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Avery Dennison Reports Q4 Loss, Many Charges

Wednesday, January 25, 2006

Press release from the issuing company

PASADENA, Calif.--Jan. 24, 2006-- Avery Dennison Corporation today reported a loss for the fourth quarter of $0.07 per share on a fully diluted basis, compared with fully diluted earnings per share of $0.83 a year ago. Reported results included the impact of previously announced restructuring actions, product line divestitures and discontinued operations, as well as the effects of a legal accrual related to a patent lawsuit and gain on sale of a leased asset. Excluding these costs, fourth quarter diluted earnings per share were $0.92 compared with $0.83 a year ago, above the Company's guidance for the quarter. (See Attachment A-3: "Preliminary Reconciliation of GAAP to Non-GAAP Measures".) Compared to the prior year fourth quarter, earnings before restructuring and divestiture-related charges increased on lower sales due to improved profitability, primarily related to reductions in operating expense and the tax rate. Severance and non-cash charges associated with the restructuring actions and divestitures totaled $130 million before tax in the fourth quarter, or $98 million after tax. "We made significant progress in 2005 to improve the profitability of our businesses," said Dean A. Scarborough, president and chief executive officer of Avery Dennison. "The charges that reduced fourth quarter reported earnings reflect our steps to fine-tune our portfolio and improve our global operating efficiencies. These actions will enhance our ability to meet both our top-line growth and margin improvement objectives." Pre-tax charges associated with restructuring actions include $28 million in severance costs for a previously announced reduction in headcount of approximately 700 employees, and $14 million in asset and lease impairments, with actions impacting all of the Company's segments and most regions. Pre-tax savings associated with these actions are expected to total $50 to $60 million in 2006, increasing to a total of $65 to $70 million per year when fully implemented. The Company anticipates additional restructuring actions in 2006, which could result in further headcount reductions totaling an estimated 80 to 100 positions, with restructuring charges in the range of $10 to $15 million expected to be incurred during the first half of 2006. These actions are expected to yield a further $15 to $20 million in savings per year when fully implemented. Pending divestitures include several non-strategic, low margin product lines. Pre-tax costs recognized in the fourth quarter in connection with these divestitures include $6 million in severance for a reduction in headcount of approximately 150 employees, and $83 million in non-cash charges associated with the impairment of goodwill and other assets. (See Pending divestitures, below, for more information.) A portion of the benefits from restructuring actions and divestitures will be used to fund investments in ongoing Horizons initiatives and future growth opportunities, as well as actions to drive additional productivity gains. Other financial highlights from continuing operations for the fourth quarter of 2005: -- Sales declined by approximately 4 percent from the prior year to $1.36 billion due to a reduction in unit volume. The unit volume reduction reflected an extra week of sales which benefited the fourth quarter of the prior year, as well as an increase in year-end orders by several large customers in the Office and Consumer Products segment, which likewise benefited the prior year. Excluding the estimated benefit of the extra week and advance orders, unit volume was comparable to the prior year. -- Gross profit margin improved by 10 basis points compared to the fourth quarter of 2004, reflecting the benefits of pricing actions and productivity gains, offset by the impact of lower sales, unfavorable segment mix, and higher spending associated with the development of the Company's radio frequency identification (RFID) business. Gross profit margin improved by 130 basis points compared to the third quarter of 2005, reflecting favorable product mix. The benefit of product mix was partially offset by sequentially higher raw material costs, which the Company expects to mitigate with price increases during the first quarter of 2006. -- Marketing, general and administrative expenses as a percent of sales improved by 50 basis points compared to the same quarter a year ago, reflecting spending controls implemented during the year. -- Excluding restructuring and asset impairment costs, gain on sale of a leased asset, and a legal accrual related to a patent suit in the fourth quarter of 2005, operating margin improved by 60 basis points over the fourth quarter of 2004, due to improved gross profit margin and 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".) -- Continued improvements in the Company's global tax structure reduced the quarterly effective tax rate on income from continuing operations to 19.7 percent, while the tax effect of restructuring and divestiture-related charges reduced the rate further to 2.4 percent, compared to 23.9 percent in the same quarter a year ago. Segment results from continuing operations Sales for the Company's Pressure-sensitive Materials segment declined by approximately 3 percent from the prior year to $763 million due to a reduction in unit volume, reflecting the extra week of sales which benefited the fourth quarter of the prior year. Excluding the benefit of the extra week in the prior year, unit volume increased by an estimated 1 percent. Before the effects of restructuring and asset impairment costs and the legal accrual, operating margin for the segment improved to 8.6 percent compared with 8.0 percent a year ago, reflecting productivity improvement initiatives and spending controls. With the exception of cost inflation incurred during the fourth quarter of 2005, 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".) Sales for the Office and Consumer Products segment declined by approximately 11 percent from the prior year to $293 million due to a reduction in unit volume, primarily reflecting the extra week of sales and increased year-end orders by large customers, both of which benefited the fourth quarter of the prior year. Excluding these factors, unit volume declined by an estimated 3 percent. Before the effects