GLENDALE, Calif. - Avery Dennison Corporation (NYSE:AVY) today announced preliminary, unaudited results for its second quarter ended July 2, 2016. All non-GAAP financial measures referenced in this document are reconciled to GAAP in the attached tables. Unless otherwise indicated, comparisons are to the same period in the prior year.
“We had another solid quarter, with earnings above our expectations,” said Mitch Butier, Avery Dennison president and CEO. “PSM delivered exceptional profitability, reflecting strong organic growth in the emerging markets, and productivity gains globally,” Butier added. “Amidst challenging apparel market conditions, RBIS earnings came in as expected. The team continues to make good progress with the transformation of this business.
“We have raised our outlook for full year earnings per share, reflecting the strong operating performance in the second quarter,” said Butier. “We remain confident that the consistent execution of our strategies will enable us to continue meeting our long-term goals for superior value creation through a balance of profitable growth and capital discipline."
For more details on the company’s results, see the summary table accompanying this news release, as well as the supplemental presentation materials, “Second Quarter 2016 Financial Review and Analysis,” posted on the company’s website at www.investors.averydennison.com, and furnished to the SEC on Form 8-K.
Second Quarter 2016 Results by Segment
Organic sales change refers to the increase or decrease in sales excluding the estimated impact of currency translation, product line exits, and acquisitions and divestitures. Adjusted operating margin refers to income before interest expense and taxes, excluding restructuring charges and other items, as a percentage of sales.
Pressure-sensitive Materials (PSM)
- PSM reported sales increased approximately 3 percent; on an organic basis, sales grew approximately 5 percent. Within the segment, organic sales growth was mid-single digit for Label and Packaging Materials, and low-single digit for combined Graphics and Performance Tapes.
- Operating margin improved 130 basis points to 13 percent as the benefit of productivity initiatives and increased volume more than offset higher employee-related costs and the net impact of price and raw material input costs. Adjusted operating margin improved 120 basis points.
Retail Branding and Information Solutions (RBIS)
- RBIS reported sales decreased 2 percent; on an organic basis, sales grew approximately 2 percent.
- Operating margin increased by nearly five points to 7.5 percent, largely due to the benefit of lower restructuring charges. Adjusted operating margin improved 30 basis points as the net savings associated with the business model transformation and higher volume were partially offset by the impact of strategic pricing actions and higher employee-related costs.
Share Repurchases / Equity Dilution from Long-Term Incentives
The company repurchased 0.9 million shares in the second quarter of 2016 at an aggregate cost of $64 million. Net of dilution, the company reduced its share count by 0.3 million in the second quarter. The cost of repurchases, net of proceeds from stock option exercises, was $39 million.
The second quarter effective tax rate was approximately 19 percent, compared to approximately 36 percent last year, reflecting the release of a valuation allowance associated with structural simplification efforts, and favorable outcomes for tax filing positions with certain foreign tax jurisdictions. The adjusted tax rate for the second quarter was 34 percent, consistent with the anticipated full year tax rate in the low to mid-thirty percent range.
Cost Reduction Actions
In the second quarter, the company realized approximately $21 million in pre-tax savings from restructuring, net of transition costs, and incurred pre-tax restructuring charges of approximately $6 million, approximately two-thirds of which represented cash charges.
Pension Settlement Charge
As part of a previously announced long-term strategy to reduce financial volatility associated with its frozen defined benefit pension plan for U.S. employees, the company offered eligible former employees the option to receive their benefits immediately as either a lump sum payment or an annuity, rather than waiting until they were retirement eligible under the terms of the plan. This action was completed during the second quarter, with payments made out of existing plan assets.
This action resulted in the settlement of approximately $70 million of the company’s pension liability, and a one-time, non-cash charge of approximately $41 million, or approximately $0.30 per share, in the second quarter. This action is not expected to change required contributions to the pension plan over the next several years. The company does not anticipate making any contributions to the U.S. pension plan in 2016, and the amount of contributions to foreign plans is expected to be similar to recent years.
In its supplemental presentation materials, “Second Quarter 2016 Financial Review and Analysis,” the company provides a list of factors that it believes will contribute to its 2016 financial results. Based on the factors listed and other assumptions, the company now expects 2016 earnings per share of $3.35 to $3.50. Excluding an estimated $0.15 per share for restructuring charges and other items, and $0.30 per share for the non-cash charge to settle the U.S. pension obligations, the company now expects adjusted earnings per share (non-GAAP) of $3.80 to $3.95.
Note: Throughout this release and the supplemental presentation materials, amounts on a per share basis reflect fully diluted shares outstanding.