Avery Dennison (AVY) Q4 2007 earnings summary

Executive summary

• FY07 net sales rose 13% to $6.31B, driven mainly by the Paxar acquisition and currency; organic growth was 1%.

• Net income fell to $303.5M from $373.2M, while diluted EPS declined to $3.07 from $3.72; higher acquisition-related costs, interest, restructuring, raw materials and taxes weighed on results.

• Paxar, acquired June 15 for approximately $1.3B, expanded Retail Information Services; integration generated $20M of 2007 synergies and substantial restructuring and transition costs.

Financial highlights

• Net sales were $6,307.8M, up 13%; gross profit was $1,722.4M, with a 27.3% gross margin versus 27.6% in 2006.

• Income from continuing operations was $303.5M versus $358.5M; diluted continuing-operations EPS was $3.07 versus $3.57.

• Operating cash flow was $499.4M; free cash flow was $244.6M versus $315.5M, reflecting higher capital and software spending and lower net income.

• Foreign currency translation added $232M to sales and $13M to net income; acquisition benefit to sales was estimated at $500M.

• Other expense, net, was $59.4M, including $57.5M of restructuring and impairment charges, a $4.8M hedge loss and a $3.2M lawsuit accrual reversal.

Outlook and guidance

• FY08 revenue growth was expected at a high-single-digit to low-double-digit rate, including a ~6.5% Paxar benefit and modest currency benefit, based on year-end exchange rates.

• Paxar annual cost synergies were estimated at $115M-$125M; $60M-$70M incremental savings were expected in 2008, against total pretax integration cash costs of $165M-$180M.

• FY08 restructuring and realignment actions were expected to generate $30M of incremental savings, net of transition costs; 2008 raw-material inflation was estimated at ~2%, or $50M-$55M, partly offset by pricing.

• FY08 interest expense was estimated at $125M-$135M; capital and software spending was forecast at ~$195M before integration, plus $25M-$30M for Paxar integration.

• Annual earnings and free cash flow were expected to increase versus 2007; restructuring and asset impairment charges were expected to be lower.