Avery Dennison (AVY) Q4 2006 earnings summary

Executive summary

• FY 2006 sales from continuing operations rose 2% to $5,575.9 million; net income increased to $367.2 million from $226.4 million, and diluted EPS was $3.66 versus $2.25.

• Results benefited from productivity savings, lower restructuring and impairment charges, favorable tax items, and the divestiture tax benefit; environmental costs, stock compensation, and restructuring transition costs were offsets.

• Q4 2006 sales were $1,411.4 million, gross profit $389.5 million, net income $101.5 million, and diluted EPS $1.01; Q4 2005 net income was a loss of $6.9 million.

Financial highlights

• FY sales were $5,575.9 million, up 2% reported and ~3% organically; core unit volume rose 2%, pricing and mix contributed 1%, and currency added $21 million.

• Gross profit was $1,528.4 million; gross margin was 27.4%, versus 27.0% in 2005. Net income was $367.2 million, or 6.6% of sales, versus $226.4 million, or 4.1%.

• Income from continuing operations was $352.5 million and diluted continuing-operations EPS was $3.51; reported diluted EPS of $3.66 included $0.15 per share from discontinued operations.

• Operating cash flow was $510.8 million and free cash flow was $315.5 million, up from $253.3 million; cash flow reflected higher net income and changes in assets and liabilities.

• Other expense, net, was $36.2 million in 2006 versus $63.6 million in 2005; 2006 included $29.8 million of restructuring, impairment and lease charges and a $13 million environmental accrual, partly offset by asset and investment gains.

Outlook and guidance

• FY 2007 revenue growth expected in the low- to mid-single digits, including a modest positive currency effect; expectations remained subject to economic and market conditions.

• Restructuring and realignment expected to reduce costs by a further $45 million versus 2006; some savings will be reinvested, including $12 million to $15 million for IT.

• Annual earnings and free cash flow expected to increase versus 2006; share repurchases expected to benefit EPS, and 2007 restructuring and impairment charges expected below 2006 levels.

• 2007 capital spending forecast at $160 million to $165 million, or $210 million to $225 million including software; major projects include capacity expansion in China and India.

• Annual effective tax rate expected to rise in 2007, with quarterly variation; pretax interest expense expected approximately even with 2006, subject to average debt outstanding.