"In the face of continuing tough market conditions we increased operating margin, reflecting the strength of our franchise businesses and the effectiveness of our operating model," said Dean A. Scarborough, president and chief executive officer of Avery Dennison. "The combination of fixed-cost reductions and increasing variable margins positions the Company for strong profit growth when markets improve."
"While the rate of volume decline in the third quarter improved compared with the first half of the year, this was largely due to a slowdown in inventory reductions," Scarborough said. "Our end-markets remain soft, and we continue to be cautious about the pace of their recovery."
"I want to note the excellent performance of our employees in such uncertain times," Scarborough said. "They have maintained their focus on serving our customers, operating our businesses, and laying the groundwork for the future. This has been hard work, and they've done a tremendous job."
For more details on the Company's results for the quarter, see the Company's supplemental presentation materials, "Third Quarter 2009 Financial Review and Analysis," posted at the Company's Web site at www.investors.averydennison.com, and furnished under Form 8-K with the SEC.
Third Quarter, 2009 Results by Segment
All references to sales reflect comparisons on an organic basis, which exclude the impact of acquisitions and foreign currency translation. All references to operating margin exclude the impact of restructuring, asset impairment charges, lease cancellation costs, and other items.
Pressure-sensitive Materials (PSM)
* Roll Materials sales declined, reflecting weakness in end-markets. Sales continued to decline in the more economically sensitive Graphics and Reflective Products division.
* Operating margin increased as productivity offset the impact of reduced fixed-cost leverage, while the effects of pricing and raw material trends continued to cover the cumulative impact of 2008 inflation.
Retail Information Services (RIS)
* The decline in sales primarily reflected reduced demand for apparel in the U.S. and in Europe, and caution on the part of retailers.
* The decline in operating margin reflected reduced fixed-cost leverage, pricing, and other factors that more than offset the benefit of restructuring and productivity actions.
* The Company is continuing initiatives to reduce fixed costs in light of current market conditions, while introducing new products and improving value-added services to increase its share of this large market.
Office and Consumer Products (OCP)
* The decline in sales reflected weak end-market demand, led by slower corporate purchase activity. The sales decline was partially offset by strong back-to-school sales, due in part to expanded distribution and consumer trade-up to more durable binders.
* Operating margin declined as the benefit of productivity actions was more than offset by the impact of reduced fixed-cost leverage.
Other specialty converting businesses
* The decline in sales is primarily attributable to lower volume of products sold to the housing and construction industries.
* The increase in operating margin reflected restructuring and productivity improvements that more than offset reduced fixed-cost leverage.
Consolidated Items and Actions
* In the fourth quarter of 2008, the Company began a restructuring program expected to reduce costs across all segments of the business. The Company is targeting $160 million in annualized savings by mid-2010 (estimating $75 million benefit, net of transition costs, in 2009). The Company estimates that it will incur approximately $130 million of total restructuring charges associated with these actions, with approximately $110 million to be incurred in 2009. In addition to the savings from these new actions, the Company expects approximately $40 million of carryover savings in the year from previously implemented actions.
At the end of the third quarter of 2009, the Company achieved run-rate savings representing approximately 70 percent of its restructuring target.
* The effective tax rate in the third quarter was negative 7 percent, while the adjusted tax rate was positive 7.5 percent. The effective and adjusted tax rates for the full year are expected to be in the low single-digits and low double-digits, respectively. The ongoing annual tax rate is expected to be in the low 20 percent range, varying significantly from quarter to quarter.