Avery Dennison Announces Third Quarter 2018 Results

• 3Q18 Reported EPS of $1.69
  • Adjusted EPS (non-GAAP) of $1.45
• 3Q18 Net sales increased 4.8% to $1.76 billion
  • Sales change ex. currency (non-GAAP) of 6.1%
• FY18 Reported EPS guidance raised by $0.07, reflecting reduction in restructuring cost estimate
  • Maintained guidance for FY18 Adjusted EPS, despite incremental second half headwind from currency translation

GLENDALE, Calif.--(BUSINESS WIRE)-- Avery Dennison Corporation (NYSE:AVY) today announced preliminary, unaudited results for its third quarter ended September 29, 2018. 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, in line with our expectations, with strong top-line growth and adjusted EPS up 15 percent,” said Mitch Butier, President and CEO. “Label and Graphic Materials delivered strong sales growth, while its margin declined in the face of continued inflationary pressure; we expect meaningful recovery in the fourth quarter, as recent pricing actions take full effect. Retail Branding and Information Solutions continues to deliver, with another quarter of strong sales growth in both the base business and RFID, along with significant margin expansion. Results for Industrial and Healthcare Materials were disappointing, as organic sales were down modestly, driven by a decline in the China automotive business.

“We remain confident in the adjusted earnings guidance we communicated last quarter, despite incremental currency headwinds and continued inflationary pressure,” added Butier. “Our ability to consistently achieve our strategic and financial goals continues to demonstrate the resilience of our business and the talent of our team.”

For more details on the company’s results, see the summary table accompanying this news release, as well as the supplemental presentation materials, “Third Quarter 2018 Financial Review and Analysis,” posted on the company’s website at www.investors.averydennison.com, and furnished to the SEC on Form 8-K.

Third Quarter 2018 Results by Segment

Sales change ex. currency refers to the increase or decrease in sales excluding the estimated impact of foreign currency translation and currency adjustment for transitional reporting of highly inflationary economies (Argentina). The estimated impact of foreign currency translation is calculated on a constant currency basis, with prior period results translated at current period average exchange rates to exclude the effect of currency fluctuations. Organic sales change refers to the increase or decrease in sales excluding the estimated impact of foreign currency translation, currency adjustment for transitional reporting of highly inflationary economies (Argentina), product line exits, and acquisitions and divestitures. Adjusted operating margin refers to income before taxes, interest expense, other non-operating expense, and other expense, net, as a percentage of sales.

Label and Graphic Materials

• Reported sales increased 5.0 percent; on an organic basis, sales grew 6.4 percent. Sales on an organic basis increased mid-single digits in Label and Packaging Materials and high-single digits in the combined Graphics and Reflective Solutions businesses.
• Reported operating margin decreased 20 basis points to 12.8 percent, including an 80 basis points net benefit from restructuring charges and an Argentine peso remeasurement loss. The benefits from higher volume/mix were more than offset by the net impact of pricing and raw material costs (excluding the effects of currency) and transition costs associated with our European restructuring. Adjusted operating margin decreased 100 basis points to 12.3 percent.

Retail Branding and Information Solutions

• Reported sales increased 6.6 percent; on an organic basis, sales grew 8.2 percent, driven by strength in both the base business and radio frequency identification (RFID) solutions.
• Reported operating margin increased 360 basis points to 10.6 percent, including a 120 basis points benefit from a reduction in restructuring charges. The benefits from higher volume and productivity were partially offset by growth-related investments and higher employee-related costs. Adjusted operating margin increased 240 basis points to 11.4 percent.

Industrial and Healthcare Materials

• Reported sales decreased 0.8 percent; on an organic basis, sales declined 0.4 percent driven by a decline in the China automotive business, which offset strong mid-single digit growth for the rest of the industrial categories.
• Reported operating margin increased 80 basis points to 9.2 percent, including a benefit from lower transaction and transition costs related to prior year acquisitions, as well as lower employee-related costs, which more than offset growth-related investments and the net impact of pricing and raw material costs. Adjusted operating margin increased 60 basis points to 9.2 percent.

Other

Share Repurchases / Equity Dilution

The company repurchased 0.7 million shares in the third quarter at an aggregate cost of $72 million. Net of dilution from long-term incentives, the company’s share count at the end of the quarter was down by 1.5 million compared to the same time last year. Year-to-date, the company returned $306 million in cash to shareholders through a combination of share repurchases and dividends, up from $221 million for the same period last year.

Income Taxes

The third quarter GAAP effective tax rate was 10.5 percent, compared to 26.2 percent in the prior year, primarily driven by tax benefits from the deduction of the third quarter pension contribution on the company’s 2017 U.S. income tax return. The full year GAAP effective tax rate is estimated to be approximately 20 percent.

The adjusted non-GAAP tax rate for the quarter was 25 percent, consistent with the company’s previous guidance.

