Avery Dennison Announces First Quarter 2018 Results

• 1Q18 Reported EPS of $1.40
  • Adjusted EPS (non-GAAP) of $1.44
• 1Q18 Net sales increased 13.0% to $1.78 billion
  • Sales change ex. currency (non-GAAP) of 6.8%
  • Organic sales change (non-GAAP) of 3.4%
• FY18 Reported EPS guidance midpoint reduced by $0.63, reflecting higher anticipated restructuring charges
  • Raised FY18 guidance midpoint for Adjusted EPS by $0.13

GLENDALE, Calif.--(BUSINESS WIRE)-- Avery Dennison Corporation (NYSE:AVY) today announced preliminary, unaudited results for its first quarter ended March 31, 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 are off to a good start to the year, with adjusted EPS up 30 percent driven by a combination of solid operating results, currency translation tailwinds, and a lower tax rate,” said Mitch Butier, President and CEO. “Label and Graphic Materials delivered solid organic growth and sustained its strong operating margin; Retail Branding and Information Solutions expanded its margin significantly, with solid organic growth driven by strength in RFID; and Industrial and Healthcare Materials results were in line with expectations, with revenue up nearly 50 percent, largely due to acquisitions, while operating margin declined.

“We have initiated a large, multi-year restructuring plan associated with the consolidation of LGM’s European footprint, designed to further enhance our competitive position in the region,” said Butier. “Excluding the incremental charges from this action, our current year outlook has improved, reflecting a continuation of strong operating performance and an increased benefit from currency translation.”

For more details on the company’s results, see the summary table accompanying this news release, as well as the supplemental presentation materials, “First 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.

First 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. 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, product line exits, and acquisitions and divestitures. Adjusted operating margin refers to income before interest expense, other non-operating expense, and taxes, excluding restructuring charges and other items, as a percentage of sales.

Label and Graphic Materials

• Reported sales increased 11.8 percent. Sales ex. currency increased 4.2 percent; on an organic basis, sales grew 3.6 percent. Sales on an organic basis increased mid-single digits in Label and Packaging Materials and increased low-single digits in the combined Graphics and Reflective Solutions businesses.
• Reported operating margin decreased 30 basis points to 12.3 percent, reflecting the impact of restructuring actions. Adjusted operating margin increased 20 basis points to 13.0 percent as the benefits of increased volume and productivity more than offset higher employee-related costs and the net impact of pricing and raw material costs.

Retail Branding and Information Solutions

• Reported sales increased 5.2 percent; on an organic basis, sales grew 3.1 percent driven by strength in radio frequency identification (RFID) solutions.
• Reported operating margin increased 160 basis points to 9.0 percent as the benefits from productivity, reduced amortization expense, and increased volume were partially offset by higher employee-related costs and investments. Adjusted operating margin increased 170 basis points to 10.2 percent.

Industrial and Healthcare Materials

• Reported sales increased 48.8 percent. Sales ex. currency increased 42.2 percent; on an organic basis, sales grew 2.8 percent. Sales in industrial categories grew more than 50 percent ex. currency and mid-single digits on an organic basis. Sales in healthcare categories grew roughly 10 percent ex. currency and were relatively unchanged on an organic basis.
• Reported operating margin declined 390 basis points to 7.5 percent as the impact of acquisitions, increased investments, and the net impact of pricing and raw material costs were partially offset by increased volume. Adjusted operating margin declined 430 basis points to 7.5 percent.

Other

Share Repurchases / Equity Dilution

The company repurchased 0.4 million shares in the first quarter at an aggregate cost of $52 million. Net of dilution from long-term incentives, the company’s share count decreased 0.2 million in the quarter.

Income Taxes

The first quarter effective tax rate was 20.9 percent, up from 17.4 percent in the prior year. The adjusted tax rate for the quarter was 25 percent, consistent with the company’s expectation for the full year tax rate.

Cost Reduction Actions

In the first quarter, the company realized approximately $11 million in pretax savings from restructuring, net of transition costs, and incurred pretax restructuring charges of approximately $13 million, roughly half of which represented cash charges.

The company approved a restructuring plan associated with the consolidation of the European footprint of its Label and Graphic Materials segment, which is expected to result in a net reduction in headcount of approximately 150 positions. The company expects this plan to be largely complete by the end of 2019.

Total pretax restructuring charges associated with this plan are estimated at approximately $70 million. Of these charges, $6.9 million represents non-cash asset impairment charges, all of which were recorded in the first quarter of 2018. The remaining charges, which relate to cash costs primarily for severance, will largely be recognized during the second quarter of 2018; the vast majority of the cash payments associated with these accruals will be made in 2019.

The company expects to realize approximately $25 million in annualized savings from this plan, beginning in 2020.

Pension Accounting Change

In the first quarter of 2018, the company adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, on a retrospective basis. This ASU requires the net periodic benefit cost of defined benefit plans, other than service cost, to be presented below operating income. These changes in presentation do not change net income or earnings per share, but have a modest favorable impact on both reported and adjusted operating margins for the total company and its segments.

A summary of historical reclassified results, “Supplemental Historical Results (ASU 2017-07 Reclassification),” has been posted on the company’s website at www.investors.averydennison.com.

Outlook

In its supplemental presentation materials, “First 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 $4.90 to $5.10. Excluding an estimated $0.95 per share for restructuring charges and other items, the company now expects adjusted earnings per share (non-GAAP) of $5.85 to $6.05.

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; 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. 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.

In the first quarter of 2018, we adopted ASU No. 2016-16, Intra-entity Transfer of Assets Other Than Inventory, on a modified retrospective basis. This ASU requires companies to recognize the income tax effects of intra-entity sales and transfers of assets other than inventory in the period in which they occur. Upon adoption, we derecognized tax-related deferred charges and recognized deferred tax assets related to certain intra-entity asset transfers as a net reduction to retained earnings.

In the first quarter of 2018, we adopted ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, on a retrospective basis. This ASU reduces the diversity in the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. Prior year results have been reclassified as required by the guidance.