourth quarter of 2005. These charges relate to estimated severance costs for a potential reduction in headcount of over 500 positions, with actions expected to impact most businesses and geographic regions.
Annual pre-tax savings associated with these and other cost reduction actions could total $40 million to $50 million in 2006, increasing to a total of $60 million to $70 million by 2007. Approximately half of the targeted savings is expected to be generated by actions taken to streamline corporate general and administrative activities, including the Company's shared services units.
In addition, the Company is considering a number of divestitures of non-strategic, low-margin businesses, which would reduce annual sales by approximately $70 million, with minimal impact to earnings from operations. Such divestitures, if completed, could result in pre-tax, non-cash charges in excess of $100 million, representing goodwill and other asset write-downs. These charges could be incurred as early as the fourth quarter of 2005.
Planned savings and cash generated from divestitures will be used in part to fund investments in ongoing Horizons initiatives and future growth opportunities, as well as actions to drive additional productivity gains.
Financial highlights for the third quarter of 2005:
-- Earnings per share, on a diluted basis, were $0.86, compared with $0.75 a year ago. Results for the third quarter of 2005 include an incremental tax expense of approximately $0.14 per share associated with the repatriation of $350 million of earnings of certain foreign subsidiaries, to be completed
during the fourth quarter.
-- Net income increased 15 percent to $86.2 million, compared with $75 million last year.
-- Sales for the third quarter increased 2 percent over the prior year to $1.4 billion, at the low end of the Company's expectations, reflecting relatively weak results in the first two months of the quarter, partially offset by higher sales growth in September. The improvement in the sales trend has
continued into the early part of the fourth quarter.
The impact of currency translation contributed approximately 40 percent of the sales growth during the quarter. The net effect of pricing and product mix changes was positive, more than offsetting a modest decline in unit volume, which reflected generally weak industry conditions, market share loss resulting from price increases in several businesses, and a shift in the timing of sales related to the back-to-school season.
-- Gross profit margin was comparable to the third quarter of 2004, reflecting improved pricing and productivity, offset by unfavorable segment mix and higher spending associated with the development of the Company's radio frequency identification (RFID) business. Higher raw material costs were fully offset with selling price increases.
-- Marketing, general and administrative expenses as a percent of sales improved by 80 basis points compared to the same quarter a year ago, reflecting spending controls implemented during the past six months.
-- Excluding restructuring, asset impairment and plant transition costs in the third quarter of 2005, operating margin improved by 80 basis points over the third quarter of 2004, due to the reduction in marketing, general and administrative expenses as a percentage of sales. (See Attachment A-3: "Preliminary Reconciliation of GAAP to Non-GAAP Measures".)
-- The one-time incremental tax expense associated with the repatriation of earnings impacted the quarter by $0.14 per share. The Company also had a $.09 per share benefit related to several favorable tax audit settlements in multiple jurisdictions. Geographic income mix and other factors also contributed favorably to the tax rate. As a result, the effective tax rate for the third quarter was 23.8 percent, compared to 26.8 percent for the same period last year. Adjusting for the unusual items, the company's effective tax rate for the quarter was approximately 22.5 percent, which is expected to be sustained through year end.
The Company's Pressure-sensitive Materials segment reported sales of approximately $775 million, up approximately 4 percent over the third quarter of 2004. Approximately three-quarters of the increase in segment revenue reflects unit volume growth and a positive contribution from price and mix. The balance of the growth is attributable to the impact of currency translation.
Before the effects of currency translation, sales in the North American pressure-sensitive roll materials business declined by approximately 3 percent, with the benefit of price increases more than offset by a decline in volume. The volume decline affected most business segments within the North American pressure-sensitive roll materials business with the exception of films, which continued to benefit from growth in the beverage label market.
Sales in the European pressure-sensitive roll materials business grew approximately 9 percent in local currency, driven by solid unit volume growth and a positive contribution from changes in price and mix. Strong growth in the Eastern European region contributed to this result. The roll materials business in Asia continued to report double-digit growth in local currency sales, while sales for this business in Latin America declined slightly. Sales in the graphics and reflective materials business increased modestly before the effect of currency.
Excluding asset impairment costs, operating margin for the segment declined to 9.0 percent compared with 9.2 percent a year ago, due to higher bad debt expense in Eastern Europe, partially offset by productivity improvement initiatives and spending controls. The benefit of price increases covered higher raw material costs. (See Attachment A-4: "Preliminary Supplementary Information, Reconciliation of GAAP to Non-GAAP Supplementary Information".)
