Avery Dennison 10-Q 2021-10-02

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM

10-Q

(Mark One)

For the quarterly period ended October 2, 2021.

OR

For the transition period from ________________________ to ________________________

Commission file number

1-7685

AVERY DENNISON CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (626)

304-2000

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act). Yes ☐ No ☒

Number of shares of $1 par value common stock outstanding as of October 30, 2021:

82,795,583

AVERY DENNISON CORPORATION

FISCAL THIRD QUARTER 2021 QUARTERLY REPORT ON FORM

10-Q

TABLE OF CONTENTS

Safe Harbor Statement

The matters discussed in this Quarterly Report contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which are not statements of historical fact, contain estimates, assumptions, projections and/or expectations regarding future events, that may or may not occur. Words such as “aim,” “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “foresee,” “guidance,” “intend,” “may,” “might,” “objective,” “plan,” “potential,” “project,” “seek,” “shall,” “should,” “target,” “will,” “would,” or variations thereof, and other expressions that refer to future events and trends, identify forward-looking statements. These forward-looking statements, and financial or other business targets, are subject to certain risks and uncertainties, which could cause our actual results to differ materially from the expected results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements also include those related to the acquisition of Vestcom, including its anticipated effect on our long-term targets and future financial results.

We believe that the most significant risk factors that could affect our financial performance in the near-term include: (i) the impacts to underlying demand for our products and/or foreign currency fluctuations from global economic conditions, political uncertainty, changes in environmental standards and governmental regulations, including as a result of

COVID-19;

(ii) competitors’ actions, including pricing, expansion in key markets, and product offerings; (iii) the degree to which higher costs can be offset with productivity measures and/or passed on to customers through price increases, without a significant loss of volume; and (iv) the execution and integration of acquisitions, including the acquisition of Vestcom.

The more significant risks and uncertainties that may impact us are discussed in more detail under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Result

Showing the first 8K of 70K characters. Open the full section

Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, provides management’s views on our financial condition and results of operations and should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and related notes.

NON-GAAP

FINANCIAL MEASURES

We report our financial results in conformity with accounting principles generally accepted in the United States of America, or GAAP, and also communicate with investors using certain

non-GAAP

financial measures. These

non-GAAP

financial measures are not in accordance with, nor are they a substitute for or superior to, the comparable GAAP financial measures. These

non-GAAP

financial measures are intended to supplement the presentation of our financial results that are prepared in accordance with GAAP. Based upon feedback from investors and financial analysts, we believe that the supplemental

non-GAAP

financial measures we provide are useful to their assessments of our performance and operating trends, as well as liquidity.

Our

non-GAAP

financial measures exclude the impact of certain events, activities or strategic decisions. The accounting effects of these events, activities or decisions, which are included in the GAAP financial measures, may make it difficult to assess our underlying performance in a single period. By excluding the accounting effects, positive or negative, of certain items (e.g., restructuring charges, outcomes of certain legal proceedings, certain effects of strategic transactions and related costs, losses from debt extinguishments, gains or losses from curtailment or settlement of pension obligations, gains or losses on sales of certain assets, gains or losses on investments and other items), we believe that we are providing meaningful supplemental information that facilitates an understanding of our core operating results and liquidity measures. While some of the items we exclude from GAAP financial measures recur, they tend to be disparate in amount, frequency, or timing.

We use these

non-GAAP

financial measures internally to evaluate trends in our underlying performance, as well as to facilitate comparison to the results of competitors for quarters and year-to-date periods, as applicable.

We use the

non-GAAP

financial measures described below in this MD&A.

We believe that sales change ex. currency and organic sales change assist investors in evaluating the sales change from the ongoing activities of our businesses and enhance their ability to evaluate our results from period to period.

Avery Dennison Corporation

OVERVIEW AND OUTLOOK

Operational and Market Update

Uncertainty surrounding the global health crisis remains elevated as many parts of the world are experiencing an increase in cases related to

COVID-19,

with the greatest impact to the company in Southeast Asia, particularly in our Retail Branding and Information Solutions (“RBIS”) reportable segment. The safety and well-being of employees has been and continues to be our top priority. We have taken steps to ensure employee safety, quickly implementing world-class safety protocols and continuing to adapt our guidelines as the pandemic continues to evolve. Where appropriate, we may take further actions required by international, federal, state or local authorities or that we determine are in the best interests of our employees, customers, shareholders and communities.

