Avery Dennison Q2 Profits Down, Lowers Forecast
Wednesday, July 25, 2007
Press release from the issuing companyTuesday July 24 PASADENA, Calif.-- Avery Dennison Corporation today reported net income of $85.8 million or $0.87 per share for the second quarter, compared to $112 million or $1.12 per share for the same period last year. Second quarter 2007 results included Paxar acquisition-related expenses, including software impairment charges, two weeks of operating results from Paxar and higher interest associated with the transaction. The net effect of the Paxar acquisition and other items reduced net income by approximately $0.15 per share for the quarter. Second quarter 2006 results included a net benefit of $0.13 per share related to discontinued operations, net of other items.
The Company reported adjusted earnings of $100.9 million or $1.02 per share for the second quarter of 2007, compared with $99.5 million or $0.99 per share for the same period last year. These adjusted results exclude the impact of discontinued operations, the Paxar acquisition, restructuring and asset impairment charges, and other items.
Net sales for the second quarter were $1.52 billion, an increase of 8.1 percent from $1.41 billion for the same quarter last year. Organic sales growth, which excludes the impact of acquisitions, divestitures and foreign currency translation, was 2 percent. This increase reflected higher unit volumes, partially offset by negative changes in pricing and product mix.
"Net income from continuing operations continued to grow during the second quarter, despite a relatively slow market for roll label materials in North America and a more competitive pricing environment," said Dean A. Scarborough, president and chief executive officer. "Most importantly, the North American roll label material business achieved its first positive volume comparisons in two years. The Company's earnings growth was below expectations, however, and we have lowered the earnings outlook for the year."
Avery Dennison completed the acquisition of Paxar on June 15, 2007 and is merging the company with its Retail Information Services segment (RIS), which serves the global retail information and brand identification market. The Company has raised the estimates of the cost synergies from the transaction to $115-$125 million, from $90-$100 million. EPS accretion is now estimated to be $0.40-$0.50 in 2008, rising to $0.90-$1.00 when fully integrated, up from initial estimates of $0.60 to $0.70 upon completion. One-time costs related to the integration, including charges associated with the consolidation of the two companies' information systems, are now expected to be in the range of $175 to $210 million, up from initial estimates of $150 to $175+ million. An estimated 15 percent of the one-time costs are expected to take the form of non-cash charges.
"During the second quarter, we completed one of the most important acquisitions in the history of the Company," Scarborough said. "The combining of Paxar with RIS is a transformative event for Avery Dennison and will enable us to serve a worldwide market for retail information and brand identification of more than $15 billion."
"We are pleased with the progress of the integration," Scarborough added. "We have retained a significant number of senior level Paxar executives and the leadership team represents a good blend of managers from both companies. Our teams have done a great job of identifying more savings than we initially expected, developing plans to achieve those savings faster than we anticipated, and finding additional opportunities to grow our business. We expect that the combined strength of the two companies, coupled with substantial cost synergies, will create a business that will produce sales growth above the Company average, with expanding profitability and return."
Second Quarter Financial Highlights
(For a more detailed presentation of the Company's results for the quarter, see Second Quarter 2007 Financial Review and Analysis, posted at the Company's Web site at www.investors.averydennison.com.)
* Core unit volume grew an estimated 3 percent. The effect of pricing and product mix changes was modestly negative, in line with Company expectations.
* Operating margin (GAAP basis) was 7.3 percent, compared to 8.8 percent for the same period last year. Excluding the effect of the Paxar acquisition, interest expense, restructuring and asset impairment charges, operating margin declined by 10 basis points to 10 percent. (See Attachment A-3: "Preliminary Reconciliation of GAAP to Non-GAAP Measures".)
* The effective tax rate was 23 percent. The Company anticipates that the effective tax rate for the year will be in the range of 20-22 percent, with the potential for volatility between quarters.
(See Attachments A-4 and A-6: "Preliminary Supplementary Information, Reconciliation of GAAP to Non-GAAP Supplementary Information" for adjusted operating margins included below.)
* Pressure-sensitive Materials reported sales of $879 million, up 8.6 percent from $810 million. Organic sales growth for the segment was approximately 4 percent. Segment operating margin (GAAP basis) was 10.1 percent, compared to 9.6 percent for the same period last year. Operating margin before restructuring costs, asset impairment charges, and the reversal of an accrual related to a patent lawsuit was 9.8 percent, same as the previous year.
* Retail Information Services reported sales of $219 million, up 20.8 percent from $181 million due to the effect of the Paxar acquisition. Organic sales decline for the segment was approximately one percent. Segment operating margin (GAAP basis) was 0.3 percent, compared to 11.6 percent for the second quarter of 2006. Operating margin before the effects of the acquisition and restructuring costs and asset impairment charges declined 200 basis points to 10.7 percent.
* Office and Consumer Products sales declined one percent to $263 million. Organic sales decline for the segment was approximately 3 percent. Segment operating margin (GAAP basis) was 16.1 percent, compared to 17.1 percent for the same period last year. Operating margin declined 30 basis points to 16.2 percent, excluding divestiture-related expenses and a gain from curtailment and settlement of a pension obligation.
Outlook for the Year
Reflecting second quarter earnings and the effects of the Paxar acquisition, Avery Dennison announced that it expects earnings for 2007, before restructuring charges and integration costs, to be in the range of $3.90 to $4.10. Prior to the announcement of the Paxar acquisition, the Company had expected earnings of $4.05 to $4.30 before restructuring charges. Dilution from the Paxar acquisition is expected to be in the range of $(0.05) to $(0.10) for the year, before restructuring and integration costs.
The Company's earnings expectations reflect an assumption of reported revenue growth from continuing operations in the range of 14 to 16 percent, including a 9 percent contribution from the Paxar acquisition (net of divestitures), and an estimated 3.5 to 4 percent benefit from currency translation.
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