PASADENA, Calif.--April 26, 2005-- Avery Dennison Corporation today reported first quarter diluted earnings per share of $0.57, compared with $0.52 per share for the first quarter of 2004, which are in line with the Company's previously announced revised expectations. The first quarter 2005 results include severance and transition costs of approximately $0.04 per share related to a previously announced plant closure, while the prior-year first quarter earnings include a negative impact of $0.16 per share from restructuring costs and asset impairment charges related to the integration of an acquisition.
"Although we started the year with strong sales growth, demand slowed significantly as the quarter progressed. Sales weakened across most businesses and regions late in the quarter," said Philip M. Neal, chairman and chief executive officer of Avery Dennison. "We are clearly disappointed in the results for the quarter. While we are continuing to fund growth programs with significant potential, we have implemented a number of immediate actions throughout the Company to sharply reduce expenses."
Key results for the first quarter of 2005 include:
Earnings per share, on a diluted basis, were $0.57, compared with $0.52 per share in the same quarter a year ago. While the Company successfully raised prices to fully offset raw material cost increases, the quarter's results were negatively affected by lower-than-anticipated unit volume growth, higher-than-anticipated spending related to growth activities and an increase in inventory reserves related to a new product launch, as well as other factors. First quarter 2005 earnings include a negative impact of $0.04 per share from severance and transition costs related to a plant closure, while the prior-year first quarter earnings include a negative impact of $0.16 per share from restructuring costs and asset impairment charges related to the integration of an acquisition. (See Attachment A-3: "Preliminary Reconciliation of GAAP to Non-GAAP Measures").
Net income was $57.7 million, compared with $52.6 million in the first quarter of 2004.
Reported sales grew 8 percent from prior-year levels, reaching $1.3 billion for the first quarter of 2005, compared with $1.2 billion in the first quarter of 2004. The impact of currency translation contributed approximately 40 percent of the sales growth during the quarter, while price and mix contributed approximately 30 percent.
Core unit volume grew approximately 2 percent over the prior-year first quarter, which was approximately two to three points below the Company's expectations at the start of the year, reflecting a slowdown in the pressure-sensitive materials and retail information services segments late in the quarter.
Gross profit margin declined 60 basis points compared with the first quarter of 2004 due to the increase in inventory reserves related to a new product launch and spending related to the Company's RFID (radio frequency identification) business. Higher raw material costs were fully offset by selling price increases.
Marketing, general and administrative expenses increased by $34 million compared with the first quarter of 2004. Approximately one-third of this increase is attributable to currency translation, the acquisition of Rinke Etiketten in late 2004, and other volume-related spending. Another approximately one-third of the higher spending was due to expenses associated with the Company's longer-term growth initiatives, including RFID, while the balance reflected a variety of factors, including higher pension expense and bad debt write-offs.
Excluding restructuring and transition costs, asset impairment charges and gain on sale of assets, operating margin declined 150 basis points compared with the first quarter of 2004, due to the factors affecting gross profit margin as well as marketing, general and administrative expenses, which are described above. (See Attachment A-3: "Preliminary Reconciliation of GAAP to Non-GAAP Measures").
The tax rate for the first quarter was 26 percent, in line with the Company's previously announced expectations.
The Company's Pressure-sensitive Materials segment reported sales of approximately $789 million, reflecting growth of more than 8 percent over the first quarter of 2004. Approximately 50 percent of the segment revenue growth 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, primarily the Euro. The North American pressure-sensitive roll materials business posted revenue growth of approximately 4 percent, with the benefit of price increases more than offsetting a decline in volume. The volume decline affected all 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. The Company announced that it is investing approximately $30 million to add a new production line for film materials to meet the growing demand for pressure-sensitive labels by beer producers.
Before the effect of currency translation, sales in the European pressure-sensitive roll materials business also grew approximately 4 percent, with modest increases in unit volume and favorable price and mix. While the rate of sales growth for the roll materials business in emerging markets slowed compared with the very strong growth achieved in the fourth quarter of 2004, sales in these markets grew 13 percent in the first quarter, before the impact of currency translation. The graphics and reflective materials business posted low single-digit sales growth, excluding the impact of currency translation. Excluding restructuring costs, asset impairment charges and gain on sale of assets, operating margin for the segment increased to 8.9 percent compared with 8.1 percent in the prior-year quarter, due to productivity improvement initiatives, including plant closures completed in Europe during the first half of 2004. The benefit of price increases offset higher raw material costs. (See Attachment A-4: "Reconciliation of GAAP to Non-GAAP Supplementary Information").
The Office and Consumer Products segment reported sales of approximately $259 million, reflecting an increase of more than 2 percent over the prior-year first quarter. The revenue increase for the segment was largely due to the impact of currency translation. As expected, the benefit of price increases was offset by a volume decline associated with customers building inventory in the fourth quarter of 2004 in anticipation of the higher prices. The Company's January 1 price increase in the office and consumer products business fully covered cumulative raw material cost inflation. Excluding restructuring and transition costs related to a plant closure, operating margin for the segment declined to 12.6 percent compared with 14.7 percent in the first quarter of 2004. The year-on-year decline in margin is largely attributable to an increase in inventory reserves related to a new product. (See Attachment A-4: "Reconciliation of GAAP to Non-GAAP Supplementary Information").
The retail information services segment reported sales of approximately $157 million, reflecting an increase of approximately 14 percent. Nearly half of the growth is due to the positive impact of currency translation and the Rinke acquisition, with the balance due to core unit volume growth. Operating margin declined to 3.7 percent in the first quarter, compared with 6.5 percent in the year-ago first quarter. The decline in operating margin reflects higher spending on growth programs and modest raw material cost inflation, as well as price erosion.
Businesses in the other specialty converting group reported sales of approximately $141 million. The Company said that its RFID business has achieved its goal of being production-ready at the end of the first quarter. Avery Dennison has completed construction of its new high-speed production line for manufacturing RFID inlays and the business is positioned to meet expected growth in demand for RFID applications.
Based on first quarter results and preliminary trends in the second quarter, Avery Dennison is updating its reported revenue growth target for the full year to 5 percent to 6 percent, down from its previous guidance of 6 percent to 10 percent. The Company said it is adjusting its earnings-per-share guidance for the full year to a range of $2.85 to $3.15 per share, from its previously announced expectation in the range of $3.15 to $3.50 per share. The Company also said that it anticipates earnings for the second and third quarters combined to be in the range of $1.45 to $1.65 per share. The Company indicated that its revised guidance assumes lower unit volume growth than originally anticipated for the year, along with continued raw material inflation through the second quarter, offset by the benefit of targeted cost reductions.
"We are absolutely committed to improving our operating margin during the remainder of the year," said Neal. "We have instituted stringent spending restrictions in every corner of the Company in order to achieve our goals.
"Our long-term business fundamentals continue to be strong. We have great businesses with excellent long-term growth potential and we have a dedicated team of managers who are determined to get us back on track. The events of this past quarter have not changed our optimistic view of the future," said Neal.
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