As supply chains remain constrained, we continue to actively manage through a dynamic supply and demand environment. Demand across the majority of businesses and regions remains strong, while raw materials, freight and labor availability continue to be constrained. Inflation remains persistent and we have implemented pricing and material

re-engineering

actions to offset higher costs. We are leveraging our global scale and working closely with customers and suppliers to minimize disruptions and continue to demonstrate agility and preparedness through robust scenario planning.

Overall,

COVID-19

had a notably negative impact on our consolidated financial results in 2020, most significantly in our RBIS and Industrial and Healthcare Materials (“IHM”) reportable segments. Our operations largely recovered from the prior-period impact of

COVID-19,

with this recovery reflected in higher volume across our businesses.

Net Sales

The factors impacting reported net sales change, as compared to the prior-year period, are shown in the table below.

In the three months and nine months ended October 2, 2021, net sales increased on an organic basis compared to the same periods in the prior year due to higher volume/mix and pricing actions.

Net Income

Net income increased from approximately $364 million in the first nine months of 2020 to approximately $557 million in the first nine months of 2021. Major factors affecting the change in net income included the following:

Offsetting factors:

Avery Dennison Corporation

Acquisitions

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 a purchase price of $1.46 billion, subject to customary post-closing adjustments. We funded this acquisition using a combination of cash and proceeds from commercial paper borrowings and issuances of senior notes. Refer to Note 4, “Debt,” to the unaudited Condensed Consolidated Financial Statements for more information.

We believe Vestcom’s solutions expand our position in high value categories while adding channel access and data management capabilities to our RBIS reportable segment.

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. We believe this acquisition enhances the product portfolio in our RBIS reportable segment.

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. We believe this acquisition expands the product portfolio in our IHM 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 performance targets. We estimate the fair value of these earn-out payments as of October 2, 2021 to be approximately $12 million, which has been included in the $43 million of aggregate purchase consideration.

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

Refer to Note 2, “Acquisitions,” to the unaudited Condensed Consolidated Financial Statements for more information.

Cost Reduction Actions

2019/2020 Actions

During the nine months ended October 2, 2021, we recorded $6.7 million in restructuring charges related to our 2019/2020 actions. These charges consisted of severance and related costs for the reduction of approximately 235 positions at numerous locations across our company, which primarily included actions in our RBIS reportable segment. The actions were primarily related to global headcount and footprint reductions, with some actions accelerated or expanded in response to COVID-19.

Restructuring charges were included in “Other expense (income), net” in the unaudited Condensed Consolidated Statements of Income. Refer to Note 6, “Cost Reduction Actions,” to the unaudited Condensed Consolidated Financial Statements for more information.

Avery Dennison Corporation

Cash Flow

During the first nine months of 2021, net cash provided by operating activities increased compared to the same period last year primarily due to higher net income and improved operational working capital, partially offset by higher income tax payments, net of refunds. During the first nine months of 2021, free cash flow increased compared to the same period last year primarily due to an increase in net cash provided by operating activities, partially offset by an increase in purchases of property, plant and equipment.

Outlook

In addition to the continued uncertain impact on

COVID-19

on our businesses and including the impact of the recently completed Vestcom acquisition, certain factors that we believe may contribute to our 2021 results are described below.

ANALYSIS OF RESULTS OF OPERATIONS FOR THE THIRD QUARTER

Income Before Taxes

Gross Profit Margin

Gross profit margin for the third quarter of 2021 decreased from the same period last year primarily due to the net impact of higher selling prices, higher raw material costs, and higher freight costs and higher employee-related costs, partially offset by higher volume and the impact of prior-year temporary cost reduction actions.

Marketing, General and Administrative Expense

Marketing, general and administrative expense increased in the third quarter of 2021 compared to the same period last year primarily due to growth investments, higher employee-related costs, and the impact of prior-year temporary cost reduction actions.

Avery Dennison Corporation

Other Expense (Income), Net

Refer to Note 6, “Cost Reduction Actions,” to the unaudited Condensed Consolidated Financial Statements for more information regarding restructuring charges.

