Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements			Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 238)			38
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2022 and January 1, 2022			40
Consolidated Statements of Income for 2022, 2021 and 2020			41
Consolidated Statements of Comprehensive Income for 2022, 2021 and 2020			42
Consolidated Statements of Shareholders’ Equity for 2022, 2021 and 2020			43
Consolidated Statements of Cash Flows for 2022, 2021 and 2020			44
Notes to Consolidated Financial Statements			45

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Avery Dennison Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Avery Dennison Corporation and its subsidiaries (the “Company”) as of December 31, 2022 and January 1, 2022, and the related consolidated statements of income, of comprehensive income, of shareholders’ equity, and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and January 1, 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to

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accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Income Taxes

As described in Notes 1 and 14 to the consolidated financial statements, the Company is subject to income tax in the U.S. and multiple foreign jurisdictions, whereby management applies judgment in evaluating and estimating the Company’s worldwide provision, accruals for taxes, deferred taxes and for evaluating the Company’s tax positions. As of and for the year ended December 31, 2022, management recorded a provision for income taxes of $242.2 million, recorded total deferred tax assets of $115.1 million and disclosed unrecognized tax benefits of $69.5 million. As disclosed by management, significant judgments and estimates are required by management when determining the Company’s tax expense and evaluating tax positions, including uncertainties. Management’s estimate of the potential outcome of uncertain tax issues is subject to management’s assessment of relevant facts and circumstances existing at the balance sheet date, taking into consideration existing laws, regulations and practices of the governmental authorities exercising jurisdiction over the Company’s operations. Management’s assessment of the future realizability of the Company’s deferred tax assets relies heavily on forecasted earnings in certain jurisdictions, and such forecasted earnings are determined by the manner in which the Company operates its business and the relevant carryforward periods.

The principal considerations for our determination that performing procedures relating to income taxes is a critical audit matter are (i) the significant judgment by management when accounting for income taxes, including evaluating the potential outcome of various uncertain tax issues and the realizability of deferred tax assets; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating evidence related to the potential outcome of uncertain tax issues and the realizability of deferred tax assets on a jurisdictional basis; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to accounting for income taxes, including controls over the identification and recognition of uncertain tax issues and the realizability of deferred tax assets on a jurisdictional basis. These procedures also included, among others, (i) testing the income tax provision and the rate reconciliation and (ii) evaluating management’s process for assessing the potential outcome of uncertain tax issues and the future realizability of deferred tax assets. Evaluating management’s process for assessing the potential outcome of certain uncertain tax issues included evaluating management’s assessment of existing laws and regulations and practices of governmental authorities exercising jurisdiction over the Company’s operations. Evaluating management’s process for assessing the future realizability of certain deferred tax assets on a jurisdictional basis included evaluating estimates of future taxable income, evaluating management’s application of income tax law, and testing the completeness and accuracy of underlying data used in management’s assessment. Evaluating management’s estimates of future taxable income involved evaluating whether the estimates used by management were reasonable considering the current and past performance of the Company on a jurisdictional basis and whether the estimates were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of management’s assessment of the potential outcome of uncertain tax issues and the future realizability of deferred tax assets, including the application of relevant foreign and domestic income tax laws and regulations, the provision for income taxes and the reasonableness of management’s assessment of whether it is more-likely-than-not that certain tax positions will be sustained.

/s/ PricewaterhouseCoopers LLP

Los Angeles, California
February 22, 2023

We have served as the Company’s auditor since at least 1960, which were the Company’s first financial statements subject to SEC reporting requirements. We have not been able to determine the specific year we began serving as auditor of the Company or a predecessor company.

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Consolidated Balance Sheets

(Dollars in millions, except per share amount)						December 31, 2022						January 1, 2022
Assets
Current assets:
Cash and cash equivalents						$	167.2					$	162.7
Trade accounts receivable, less allowances of $34.4 and $33 at year-end 2022 and 2021, respectively						1,374.4						1,424.5
Inventories						1,009.9						907.2
Other current assets						230.5						240.2
Total current assets						2,782.0						2,734.6
Property, plant and equipment, net						1,540.2						1,477.7
Goodwill						1,862.4						1,881.5
Other intangibles resulting from business acquisitions, net						840.3						911.4
Deferred tax assets						115.1						130.2
Other assets						810.5						836.2
						$	7,950.5					$	7,971.6
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term borrowings and current portion of long-term debt and finance leases						$	598.6					$	318.8
Accounts payable						1,339.3						1,298.8
Accrued payroll and employee benefits						228.5						299.0
Accrued trade rebates						173.8						176.3
Income taxes payable						76.2						74.9
Other current liabilities						383.4						380.1
Total current liabilities						2,799.8						2,547.9
Long-term debt and finance leases						2,503.5						2,785.9
Long-term retirement benefits and other liabilities						367.1						474.9
Deferred tax liabilities and income taxes payable						247.9						238.5
Commitments and contingencies (see Notes 7 and 8)
Shareholders’ equity:
Common stock, $1 par value per share, authorized – 400,000,000 shares at year-end 2022 and 2021; issued – 124,126,624 shares at year-end 2022 and 2021; outstanding – 80,810,016 and 82,605,953 shares at year-end 2022 and 2021, respectively						124.1						124.1
Capital in excess of par value						879.3						862.3
Retained earnings						4,414.6						3,880.7
Treasury stock at cost, 43,316,608 and 41,520,671 shares at year-end 2022 and 2021, respectively						(3,021.8)						(2,659.8)
Accumulated other comprehensive loss						(364.0)						(282.9)
Total shareholders’ equity						2,032.2						1,924.4
						$	7,950.5					$	7,971.6

See Notes to Consolidated Financial Statements

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Consolidated Statements of Income

(In millions, except per share amounts)						2022						2021						2020
Net sales						$	9,039.3					$	8,408.3					$	6,971.5
Cost of products sold						6,635.1						6,095.5						5,048.2
Gross profit						2,404.2						2,312.8						1,923.3
Marketing, general and administrative expense						1,330.8						1,248.5						1,060.5
Other expense (income), net						(.6)						5.6						53.6
Interest expense						84.1						70.2						70.0
Other non-operating expense (income), net						(9.4)						(4.1)						1.9
Income before taxes						999.3						992.6						737.3
Provision for income taxes						242.2						248.6						177.7
Equity method investment (losses) gains						—						(3.9)						(3.7)
Net income						$	757.1					$	740.1					$	555.9
Per share amounts:
Net income per common share						$	9.28					$	8.93					$	6.67
Net income per common share, assuming dilution						$	9.21					$	8.83					$	6.61
Weighted average number of shares outstanding:
Common shares						81.6						82.9						83.4
Common shares, assuming dilution						82.2						83.8						84.1

See Notes to Consolidated Financial Statements

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Consolidated Statements of Comprehensive Income

(In millions)						2022						2021						2020
Net income						$	757.1					$	740.1					$	555.9
Other comprehensive (loss) income, net of tax:
Foreign currency translation:
Translation (loss) gain						(96.6)						30.7						(3.0)
Pension and other postretirement benefits:
Net gain recognized from actuarial gain/loss and prior service cost/credit						6.3						27.9						6.2
Reclassifications to net income						2.8						4.4						2.9
Cash flow hedges:
Gains (losses) recognized on cash flow hedges						4.9						5.4						(7.5)
Reclassifications to net income						1.5						(1.7)						(.1)
Other comprehensive (loss) income, net of tax						(81.1)						66.7						(1.5)
Total comprehensive income, net of tax						$	676.0					$	806.8					$	554.4

See Notes to Consolidated Financial Statements

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Consolidated Statements of Shareholders’ Equity

(Dollars in millions, except per share amounts)						Common stock, $1 par value						Capital in excess of par value						Retained earnings						Treasury stock						Accumulated other comprehensive loss						Total
Balance as of December 28, 2019						$	124.1					$	874.0					$	2,979.1					$	(2,425.1)					$	(348.1)					$	1,204.0
Net income						—						—						555.9						—						—						555.9
Other comprehensive income (loss), net of tax						—						—						—						—						(1.5)						(1.5)
Repurchase of 792,997 shares for treasury						—						—						—						(104.3)						—						(104.3)
Issuance of 389,102 shares under stock-based compensation plans						—						(11.9)						(3.4)						20.2						—						4.9
Contribution of 188,229 shares to 401(k) plan						—						—						14.5						8.2						—						22.7
Dividends of $2.36 per share						—						—						(196.8)						—						—						(196.8)
Balance as of January 2, 2021						$	124.1					$	862.1					$	3,349.3					$	(2,501.0)					$	(349.6)					$	1,484.9
Net income						—						—						740.1						—						—						740.1
Other comprehensive income (loss), net of tax						—						—						—						—						66.7						66.7
Repurchase of 925,425 shares for treasury						—						—						—						(180.9)						—						(180.9)
Issuance of 257,189 shares under stock-based compensation plans						—						.2						(7.2)						16.6						—						9.6
Contribution of 123,015 shares to 401(k) plan						—						—						19.1						5.5						—						24.6
Dividends of $2.66 per share						—						—						(220.6)						—						—						(220.6)
Balance as of January 1, 2022						$	124.1					$	862.3					$	3,880.7					$	(2,659.8)					$	(282.9)					$	1,924.4
Net income						—						—						757.1						—						—						757.1
Other comprehensive income (loss), net of tax						—						—						—						—						(81.1)						(81.1)
Repurchase of 2,173,416 shares for treasury						—						—						—						(379.5)						—						(379.5)
Issuance of 223,676 shares under stock-based compensation plans						—						17.0						(4.4)						10.6						—						23.2
Contribution of 153,803 shares to 401(k) plan						—						—						20.1						6.9						—						27.0
Dividends of $2.93 per share						—						—						(238.9)						—						—						(238.9)
Balance as of December 31, 2022						$	124.1					$	879.3					$	4,414.6					$	(3,021.8)					$	(364.0)					$	2,032.2

See Notes to Consolidated Financial Statements

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Consolidated Statements of Cash Flows

(In millions)						2022						2021						2020
Operating Activities
Net income						$	757.1					$	740.1					$	555.9
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation						177.4						167.3						154.2
Amortization						113.3						76.8						51.1
Provision for credit losses and sales returns						50.1						35.7						64.0
Stock-based compensation						47.4						37.2						24.0
Pension plan settlements and related charges						—						1.6						.5
Deferred taxes and other non-cash taxes						18.4						2.6						9.3
Other non-cash expense and loss (income and gain), net						23.5						10.1						44.9
Changes in assets and liabilities and other adjustments:
Trade accounts receivable						(22.1)						(113.2)						14.7
Inventories						(140.7)						(182.7)						(6.0)
Accounts payable						68.2						255.2						(68.2)
Taxes on income						18.9						(7.3)						(35.2)
Other assets						15.3						4.1						18.2
Other liabilities						(165.8)						19.3						(76.1)
Net cash provided by operating activities						961.0						1,046.8						751.3
Investing Activities
Purchases of property, plant and equipment						(278.1)						(255.0)						(201.4)
Purchases of software and other deferred charges						(20.4)						(17.1)						(17.2)
Proceeds from sales of property, plant and equipment						2.3						1.1						9.2
Proceeds from insurance and sales (purchases) of investments, net						1.9						3.1						5.6
Proceeds from sale of product line and venture investment						1.1						7.6						—
Payments for acquisitions, net of cash acquired, and venture investments						(39.5)						(1,477.6)						(350.4)
Net cash used in investing activities						(332.7)						(1,737.9)						(554.2)
Financing Activities
Net increase (decrease) in borrowings with maturities of three months or less						34.6						259.2						(110.4)
Additional borrowings under revolving credit facility						—						—						500.0
Repayments of borrowings under revolving credit facility						—						—						(500.0)
Additional long-term borrowings						—						791.7						493.7
Repayments of long-term debt and finance leases						(6.3)						(13.4)						(270.2)
Dividends paid						(238.9)						(220.6)						(196.8)
Share repurchases						(379.5)						(180.9)						(104.3)
Net (tax withholding) proceeds related to stock-based compensation						(25.1)						(25.4)						(19.7)
Other						—						(6.3)						—
Net cash (used in) provided by financing activities						(615.2)						604.3						(207.7)
Effect of foreign currency translation on cash balances						(8.6)						(2.8)						9.2
Increase (decrease) in cash and cash equivalents						4.5						(89.6)						(1.4)
Cash and cash equivalents, beginning of year						162.7						252.3						253.7
Cash and cash equivalents, end of year						$	167.2					$	162.7					$	252.3

See Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

We are a global materials science and digital identification solutions company that provides branding and information labeling solutions, including pressure-sensitive materials, radio-frequency identification ("RFID") inlays and tags, and a variety of converted products and solutions. We design and manufacture a wide range of labeling and functional materials that enhance branded packaging, carry or display information that connects the physical and the digital, and improve customers’ product performance. We serve an array of industries worldwide, including home and personal care, apparel, e-commerce, logistics, food and grocery, pharmaceuticals and automotive.

Principles of Consolidation

Our Consolidated Financial Statements include the accounts of majority-owned and controlled subsidiaries. Intercompany accounts, transactions and profits are eliminated in consolidation.

