Avery Outperforms in 3Q (AVY)

Including restructuring costs and other items, earnings from continuing operations were 37 cents per share in the quarter compared with 33 cents in the year-ago quarter.

Total revenues dipped 0.8% to $1.488 billion from $1.500 billion in the prior-year quarter. Revenues were ahead of the Zacks Consensus Estimate of $1.487 billion.

Cost of sales for the reported quarter fell 3.3% to $1.096 billion. Gross profit increased 7.1% to $392 million from $366.9 million in the prior-year quarter.

Marketing, general & administrative expenses were $293.9 million versus $285 million in the year-ago quarter. Adjusted operating income from continuing operations increased to $98.1 million from $81.9 million in the year-earlier quarter. Operating margin expanded 110 basis points (bps) to 6.6% in the quarter.

Segmental Performance

Total revenues in the Pressure-sensitive Materials segment fell 1.3% to $982.9 million. Adjusted operating profit increased 4.4% to $85.8 million in the quarter. Operating margin contracted 30 bps to 7.4%, driven by employee related expenses, effects of product-mix and higher restructuring costs, partially offset by higher volumes and productivity initiatives.

Total revenues from Retail Branding and Information Solutions increased 3.7% to $374.2 million from $360.7 million in the year-earlier quarter. Segmental adjusted operating income increased 33.6% to $15.9 million with adjusted operating margin expanding 90 bps to 4.2% due to productivity initiatives, higher volumes, lower restructuring charges, partially offset by employee related expenses and effects of product-mix.

Other specialty converting businesses segment reported net sales of $130.7 million, down 9% from $144.2 million in the year-ago quarter. Adjusted operating profit was $5.5 million compared with a loss of $1.1 million in the prior-year quarter. Adjusted operating margin jumped 500 basis points to 4.2% in the quarter due to RFID profitability, partially offset by higher restructuring costs.

Financial Position

As of September 29, 2012, cash and cash equivalents of the company were $190.7 million versus $119.7 million as of October 1, 2011. Long-term debt decreased to $702.7 million as of September 29, 2012, from $954.5 million as of October 1, 2011.

Cash flow from operating activities was $214.1 million in the first nine months of fiscal 2012 compared with $120 million of cash used in operating activities in the first nine months of fiscal 2011. Avery repurchased 2.9 million shares during the quarter at an aggregate cost of $86 million.

Outlook

The company has raised its adjusted earnings guidance to a range of $2.00 to $2.05 per share from the earlier guidance range of $1.90 to $2.05 from $1.80. Free cash flow from continuing operations is expected to lie between $280 million and $310 million in 2012.

Our View

Avery is spending on restructuring activities to achieve more than $100 million in annualized savings from mid-2013. However, the activities being capital intensive will pressure margins in the upcoming quarters.

Avery retains a short-term Zacks #4 Rank (Sell). We have a long-term Underperform recommendation on the stock.