Avery Dennison (AVY) Q4 2004 earnings summary

Executive summary

• FY04 sales from continuing operations rose 12% to $5.34B; core unit volume grew an estimated 8%, supported by emerging markets, new products, currency translation and an extra fiscal week.

• Net income increased 4% to $279.7M and diluted EPS rose to $2.78 from $2.68; performance included $35.2M of pretax restructuring and impairment charges.

• Q4 sales were $1.434B, gross profit $433.0M, net income $83.6M and diluted EPS $0.83.

Financial highlights

• FY04 net sales were $5,340.9M vs. $4,762.6M; gross profit was $1,579.5M vs. $1,458.0M, while gross margin was 29.6% vs. 30.6%.

• Income from continuing operations was $279.7M vs. $242.8M; net income was $279.7M vs. $267.9M, including discontinued operations in the 2003 comparison.

• Diluted EPS was $2.78 vs. $2.68; 2004 income benefited from a 25.1% effective tax rate, including ~$8M from favorable tax audit settlements.

• Operating cash flow reached $516.9M vs. $334.9M; free cash flow was $338.0M vs. $133.5M, supported by higher earnings, working-capital changes and lower cash capex payments.

• Adjusted for $35.2M pretax 2004 restructuring and impairment charges, largely Jackstädt integration costs; 2003 included $34.3M of Q4 charges and a $9M lawsuit settlement gain.

Outlook and guidance

• FY05 core unit volume growth forecast at 4%–7%, with growth expected from Asia, Latin America and Eastern Europe; positive price/mix and currency translation were also anticipated.

• Pricing actions and productivity initiatives were expected to offset rising raw-material costs and improve profitability; higher growth-investment costs, including RFID, were expected to offset some gains.

• FY05 pension and medical costs expected to rise $17M–$18M pretax; interest expense forecast at $50M–$60M and annual tax rate at 25%–27%.

• FY05 capex expected to be ~$200M, funded through operating cash flow; stock-option expense expected at $8M–$10M after tax in H2 2005.

• Gainesville plant closure expected to generate ~$8M annualized savings beginning Q4 2005, with $9M–$11M of restructuring and transition costs over the next few quarters.