Segment Information

In the fourth quarter of 2022, we changed our operating structure to align with our overall business strategy, and our Chief Executive Officer, who is also our chief operating decision maker, requested changes in the information that he regularly reviews to allocate resources and assess performance. As a result, our fiscal year 2022 results are reported based on our new reportable segments as described in Note 15, "Segment Information." We have recast prior periods to reflect our new operating structure.

Fiscal Year

Our fiscal years generally consist of 52 weeks, but every fifth or sixth fiscal year consists of 53 weeks; our 2022 and 2021 fiscal years consisted of 52-week periods ending December 31, 2022 and January 1, 2022, respectively. Our 2020 fiscal year consisted of a 53-week period ending January 2, 2021.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and assumptions for the reporting period and as of the date of our financial statements. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenue and expense. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents generally consist of cash on hand, deposits in banks, cash-in-transit, and bank drafts and short-term investments with maturities of three months or less when purchased or received. The carrying value of these assets approximates fair value due to the short maturity of these instruments.

Inventories

We state inventories at the lower of cost or net realizable value and categorized as raw materials, work-in-progress, or finished goods. Cost is determined using the first-in, first-out method. We record inventory that is damaged, obsolete, excess and slow-moving to cost of products sold and we establish a lower cost basis for the inventory. Slow-moving inventory is reviewed by category and may be recognized partially or fully to cost of products sold depending on the type of product, level of usage and length of time the product has been included in inventory.

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Trade Accounts Receivable

We record trade accounts receivable at the invoiced amount. Our allowance for credit losses reflects customer trade accounts receivable that are estimated to be partially or entirely uncollectible. These allowances are used to reduce gross trade receivables to their net realizable values. We record these allowances based on estimates related to the following:

• The financial condition of customers;

• The aging of receivable balances;

• Our historical collection experience; and

• Current and expected future macroeconomic and market conditions.

Property, Plant and Equipment

We generally compute depreciation using the straight-line method over the estimated useful lives of the respective assets, ranging from ten to 45 years for buildings and improvements and three to 15 years for machinery and equipment. Leasehold improvements are depreciated over the shorter of the useful life of the asset or the term of the associated leases. We expense maintenance and repair costs as incurred; we capitalize renewals and improvements. Upon the sale or retirement of assets, the accounts are relieved of the cost and the related accumulated depreciation, with any resulting gain or loss included in net income.

Leases

Our leases primarily relate to office and warehouse space, machinery, transportation, and equipment for information technology. We determine if an arrangement is a lease or contains a lease at inception. For lease accounting purposes, we do not separate lease and nonlease components, nor do we record operating or finance lease assets and liabilities for short-term leases. We have options to renew or terminate some of our leases. We evaluate renewal and termination options based on considerations available at the lease commencement date and over the lease term to determine if we are reasonably certain to exercise these options. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date to determine the present value of lease payments. We recognize expense for operating leases using a straight-line basis over the lease term, with variable lease payments recognized in the periods in which they are incurred.

Software

We capitalize software costs incurred during the application development stage of software development, including costs incurred for design, coding, installation to hardware, testing, and upgrades and enhancements that provide the software or hardware with additional functionalities and capabilities. We expense software costs, including internal and external training costs and maintenance costs, incurred during the preliminary project stage and the post-implementation and/or operation stage. In addition, we capitalize implementation costs incurred under a hosting arrangement that is a service contract. Capitalized software, which is included in “Other assets” in the Consolidated Balance Sheets, is amortized on a straight-line basis over the estimated useful life of the software, which is generally between five and ten years.

Venture Investments

We invest in privately held companies and utilize the measurement alternative for equity investments that do not have readily determinable fair values, measuring them at cost less impairment plus or minus observable price changes in orderly transactions. The carrying value of our venture investments is included in “Other assets” in the Consolidated Balance Sheets.

See Note 9, “Fair Value Measurements,” for more information.

Impairment of Long-lived Assets

We record impairment charges when the carrying amounts of long-lived assets are determined not to be recoverable. We measure recoverability by comparing the undiscounted cash flows expected from the applicable asset or asset group’s use and eventual disposition to its carrying value. We calculate the amount of impairment loss as the excess of the carrying value over the fair value. Historically, changes in market conditions and management strategy have caused us to reassess the carrying amount of our long-lived assets.

Goodwill and Other Intangibles Resulting from Business Acquisitions

We account for business combinations using the acquisition method, with the excess of the acquisition cost over the fair value of net tangible assets and identified intangible assets acquired considered goodwill. As a result, we disclose goodwill separately from other intangible assets. Other identifiable intangibles include customer relationships, patented and other developed technology, and trade names and trademarks.

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We perform an annual impairment test of goodwill during the fourth quarter and, as necessary, if changes in facts and circumstances that indicate the fair value of a reporting unit may be less than its carrying value. Certain factors may cause us to perform an impairment test outside of our annual assessment, including significant underperformance of a business relative to expected operating results, significant adverse economic and industry trends, significant decline in our market capitalization for an extended period of time relative to net book value, or our decision to divest a portion of a reporting unit. In performing impairment tests, we have the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative assessment for goodwill impairment. If the qualitative assessment indicates that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative assessment. A quantitative assessment primarily uses the present value (discounted cash flow) method to determine the fair value of reporting units with goodwill.

We compare the fair value of each reporting unit to its carrying amount, and, to the extent the carrying amount exceeds the unit’s fair value, we recognize an impairment of goodwill for the excess up to the amount of goodwill of that reporting unit.

In consultation with outside specialists, we estimate the fair value of our reporting units using various valuation techniques, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various assumptions about our reporting units, including their respective forecasted sales, operating margins and growth rates, as well as discount rates. Our assumptions about discount rates are based on the weighted average cost of capital for comparable companies. Our assumptions about sales, operating margins and growth rates are based on our forecasts, business plans, economic projections, anticipated future cash flows, and marketplace data. We also make assumptions for varying perpetual growth rates for periods beyond our long-term business plan period. We base our fair value estimates on projected financial information and assumptions that we believe are reasonable. However, actual future results may differ materially from these estimates and projections. The valuation methodology we use to estimate the fair value of reporting units requires inputs and assumptions that reflect current market conditions, as well as the impact of planned business and operational strategies that require management judgment. The estimated fair value could increase or decrease depending on changes in the inputs and assumptions.

We test indefinite-lived intangible assets, consisting of trade names and trademarks, for impairment in the fourth quarter or whenever events or circumstances indicate that it is more-likely-than-not that their carrying amounts exceed their fair values. In performing the impairment tests, we have the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative assessment for indefinite-lived intangible asset impairment. If we decide not to perform a qualitative assessment, or if the qualitative assessment indicates that it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying value, we perform a quantitative assessment. Fair value is estimated as the discounted value of future revenues using a royalty rate that a third party would pay to use the asset. Variation in the royalty rates could impact our estimate of fair value. If the carrying amount of an asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

We amortize finite-lived intangible assets, consisting of customer relationships, patented and other developed technology, trade names and trademarks, and other intangibles, on a straight-line basis over their estimated useful lives.

See Note 3, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” for more information.

Foreign Currency

We translate asset and liability accounts of international operations into U.S. dollars at current rates. Revenues and expenses are translated at the weighted average currency rate for the fiscal year. We record gains and losses resulting from hedging the value of investments in certain international operations and from the translation of balance sheet accounts directly as a component of other comprehensive income.

We account for our operations in Argentina as highly inflationary, because the country’s three-year cumulative inflation rate exceeds 100%. As a result, the functional currency of our Argentine subsidiary is the U.S. dollar.

Financial Instruments

We enter into foreign exchange derivative contracts to reduce our risk from exchange rate fluctuations associated with receivables, payables, loans and firm commitments denominated in certain foreign currencies that arise primarily as a result of our operations outside the U.S. From time to time, we enter into interest rate contracts to help manage our exposure to certain interest rate fluctuations. We also enter into futures contracts to hedge certain price fluctuations for a portion of our anticipated domestic purchases of natural gas. The maximum length of time for which we hedge our exposure to the variability in future cash flows is 36 months for forecasted foreign exchange and commodity transactions and 10 years for cross-currency swap transactions.

On the date we enter into a derivative contract, we determine whether the derivative will be designated as a hedge. Derivatives designated as hedges are classified as either (1) hedges of the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value” hedges) or (2) hedges of a forecasted transaction or the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (“cash flow” hedges). Other derivatives not

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designated as hedges are recorded on the balance sheets at fair value, with changes in fair value recognized in earnings. Our policy is not to purchase or hold any foreign currency, interest rate or commodity contracts for trading purposes.

We assess, both at the inception of any hedge and on an ongoing basis, whether our hedges are highly effective. If we determine that a hedge is not highly effective, we prospectively discontinue hedge accounting. For cash flow hedges, we record gains and losses as components of other comprehensive income and reclassify them into earnings in the same period during which the hedged transaction affects earnings. In the event that the anticipated transaction is no longer likely to occur, we recognize the change in fair value of the instrument in current period earnings. We recognize changes in fair value hedges in current period earnings. We also recognize changes in the fair value of underlying hedged items (such as recognized assets or liabilities) in current period earnings and offset the changes in the fair value of the derivative.

In the Consolidated Statements of Cash Flows, hedges are classified in the same category as the item hedged, primarily in operating activities.

See Note 5, “Financial Instruments,” for more information.

Fair Value Measurements

We define fair value as the price that would be received from selling an asset or paid for transferring a liability in an orderly transaction between market participants at the measurement date. In determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability.

We determine fair value based on a three-tier fair value hierarchy, which we use to prioritize the inputs used in measuring fair value. These tiers consist of Level 1, which are observable inputs such as quoted prices in active markets; Level 2, which are inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, which are unobservable inputs in which little or no market data exists, and require us to develop our own assumptions to determine the best estimate of fair value.

Revenue Recognition

We recognize sales when or as we satisfy a performance obligation by transferring control of a product or service to a customer, in an amount that reflects the consideration which we would expect for the product or service. We consider a number of factors in determining when we have transferred control to a customer, including the following: (i) our present right to payment; (ii) the customer’s legal title to the asset; (iii) physical possession of the asset; (iv) the customer’s significant risks and rewards of ownership of the asset; and (v) the customer’s acceptance of the asset.

Our payment terms with our customers are generally consistent with those used in the industries and the regions in which we operate.

We accept sales returns in certain limited circumstances. We record an estimate for return liabilities and a corresponding reduction to sales in the amount we expect to repay or credit customers, which we base on historical returns and outstanding customer claims. We update our estimates each reporting period.

Sales rebates, discounts and other customer concessions represent variable consideration and are common in the industries and regions in which we operate, which we account for as a reduction to sales based on estimates at the time at which products are sold. We base these estimates on our historical experience, as well as current information such as sales forecasts. We review our estimates regularly and, as additional information becomes available, we adjust our sales and the respective accruals as necessary.

We exclude sales tax, value-added tax and other taxes we collect from customers from sales. We account for shipping and handling activities after control of a product is transferred to a customer as fulfillment costs and not as separate performance obligations. As a practical expedient, we have elected not to disclose the value of unsatisfied performance obligations for contracts with an original expected length of less than one year. We generally expense sales commissions when incurred because the amortization period would have been one year or less. We record these costs in “Marketing, general and administrative expense” in the Consolidated Statements of Income.

Research and Development

Research and development costs are related to research, design and testing of new products and applications, which we expense as incurred.

Long-Term Incentive Compensation

No long-term incentive compensation expense was capitalized in 2022, 2021 or 2020.

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Valuation of Stock-Based Awards

We base our stock-based compensation expense on the fair value of awards, adjusted for estimated forfeitures, amortized on a straight-line basis over the requisite service period for stock options and restricted stock units (“RSUs”). We base compensation expense for performance units (“PUs”) on the fair value of awards, adjusted for estimated forfeitures, and amortized on a straight-line basis as these awards cliff-vest at the end of the requisite service period. We base compensation expense related to market-leveraged stock units (“MSUs”) on the fair value of awards, adjusted for estimated forfeitures, and amortized on a graded-vesting basis over their respective performance periods.

Compensation expense for awards with a market condition as a performance objective, which includes PUs and MSUs, is not adjusted if the condition is not met, as long as the requisite service period is met.

We estimate the fair value of stock options as of the date of grant using the Black-Scholes option-pricing model. This model requires input assumptions for our expected dividend yield, expected stock price volatility, risk-free interest rate and expected option term.

We determine the fair value of RSUs and the component of PUs that is subject to the achievement of a performance objective using a financial performance condition based on the fair market value of our common stock as of the date of grant, adjusted for foregone dividends. Over the performance period of the PUs, the estimated number of shares of our common stock issuable upon vesting is adjusted upward or downward from the target shares at the time of grant based on the probability of the financial performance objectives established for the award being achieved.

We determine the fair value of stock-based awards that are subject to achievement of performance objectives based on a market condition, which includes MSUs and the other component of PUs, using the Monte-Carlo simulation method, which utilizes multiple input variables, including expected stock price volatility and other assumptions appropriate for determining fair value, to estimate the probability of satisfying the target performance objectives established for the award.

Certain of these assumptions are based on management’s estimates, in consultation with outside specialists. Significant changes in assumptions for future awards and actual forfeiture rates could materially impact stock-based compensation expense and our results of operations.

