Avery Dennison Corporation (AVY) FY2025 Earnings Quality Report

Grade: F — Major Red Flags

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed 2026-02-25, FY ended December 31, 2025) + Yahoo Finance

Auditor: PricewaterhouseCoopers LLP — Unqualified opinion (1 critical audit matter: revenue recognition)

One-line verdict: Avery Dennison is a well-run materials science and digital identification company that receives an F grade solely because of two structural balance sheet characteristics: $3.7 billion debt covered by only $203 million cash (5% coverage), and $3.1 billion goodwill+intangibles at 138% of equity. Every other check passes. Revenue grew 1.1% to $8.86 billion, CFFO/NI of 1.28 demonstrates solid cash conversion, free cash flow of $687 million nearly equals net income, gross margin is stable at 28.8%, the M-Score of -2.54 is clean, and the Z-Score of 3.49 places the company safely out of the distress zone. This is the cleanest operational profile in the batch, penalized by capital structure choices (aggressive buyback-funded leverage) and acquisition-built goodwill rather than by any earnings quality concern.

Business Overview: Two Segments, Global Footprint

Per the 10-K, Avery Dennison operates through two reportable segments:

Materials Group — "a leading global provider" of pressure-sensitive label materials and packaging solutions. This is the core adhesive materials business.

Solutions Group — digital identification solutions including RFID tags, intelligent labels, and supply chain visibility tools.

The filing states: "In 2025, approximately 69% of our net sales originated outside the U.S." and the company operated "over 200 manufacturing and distribution facilities" in "more than 50 countries." This is a genuinely global business.

In FY2025, Avery acquired W.F. Taylor Holdings, Inc. ("Taylor Adhesives"), a "Georgia-based flooring adhesives business" for approximately $390 million.

Profitability: Steady Growth, Stable Margins

Per the filing's consolidated results:

Per the filing, "gross profit in 2025 increased compared to 2024 primarily due to benefits from productivity initiatives." Income before taxes declined 3% due to higher interest expense ($135M vs $117M, reflecting the Taylor Adhesives acquisition financing) and higher other expenses.

The filing provides forward guidance: management anticipates "a favorable impact to our full-year net sales and operating income from foreign currency translation" and "incremental savings from restructuring actions, net of transition costs." However, "we anticipate an unfavorable impact to our operating income from higher interest expense."

Cash Flow: Consistent, Predictable

CFFO/NI ratios of 1.28-1.64 across three years demonstrate reliable cash conversion. FCF/NI of 0.99 in FY2025 means nearly every dollar of reported profit converts to free cash. CapEx declined from $312M to $199M — a 36% reduction over two years, suggesting the company has completed a capital investment cycle and is now harvesting returns.

The 18-Point Screening

Revenue Quality

All clean. DSO of 62 days is higher than the consumer goods companies in this batch but normal for B2B materials — Avery sells to industrial customers and converters with standard trade terms.

Expense Quality

All four expense quality checks pass. Inventory flat while COGS grew is a healthy signal. Gross margin stability at 28.8% across two years shows pricing discipline.

Cash Flow Quality

C4: Only $203 million cash against $3.7 billion total debt. This is the most common flag for companies that maintain minimal cash balances while using revolving credit facilities for liquidity. With Debt/EBITDA of 2.7x and interest coverage of 8.3x, the debt is well-serviced, but the cash position provides no buffer for unexpected liquidity needs.

Balance Sheet

D1: $2.3 billion goodwill and $828 million intangibles total $3.1 billion, or 138% of equity. The goodwill reflects acquisitions over the years — including the recent $390 million Taylor Adhesives deal. Avery's thin equity base ($2.24 billion) is the result of aggressive share buybacks over many years rather than operating weakness.

Acquisition Risk

Manipulation Score

All eight M-Score components are benign: DSRI 1.014, GMI 1.005, AQI 1.074, SGI 1.011, DEPI 0.970, SGAI 0.995, TATA -0.022, LVGI 1.033. None show concerning deviations.

Key Risks from the 10-K

1. Tariff and Trade Policy Exposure

The filing states: "Changes in laws and regulations applicable to us in the U.S. and international trade regulations (including tariffs), as well as the impact these changes have on demand for our products" is a risk. With 69% of revenue outside the U.S. and manufacturing across 50+ countries, tariff changes can disrupt both supply chains and demand. The filing specifically notes "macroeconomic developments such as impacts from slower growth in the geographic regions in which we operate."

2. Acquisition Integration

The filing warns that "acquisitions will be successful, contribute to our profitability or drive accretive returns" is not guaranteed. The $390 million Taylor Adhesives acquisition adds a new product category (flooring adhesives) that must be integrated. The filing also mentions the company "may not be able to identify additional value-accretive acquisition targets" — suggesting the M&A pipeline may be slowing.

3. Foreign Currency Translation

With 69% of revenue outside the U.S., currency movements directly impact reported results. The filing notes management anticipates "a favorable impact to our full-year net sales and operating income from foreign currency translation, based on recent rates," but this assumption can reverse quickly.

4. Rising Interest Expense

Interest expense grew from $117M to $135M (+15%) due to the Taylor Adhesives acquisition financing. The filing warns of "unfavorable impact to our operating income from higher interest expense" going forward. While interest coverage of 8.3x is comfortable, the trajectory is rising.

Summary

Grade: F under the screening framework, but operationally this is the cleanest company in the batch.

Avery Dennison passes 16 of 18 checks — the best hit rate among all 10 companies reviewed. The two fails are purely structural: thin cash ($203M vs $3.7B debt) and elevated goodwill+intangibles (138% of equity). Both reflect management's capital allocation choices (aggressive buybacks and acquisitions) rather than operational weakness.

The M-Score of -2.54 is comfortably clean. CFFO/NI of 1.28 shows solid cash conversion. FCF/NI of 0.99 means reported earnings are real. Gross margin is stable. Accruals are minimal. The Z-Score of 3.49 is in the safe zone. Debt/EBITDA of 2.7x and interest coverage of 8.3x are both healthy.

The real risks are macro: 69% international revenue exposed to tariffs and currency, rising interest expense, and a global economy that may slow demand for labeling and packaging materials. But the financials do not suggest any hidden accounting problems.

**Disclaimer**: This report is based on Avery Dennison's FY2025 10-K filed with SEC EDGAR on February 25, 2026. This is NOT investment advice.

Data: SEC EDGAR 10-K + Yahoo Finance

Auditor: PricewaterhouseCoopers LLP (Unqualified opinion, 1 critical audit matter — revenue recognition)

Fiscal year ended: December 31, 2025