Cost Reduction Actions

In the third quarter, the company realized approximately $6 million in pretax savings from restructuring, net of transition costs, and recognized a net benefit in pretax restructuring charges in the amount of $6.4 million, reflecting a reduction to the estimate for severance costs associated with LGM’s European restructuring plan.

U.S. Pension Plan Termination

In connection with the previously announced termination of the Avery Dennison Pension Plan, a tax-qualified U.S. defined benefit plan, the company contributed $200 million to the plan during the third quarter using commercial paper borrowings. The company expects to contribute an additional estimated $30 million during 2019, to fully fund the plan and complete the transaction. The company continues to estimate that the after-tax impact of actions connected with the termination will reduce reported EPS by $0.50 to $0.70 in 2018, and an additional $4.25 to $4.45 during 2019, reflecting estimated total pre-tax settlement charges in the range of $575 million to $600 million.

Outlook

In its supplemental presentation materials, “Third Quarter 2018 Financial Review and Analysis,” the company provides a list of factors that it believes will contribute to its 2018 financial results. Based on the factors listed and other assumptions, the company now expects 2018 reported earnings per share of $4.57 to $4.92. Excluding an estimated $1.18 to $1.38 per share for restructuring charges, pension settlement charges, and other items, the company expects adjusted earnings per share (non-GAAP) of $5.95 to $6.10, which is unchanged from its guidance in July.

Note: Throughout this release and the supplemental presentation materials, amounts on a per share basis reflect fully diluted shares outstanding.

About Avery Dennison

Avery Dennison (NYSE:AVY) is a global materials science company specializing in the design and manufacture of a wide variety of labeling and functional materials. The company’s products, which are used in nearly every major industry, include pressure-sensitive materials for labels and graphic applications; tapes and other bonding solutions for industrial, medical, and retail applications; tags, labels, and embellishments for apparel; and radio frequency identification (RFID) solutions serving retail apparel and other markets. Headquartered in Glendale, California, the company employs approximately 30,000 employees in more than 50 countries. Reported sales in 2017 were $6.6 billion. Learn more at www.averydennison.com.

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

Certain statements contained in this document are "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements, and financial or other business targets, are subject to certain risks and uncertainties. Actual results and trends may differ materially from historical or anticipated results depending on a variety of factors, including but are not limited to, risks and uncertainties relating to the following: fluctuations in demand affecting sales to customers; worldwide and local economic conditions; changes in political conditions; changes in governmental laws and regulations; fluctuations in foreign currency exchange rates and other risks associated with foreign operations, including in emerging markets; the financial condition and inventory strategies of customers; changes in customer preferences; fluctuations in cost and availability of raw materials; our ability to generate sustained productivity improvement; our ability to achieve and sustain targeted cost reductions; the impact of competitive products and pricing; loss of significant contracts or customers; collection of receivables from customers; selling prices; business mix shift; execution and integration of acquisitions; timely development and market acceptance of new products, including sustainable or sustainably-sourced products; investment in development activities and new production facilities; amounts of future dividends and share repurchases; customer and supplier concentrations; successful implementation of new manufacturing technologies and installation of manufacturing equipment; disruptions in information technology systems, including cyber-attacks or other intrusions to network security; successful installation of new or upgraded information technology systems; data security breaches; volatility of financial markets; impairment of capitalized assets, including goodwill and other intangibles; credit risks; our ability to obtain adequate financing arrangements and maintain access to capital; fluctuations in interest and tax rates; changes in tax laws and regulations, including the Tax Cuts and Jobs Act, and uncertainties associated with interpretations of such laws and regulations; outcome of tax audits; fluctuations in pension, insurance, and employee benefit costs, including risks related to the termination of our U.S. pension plan; the impact of legal and regulatory proceedings, including with respect to environmental, health and safety; protection and infringement of intellectual property; the impact of epidemiological events on the economy and our customers and suppliers; acts of war, terrorism, and natural disasters; and other factors.

We believe that the most significant risk factors that could affect our financial performance in the near-term include: (1) the impacts of global economic conditions and political uncertainty on underlying demand for our products and foreign currency fluctuations; (2) the degree to which higher costs can be offset with productivity measures and/or passed on to customers through selling price increases, without a significant loss of volume; (3) competitors' actions, including pricing, expansion in key markets, and product offerings; and (4) the execution and integration of acquisitions.

For a more detailed discussion of these and other factors, see “Risk Factors” and “Management’s Discussion and Analysis of Results of Operations and Financial Condition” in our 2017 Form 10-K, filed with the Securities and Exchange Commission on February 21, 2018, and subsequent quarterly reports on Form 10-Q. The forward-looking statements included in this document are made only as of the date of this document, and we undertake no obligation to update these statements to reflect subsequent events or circumstances, other than as may be required by law.

For more information and to listen to a live broadcast or an audio replay of the quarterly conference call with analysts, visit the Avery Dennison website at www.investors.averydennison.com.