Valuation of Cash-Based Awards

Cash-based awards consist of long-term incentive units (“LTI Units”) granted to eligible employees. We classify LTI Units as liability awards and remeasure them at each quarter-end over the applicable vesting or performance period. In addition to LTI Units with terms and conditions that mirror those of RSUs, we also grant certain employees LTI Units with terms and conditions that mirror those of PUs and MSUs.

Forfeitures

We estimate expected forfeitures in determining the compensation cost to be recognized each period, rather than accounting for forfeitures as they occur. We record changes in estimated forfeiture rates as cumulative adjustments in the period estimates are revised.

See Note 12, “Long-term Incentive Compensation,” for more information.

Taxes Based on Income

Because we are subject to income tax in the U.S. and multiple foreign jurisdictions, judgment is required in evaluating and estimating our worldwide provision, accruals for taxes, deferred taxes and tax positions. Our provision for income taxes is determined using the asset and liability approach in accordance with GAAP. Under this approach, deferred taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. We record a valuation allowance to reduce our deferred tax assets when uncertainty regarding their realizability exists. We recognize and measure our uncertain tax positions following the more-likely-than-not threshold for recognition and measurement for tax positions we take or expect to take on a tax return.

See Note 14, “Taxes Based on Income,” for more information.

Recent Accounting Requirements

In September 2022, the Financial Accounting Standards Board (“FASB”) issued guidance to improve the transparency of supplier finance programs by requiring disclosures of key program terms, information about obligations under these programs and a rollforward of these obligations. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the disclosure on rollforward information, which is effective for fiscal years beginning after December 15, 2023. We plan to adopt this guidance at the beginning of our 2023 fiscal year on January 1, 2023.

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NOTE 2. ACQUISITIONS

Subsequent to our fiscal year-end 2022, in January 2023, we entered into an agreement to acquire Thermopatch, Inc., a New York-based manufacturer specializing in labeling, embellishments, and transfers for the sports, industrial laundry, workwear and hospitality industries. We believe this acquisition will expand the product portfolio in our Solutions Group reportable segment. We expect to complete this acquisition in the first quarter of 2023.

2022 Acquisitions

In January 2022, we completed our acquisitions of TexTrace AG ("TexTrace"), a Switzerland-based technology developer specializing in custom-made woven and knitted RFID products that can be sewn onto or inserted into garments, and Rietveld Serigrafie B.V. and Rietveld Screenprinting Serigrafi Baski Matbaa Tekstil Ithalat Ihracat Sanayi ve Ticaret Limited Sirketi (collectively, "Rietveld"), a Netherlands-based provider of external embellishment solutions and application and printing methods for performance brands and team sports in Europe. These acquisitions expanded the product portfolio in our Solutions Group reportable segment. The acquisitions of TexTrace and Rietveld are referred to collectively as the "2022 Acquisitions."

The aggregate purchase consideration for the 2022 Acquisitions was approximately $35 million. We funded the 2022 Acquisitions using cash and commercial paper borrowings. In addition to the cash paid at closing, the sellers in one of these acquisitions are eligible for earn-out payments of up to $30 million, subject to the acquired company achieving certain post-acquisition performance targets. As of the acquisition date, we included an estimate of the fair value of these earn-out payments in the aggregate purchase consideration.

The 2022 Acquisitions were not material, individually or in the aggregate, to the Consolidated Financial Statements.

Vestcom Acquisition

On August 31, 2021, we completed our acquisition of CB Velocity Holdings, LLC (“Vestcom”), an Arkansas-based provider of shelf-edge pricing, productivity and consumer engagement solutions for retailers and consumer packaged goods companies, for purchase consideration of $1.47 billion. We funded this acquisition using cash and proceeds from both commercial paper borrowings and issuances of senior notes. Refer to Note 4, “Debt,” to the Consolidated Financial Statements for more information.

Vestcom’s solutions expanded our position in high value categories and added channel access and data management capabilities to our Solutions Group reportable segment.

The table below summarizes the fair value of assets acquired and liabilities assumed in the Vestcom acquisition based on our final allocation of the purchase consideration.

(In millions)
Cash and cash equivalents						$	24.3
Trade accounts receivable						98.4
Other current assets						28.5
Property, plant and equipment						56.2
Goodwill						756.1
Other intangibles resulting from business acquisition						727.0
Other assets						22.8
Total assets						1,713.3
Current liabilities						47.5
Other liabilities						17.2
Deferred and non-current income tax liabilities						183.5
Total liabilities						248.2
Net assets acquired						$	1,465.1

The impact of the Vestcom acquisition was not material to the pro forma net sales or net income of our combined operations for the periods presented. Net sales and net income related to Vestcom post-acquisition were not material to the Consolidated Statements of Income for 2021.

Other 2021 Acquisitions

On March 18, 2021, we completed our acquisition of the net assets of ZippyYum, LLC (“ZippyYum”), a California-based developer of software products used in the food service and food preparation industries. This acquisition enhanced the product portfolio in our Solutions Group reportable segment.

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On March 1, 2021, we completed our acquisition of the issued and outstanding stock of JDC Solutions, Inc. (“JDC”), a Tennessee-based manufacturer of pressure-sensitive specialty tapes. This acquisition expanded the product portfolio in our Materials Group reportable segment.

The acquisitions of ZippyYum and JDC are referred to collectively as the “Other 2021 Acquisitions.”

The aggregate purchase consideration for the Other 2021 Acquisitions was approximately $43 million. We funded the Other 2021 Acquisitions using cash and commercial paper borrowings. In addition to the cash paid at closing, the sellers in one of these acquisitions are eligible for earn-out payments of up to approximately $13 million subject to the acquired company’s achievement of certain post-acquisition performance targets. As of the acquisition date, we estimated the fair value of these earn-out payments to be approximately $12 million, which was included in the $43 million of aggregate purchase consideration.

The Other 2021 Acquisitions were not material, individually or in the aggregate, to the Consolidated Financial Statements.

NOTE 3. GOODWILL AND OTHER INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS

Goodwill

Results from our annual goodwill impairment test in the fourth quarter of 2022 indicated that no impairment occurred during 2022. The assumptions used in our assessment of these assets were primarily based on Level 3 inputs.

During the fourth quarter of 2022, we changed our operating structure to align with our overall business strategy. As a result, our fiscal year 2022 results are reported based on our new reportable segments described in Note 15, "Segment Information. We have recast prior periods to reflect our new operating structure. There was no goodwill impairment recognized as a result of the change in reportable segments.

Changes in the net carrying amount of goodwill for 2022 and 2021 by reportable segment are shown below:

(In millions)						Materials Group						Solutions Group																		Total
Goodwill as of January 2, 2021						$	664.6					$	471.8																	$	1,136.4
Acquisitions(1)						6.9						774.5																		781.4
Acquisition adjustment(2)						1.2						—																		1.2
Translation adjustments						(27.2)						(10.3)																		(37.5)
Goodwill as of January 1, 2022						645.5						1,236.0																		1,881.5
Acquisitions(3)						—						16.3																		16.3
Acquisition adjustment(4)						—						(.5)																		(.5)
Translation adjustments						(26.8)						(8.1)																		(34.9)
Goodwill as of December 31, 2022						$	618.7					$	1,243.7																	$	1,862.4

(1)Goodwill acquired related to the acquisitions of Vestcom, JDC and ZippyYum. We expect nearly all of the recognized goodwill related to the Vestcom and JDC acquisitions not to be deductible for income tax purposes and the recognized goodwill related to the ZippyYum acquisition to be deductible for income tax purposes.

(2)Measurement period adjustment related to the finalization of the purchase price allocation for the December 2020 acquisition of ACPO, Ltd.

(3)Goodwill acquired related to the 2022 Acquisitions. We expect the recognized goodwill related to the 2022 Acquisitions to be non-deductible for income tax purposes.

(4)Measurement period adjustment related to the finalization of the purchase price allocation for the August 2021 acquisition of Vestcom.

The carrying amounts of goodwill at December 31, 2022 and January 1, 2022 were net of accumulated impairment losses of $820 million recognized in fiscal year 2009 by our Solutions Group reportable segment.

Indefinite-Lived Intangible Assets

In connection with our acquisition of Vestcom, we acquired approximately $135 million of identifiable indefinite lived intangible assets consisting of trade names and trademarks. We utilized the income approach to estimate the fair values of acquired identifiable intangibles, primarily using Level 3 inputs. We applied significant judgment in determining the fair value of intangible assets, which included our estimates and assumptions with respect to estimated future revenue and related profit margins, royalty rates, discount rates and economic lives assigned to the acquired intangible assets.

Results from our annual indefinite-lived intangible assets impairment test in the fourth quarter indicated that no impairment occurred in 2022. The carrying value of indefinite-lived intangible assets resulting from business acquisitions, consisting of trade names and trademarks, was $154.7 million and $155.6 million at December 31, 2022 and January 1, 2022, respectively.

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Finite-Lived Intangible Assets

In connection with the 2022 Acquisitions, we acquired approximately $21 million of identifiable finite-lived intangible assets, which consisted of patented and other developed technology as well as customer relationships.

In connection with our acquisition of Vestcom, we acquired approximately $592 million of identifiable finite-lived intangible assets, which consisted of customer relationships and patented and other developed technology. We utilized the income approach to estimate the fair values of acquired identifiable intangibles, primarily using Level 3 inputs. We applied significant judgment in determining the fair value of intangible assets, which included our estimates and assumptions with respect to estimated future revenue and related profit margins, customer retention rates, technology migration curves, royalty rates, discount rates and economic lives assigned to the acquired intangible assets.

The table below summarizes the amounts and weighted average useful lives of these intangible assets as of the acquisition date.

						Amount (in millions)						Weighted average amortization period (in years)
Customer relationships						$	492.0					12
Patented and other developed technology						100.4						7

The intangible assets from the Other 2021 Acquisitions were not material to the Consolidated Financial Statements.

Refer to Note 2, “Acquisitions,” for more information.

The table below sets forth our finite-lived intangible assets resulting from business acquisitions at December 31, 2022 and January 1, 2022, which continue to be amortized.

						2022																		2021
(In millions)						Gross Carrying Amount						Accumulated Amortization						Net Carrying Amount						Gross Carrying Amount						Accumulated Amortization						Net Carrying Amount
Customer relationships						$	852.2					$	330.1					$	522.1					$	862.5					$	277.2					$	585.3
Patented and other developed technology						261.9						104.3						157.6						247.7						84.7						163.0
Trade names and trademarks						14.4						10.3						4.1						14.8						9.7						5.1
Other intangibles						3.2						1.4						1.8						3.2						.8						2.4
Total						$	1,131.7					$	446.1					$	685.6					$	1,128.2					$	372.4					$	755.8

Amortization expense for finite-lived intangible assets resulting from business acquisitions was $81.8 million for 2022, $44.6 million for 2021 and $19.9 million for 2020.

We expect estimated amortization expense for finite-lived intangible assets resulting from business acquisitions for each of the next five fiscal years and thereafter to be as follows:

(In millions)						Estimated Amortization Expense
2023						$	80.9
2024						79.2
2025						78.4
2026						75.5
2027						75.2
2028 and thereafter						296.4

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NOTE 4. DEBT

Short-Term Borrowings

We had $128 million and $189 million of outstanding borrowings from U.S. commercial paper issuances as of December 31, 2022 and January 1, 2022, respectively, with a weighted average interest rate of 4.84% and 0.32%, respectively.

We have a Euro-Commercial Paper Program under which we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding of $500 million. Proceeds from issuances under this program may be used for general corporate purposes. The maturities of the notes vary, but may not exceed 364 days from the date of issuance. Our payment obligations with respect to any notes issued under this program are backed by our revolving credit facility (the “Revolver”). There are no financial covenants under this program. We had balances of $213 million and $113.1 million outstanding under this program as of December 31, 2022 and January 1, 2022, respectively, with a weighted average interest rate of 2.06% and (0.47)%, respectively.

Short-Term Credit Facilities

Subsequent to fiscal year 2022, in January 2023, we extended the maturity date of the Revolver by one year to February 13, 2026, and increased the commitments by $400 million, from $800 million to $1.2 billion. Additionally, we amended the Revolver to replace the LIBOR benchmark interest rate with Term SOFR, Euribor and SONIA benchmark interest rates. We use the Revolver as a back-up facility for our commercial paper program and for other corporate purposes. In February 2020, we had amended and restated the Revolver, eliminating one of the financial covenants and extending its maturity date to February 13, 2025. The Revolver allowed for a one-year extension of the maturity date under certain circumstances and the option to increase the commitments by up to $400 million, subject to lender approvals and customary requirements.

No balance was outstanding under the Revolver as of December 31, 2022 or January 1, 2022. Commitment fees associated with the Revolver in 2022, 2021 and 2020 were $0.9 million, $0.9 million and $0.8 million, respectively.

In addition to the Revolver, we have short-term lines of credit available in various countries of approximately $341 million in the aggregate at December 31, 2022. These lines may be cancelled at any time by us or the issuing banks. Short-term borrowings outstanding under these lines of credit were $2.4 million and $11.2 million at December 31, 2022 and January 1, 2022, respectively, with weighted average interest rates of 0.64% and 4.97%, respectively.

From time to time, we provide guarantees on certain arrangements with banks. Our exposure to these guarantees is not material.