The Office and Consumer Products segment reported sales of approximately $284 million, a decline of approximately 6 percent from the third quarter of 2004. The benefit of price increases was more than offset by a decline in volume, partially reflecting an approximately $10 million shift in back-to-school related sales into the second quarter of 2005.
Excluding transition costs associated with a previously announced plant closure, operating margin for the segment increased to 15.1 percent compared with 14.6 percent a year ago, reflecting the benefit of pricing, productivity improvement efforts and spending controls. Price increases, effective January 1 of this year, have covered cumulative raw material cost inflation for the segment. (See Attachment A-4: "Preliminary Supplementary Information, Reconciliation of GAAP to Non-GAAP Supplementary Information".)
The Retail Information Services segment reported sales of approximately $166 million, an increase of approximately 5 percent over the third quarter of 2004. Approximately 70 percent of the growth is due to the combined effect of the Rinke acquisition and currency translation, with the balance due to core unit volume growth. Operating margin for the segment increased to 7.2 percent in the third quarter, compared with 6.4 percent a year ago, reflecting productivity improvement efforts, including movement of production from Hong Kong to lower cost operations in mainland China, as well as spending controls.
Businesses in the other specialty converting group reported sales of approximately $138 million, an increase of approximately 7 percent over the third quarter of 2004. Operating margin for these businesses declined to 5.1 percent from 6.6 percent a year ago, due to higher spending related to the Company's radio frequency identification (RFID) division, partially offset by the benefit of productivity initiatives and spending controls.
The Company announced that it had been notified by the Australian Competition and Consumer Commission that it was seeking information in connection with an investigation of the Company's label stock business. The Company is cooperating with the investigation.
Separately, the Company announced that it had contacted relevant authorities in the U.S. with respect to the preliminary results of an internal investigation of potential violations of the Foreign Corrupt Practices Act, and that it intends to make a full report to these authorities shortly. The issues relate to transactions carried out by a small number of employees of the Company's reflectives business in China, which had sales of approximately $5 million in 2004. The transactions giving rise to these issues appear to have been relatively minor in amount and of limited duration. Based on findings to date, no changes to the Company's previously filed financial statements are warranted as a result of these matters. However, the Company expects that fines or other penalties could be incurred.
Reflecting improved profitability and the reduction in its tax rate, Avery Dennison is raising its 2005 earnings-per-share guidance to a range of $3.28 to $3.43, before the impact of plant transition costs, restructuring, asset impairment charges, and the one-time tax expense associated with the repatriation of earnings. While fourth quarter actions are still being developed, in the aggregate, these items could reduce full year earnings by $0.35 to $0.45 per share, including year-to-date costs already reported. Additionally, non-cash charges associated with potential divestitures could further reduce reported earnings. The Company's previously announced earnings expectation excluding these factors was $2.95 to $3.20 per share.
The Company's outlook for the fourth quarter anticipates continued weakness in core volume growth, recognizing unusually high sales during the prior year related to an extra week of sales, as well as the effect of customers buying in advance of 2005 price increases. The Company indicated that it expects additional raw material cost inflation in the fourth quarter, which it anticipates passing on to customers, as needed.
"While we anticipate top-line growth to remain soft in the near-term, we expect sales growth to accelerate, as we return to more typical volume gains resulting from the underlying drivers in our markets, as well as new products and services from our pipeline of Horizon growth initiatives," said Scarborough.
"We remain focused on margin expansion during this period of rising costs, by maintaining our pricing discipline and executing our aggressive operational improvement strategy," added Scarborough. "We will reinvest a portion of the gains from our productivity improvement efforts into targeted growth initiatives, including expansion in the rapidly growing emerging markets, as well as new product and service innovations such as RFID."
Avery Dennison is a global leader in pressure-sensitive labeling materials, office products and retail tag, ticketing and branding systems. Based in Pasadena, Calif., Avery Dennison is a FORTUNE 500 company with 2004 sales of $5.3 billion. Avery Dennison employs more than 21,000 individuals in 47 countries worldwide who apply the Company's technologies to develop, manufacture and market a wide range of products for both consumer and industrial markets.
Products offered by Avery Dennison include Avery-brand office products and graphics imaging media, Fasson-brand self-adhesive materials, peel-and-stick postage stamps, reflective highway safety products, labels for a wide variety of automotive, industrial and durable goods applications, brand identification and supply chain management products for the retail and apparel industries, and specialty tapes and polymers.
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