FO Fortune Brands

Avery Dennison Corporation (AVY) reported a adjusted net income of $38.1 million or 36 cents per share in the fourth quarter of fiscal 2011, down considerably from $89.6 million or 83 cents per share delivered in the year-ago quarter. Adjusted earnings per share were well below the Zacks Consensus Estimate of 46 cents per share.

The company incurred restructuring costs and special items of $9.1 million or 9 cents per share. Including these charges, Avery Dennison’s income in the quarter stood at $29 million or 27 cents per in the reported quarter.

The prior year’s quarter excluded a benefit of $10.3 million or 10 cents. Including this net income in the prior year quarter was $99.9 million or 93 cents per share.

Total revenue in the quarter dipped 0.5% to $1.45 billion from $1.46 billion in the prior-year quarter, way short of the Zacks Consensus Estimate of $1.6 billion. Increase in sales in the Pressure-sensitive Materials segment was offset by declines in the Retail Branding and Information Solutions and Other specialty converting businesses.

Cost of sales during the reported quarter dipped 0.2% to $1.096 billion. Gross profit declined 2% to $358.6 million from $364.1 million in the prior-year quarter.

Marketing, general & administrative expenses were $287.7 million versus $290.8 million in the year-ago quarter. Adjusted operating income declined to $70.9 million from $73.3 million in the year-earlier quarter.

Segmental Performance

Total revenue in the Pressure-sensitive Materials segment increased 2% on a year-over-year basis to $960.5 million. Both Label and Packaging Materials and Graphics and Reflective Solutions saw growth in revenues. Adjusted operating profit remained flat at $69.8 million.

Total revenue from Retail Branding and Information Solutions declined to $368.4 million from $386.4 million in the year-earlier quarter due to lower demand from retailers and brands in the U.S. and Europe. Segmental adjusted operating income also decreased to $16.3 million from $17.3 million in the prior-year quarter.

Other specialty converting businesses segment reported net sales of $125.7 million, down 6% from $133.7 million in the year-ago quarter. The segment posted an operating loss of $5.8 million versus an operating loss of $2.8 million in the prior-year quarter.

Fiscal 2011 Performance

Avery Dennison reported adjusted EPS of $1.74 compared with $2.39 in the prior fiscal. Results missed the Zacks Consensus Estimate of $2.23.  Including one-time items, EPS was $1.45 compared with $2.27 in the prior year. Results were below the company’s guided range of $2.15 and $2.30, and the Zacks Consensus Estimate of $2.23.

Avery Dennison reported revenues of $6.03 billion, a 4.2% increase over $5.78 billion in the prior year. Revenues were below the Zacks Consensus Estimate of $6.69 billion.

Financial Position

As of fiscal 2011 end, cash and cash equivalents of the company were $178 million versus $127.5 million as of fiscal 2010 end. Long-term debt were $954.2 million as of fiscal 2011 end compared with $956.2 million as of fiscal 2010 end.

Cash flow from operating activities was $422.7 million in fiscal 2011 compared with $486.7 million in 2010. The company generated free cash flow of $292 during the year compared with $378.9 million in the prior year.

Avery Dennison’s board of directors announced an 8% increase in its quarterly dividend to 27 cents. The dividend is payable March 21, 2012 to shareholders of record on March 7, 2012.

Outlook

The company expects adjusted EPS to lie between $1.80 and $2.15 and free cash flow from continuing operations between $275 million and $325 million.

Our Take

The company has been successful in offsetting raw material costs by implementing price increases and cost reduction initiatives. The company experienced unexpected declines in volumes in fiscal 2011. Now with the weaker Office Products business sold out, the company will be able to focus on its market-leading, pressure-sensitive materials business, and Retail Branding and Information Solutions segment.

We maintain our Underperform recommendation on Avery Dennison. The shares of Avery Dennison are currently maintaining a Zacks #5 Rank (Strong Sell rating) over the short term that corresponds with our Underperform recommendation.

Pasadena, California-based Avery Dennison produces pressure-sensitive materials, office products and a variety of tickets, tags, labels and other converted products. Avery is a Fortune 500 company operating over 200 manufacturing and distribution facilities with roughly 32,000 employees in more than 60 countries. It competes primarily with Bemis Company Inc. (BMS) and Fortune Brands Inc. (FO).

 
AVERY DENNISON (AVY): Free Stock Analysis Report
 
BEMIS (BMS): Free Stock Analysis Report
 
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