Long-Term Borrowings

In August 2021, we issued $500 million of senior notes, due February 15, 2032, which bear an interest rate of 2.250%, payable semiannually in arrears. Our net proceeds from this issuance, after deducting underwriting discounts and offering expenses, were $493.7 million. Additionally, in August 2021, we issued $300 million of senior notes, due August 15, 2024, which we can repay without penalty on or after August 15, 2022 and bear an interest rate of 0.850%, payable semiannually in arrears. Our net proceeds from this issuance, after deducting underwriting discounts and offering expenses, were $298 million. We used the net proceeds from these two debt issuances to finance a portion of the Vestcom acquisition.

In March 2020, we issued $500 million of senior notes, due April 2030. These senior notes bear an interest rate of 2.65% per year, payable semiannually in arrears. Our net proceeds from the issuance, after deducting underwriting discounts and offering expenses, were $493.7 million, which we used to repay both existing indebtedness under our commercial paper program used to fund our Smartrac acquisition and our $250 million of senior notes that matured in April 2020.

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Our long-term debt, and related interest rates, at year-end 2022 and 2021 is shown below.

(In millions)						2022						2021
Long-term debt
Medium-term notes:
Series 1995 due 2025						$	30.0					$	30.0
Long-term notes:
Senior notes due 2023 at 3.4%						249.7						249.5
Senior notes due 2024 at 0.85%						299.0						298.3
Senior notes due 2025 at 1.25%(1)						531.3						563.3
Senior notes due 2028 at 4.875%						496.0						495.3
Senior notes due 2030 at 2.650%						495.5						494.8
Senior notes due 2032 at 2.25%						494.5						493.9
Senior notes due 2033 at 6.0%						149.1						149.1
Less amount classified as current						(249.7)						—
Total long-term debt(2)						$	2,495.4					$	2,774.2

(1)			These senior notes are euro-denominated. The face value is €500 million.
(2)			Included unamortized debt issuance costs and debt discounts of $10.5 million and $7.1 million, respectively, as of year-end 2022 and $12.9 million and $8.2 million, respectively, as of year-end 2021.

At year-end 2022 and 2021, our medium-term notes had accrued interest at a weighted average fixed rate of 7.5%. In the second quarter of 2020, we repaid $15 million of medium-term notes that matured in June 2020.

We expect maturities of our long-term debt for each of the next five fiscal years and thereafter to be as follows:

Year						(In millions)
2023						$	250.0
2024						300.0
2025						562.6
2026						—
2027						—
2028 and thereafter						1,650.0

Refer to Note 7, “Commitments and Leases,” for information related to finance leases.

Other

The Revolver contains a financial covenant that requires us to maintain a specified ratio of total debt in relation to a certain measure of income. As of December 31, 2022 and January 1, 2022, we were in compliance with our financial covenants.

Our total interest costs in 2022, 2021 and 2020 were $89.8 million, $75.0 million and $73.9 million, respectively, of which $5.7 million, $4.8 million and $3.9 million, respectively, was capitalized as part of the cost of property, plant and equipment and capitalized software.

The estimated fair value of our long-term debt is primarily based on the credit spread above U.S. Treasury securities or euro government bond securities, as applicable, on notes with similar rates, credit ratings and remaining maturities. The fair value of short-term borrowings, which includes commercial paper issuances and short-term lines of credit, approximates their carrying value given their short duration. The fair value of our total debt was $2.85 billion at December 31, 2022 and $3.25 billion at January 1, 2022. Fair value amounts were determined based primarily on Level 2 inputs, which are inputs other than quoted prices in active markets that are either directly or indirectly observable. Refer to Note 1, “Summary of Significant Accounting Policies,” for more information.

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NOTE 5. FINANCIAL INSTRUMENTS

As of December 31, 2022, the aggregate U.S. dollar equivalent notional value of our outstanding commodity contracts and foreign exchange contracts was $6.1 million and $1.36 billion, respectively. Our outstanding foreign exchange contracts as of December 31, 2022 were recorded under various currencies, primarily the U.S. dollar, euro, Chinese renminbi, British pound sterling and Hong Kong dollar.

We recognize derivative instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets. We designate commodity forward contracts on forecasted purchases of commodities and foreign exchange contracts on forecasted transactions as cash flow hedges. We also enter into foreign exchange contracts to offset certain of our economic exposures arising from foreign exchange rate fluctuations.

Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of “Accumulated other comprehensive loss” and reclassified into earnings in the same period(s) during which the hedged transaction impacts earnings. Gains and losses on these derivatives, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings. Except for the cross-currency swap discussed below, cash flow hedges were not material in 2022, 2021 or 2020.

Cross-Currency Swap

In March 2020, we entered into U.S. dollar to euro cross-currency swap contracts with a total notional amount of $250 million to effectively convert the fixed-rate U.S. dollar-denominated debt into euro-denominated debt, including semiannual interest payments and the payment of principal at maturity. During the term of the contract, which ends on April 30, 2030, we pay fixed-rate interest in euros and receive fixed-rate interest in U.S. dollars. These contracts have been designated as cash flow hedges. The fair value of these contracts was $15.5 million as of December 31, 2022, which was included in "Other Assets" and $(10.3) million as of January 1, 2022, which was included in “Long-term retirement benefits and other liabilities” in the Consolidated Balance Sheets. Refer to Note 9, “Fair Value Measurements,” to the Consolidated Financial Statements for more information.

We recorded no ineffectiveness from our cross-currency swap to earnings during 2022, 2021 or 2020.

Other Derivatives

The following table shows the fair value and balance sheet locations of other derivatives as of December 31, 2022 and January 1, 2022:

						Asset																		Liability
(In millions)						Balance Sheet Location						2022						2021						Balance Sheet Location						2022						2021
Foreign exchange contracts						Other current assets						$	4.3					$	6.3					Other current liabilities						$	9.6					$	2.9
Commodity contracts						Other current assets						—						—						Other current liabilities						.2						—
												$	4.3					$	6.3											$	9.8					$	2.9

For other derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings.

The following table shows the components of the net gains (losses) recognized in income related to these derivative instruments:

(In millions)						Statements of Income Location						2022						2021						2020
Foreign exchange contracts						Cost of products sold						$	5.6					$	1.4					$	1.9
Foreign exchange contracts						Marketing, general and administrative expense						(4.3)						21.0						(14.2)
												$	1.3					$	22.4					$	(12.3)

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NOTE 6. PENSION AND OTHER POSTRETIREMENT BENEFITS

Defined Benefit Plans

We sponsor a number of defined benefit plans, the accrual of benefits under some of which has been frozen, covering eligible employees in the U.S. and certain other countries. Benefits payable to an employee are based primarily on years of service and the employee’s compensation during the course of his or her employment with us.

We are also obligated to pay unfunded termination indemnity benefits to certain employees outside the U.S., which are subject to applicable agreements, laws and regulations. We have not incurred significant costs related to these benefits, and, therefore, no related costs have been included in the disclosures below.

Plan Assets

Assets in our international plans are invested in accordance with locally accepted practices and primarily include equity securities, fixed income securities, insurance contracts and cash. Asset allocations and investments vary by country and plan. Our target plan asset investment allocation for our international plans in the aggregate is approximately 26% in equity securities, 59% in fixed income securities and cash, and 15% in insurance contracts and other investments, subject to periodic fluctuations among these asset classes.

Fair Value Measurements

The valuation methodologies we use for assets measured at fair value are described below.

Cash is valued at nominal value. Cash equivalents and mutual funds are valued at fair value as determined by quoted market prices, based upon the net asset value (“NAV”) of shares held at year-end. Fixed income treasury securities are valued at fair value as determined by quoted prices in active markets. Fixed income municipal and corporate bonds are valued at fair value based on quoted prices for similar instruments in active markets or other inputs that are observable or can be corroborated by observable market data. Pooled funds are structured as collective trusts, not publicly traded and valued by calculating NAV per unit based on the NAV of the underlying funds/trusts as a practical expedient for the fair value of the pooled funds. Insurance contracts are valued at book value, which approximates fair value and is calculated using the prior-year balance plus or minus investment returns and changes in cash flows.

These methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While we believe these valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

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The following table sets forth, by level within the fair value hierarchy (as applicable), international plan assets at fair value:

												Fair Value Measurements Using
(In millions)						Total						Quoted Prices in Active Markets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Other Unobservable Inputs (Level 3)
2022
Cash						$	6.4					$	6.4					$	—					$	—
Insurance contracts						37.1						—						—						37.1
Pooled funds – real estate investment trusts						8.3						—						—						8.3
Pooled funds – fixed income securities(1)						335.7
Pooled funds – equity securities(1)						151.9
Pooled funds – other investments(1)						45.9
Total international plan assets at fair value						$	585.3
2021
Cash						$	10.1					$	10.1					$	—					$	—
Insurance contracts						37.9						—						—						37.9
Pooled funds – real estate investment trusts						11.0						—						—						11.0
Pooled funds – fixed income securities(1)						464.4
Pooled funds – equity securities(1)						302.8
Pooled funds – other investments(1)						48.4
Total international plan assets at fair value						$	874.6

(1)Pooled funds that are measured at fair value using the NAV per unit (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to reconcile to total international plan assets.

The following table presents a reconciliation of Level 3 international plan asset activity during the year ended December 31, 2022:

						Level 3 Assets
(In millions)						Insurance Contracts						Pooled Funds – Real Estate Investment Trusts						Total
Balance at January 1, 2022						$	37.9					$	11.0					$	48.9
Net realized and unrealized gain (loss)						.7						(1.6)						(.9)
Purchases						3.2						—						3.2
Settlements						(3.2)						—						(3.2)
Impact of changes in foreign currency exchange rates						(1.5)						(1.1)						(2.6)
Balance at December 31, 2022						$	37.1					$	8.3					$	45.4

Plan Assumptions

Discount Rate

In consultation with our actuaries, we annually review and determine the discount rates used to value our pension and other postretirement obligations. The assumed discount rate for each pension plan reflects market rates for high quality corporate bonds currently available. Our discount rate is determined by evaluating yield curves consisting of large populations of high quality corporate bonds. The projected pension benefit payment streams are then matched with bond portfolios to determine a rate that reflects the liability duration unique to our plans.

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We use the full yield curve approach to estimate the service and interest cost components of net periodic benefit cost for our pension and other postretirement benefit plans. Under this approach, we apply multiple discount rates from a yield curve composed of the rates of return on several hundred high-quality, fixed income corporate bonds available at the measurement date. We believe that this approach provides a more precise measurement of service and interest cost by aligning the timing of a plan’s liability cash flows to its corresponding rates on the yield curve.

Long-term Return on Assets

We determine the long-term rate of return assumption for plan assets by reviewing the historical and expected returns of both the equity and fixed income markets, taking into account our asset allocation, the correlation between returns in our asset classes, and our mix of active and passive investments. Additionally, we evaluate current market conditions, including interest rates, and review market data for reasonableness and appropriateness.

Measurement Date

We measure the actuarial value of our benefit obligations and plan assets using the calendar month-end closest to our fiscal year-end and adjust for any contributions or other significant events between the measurement date and our fiscal year-end.

Plan Balance Sheet Reconciliations

The following table provides a reconciliation of benefit obligations, plan assets, funded status of the plans and accumulated other comprehensive loss for our defined benefit plans:

Plan Benefit Obligations

						Pension Benefits
						2022												2021
(In millions)						U.S.						Int’l						U.S.						Int’l
Change in projected benefit obligations
Projected benefit obligations at beginning of year						$	66.8					$	882.4					$	77.3					$	953.9
Service cost						—						16.5						—						19.0
Interest cost						1.2						10.8						1.0						8.9
Participant contribution						—						4.6						—						4.7
Amendments						—						—						—						(.9)
Actuarial (gain) loss						(9.1)						(244.9)						(1.7)						(15.6)
Benefits paid						(7.1)						(21.3)						(9.8)						(23.3)
Settlements						—						(1.0)						—						(3.7)
Foreign currency translation						—						(60.2)						—						(60.6)
Projected benefit obligations at end of year						$	51.8					$	586.9					$	66.8					$	882.4
Accumulated benefit obligations at end of year						$	51.8					$	540.2					$	66.8					$	806.4

Plan Assets

						Pension Benefits
						2022												2021
(In millions)						U.S.						Int’l						U.S.						Int’l
Change in plan assets
Plan assets at beginning of year						$	—					$	874.6					$	—					$	897.2
Actual return on plan assets						—						(226.5)						—						37.3
Employer contributions						7.1						15.2						9.8						20.7
Participant contributions						—						4.6						—						4.7
Benefits paid						(7.1)						(21.3)						(9.8)						(23.3)
Settlements						—						(1.0)						—						(3.7)
Foreign currency translation						—						(60.3)						—						(58.3)
Plan assets at end of year						$	—					$	585.3					$	—					$	874.6

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Funded Status

						Pension Benefits
						2022												2021
(In millions)						U.S.						Int’l						U.S.						Int’l
Funded status of the plans
Other assets						$	—					$	70.0					$	—					$	113.6
Other accrued liabilities						(6.2)						(.4)						(7.0)						(1.0)
Long-term retirement benefits and other liabilities(1)						(45.6)						(71.2)						(59.8)						(120.4)
Plan assets less than benefit obligations						$	(51.8)					$	(1.6)					$	(66.8)					$	(7.8)

(1)In accordance with our funding strategy, we have the option to fund certain of our U.S. liabilities with proceeds from our company-owned life insurance policies.

