Avery Dennison (AVY) Q4 2003 earnings summary

Executive summary

• FY03 sales from continuing operations rose 15% to $4.76B, driven by acquisitions, favorable currency translation and growth in existing businesses; net income rose 4.2% to $267.9M.

• Core unit volumes grew an estimated 4% in FY03 versus 7%-8% in FY02; growth accelerated in Q4 across most businesses and regions, supporting better-than-expected quarterly sales and net income.

• Earnings growth lagged sales growth as gross margin declined, pricing remained competitive and interest expense increased; 2004 outlook anticipated higher sales and net income.

Financial highlights

• FY03 net sales were $4,762.6M, gross profit $1,458.0M and net income $267.9M; diluted EPS was $2.68 versus $2.59 in FY02.

• Gross margin fell to 30.6% from 32.1%; continuing-operations income before taxes was $334.9M versus $354.3M, while continuing-operations income was $242.8M versus $249.8M.

• Q4 FY03 continuing-operations sales were $1,231.1M and net income was $59.3M, versus $1,092.0M and $55.5M in Q4 FY02.

• Currency translation added ~$235M to FY03 sales and ~$0.14 to diluted EPS; the EPS benefit was partly offset by weaker U.K. pound pricing against euro-denominated materials.

• Adjusted for restructuring, impairment, lease and divestiture charges, segment operating income trends differed: Pressure-sensitive Adhesives and Materials improved, while Consumer and Converted Products faced weaker domestic results.

Outlook and guidance

• FY04 outlook called for sales and net income growth from anticipated economic improvement and growth and productivity initiatives; currency translation was also expected to benefit results if the euro remained above its FY03 average.

• Earnings were expected to be higher in H2 than H1 as cost-reduction savings ramped; FY04 interest expense was expected to be comparable to FY03.

• FY04 pension, medical and insurance costs were expected to rise $13M-$14M pre-tax, including an estimated $9M pension-expense increase; the effective tax rate was expected near 27.5%.

• FY04 capex was forecast at $175M-$200M, funded through operating cash flows, with Asia capacity expansion and North American roll-materials productivity projects planned.

• Further Jackstädt integration charges of $30M-$35M were expected in H1 FY04, with annualized savings of $25M-$30M anticipated from H2.