of restructuring and asset impairment costs, operating margin for the segment increased to 22.4 percent compared with 19.7 percent a year ago, reflecting the benefit of productivity improvement efforts, spending controls and pricing. Price increases, effective January 1, 2005, have covered cumulative raw material inflation for the segment over the past two years. (See Attachment A-4: "Preliminary Supplementary Information, Reconciliation of GAAP to Non-GAAP Supplementary Information".) Sales for the Retail Information Services segment declined by approximately 3 percent from the prior year to $170 million due to a reduction in unit volume, reflecting the extra week of sales which benefited the fourth quarter of the prior year. Excluding the benefit of the extra week in the prior year, unit volume was up slightly. Before the effects of restructuring, asset impairment and lease cancellation charges, operating margin for the segment increased to 8.0 percent in the fourth quarter, compared with 7.0 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. (See Attachment A-4: "Preliminary Supplementary Information, Reconciliation of GAAP to Non-GAAP Supplementary Information".) Businesses in the Other Specialty Converting group reported sales of approximately $138 million, up approximately 1 percent compared to the fourth quarter of 2004 due to unit volume growth. Excluding the benefit of the extra week in the prior year, unit volume increased by an estimated 5 percent. Before the effects of restructuring and asset impairment costs, operating margin for these businesses decreased to 1.7 percent from 2.1 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. (See Attachment A-4: "Preliminary Supplementary Information, Reconciliation of GAAP to Non-GAAP Supplementary Information".) Financial highlights for the year: * Earnings per share, on a diluted basis, were $2.25, compared with $2.78 per share in 2004. Net income was $226.4 million, compared with $279.7 million in 2004. Excluding restructuring and divestiture-related charges and transition costs, the incremental tax expense associated with the repatriation of earnings of certain foreign subsidiaries, expense accrual related to a patent infringement case, and gain on sale of assets, annual earnings per share and net income were $3.46 and $348.0 million, respectively. On a comparable basis, earnings per share and net income grew 13 percent. (See Attachment A-3: "Reconciliation of GAAP to Non-GAAP Measures"). * Reported sales from continuing operations grew approximately 3 percent to $5.47 billion, compared with $5.32 billion in 2004. * Excluding restructuring, asset impairment and plant transition costs, as well as gain on sale of assets and an expense accrual related to a patent infringement case, operating margin improved by 20 basis points compared with 2004. (See Attachment A-3: "Reconciliation of GAAP to Non-GAAP Measures"). * The full-year effective tax rate on income from continuing operations was 20.4 percent, down 470 basis points compared with last year. The full-year tax rate includes $14 million of incremental expense associated with the repatriation of foreign earnings under the Homeland Investment Act; this cost was more than offset by favorable global tax audit settlements of $9 million in the third quarter of 2005, $7 million of restructuring-related tax savings, as well as the benefit of geographic income mix and continued improvements in our global tax structure. The 2004 tax rate included a favorable tax audit settlement of $4 million in the second quarter of that year. Pending divestitures: The Company is currently in discussions to sell a business consisting of raised reflective pavement markers. The financial results for this business have been included as discontinued operations. Sales for the approximately break-even business were $23 million in 2005. Divestiture of this business would not impact the Company's reflective films business; the Company will continue to manufacture and market reflective films for the graphics and highway and traffic safety markets, utilizing its proprietary glass beaded and microreplication technology. In addition, the Company is also negotiating the sale of two product lines, which would reduce annual sales by approximately $70 million, with minimal impact to earnings from operations. Outlook for 2006 Avery Dennison announced that it expects fully diluted earnings for 2006 to be in the range of $3.45 to $3.80 per share. This range includes an estimated $0.12 per share impact from stock option expense, not included in 2005 reported earnings. The Company's expectation for stock option expense is below its previous estimated range of $0.13 to $0.18 per share, following the finalization of its accounting methodology. The Company's expected range in earnings excludes the impact of additional restructuring charges related to plans that have not yet been finalized. Based on plans to date, these charges could reduce full year earnings by $0.08 to $0.12 per share; this range may increase as planning continues. The Company's earnings expectations reflect an assumption of reported revenue growth from continuing operations in the range of 2 to 3 percent, including an estimated 3 percent negative impact primarily from currency translation and product line divestitures. "Even though we faced a challenging business environment in 2005, we built momentum through disciplined cost control and rigorous pricing execution," said Scarborough. "We will maintain that tight discipline going forward, driving solid margin improvement in 2006, while simultaneously pursuing growth opportunities, including expansion in the rapidly growing emerging markets, as well as new product and service innovations out of our Horizons pipeline." "We are especially pleased with the progress we have made in developing our RFID business this past year," added Scarborough. "We continue to improve the operating efficiency of our new high-speed manufacturing process, and are seeing good traction with customers who are moving to the Gen 2 RFID chip standard. We believe that we are very well positioned to achieve our market share objectives as industry demand accelerates." 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 2005 sales of $5.5 billion. Avery Dennison employs more than 22,000 individuals in 48 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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