						Pension Benefits
						2022												2021
						U.S.						Int’l						U.S.						Int’l
Weighted average assumptions used to determine year-end benefit obligations
Discount rate						5.06		%				4.36		%				2.49		%				1.57		%
Compensation rate increase						—						2.75						—						2.33

For U.S. and international plans combined, the projected benefit obligations and fair values of plan assets for pension plans with projected benefit obligations in excess of plan assets were $165 million and $42 million, respectively, at year-end 2022 and $261 million and $73 million, respectively, at year-end 2021.

For U.S. and international plans combined, the accumulated benefit obligations and fair values of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $132 million and $23 million, respectively, at year-end 2022 and $228 million and $67 million, respectively, at year-end 2021.

Accumulated Other Comprehensive Loss

The following table shows the pre-tax amounts recognized in “Accumulated other comprehensive loss” in the Consolidated Balance Sheets:

						Pension Benefits
						2022												2021
(In millions)						U.S.						Int’l						U.S.						Int’l
Net actuarial loss						$	9.1					$	38.2					$	15.6					$	41.5
Prior service (credit) cost						—						(3.5)						—						(4.0)
Net amount recognized in accumulated other comprehensive loss						$	9.1					$	34.7					$	15.6					$	37.5

The following table shows the pre-tax amounts recognized in “Other comprehensive loss (income)”:

						Pension Benefits
						2022												2021												2020
(In millions)						U.S.						Int’l						U.S.						Int’l						U.S.						Int’l
Net actuarial (gain) loss						$	(5.6)					$	(.8)					$	(.7)					$	(34.8)					$	3.5					$	(13.5)
Prior service credit						—						—						—						(.9)						—						.4
Amortization of unrecognized:
Net actuarial gain						(.8)						(2.5)						(.8)						(6.1)						(.6)						(5.2)
Prior service credit (cost)						—						.4						—						.4						—						.4
Settlements						(.1)						.1						(1.1)						(.5)						(.2)						(.3)
Net amount recognized in other comprehensive loss (income)						$	(6.5)					$	(2.8)					$	(2.6)					$	(41.9)					$	2.7					$	(18.2)

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Plan Income Statement Reconciliations

The following table shows the components of net periodic benefit cost, which are recorded in net income for our defined benefit plans:

						Pension Benefits
						2022												2021												2020
(In millions)						U.S.						Int’l						U.S.						Int’l						U.S.						Int’l
Service cost						$	—					$	16.5					$	—					$	19.0					$	—					$	17.8
Interest cost						1.2						10.8						1.0						8.9						1.8						11.0
Actuarial (gain) loss						(3.5)						—						(1.1)						—						3.7						—
Expected return on plan assets						—						(21.9)						—						(19.8)						—						(18.5)
Amortization of actuarial loss						.8						2.5						.8						6.1						.6						5.2
Amortization of prior service (credit) cost						—						(.4)						—						(.4)						—						(.4)
Recognized loss (gain) on settlements(1)						.1						(.1)						1.1						.5						.2						.3
Net periodic benefit cost (credit)						$	(1.4)					$	7.4					$	1.8					$	14.3					$	6.3					$	15.4

(1)In 2022, settlements in the U.S. related to a non-qualified plan; settlements in our international plans related to lump-sum payments in Belgium. In 2021, settlements in the U.S. related to a non-qualified plan; settlements in our international plans related to lump-sum payments in Belgium and Switzerland. In 2020, settlements in the U.S. related to a non-qualified plan; settlements in our international plans related to lump-sum payments in Belgium, France and for certain expatriate employees.

Service cost and components of net periodic benefit cost other than service cost were included in “Marketing, general and administrative expense” and “Other non-operating expense (income), net” in the Consolidated Statements of Income, respectively.

The following table shows the weighted average assumptions used to determine net periodic cost:

						Pension Benefits
						2022												2021												2020
						U.S.						Int’l						U.S.						Int’l						U.S.						Int’l
Discount rate						2.19		%				1.57		%				2.20		%				1.26		%				2.89		%				1.66		%
Expected return on assets						—						3.00						—						2.61						—						2.79
Compensation rate increase						—						2.33						—						2.15						—						2.21

Plan Contributions

We make contributions to our defined benefit plans sufficient to meet the minimum funding requirements of applicable laws and regulations, plus additional amounts, if any, we determine to be appropriate. The following table sets forth our expected contributions in 2023:

(In millions)
U.S. pension plans						$	6.3
International pension plans						12.8

Future Benefit Payments

The future benefit payments shown below reflect the expected service periods for eligible participants.

						Pension Benefits
(In millions)						U.S.						Int’l
2023						$	6.3					$	22.2
2024						6.1						22.6
2025						5.9						23.9
2026						5.9						26.4
2027						5.3						27.0
2028-2032						20.2						142.7

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Postretirement Health Benefits

We provide postretirement health benefits to certain of our retired U.S. employees up to the age of 65 under a cost-sharing arrangement and provide supplemental Medicare benefits to certain of our U.S. retirees over the age of 65. Our postretirement health benefit plan was closed to new participants retiring after December 31, 2021. Our policy is to fund the cost of these postretirement benefits from operating cash flows. While we do not intend to terminate these postretirement health benefits, we may do so at any time, subject to applicable laws and regulations. At year-end 2022, our postretirement health benefits obligation and related loss recorded in “Accumulated other comprehensive loss” were approximately $2 million and $11 million, respectively. At year-end 2021, our postretirement health benefits obligation and related loss recorded in “Accumulated other comprehensive loss” were approximately $2 million and $12 million, respectively. Net periodic benefit cost was not material in 2022, 2021 or 2020.

Defined Contribution Plans

We sponsor various defined contribution plans worldwide, the largest of which is the Avery Dennison Corporation Employee Savings Plan (“Savings Plan”), a 401(k) plan for our U.S. employees.

We recognized expense of $27.3 million, $24.6 million and $22.7 million in 2022, 2021 and 2020, respectively, related to our employer contributions and employer match of participant contributions to the Savings Plan.

Other Retirement Plans

We have deferred compensation plans and programs that permit eligible employees to defer a portion of their compensation. The compensation voluntarily deferred by the participant, together with certain employer contributions, earns specified and variable rates of return. As of year-end 2022 and 2021, we had accrued $87.3 million and $96.1 million, respectively, for our obligations under these plans. A portion of the interest on certain of our contributions may be forfeited by participants if their employment terminates before age 55 other than by reason of death or disability.

Our Directors Deferred Equity Compensation Program allows our non-employee directors to elect to receive their cash compensation in deferred stock units (“DSUs”) issued under our equity plan. Additionally, two legacy deferred compensation plans had DSUs that were issued under our then-active equity plans. Dividend equivalents, representing the value of dividends per share paid on shares of our common stock and calculated with reference to the number of DSUs held as of a quarterly dividend record date, are credited in the form of additional DSUs on the applicable dividend payable date. DSUs are converted into shares of our common stock upon a director’s separation from our Board. Approximately 0.1 million DSUs were outstanding for both year-end 2022 and 2021, with an aggregate value of $20 million and $24 million, respectively.

We hold company-owned life insurance policies, the proceeds from which are payable to us upon the death of covered participants. The cash surrender values of these policies, net of outstanding loans, which are included in “Other assets” in the Consolidated Balance Sheets, were $265.0 million and $272.2 million at year-end 2022 and 2021, respectively.

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NOTE 7. COMMITMENTS AND LEASES

Supplemental cost information related to leases is shown below.

(In millions)						2022						2021						2020
Operating lease costs						$	70.8					$	68.8					$	63.1

Lease costs related to finance leases were not material in 2022, 2021 or 2020.

Supplemental balance sheet information related to leases is shown below.

(In millions)						Balance Sheet Location						2022						2021
Assets
Operating						Other assets						$	161.7					$	183.0
Finance(1)						Property, plant and equipment, net						27.5						28.9
Total leased assets												$	189.2					$	211.9
Liabilities
Current:
Operating						Other current liabilities						$	42.4					$	47.3
Finance						Short-term borrowings and current portion of long-term debt and finance leases						5.4						5.5
Non-current:
Operating						Long-term retirement benefits and other liabilities						113.6						135.3
Finance						Long-term debt and finance leases						8.2						11.7
Total lease liabilities												$	169.6					$	199.8

(1)			Finance lease assets are net of accumulated amortization of $12.4 million and $10.4 million as of December 31, 2022 and January 1, 2022, respectively.

Supplemental cash flow information related to leases is shown below.

(In millions)						2022						2021						2020
Cash paid for amounts included in the measurement of operating lease liabilities						$	60.5					$	54.2					$	54.9
Operating lease assets obtained in exchange for operating lease liabilities						37.2						58.0						48.4

Cash flows related to finance leases were not material in 2022, 2021 or 2020.

Weighted average remaining lease term and discount rate information related to leases as of December 31, 2022 and January 1, 2022 is shown below.

						2022						2021
Weighted average remaining lease term (in years):
Operating						5.9						6.5
Finance						2.7						3.3
Weighted average discount rate (percentage):
Operating						3.2		%				3.0		%
Finance						2.8						2.9

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Operating and finance lease liabilities by maturity date from December 31, 2022 are shown below.

(In millions)						Operating Leases						Finance Leases
2023						$	45.8					$	5.8
2024						35.4						5.4
2025						27.8						2.1
2026						18.8						.7
2027						10.8						.2
2028 and thereafter						35.5						—
Total lease payments						174.1						14.2
Less: imputed interest						(18.1)						(.6)
Present value of lease liabilities						$	156.0					$	13.6

As of December 31, 2022, we had no significant operating or finance leases that had not yet commenced.

NOTE 8. CONTINGENCIES

Legal Proceedings

We are involved in various lawsuits, claims, inquiries, and other regulatory and compliance matters, most of which are routine to the nature of our business. When it is probable that a loss will be incurred and where a range of the loss can be reasonably estimated, the best estimate within the range is accrued. When the best estimate within the range cannot be determined, the low end of the range is accrued. The ultimate resolution of these claims could affect future results of operations should our exposure be materially different from our estimates or should we incur liabilities that were not previously accrued. Potential insurance reimbursements are not offset against potential liabilities.

We are currently party to a litigation in which ADASA Inc. (“Adasa”), an unrelated third party, alleged that certain of our RFID products infringed on its patent. The case was filed on October 24, 2017 in the United States District Court in the District of Oregon (Eugene Division) and is captioned ADASA Inc. v. Avery Dennison Corporation. We recorded a contingent liability in the amount of $26.6 million related to this matter in the second quarter of 2021 based on a jury verdict issued on May 14, 2021.

During the fourth quarter of 2021, the first instance judgment associated with the jury verdict was issued. This resulted in additional potential liability for the RFID tags sold during the period from the jury verdict to the issuance of the first instance judgment and a royalty on additional late-disclosed tags, as well as sanctions, prejudgment interest, costs, and attorneys’ fees. In addition, Adasa was awarded an ongoing royalty on in-scope tags sold after October 14, 2021. On October 22, 2021, we appealed the judgment to the United States Court of Appeals for the Federal Circuit ("CAFC"). We have largely completed our migration to alternative encoding methods for our RFID tags.

During the fourth quarter of 2022, the CAFC issued its opinion, reversing the grant of summary judgment of validity as to anticipation and obviousness, vacating the sanctions ruling, and remanding the case for retrial. The CAFC affirmed subject-matter eligibility and damages if liability is determined in the retrial. On remand, the trial court must reconsider the amount of sanctions consistent with the CAFC's instruction to limit sanctions to the late-disclosed tags. With continued evaluation of the matter and our defenses, as well as consultation with our outside counsel, we continue to believe that Adasa’s patent is invalid and that the sanctions are unreasonable. In addition, we believe that there are appealable grounds in the CAFC’s decision; as a result, we will seek U.S. Supreme Court review as the first of the potential next steps in the litigation process. As of December 31, 2022, we continue to evaluate our options and estimate a range of potential outcomes between approximately $5 million to $71 million. Based on our assessment, we concluded that the current reserve of $26.6 million is representative of the estimated liability taking into consideration the potential outcomes; as such, we did not record a change to the accrued liability.

Because of the uncertainties associated with claims resolution and litigation, future expenses to resolve these matters could be higher than the liabilities we have accrued; however, we are unable to reasonably estimate a range of potential expenses. If information were to become available that allowed us to reasonably estimate a range of potential expenses determined to be probable in an amount higher or lower than what we have accrued and determined such to be probable, we would adjust our accrued liabilities accordingly. Additional lawsuits, claims, inquiries, and other regulatory and compliance matters could arise in the future. The range of expenses for resolving any future matters would be assessed as they arise; until then, a range of potential expenses for such resolution cannot be determined. Based upon current information, we believe that the impact of the resolution of these matters would not be, individually or in the aggregate, material to our financial position, results of operations or cash flows.

