Avery Dennison (AVY) Q4 2005 earnings summary

Executive summary

• FY 2005 sales rose 3% to $5,473.5 million, while net income fell 19% to $226.4 million; lower core unit volume and higher restructuring charges weighed on results.

• Sales growth was supported by price increases and favorable currency translation; higher pricing helped offset raw-material inflation but contributed to North American roll-materials share loss.

Financial highlights

• Net sales were $5,473.5 million versus $5,317.0 million; gross profit was $1,621.1 million and gross margin was 29.6%, unchanged YoY.

• Income from continuing operations was $291.8 million, up from $281.0 million; net income was $226.4 million versus $279.7 million, including a $65.4 million loss from discontinued operations in 2005.

• Diluted EPS was $2.25 versus $2.78; continuing-operations diluted EPS was $2.90 versus $2.79.

• Operating cash flow was $441.6 million versus $516.9 million; free cash flow was $253.3 million versus $316.2 million, primarily reflecting lower net income.

• Other expense, net, was $63.6 million versus $35.2 million, including restructuring and impairment charges; an additional $74.4 million pretax impairment was recorded in discontinued operations for the planned pavement-marker sale.

Outlook and guidance

• 2006 unit volume growth forecast at 2%-3%, based on underlying growth of 4%-5% partly offset by divestitures and withdrawal from low-margin private-label business; price/mix benefit expected to be offset by currency translation.

• Restructuring and realignment expected to deliver $80-$90 million in annualized pretax savings, with 60%-70% anticipated in 2006; 2006 transitional costs forecast at $15-$20 million.

• 2006 free cash flow forecast at $300-$350 million; capital expenditures projected at $175-$200 million, funded through operating cash flow.

• 2006 pretax interest expense forecast at $55-$60 million; effective tax rate forecast at 20%-23%; stock-option expense estimated at $17 million pretax, or $0.12 per share after tax.

• Price increases in early 2006 expected to offset raw-material inflation from late 2005 and early 2006; RFID pretax loss expected to improve by $2-$7 million versus 2005.