Avery Dennison Announces Fourth Quarter and Full Year 2020 Results
Avery Dennison Corporation today announced preliminary, unaudited results for its fourth quarter and year ended January 2, 2021 and provided an update related to the impact of the COVID-19 pandemic on the company. Non-GAAP financial measures referenced in this document are reconciled to GAAP in the attached tables. Unless otherwise indicated, comparisons are to the same period in the prior year.
“We delivered another year of strong earnings growth in 2020,” said Mitch Butier, Chairman, President and CEO. “In the face of an unprecedented series of crises, our team demonstrated remarkable preparedness and incredible agility in ensuring the health and welfare of our employees, delivering for our customers, supporting our communities, and minimizing the impact of the recession for our shareholders.
“We were able to protect, even expand, margins, despite pandemic-related market declines particularly in the second quarter,” added Butier. “Underlying label demand in LGM, our largest business, remained strong throughout the downturn, while volume trends improved sequentially in RBIS and IHM in the second half. RFID grew significantly due to continued strong organic growth and the acquisition of Smartrac.
“As we enter 2021, we remain confident in our ability to continue to make progress toward our long-term goals, including consistent delivery of GDP+ growth and top-quartile return on capital,” added Butier.
“We continue to prove our resilience across business cycles,” said Butier. “I want to thank our entire team for their ongoing efforts to keep one another safe while continuing to deliver for all our stakeholders during this challenging period.”
The safety and well-being of employees has been and will continue to be the company’s top priority during this global health crisis. The company has taken steps to both ensure employee safety, as well as help mitigate the financial impact to employees resulting from mandated facility closures and necessary layoffs in early 2020. In addition, the company recently provided one-time payments to frontline workers to express gratitude for their effort and dedication throughout this difficult time.
Additionally, the company has increased community engagement during the crisis, including electing to make a $10 million incremental contribution for charitable causes in the fourth quarter.
Throughout the pandemic, the company has continued to work closely with customers to continue to deliver industry-leading products and services. Operationally, all manufacturing sites remained open during the second half of the year. Throughout the health crisis, disruptions to the company’s supply chain have been negligible.
Balance Sheet, Liquidity, and Capital Deployment
The company’s balance sheet remains strong, with ample liquidity. Net debt to adjusted EBITDA (non-GAAP) was 1.7 as of the end of the fourth quarter, below our long-term target of 2.3 to 2.6. The company’s long-term priorities for capital allocation support its primary objectives of delivering faster growth in high value categories alongside profitable growth of its base businesses. These priorities are unchanged in the current environment.
The company continues to protect its investments in high value categories, particularly RFID, and increased its pace of capital spending in the fourth quarter compared to previous expectations. Total capital spending for the year was $219 million.
The company closed two strategic acquisitions during the year, ACPO in the fourth quarter for $88 million and Smartrac in the first quarter for $255 million.
Additionally, for the fourth quarter and full year 2020, the company repurchased 0.4 and 0.8 million shares, respectively, at an aggregate cost of $52 million and $104 million, respectively. Net of dilution from long-term incentive awards, the company’s share count at the end of the year was down by 0.9 million compared to the same time last year. In 2020, the company returned $301 million in cash to shareholders through a combination of share repurchases and dividends.
Fourth Quarter 2020 Results
Net sales were $1.99 billion, up 12.3%. The extra week in 2020 increased sales 4.9%. Sales were up 5.2% ex. currency, and up 3.2% on an organic basis. Reported operating margin increased 350 basis points to 13.7%. Adjusted EBITDA margin increased 180 basis points to 16.3%, while adjusted operating margin increased 160 basis points to 13.5%.
Reported net income was $2.28 per share, up 19% and adjusted net income was $2.27 per share, up 31%, both of which were above the company’s expectations. Year-to-date free cash flow was $548 million, up 6.9% compared to last year.
Fourth Quarter 2020 Results by Segment
Label and Graphic Materials
Reported sales increased 10.1%. Sales were up 3.6% on an organic basis. Label and Packaging Materials sales were up a mid-single digit from prior year on an organic basis.
Sales declined by a mid-single digit organically in the combined Graphics and Reflective Solutions businesses. On an organic basis, sales were up a mid-single digit in North America and emerging markets, and roughly flat in Western Europe.
Reported operating margin increased 390 basis points to 15.9%, as the benefits of productivity, favorable volume/mix, lower restructuring charges, as well as raw material deflation, net of pricing more than offset higher employee-related costs. Adjusted operating margin increased 210 basis points to 15.4%.
Retail Branding and Information Solutions
Reported sales increased 19.0%. Sales were up 11.6% ex. currency, and up 3.1% on an organic basis, as strong organic growth in high value categories was partially offset by a low-to-mid-single digit decline in the base business, driven by overall lower apparel demand. Sales ex. currency growth also reflected contribution from the Smartrac acquisition.
Enterprise-wide sales of RFID products were up approximately 55% ex. currency with the benefit of the Smartrac acquisition, and up approximately 21% organically, driven by new programs and recovery in the value segment of the apparel market.
Reported operating margin increased 380 basis points to 15.3%, as the benefits of productivity, favorable volume, and lower restructuring charges more than offset higher employee-related costs. Adjusted operating margin increased 210 basis points to 15.7%.
Industrial and Healthcare Materials
Reported sales increased 10.8%. On an organic basis, sales increased 0.7%, reflecting a high-single digit increase in industrial categories, and a mid-single digit decline in healthcare categories.
Reported operating margin increased 520 basis points to 12.4%, as the benefits of lower restructuring charges, favorable volume/mix, and productivity more than offset the impact of higher employee-related costs. Adjusted operating margin increased 210 basis points to 12.3%.
The company’s reported effective tax rate was 24.6% for the fourth quarter and 24.1% for the full year. The company’s adjusted (non-GAAP) tax rate was 24.1% for the fourth quarter and full year.
The company’s 2021 adjusted tax rate is expected to be in the mid-twenty percent range, based on current tax regulations.
Cost Reduction Actions
In the fourth quarter and full year 2020, the company realized approximately $18 million and $65 million, respectively, in pre-tax savings from restructuring, net of transition costs, and incurred pre-tax restructuring charges of approximately $3 million and $55 million, respectively, the vast majority of which represents cash charges. In addition, the company delivered approximately $135 million in net temporary savings in 2020, the majority of which are expected to become a headwind as markets continue to recover.
In its supplemental presentation materials, “Fourth Quarter and Full Year 2020 Financial Review and Analysis,” the company provides a list of factors that it believes will contribute to its 2021 financial results. Based on the factors listed and other assumptions, the company expects 2021 reported earnings per share of $7.50 to $7.90.
Excluding an estimated $0.15 per share impact of restructuring charges and other items, the company expects 2021 adjusted earnings per share of $7.65 to $8.05.