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Environmental Expenditures

Environmental expenditures are generally expensed. When it is probable that a loss will be incurred and where a range of the loss can be reasonably estimated, the best estimate within the range is accrued. When the best estimate within the range cannot be determined, the low end of the range is accrued. The ultimate resolution of these matters could affect future results of operations should our exposure be materially different from our estimates or should we incur liabilities that were not previously accrued. Potential insurance reimbursements are not offset against potential liabilities. We review our estimates of the costs of complying with environmental laws related to remediation and cleanup of various sites, including sites in which governmental agencies have designated us as a potentially responsible party (“PRP”). However, environmental expenditures for newly acquired assets and those that extend or improve the economic useful life of existing assets are capitalized and amortized over the shorter of the estimated useful life of the acquired asset or the remaining life of the existing asset.

As of December 31, 2022, we have been designated by the U.S. Environmental Protection Agency (“EPA”) and/or other responsible state agencies as a PRP at eleven waste disposal or waste recycling sites that are the subject of separate investigations or proceedings concerning alleged soil and/or groundwater contamination. No settlement of our liability related to any of these sites has been agreed upon. We are participating with other PRPs at these sites and anticipate that our share of remediation costs will be determined pursuant to agreements that we negotiate with the EPA or other governmental authorities.

These estimates could change as a result of changes in planned remedial actions, remediation technologies, site conditions, the estimated time to complete remediation, environmental laws and regulations, and other factors. Because of the uncertainties associated with environmental assessment and remediation activities, our future expenses to remediate these sites could be higher than the liabilities we have accrued; however, we are unable to reasonably estimate a range of potential expenses determined to be probable. If information were to become available that allowed us to reasonably estimate a range of potential expenses in an amount higher or lower than what we have accrued, we would adjust our environmental liabilities accordingly. In addition, we may be identified as a PRP at additional sites in the future. The range of expenses for remediation of any future-identified sites would be addressed as they arise; until then, a range of expenses for such remediation cannot be determined.

The activity related to our environmental liabilities in 2022 and 2021 was as follows:

(In millions)						2022						2021
Balance at beginning of year						$	21.9					$	21.1
Charges, net of reversals						4.4						2.9
Payments						(2.0)						(2.1)
Balance at end of year						$	24.3					$	21.9

Approximately $9 million and $2 million, respectively, of this balance was classified as short-term and included in “Other current liabilities” in the Consolidated Balance Sheets as of December 31, 2022 and January 1, 2022.

NOTE 9. FAIR VALUE MEASUREMENTS

Recurring Fair Value Measurements

Assets and liabilities carried at fair value, measured on a recurring basis, as of December 31, 2022, were as follows:

												Fair Value Measurements Using
(In millions)						Total						Quoted Prices in Active Markets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Other Unobservable Inputs (Level 3)
Assets
Investments						$	31.3					$	22.6					$	8.7					$	—
Derivative assets						4.3						—						4.3						—
Bank drafts						3.2						3.2						—						—
Cross-currency swap						15.5						—						15.5						—
Liabilities
Derivative liabilities						$	12.2					$	.3					$	11.9					$	—
Contingent consideration liabilities						6.0						—						—						6.0

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Assets and liabilities carried at fair value, measured on a recurring basis, as of January 1, 2022 were as follows:

												Fair Value Measurements Using
(In millions)						Total						Quoted Prices in Active Markets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Other Unobservable Inputs (Level 3)
Assets
Investments						$	33.9					$	27.1					$	6.8					$	—
Derivative assets						7.1						.6						6.5						—
Bank drafts						14.1						14.1						—						—
Liabilities
Cross-currency swap						$	10.3					$	—					$	10.3					$	—
Derivative liabilities						3.6						—						3.6						—
Contingent consideration liabilities						7.6						—						—						7.6

Investments included fixed income securities (primarily U.S. government and corporate debt securities) measured at fair value using quoted prices/bids and a money market fund measured at fair value using NAV. As of December 31, 2022, investments of $0.7 million and $30.6 million were included in “Cash and cash equivalents” and “Other current assets,” respectively, in the Consolidated Balance Sheets. As of January 1, 2022, investments of $0.5 million and $33.4 million were included in “Cash and cash equivalents” and “Other current assets,” respectively, in the Consolidated Balance Sheets. Derivatives that are exchange-traded are measured at fair value using quoted market prices and classified within Level 1 of the valuation hierarchy. Derivatives measured based on foreign exchange rate inputs that are readily available in public markets are classified within Level 2 of the valuation hierarchy. Bank drafts (maturities greater than three months) are valued at face value due to their short-term nature and were included in “Other current assets” in the Consolidated Balance Sheets.

Contingent consideration liabilities relate to estimated earn-out payments associated with certain acquisitions completed in 2022 and 2021, which are subject to the acquired companies achieving certain post-acquisition performance targets. These liabilities were recorded based on the expected payments and have been classified as Level 3. Activity related to contingent consideration in 2022 and 2021 were immaterial.

In addition to the investments described above, we hold venture investments that had a total carrying value of $70 million and $52 million as of December 31, 2022 and January 1, 2022, respectively, which was included in “Other assets” in the Consolidated Balance Sheets. We recognized net gains on our venture investments of $13.5 million, $23 million and $5.4 million in 2022, 2021 and 2020, respectively, in “Other expense (income), net” in the Consolidated Statements of Income.

NOTE 10. NET INCOME PER COMMON SHARE

Net income per common share was computed as follows:

(In millions, except per share amounts)						2022						2021						2020
(A) Net income						$	757.1					$	740.1					$	555.9
(B) Weighted average number of common shares outstanding						81.6						82.9						83.4
Dilutive shares (additional common shares issuable under stock-based awards)						.6						.9						.7
(C) Weighted average number of common shares outstanding, assuming dilution						82.2						83.8						84.1
Net income per common share (A) ÷ (B)						$	9.28					$	8.93					$	6.67
Net income per common share, assuming dilution (A) ÷ (C)						$	9.21					$	8.83					$	6.61

Certain stock-based compensation awards were excluded from the computation of net income per common share, assuming dilution, because they would not have had a dilutive effect. Stock-based compensation awards excluded from the computation were not significant in 2022, 2021 or 2020.

NOTE 11. SUPPLEMENTAL EQUITY AND COMPREHENSIVE INCOME INFORMATION

Common Stock and Share Repurchase Program

Our Amended and Restated Certificate of Incorporation authorizes five million shares of $1 par value preferred stock (of which no shares are outstanding), with respect to which our Board may fix the series and terms of issuance, and 400 million shares of $1 par value voting common stock.

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From time to time, our Board authorizes the repurchase of shares of our outstanding common stock. Repurchased shares may be reissued under our long-term incentive plan or used for other corporate purposes. In 2022, we repurchased approximately 2.2 million shares of our common stock at an aggregate cost of $379.5 million. In 2021, we repurchased approximately 0.9 million shares of our common stock at an aggregate cost of $180.9 million.

In April 2022 our Board authorized the repurchase of shares of our common stock with a fair market value of up to $750 million, excluding any fees, commissions or other expenses related to such purchases and in addition to the amount outstanding under our previous Board authorization. Board authorizations remain in effect until shares in the amount authorized thereunder have been repurchased. Shares of our common stock in the aggregate amount of $730 million as of December 31, 2022 remained authorized for repurchase under this Board authorization.

Treasury Shares Reissuance

We fund a portion of our employee-related costs using shares of our common stock held in treasury. We reduce capital in excess of par value based on the grant date fair value of vesting awards and record net gains or losses associated with using treasury shares to retained earnings.

Accumulated Other Comprehensive Loss

The changes in “Accumulated other comprehensive loss” (net of tax) for 2022 and 2021 were as follows:

(In millions)						Foreign Currency Translation						Pension and Other Postretirement Benefits						Cash Flow Hedges						Total
Balance as of January 2, 2021						$	(248.1)					$	(92.7)					$	(8.8)					$	(349.6)
Other comprehensive income (loss) before reclassifications, net of tax						30.7						27.9						5.4						64.0
Reclassifications to net income, net of tax						—						4.4						(1.7)						2.7
Net current-period other comprehensive income (loss), net of tax						30.7						32.3						3.7						66.7
Balance as of January 1, 2022						$	(217.4)					$	(60.4)					$	(5.1)					$	(282.9)
Other comprehensive income (loss) before reclassifications, net of tax						(96.6)						6.3						4.9						(85.4)
Reclassifications to net income, net of tax						—						2.8						1.5						4.3
Net current-period other comprehensive income (loss), net of tax						(96.6)						9.1						6.4						(81.1)
Balance as of December 31, 2022						$	(314.0)					$	(51.3)					$	1.3					$	(364.0)

The following table sets forth the income tax (benefit) expense allocated to each component of other comprehensive income (loss):

(In millions)						2022						2021						2020
Foreign currency translation:
Translation (loss) gain						$	(7.0)					$	(23.2)					$	27.5
Pension and other postretirement benefits:
Net gain recognized from actuarial gain/loss and prior service cost/credit						.5						8.5						3.1
Reclassifications to net income						1.1						1.6						.9
Cash flow hedges:
Gains (losses) recognized on cash flow hedges						1.6						1.7						(2.3)
Reclassifications to net income						.4						(.5)						—
Income tax (benefit) expense allocated to components of other comprehensive income (loss)						$	(3.4)					$	(11.9)					$	29.2

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NOTE 12. LONG-TERM INCENTIVE COMPENSATION

Stock-Based Awards

Stock-Based Compensation

We grant our annual stock-based compensation awards to eligible employees in March and non-employee directors in May. Certain awards granted to retirement-eligible employees one year or more before their retirement date vest upon retirement; these awards are accounted for as fully vested one year from the date of grant.

Our 2017 Incentive Award Plan (the “Equity Plan”), a long-term incentive plan for employees and non-employee directors, allows us to grant stock-based compensation awards – including stock options, RSUs, PUs, MSUs and DSUs – or a combination of these and other awards. Under the Equity Plan, 5.4 million shares are available for issuance, and each full value award is counted as 1.5 shares for purposes of the number of shares authorized for issuance. Full value awards include RSUs, PUs and MSUs.

Stock-based compensation expense and the related recognized tax benefit were as follows:

(In millions)						2022						2021						2020
Stock-based compensation expense						$	47.4					$	37.2					$	24.0
Tax benefit						6.7						4.6						2.9

This expense was included in “Marketing, general and administrative expense” in the Consolidated Statements of Income.

As of December 31, 2022, we had approximately $61 million of unrecognized compensation expense related to unvested stock-based awards, which is expected to be recognized over the remaining weighted average requisite service period of approximately two years.

Stock Options

Stock options may be granted to employees and non-employee directors at no less than 100% of the fair market value of our common stock on the date of the grant and generally vest ratably over a four-year period. Options expire ten years from the date of grant.

No stock options were granted in fiscal years 2022, 2021 or 2020.

The following table summarizes information related to stock options:

						Number of options (in thousands)						Weighted average exercise price						Weighted average remaining contractual life (in years)						Aggregate intrinsic value (in millions)
Outstanding at January 1, 2022						142.0						$	73.76					4.40						$	20.3
Exercised						(.9)						40.33
Outstanding at December 31, 2022						141.1						$	73.96					3.42						$	15.1
Options vested and expected to vest at December 31, 2022						141.1						73.76						3.42						15.1
Options exercisable at December 31, 2022						141.1						$	73.96					3.42						$	15.1

The total intrinsic value of stock options exercised was $3.5 million in 2021 and $4 million in 2020. We received approximately $1 million in 2021 and $2 million in 2020 from the exercise of stock options. The tax benefit associated with these exercised options was $0.9 million in 2021 and $1 million in 2020. The stock option exercises in 2022 were immaterial. The intrinsic value of a stock option is based on the amount by which the market value of our stock exceeds the exercise price of the option.

Performance Units (“PUs”)

PUs are performance-based awards granted to eligible employees under the Equity Plan. PUs are payable in shares of our common stock at the end of a three- or four-year cliff vesting period provided that the designated performance objectives are achieved at the end of the period. Over the performance period, the estimated number of shares of our common stock issuable upon vesting is adjusted upward or downward based on the probability of achieving the performance objectives established for the award. The actual number of shares issued generally ranges from 0% to 200% of the target shares at the time of grant; however certain special PU awards can be issued up to 300% of the target shares at time of grant. The weighted average grant date fair value for PUs was $163.97, $191.86 and $115.07 in 2022, 2021 and 2020, respectively.

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The following table summarizes information related to awarded PUs:

						Number of PUs (in thousands)						Weighted average grant-date fair value
Unvested at January 1, 2022						322.1						$	127.33
Granted at target						159.7						163.97
Adjustment for above-target performance(1)						78.1						110.41
Vested						(182.7)						110.41
Forfeited/cancelled						(4.5)						152.27
Unvested at December 31, 2022						372.7						$	147.45

(1)Reflects adjustments for the vesting of awards based on above-target performance for the 2019-2021 performance period.

The fair value of vested PUs was $20.2 million in 2022, $19.2 million in 2021 and $20.4 million in 2020.

