-- Stable operating trends at Pasadena, Calif.-based Avery Dennison
continue to support credit quality and our expectations for the current
-- We are revising the outlook to stable from positive to reflect our
expectation that the company is unlikely to materially improve its financial
profile in the near term.
-- We affirmed all ratings on the company, including the 'BBB' corporate
-- The stable outlook indicates our expectation of gradually improving
operating trends, adequate liquidity, good free flow generation, and financial
policies that support a financial profile consistent with the current ratings.
On Dec. 11, 2012, Standard & Poor's Ratings Services revised its outlook on
Avery Dennison to stable from positive. We affirmed all other ratings,
including the 'BBB' corporate credit rating.
The outlook revision reflects our expectation that Avery is unlikely to
improve its financial profile to a level that would warrant a higher rating
during the next several quarters. Despite initiatives to increase revenues and
improve profitability, we do not expect the financial profile to materially
improve in the near term, in part, due to the continuation of challenging
business conditions. Nevertheless, we expect modestly improving operating
trends and good free cash flow generation to be supported by various cost
reduction initiatives, modest volume improvements in its core businesses,
growth in emerging markets, and effective management of raw material costs.
Overall, we expect Avery Dennison to maintain its financial profile and
sustain the key ratio of funds from operations (FFO)-to-total adjusted debt in
the mid-30% area, which is consistent with its current rating.
During October 2012, the proposed sale of office and consumer products to 3M
was terminated due to regulatory approval issues. However, the company has
restarted the sale process and have several interested buyers, both strategic
and financial, which we believe will materialize into a sale of the business
in the next few quarters. Standard & Poor's continues to regard the planned
sale as a slight net negative to the business profile, although, following the
sale we would still assess Avery's business profile as "satisfactory",
consistent with the current business risk profile.
The ratings on Avery reflect our view of the company's satisfactory business
risk profile and intermediate financial risk profile. Avery's key business
strengths include a leading global market position in pressure-sensitive
materials and retail tag and labeling systems, well-established brands, and
broad geographic diversity. Sales of pressure-sensitive materials are somewhat
dependent on the level of general economic activity, but have been fairly
resilient in the past recession. Given its leadership position in the pressure
sensitive materials segments, the company has had a good track of passing
through higher raw material costs to customers, albeit with a time lag.
While the RBIS segment has improved from its low point in 2009, and is poised
for gradual growth in sales volume and operating profitability over the next
few years, earnings are more volatile as compared with the pressure sensitive
materials segment. Recent industry dynamics of more selling seasons, faster
response times, and getting more in-store productivity bodes well for Avery's
RBIS business longer term. However, demand for price marking and brand
identification products are closely tied to retailer and apparel end markets,
and consumer spending patterns. Standard & Poor's Ratings Services views the
U.S. apparel and retail sectors as highly competitive and subject to fashion
risk and consumer spending patterns. Weak discretionary consumer spending
(mostly due to high unemployment) and rising raw material costs are key
hurdles facing these sectors.
Avery's office and consumer products unit, now under consideration for sale,
is a leading producer of printable media. This segment has faced stiff
competition in its less-differentiated product categories, and shrinking
demand, particularly in its largest mailing label category. This has resulted
in declining volumes and earnings and margin erosion for the past several
years. However, the office and consumer products segment is a relatively
stable business and a sale will reduce Avery's business diversity and expose
it increasingly to the volatile retail branding and information solutions
International opportunities are a key component of the company's growth
strategy. Pro forma for the anticipated divestiture of the office and consumer
products segment, Avery derives about 73% of its 2011 sales from outside the
U.S., and it continues to grow in emerging markets, which account for about
40% of sales. Emerging markets across Asia-Pacific (particularly China), Latin
America, and Eastern Europe continue to shift to pressure-sensitive materials
for various labeling, packaging, and decorating needs, and per capita
consumption is still much less than in the mature U.S. and European markets.
A critical underpinning to the ratings is our belief in the company's
cash-generating ability and management's track record of, and current
commitment to, preserving credit quality. We consider an average ratio of
FFO-to-total adjusted debt of approximately 35% to be consistent with the
current rating. Based on our scenario forecasts (with the anticipated sale of
the office and consumer products business), we expect FFO-to-total adjusted
debt will be in the mid-30 % area for the next few years. We adjust debt to
include about $244 million of underfunded postretirement obligations and about
$183 million of capitalized operating leases. We also expect Avery to pursue
acquisitions and any share repurchases prudently, with a view on retaining a
financial profile consistent with current ratings.
We view Avery's liquidity as adequate supported by relatively predictable free
cash generation. As of Sept. 30, 2012, the company had a cash balance of $191
million and about $362 million available under its revolving credit facility.
However, Avery has historically had, and continues to have, a high proportion
of short-term debt, including CP outstanding and short-term borrowings under
its $675 million revolving credit facility maturing in 2016, which also
backstops the CP program.
Our liquidity assessment reflects the following factors and assumptions:
-- We expect sources of cash to exceed 1.2x of cash usage during the next
12 to 18 months; and
-- We expect sources to remain positive even in the unlikely event of a
20% EBITDA decline.
Based on our 2013 scenario forecasts (assuming the sale of the office and
consumer products business), we expect capital expenditures of about $155
million and free operating cash flow of about $250 million to $300 million. In
2013, we expect Avery to make larger pension contributions (domestic and
international) mainly from the proceeds from the anticipated sale of its
office and consumer products business. In addition, we believe that Avery will
use discretionary cash flows (after dividends) primarily for share
repurchases. Debt maturities are manageable, and we expect the company will
refinance its upcoming $250 million notes due in 2013 in February 2013.
The stable outlook incorporates Avery's good cash generating ability and
management's commitment to maintaining a financial risk profile consistent
with the current ratings while pursuing a disciplined growth strategy and
We could revise the outlook to negative if volumes decline while margins
compress. In such a scenario, challenging operating conditions would lower
operating margins (before depreciation and amortization) by 200 basis points
from current levels and result in FFO-to-total adjusted debt weakening to
about 30%. We could also consider an outlook revision to negative if
management's financial policies unexpectedly become more aggressive so that
FFO-to-total adjusted debt slips to about 30% with no near-term prospects for
improvement. In our view, a departure from moderate financial policies would
include increases in debt to fund large acquisitions or potential shareholder
rewards with low prospects to quickly pay down additional debt.
We could raise the ratings modestly during the next few years if earnings and
cash flow strengthen without a commensurate increase in debt, and if Avery
maintains FFO-to-total adjusted debt within the 35% to 40% through the
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- Key Credit Factors: Methodology And Assumptions On Risks In The
Packaging Industry, Dec. 4, 2008
Ratings Affirmed; Outlook Revised
Avery Dennison Corp.
Corporate Credit Rating BBB/Stable/A-2 BBB/Positive/A-2
Avery Dennison Corp.
Senior Unsecured BBB
Short-Term Debt A-2
Commercial Paper A-2
Senior Unsecured BBB
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
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