Market-Leveraged Stock Units (“MSUs”)

MSUs are performance-based awards granted to eligible employees under our equity plans. MSUs are payable in shares of our common stock over a four-year period provided that the designated performance objective is achieved as of the end of each vesting period. MSUs accrue dividend equivalents during the vesting period, which are earned and paid only at vesting provided that, at a minimum, threshold-level performance is achieved. The number of shares earned is based upon our absolute total shareholder return at each vesting date and can range from 0% to 200% of the target amount of MSUs subject to vesting. Each of the four vesting periods represents one tranche of MSUs and the fair value of each of these four tranches was determined using the Monte-Carlo simulation model, which utilizes multiple input variables, including expected stock price volatility and other assumptions, to estimate the probability of achieving the performance objective established for the award. The weighted average grant date fair value for MSUs was $141.80, $216.06 and $94.55 in 2022, 2021 and 2020, respectively.

The following table summarizes information related to awarded MSUs:

						Number of MSUs (in thousands)						Weighted average grant- date fair value
Unvested at January 1, 2022						195.2						$	143.16
Granted at target						100.5						141.80
Adjustments for above-target performance(1)						69.2						127.45
Vested						(153.0)						130.34
Forfeited/cancelled						(3.4)						149.91
Unvested at December 31, 2022						208.5						$	145.86

(1)Reflects adjustments for the vesting of awards based on above-target performance for each of the tranches of awards vesting in 2022.

The fair value of vested MSUs was $19.9 million in 2022, $17.8 million in 2021 and $17.6 million in 2020.

Restricted Stock Units (“RSUs”)

RSUs are service-based awards granted to eligible employees and non-employee directors under our equity plans. RSUs granted to employees generally vest ratably over a period of three or four years. RSUs granted to non-employee directors generally vest in one year. The vesting of RSUs is subject to continued service through the applicable vesting date. If that condition is not met, unvested RSUs are generally forfeited. The weighted average grant date fair value for RSUs was $168.34, $196.26 and $111.71 in 2022, 2021 and 2020, respectively.

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The following table summarizes information related to awarded RSUs:

						Number of RSUs (in thousands)						Weighted average grant-date fair value
Unvested at January 1, 2022						36.1						$	139.82
Granted						44.6						168.34
Vested						(19.2)						146.32
Forfeited/cancelled						(1.7)						125.93
Unvested at December 31, 2022						59.8						$	159.23

The fair value of vested RSUs was $2.8 million, $2.7 million and $3.8 million in 2022, 2021 and 2020, respectively.

Cash-Based Awards

Long-Term Incentive Units (“LTI Units”)

LTI Units are cash-based awards granted to employees under our long-term incentive unit plan. LTI Units are service-based awards that generally vest ratably over a four-year period. The settlement value equals the number of vested LTI Units multiplied by the average of the high and low market prices of our common stock on the vesting date. The compensation expense related to these awards is amortized on a straight-line basis and the fair value is remeasured using the estimated percentage of units expected to be earned multiplied by the average of the high and low market prices of our common stock at each quarter-end.

We also grant performance-based, cash-based awards in the form of performance and market-leveraged LTI Units to eligible employees. Performance LTI Units are payable in cash at the end of a three-year cliff vesting period provided that certain performance objectives are achieved at the end of the performance period. Market-leveraged LTI Units are payable in cash and vest ratably over a period of four years. The number of performance and market-leveraged LTI Units earned at vesting is adjusted upward or downward based upon the probability of achieving the performance objectives established for the respective award and the actual number of units issued can range from 0% to 200% of the designated target units subject to vesting. Performance and market-leveraged LTI Units are remeasured using the estimated percentage of units expected to be earned multiplied by the average of the high and low market prices of our common stock at each quarter-end over their respective performance periods. The compensation expense related to performance LTI Units is amortized on a straight-line basis over their respective performance periods. The compensation expense related to market-leveraged LTI Units is amortized on a graded-vesting basis over their respective performance periods.

The compensation expense related to LTI Units was $11.5 million in 2022, $21.3 million in 2021 and $13.8 million in 2020. This expense was included in “Marketing, general and administrative expense” in the Consolidated Statements of Income. The total recognized tax benefit related to LTI Units was $2.7 million in 2022, $5.1 million in 2021 and $3.3 million in 2020.

NOTE 13. COST REDUCTION ACTIONS

Restructuring Charges

We have plans that provide eligible employees with severance benefits in the event of an involuntary termination. We calculate severance using the benefit formulas under the applicable plans. We record restructuring charges from qualifying cost reduction actions for severance and other exit costs (including asset impairment charges and lease and other contract cancellation costs) when they are probable and estimable.

2019/2020 Actions

During 2022, we recorded $7.3 million in restructuring charges, net of reversals, related to our 2019/2020 actions. These charges consisted of severance and related costs for the reduction of approximately 830 positions and asset impairment charges at numerous locations across our company, reflecting actions in both our reportable segments. The actions in our Materials Group reportable segment were primarily associated with consolidations of its operations in North America and its graphics business in Europe, in part in response to COVID-19. The actions in our Solutions Group reportable segment were primarily related to global headcount and footprint reduction, with some actions accelerated and expanded in response to COVID-19. During 2021, we recorded $13.3 million in restructuring charges, net of reversals, related to our 2019/2020 actions. These charges consisted of severance and related costs for the reduction of approximately 360 positions, as well as asset impairment charges. Our activities related to our 2019/2020 actions began in the fourth quarter of fiscal year 2019 and continued through fiscal year 2022.

Accruals for severance and related costs and lease cancellation costs were included in “Other current liabilities” in the Consolidated Balance Sheets. Asset impairment charges were based on the estimated market value of the assets, less

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selling costs, if applicable. Restructuring charges were included in “Other expense (income), net” in the Consolidated Statements of Income.

During 2022, restructuring charges and payments were as follows:

(In millions)						Accrual at January 1, 2022						Charges, Net of Reversals						Cash Payments						Non-cash Impairment						Foreign Currency Translation						Accrual at December 31, 2022
2019/2020 Actions
Severance and related costs						$	11.5					$	7.2					$	(13.4)					$	—					$	(.2)					$	5.1
Asset impairment charges						—						.1						—						(.1)						—						—
Total						$	11.5					$	7.3					$	(13.4)					$	(.1)					$	(.2)					$	5.1

During 2021, restructuring charges and payments were as follows:

(In millions)						Accrual at January 2, 2021						Charges, Net of Reversals						Cash Payments						Non-cash Impairment						Foreign Currency Translation						Accrual at January 1, 2022
2019/2020 Actions
Severance and related costs						$	28.3					$	10.3					$	(26.2)					$	—					$	(.9)					$	11.5
Asset impairment charges						—						2.4						—						(2.4)						—						—
Lease cancellation costs						—						.6						(.6)						—						—						—
2018/2019 Actions
Lease cancellation costs						.3						—						(.3)						—						—						—
Total						$	28.6					$	13.3					$	(27.1)					$	(2.4)					$	(.9)					$	11.5

The table below shows the total amount of restructuring charges incurred by reportable segment and Corporate.

(In millions)						2022						2021						2020
Restructuring charges by reportable segment and Corporate
Materials Group						$	(1.0)					$	5.0					$	36.3
Solutions Group						7.9						7.6						18.7
Corporate						.8						1.0						.3
Total						$	7.7					$	13.6					$	55.3

NOTE 14. TAXES BASED ON INCOME

Taxes based on income were as follows:

(In millions)						2022						2021						2020
Current:
U.S. federal tax						$	29.4					$	7.3					$	1.1
State taxes						8.8						5.3						1.9
International taxes						177.7						229.9						168.5
						215.9						242.5						171.5
Deferred:
U.S. federal tax						5.8						(1.1)						5.0
State taxes						.9						(5.3)						1.6
International taxes						19.6						12.5						(.4)
						26.3						6.1						6.2
Provision for income taxes						$	242.2					$	248.6					$	177.7

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The principal items accounting for the difference between taxes computed at U.S. federal statutory rate and taxes recorded were as follows:

(In millions)						2022						2021						2020
Tax provision computed at U.S. federal statutory rate(1)						$	209.9					$	208.5					$	154.8
Increase (decrease) in taxes resulting from:
State taxes, net of federal tax benefit						11.8						4.5						6.9
Foreign earnings taxed at different rates(1)						55.3						75.4						51.4
GILTI high-tax exclusion election, net(2)						(11.9)						(22.8)						(12.5)
Valuation allowance						(5.0)						(4.8)						(3.3)
U.S. federal research and development tax credits						(6.5)						(6.2)						(6.2)
Tax contingencies and audit settlements						(4.3)						3.9						(5.5)
Other items, net						(7.1)						(9.9)						(7.9)
Provision for income taxes						$	242.2					$	248.6					$	177.7

(1)			All years included certain U.S. international tax provisions and foreign earnings taxed in the U.S., net of credits.
(2)			In 2022, we recognized $11.9 million of benefit related to a GILTI exclusion election made on our 2021 U.S. federal tax return. In 2021, we recognized $14.1 million and $8.7 million of benefit related to GILTI exclusion elections made on our amended 2018 and originally filed 2020 U.S. federal tax returns, respectively. In 2020, we recognized $12.5 million of benefit related to a GILTI exclusion election we planned to make on our amended 2019 U.S. federal tax return.

Income before taxes from our U.S. and international operations was as follows:

(In millions)						2022						2021						2020
U.S.						$	232.4					$	88.0					$	123.8
International						766.9						904.6						613.5
Income before taxes						$	999.3					$	992.6					$	737.3

Our effective tax rate was 24.2%, 25.0% and 24.1% for fiscal years 2022, 2021 and 2020, respectively.

Our 2022 provision for income taxes included (i) $18.8 million of net tax charge related to the tax on GILTI of our foreign subsidiaries and the recognition of foreign withholding taxes on current year earnings, partially offset by the benefit from foreign-derived intangible income (“FDII”); (ii) $17.3 million of return-to-provision benefit, including $11.9 million related to a GILTI exclusion election and a lower net tax charge from other international inclusion items upon completion of our 2021 U.S. federal tax return, (iii) $4.3 million of net tax benefit primarily from decreases in certain tax reserves, including interest and penalties, as a result of closing tax years and the settlement of certain foreign tax audits; and (iv) a return-to-provision benefit from the interest portion of the Brazil indirect tax credit reclaimed in 2021 being adjudicated as non-taxable, pursuant to a Brazilian court decision.

In 2020, the U.S. Department of Treasury issued final regulations that provide certain U.S. taxpayers with an annual election to exclude foreign income subject to a high effective tax rate from their GILTI inclusions. We have not yet determined whether to make the election for tax year 2022. We continue to evaluate the impact of the election and currently anticipate that the benefit from making this election on our 2022 U.S. federal tax return may be significant.

Our 2021 provision for income taxes included (i) $28.5 million of net tax charge related to the tax on GILTI of our foreign subsidiaries and the recognition of foreign withholding taxes on current year earnings, partially offset by the benefit from FDII; (ii) $14.1 million of return-to-provision benefit related to a GILTI exclusion election made on our amended 2018 U.S. federal tax return; and (iii) $11.3 million of return-to-provision benefit, including $8.7 million related to a GILTI exclusion election and a higher FDII deduction reflected on our 2020 U.S. federal tax return. Our 2021 provision for income taxes also included (i) net tax benefit primarily from the release of valuation allowance against certain deferred tax assets in the U.S. and foreign jurisdictions; (ii) net tax benefit primarily from decreases in certain tax reserves, including interest and penalties, as a result of closing tax years; and (iii) net tax charges related to the tax effects of outcomes of certain legal proceedings.

Our 2020 provision for income taxes included (i) $22.1 million of net tax charge related to the tax on GILTI of our foreign subsidiaries and the recognition of foreign withholding taxes on current year earnings, partially offset by the benefit from FDII; (ii) a $12.5 million of return-to-provision benefit related to a GILTI exclusion election we planned to make on our 2019 amended U.S. federal tax return; and (iii) net tax benefit primarily from decreases in certain tax reserves, including interest and penalties, as a result of closing tax years, partially offset by increases in reserves from changes in judgment and additional interest and penalty accruals.

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Deferred Taxes

Deferred taxes reflect the temporary differences between the amounts at which assets and liabilities are recorded for financial reporting purposes and the amounts utilized for tax purposes. The primary components of the temporary differences that gave rise to our deferred tax assets and liabilities were as follows:

(In millions)						2022						2021
Accrued expenses not currently deductible						$	32.3					$	34.6
Net operating loss carryforwards						137.2						154.4
Tax credit carryforwards						9.7						34.6
Capitalized research expenses						38.6						23.7
Stock-based compensation						15.4						13.6
Pension and other postretirement benefits						31.5						38.8
Inventory reserve						15.6						14.7
Lease liabilities						33.2						42.5
Other assets						21.3						25.3
Valuation allowance						(59.4)						(70.1)
Total deferred tax assets(1)						275.4						312.1
Depreciation and amortization						(296.6)						(292.6)
Repatriation accrual						(12.0)						(16.2)
Foreign operating loss recapture						(3.2)						(3.4)
Lease assets						(33.8)						(43.8)
Total deferred tax liabilities(1)						(345.6)						(356.0)
Total net deferred tax assets (liabilities)						$	(70.2)					$	(43.9)

(1)Reflect gross amounts before jurisdictional netting of deferred tax assets and liabilities.

We assess the available positive and negative evidence to estimate if sufficient future taxable income is expected to be generated to use existing deferred tax assets. On the basis of our assessment, we record valuation allowances only with respect to the portion of the deferred tax asset that is not more-likely-than-not to be realized. Our assessment of the future realizability of our deferred tax assets relies heavily on our forecasted earnings in certain jurisdictions determined by the manner in which we operate our business and the relevant carryforward periods. Any changes to our operations may affect our assessment of deferred tax assets considered realizable if the positive evidence no longer outweighs the negative evidence.

Net operating loss carryforwards of foreign subsidiaries at December 31, 2022 and January 1, 2022 were $463 million and $508 million, respectively. Tax credit carryforwards of both domestic and foreign subsidiaries at December 31, 2022 and January 1, 2022 totaled $10 million and $35 million, respectively. If unused, foreign net operating losses and tax credit carryforwards will expire as follows:

(In millions)						Net Operating Losses**(1)**						Tax Credits
Year of Expiry
2023						$	4.5					$	.3
2024						2.6						.2
2025						2.9						.2
2026						7.2						.3
2027						4.1						.8
2028-2040						13.7						5.9
Indefinite life/no expiry						427.7						2.0
Total						$	462.7					$	9.7

(1)Net operating losses are presented before tax effects and valuation allowance.

Certain indefinite-lived foreign net operating losses may require decades to be fully utilized under our current business model.

At December 31, 2022, we had net operating loss carryforwards in certain states of $425 million before tax effects. Based on our estimates of future state taxable income, it is more-likely-than-not that the majority of these carryforwards will not be realized before they expire. Accordingly, a valuation allowance has been recorded on $380 million of these carryforwards.

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As of December 31, 2022, our provision for income taxes did not materially benefit from applicable tax holidays in foreign jurisdictions.

Unrecognized Tax Benefits

As of December 31, 2022, our unrecognized tax benefits totaled $70 million, $65 million of which, if recognized, would reduce our annual effective income tax rate. As of January 1, 2022, our unrecognized tax benefits totaled $74 million, $68 million of which, if recognized, would reduce our annual effective income tax rate.

Where applicable, we accrue potential interest and penalties related to unrecognized tax benefits in income tax expense. The interest and penalties we recognized during fiscal years 2022, 2021 and 2020 were not material, individually or in aggregate, to the Consolidated Statements of Income. We have accrued balances of $16 million and $19 million for interest and penalties, net of tax benefit, in the Consolidated Balance Sheets at December 31, 2022 and January 1, 2022, respectively.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is set forth below.

(In millions)						2022						2021
Balance at beginning of year						$	74.0					$	72.0
Additions for tax positions of current year						6.6						9.1
Additions (reductions) for tax positions of prior years, net						(2.2)						1.2
Settlements with tax authorities						(1.1)						(1.1)
Expirations of statutes of limitations						(4.8)						(5.2)
Changes due to translation of foreign currencies						(3.0)						(2.0)
Balance at end of year						$	69.5					$	74.0

It is reasonably possible that, during the next 12 months, we may realize a decrease in our uncertain tax positions, including interest and penalties, of approximately $6 million, primarily as a result of closing tax years.

The amount of income taxes we pay is subject to ongoing audits by taxing jurisdictions around the world. Our estimate of the potential outcome of any uncertain tax issue is subject to our assessment of the relevant risks, facts, and circumstances existing at the time. We believe we have adequately provided for reasonably foreseeable outcomes related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, which may impact our effective tax rate. The final determination of tax audits and any related legal proceedings could materially differ from amounts reflected in our tax provision for income taxes and the related liabilities. To date, we and our U.S. subsidiaries have completed the IRS’ Compliance Assurance Process through 2018. With limited exceptions, we are no longer subject to income tax examinations by tax authorities for years prior to 2010.

NOTE 15. SEGMENT AND DISAGGREGATED REVENUE INFORMATION

Segment Reporting

We have the following reportable segments:

• Materials Group – manufactures and sells pressure-sensitive label materials, films for graphic and reflective products, performance tapes and other adhesive products for industrial, medical and other applications, as well as fastener solutions.

• Solutions Group – designs, manufactures and sells a wide variety of branding and information solutions, including brand and price tickets, tags and labels (including RFID inlays), and related services, supplies and equipment.

Intersegment sales are recorded at or near market prices and are eliminated in determining consolidated sales. We evaluate our performance based on income from operations before interest expense and taxes. Corporate expense is excluded from the computation of income from operations for the segments.

We do not disclose total assets by reportable segment since we neither generate nor review that information internally. As our reporting structure is neither organized nor reviewed internally by country, results by individual country are not provided.

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Disaggregated Revenue Information

Disaggregated revenue information is shown below in the manner that best reflects how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Revenue from our Materials Group reportable segment is attributed to geographic areas based on the location from which products are shipped. Revenue from our Solutions Group reportable segment is shown by product group.

(In millions)						2022						2021						2020
Net sales to unaffiliated customers
Materials Group(1):
U.S.						$	1,892.1					$	1,736.4					$	1,504.5
Europe						2,396.2						2,261.1						1,952.8
Asia						1,390.3						1,471.1						1,245.3
Latin America						470.1						408.6						350.9
Other international						346.4						329.3						287.1
Total Materials Group						6,495.1						6,206.5						5,340.6
Solutions Group:
Apparel						1,851.2						1,839.1						1,432.3
Identification Solutions and Vestcom						693.0						362.7						198.6
Total Solutions Group						2,544.2						2,201.8						1,630.9
Net sales to unaffiliated customers						$	9,039.3					$	8,408.3					$	6,971.5

(1)			Previously reported segment results have been recast to reflect our new operating structure.

Revenue from our Materials Group reportable segment by product group is shown below.

(In millions)						2022						2021						2020
Net sales to unaffiliated customers
Materials Group:
Labels, graphics and reflectives						$	5,725.7					$	5,430.4					$	4,715.1
Tapes and adhesives						696.3						703.4						565.9
Other						73.1						72.7						59.6
Total Materials Group						$	6,495.1					$	6,206.5					$	5,340.6

Our total company revenue by geographic area is shown below. Revenue is attributed to geographic areas based on the location from which products are shipped.

(In millions)						2022						2021						2020
Net sales to unaffiliated customers
U.S.						$	2,565.9					$	2,065.2					$	1,683.6
Europe						2,683.6						2,541.4						2,164.7
Asia						2,817.2						2,914.5						2,378.5
Latin America						605.7						537.6						440.3
Other international						366.9						349.6						304.4
Net sales to unaffiliated customers						$	9,039.3					$	8,408.3					$	6,971.5

Net sales to unaffiliated customers in Asia included sales in China (including Hong Kong) of $1.50 billion in 2022, $1.68 billion in 2021 and $1.31 billion in 2020.

No single customer represented 10% or more of our net sales in year-end 2022, 2021 or 2020. During 2022, 2021 and 2020, our ten largest customers by net sales in the aggregate represented approximately 16%, 16% and 17% of our net sales, respectively.

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Additional Segment Information

Additional financial information by reportable segment and Corporate is shown below.

(In millions)						2022						2021						2020
Intersegment sales
Materials Group(1)						$	137.1					$	105.8					$	81.9
Solutions Group						37.4						37.3						27.5
Intersegment sales						$	174.5					$	143.1					$	109.4
Income before taxes
Materials Group(1)						$	859.3					$	883.3					$	747.0
Solutions Group						302.3						257.2						144.7
Corporate expense						(87.6)						(81.8)						(82.5)
Interest expense						(84.1)						(70.2)						(70.0)
Other non-operating expense (income), net						9.4						4.1						(1.9)
Income before taxes						$	999.3					$	992.6					$	737.3
Capital expenditures**(2)(3)**
Materials Group(1)						$	153.5					$	170.3					$	104.6
Solutions Group						144.0						96.3						101.6
Capital expenditures						$	297.5					$	266.6					$	206.2
Depreciation and amortization expense**(2)**
Materials Group(1)						$	135.8					$	141.9					$	133.7
Solutions Group						154.9						102.2						71.6
Depreciation and amortization expense						$	290.7					$	244.1					$	205.3
Other expense (income), net by reportable segment
Materials Group(1)						$	(13.4)					$	(25.7)					$	30.6
Solutions Group						7.8						36.6						22.7
Corporate						5.0						(5.3)						.3
Other expense (income), net						$	(.6)					$	5.6					$	53.6

(1)			Previously reported segment results have been recast to reflect our new operating structure.
(2)			Corporate capital expenditures and depreciation and amortization expense are allocated to the reportable segments based on their percentage of consolidated net sales.
(3)			Capital expenditures for property, plant and equipment included accruals.

Other expense (income), net by type were as follows:

(In millions)						2022						2021						2020
Other expense (income), net by type
Restructuring charges:
Severance and related costs						$	7.6					$	10.5					$	49.1
Asset impairment charges and lease cancellation costs						.1						3.1						6.2
Other items:
Transaction and related costs						.3						20.9						4.2
Outcomes of legal proceedings, net(1)						6.3						(.4)						—
Gain on venture investments, net						(13.5)						(23.0)						(5.4)
(Gain) loss on sales of assets, net						(1.4)						.2						(.5)
Gain on sale of product line						—						(5.7)						—
Other expense (income), net						$	(.6)					$	5.6					$	53.6

(1)			Amount for 2021 included an indirect tax credit based on a Brazilian Federal Supreme Court ruling in the amount of $29.1 million, partially offset by a contingent liability related to a patent infringement lawsuit in the amount of $26.6 million. Refer to Note 8, “Contingencies” for more information regarding the patent infringement lawsuit.

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Property, plant and equipment, net, in our U.S. and international operations were as follows:

(In millions)						2022						2021						2020
Property, plant and equipment, net
U.S.						$	589.0					$	524.0					$	403.1
International						951.2						953.7						940.6
Property, plant and equipment, net						$	1,540.2					$	1,477.7					$	1,343.7

Property, plant and equipment, net, located in China (including Hong Kong) was approximately $259 million in 2022, $290 million in 2021 and $297 million in 2020.

NOTE 16. SUPPLEMENTAL FINANCIAL INFORMATION

Inventories

Inventories at year-end were as follows:

(In millions)						2022						2021
Raw materials						$	457.6					$	393.6
Work-in-progress						255.1						233.1
Finished goods						297.2						280.5
Inventories						$	1,009.9					$	907.2

Property, Plant and Equipment, Net

Major classes of property, plant and equipment, stated at cost, at year-end were as follows:

(In millions)						2022						2021
Land						$	29.3					$	28.6
Buildings and improvements						781.0						777.6
Machinery and equipment						2,667.8						2,582.2
Construction-in-progress						269.6						237.8
Property, plant and equipment						3,747.7						3,626.2
Accumulated depreciation						(2,207.5)						(2,148.5)
Property, plant and equipment, net						$	1,540.2					$	1,477.7

Software

Capitalized software costs at year-end were as follows:

(In millions)						2022						2021
Cost						$	390.6					$	403.9
Accumulated amortization						(282.3)						(280.6)
Software, net						$	108.3					$	123.3

Software amortization expense was $29.5 million in 2022, $30.1 million in 2021 and $29.0 million in 2020.

Allowance for Credit Losses

Given the short-term nature of trade receivables, our allowance for credit losses is based on the financial condition of customers, the aging of receivable balances, our historical collections experience, and current and expected future macroeconomic and market conditions, including as a result of COVID-19. Balances are written off in the period in which they are determined to be uncollectible.

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The activity related to our allowance for credit losses was as follows:

(In millions)						2022						2021
Balance at beginning of year						$	33.0					$	44.6
Provision for (reversal of) credit losses						6.9						(4.7)
Amounts written off						(4.3)						(7.7)
Other, including foreign currency translation						(1.2)						.8
Balance at end of year						$	34.4					$	33.0

The provision for credit losses was $20.3 million in 2020 and reflected impacts on customers as a result of COVID-19.

Research and Development

Research and development expense, which is included in “Marketing, general and administrative expense” in the Consolidated Statements of Income, was as follows:

(In millions)						2022						2021						2020
Research and development expense						$	136.1					$	136.6					$	112.8

Supplemental Cash Flow Information

Cash paid for interest and income taxes was as follows:

(In millions)						2022						2021						2020
Interest						$	80.9					$	62.8					$	69.6
Income taxes, net of refunds						204.8						253.4						203.4

Foreign Currency Effects

Gains and losses resulting from foreign currency transactions are included in income in the period incurred. Transactions in foreign currencies (including receivables, payables and loans denominated in currencies other than the functional currency), including hedging impacts, were not material in 2022, 2021 or 2020.

Deferred Revenue

Deferred revenue primarily relates to constrained variable consideration on supply agreements for sales of products, as well as to payments received in advance of performance under a contract. Deferred revenue is recognized as revenue as or when we perform under a contract.

The following table shows the amounts and balance sheet locations of deferred revenue as of December 31, 2022 and January 1, 2022:

(In millions)						December 31, 2022						January 1, 2022
Other current liabilities						$	22.2					$	24.7
Long-term retirement benefits and other liabilities						2.1						1.9
Total deferred revenue						$	24.3					$	26.6

Revenue recognized from amounts included in deferred revenue as of January 1, 2022 was $23.5 million in 2022. Revenue recognized from amounts included in deferred revenue as of January 2, 2021 was $18.4 million in 2021. Revenue recognized from amounts included in deferred revenue as of December 28, 2019 was $12.0 million in 2020. This revenue was included in “Net sales” in the Consolidated Statements of Income.

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