In May 2021, the Brazilian Federal Supreme Court ruled on the recovery of certain indirect taxes that we had paid in previous years. As a result of the ruling, we recorded a gain of $29.1 million in “Other expense (income), net” in the unaudited Condensed Consolidated Statements of Income. We expect to use these recoveries to offset our future taxes in Brazil. Refer to Note 13, “Segment and Disaggregated Revenue Information,” to the unaudited Condensed Consolidated Financial Statements for more information regarding this ruling.

Interest Expense

Interest expense increased in the third quarter of 2021 compared to the same period last year reflecting additional interest costs related to the $800 million of senior notes we issued in August 2021.

Net Income and Earnings per Share

Provision for (Benefit from) Income Taxes

Our effective tax rate for the three months ended October 2, 2021 was 26.4% compared to 23.4% in the same period last year. The increase was primarily due to a higher forecasted effective tax rate and transaction costs related to the Vestcom acquisition, partially offset by a higher discrete benefit from return-to-provision adjustments upon completion of our 2020 U.S. federal tax return. Refer to Note 8, “Taxes Based on Income,” to the unaudited Condensed Consolidated Financial Statements for more information.

Avery Dennison Corporation

RESULTS OF OPERATIONS BY REPORTABLE SEGMENT FOR THE THIRD QUARTER

Operating income refers to income before taxes, interest and other

non-operating

expense (income), net.

Label and Graphic Materials

Net Sales

The factors impacting reported net sales change are shown in the table below.

(1)

Totals may not sum due to rounding

In the third quarter of 2021, net sales increased on an organic basis compared to the same period in the prior year due to favorable volume/mix and pricing actions. On an organic basis, net sales increased by low-double digit rates in emerging markets and North America and more than 20% in Western Europe.

Operating Income

Operating income increased in the third quarter of 2021 compared to the same period last year primarily due to favorable volume/mix, partially offset by the net impact of higher selling prices, higher raw material costs, and higher freight costs and higher employee-related costs.

Retail Branding and Information Solutions

Net Sales

The factors impacting reported net sales change are shown in the table below.

Avery Dennison Corporation

In the third quarter of 2021, company-wide, net sales of Intelligent Labels solutions and the base business increased on an organic basis by a mid-teens rate.

Operating Income

Operating income increased in the third quarter of 2021 compared to the same period last year primarily due to higher volume, benefits from productivity initiatives, including savings from restructuring actions, net of transition costs, partially offset by increased transaction and related costs, higher employee-related costs, the impact of prior-year temporary cost reduction actions, and growth investments.

Industrial and Healthcare Materials

Net Sales

The factors impacting reported net sales change are shown in the table below.

(1)

Totals may not sum due to rounding

In the third quarter of 2021, net sales increased on an organic basis compared to the same period in the prior year primarily due to a high-teens rate increase in industrial categories and a high-single digit rate increase in healthcare categories.

Operating Income

Operating income increased in the third quarter of 2021 compared to the same period last year primarily due to higher volume/mix and lower restructuring charges, partially offset by the net impact of higher selling prices, higher raw material costs, and higher freight costs, the impact of prior-year temporary cost reduction actions, and higher employee-related costs.

ANALYSIS OF RESULTS OF OPERATIONS FOR THE NINE MONTHS

YEAR-TO-DATE

Income Before Taxes

Avery Dennison Corporation

Gross Profit Margin

Gross profit margin for the first nine months of 2021 increased from the same period last year primarily due to higher volume and benefits from productivity initiatives, including savings from restructuring actions, net of transition costs, partially offset by the net impact of higher selling prices, higher raw material costs, and higher freight costs, the impact of prior-year temporary cost reduction actions, and higher employee-related costs.

Marketing, General and Administrative Expense

Marketing, general and administrative expense increased in the first nine months of 2021 compared to the same period last year primarily due to higher employee-related costs, the impact of prior-year temporary cost reduction actions, growth investments, and unfavorable currency translation, partially offset by lower allowances for credit losses and benefits from productivity initiatives, including savings from restructuring actions, net of transition costs.

Other Expense (Income), Net

Refer to Note 6, “Cost Reduction Actions,” to the unaudited Condensed Consolidated Financial Statements for more information regarding restructuring charges. Refer to Note 13, “Segment and Disaggregated Revenue Information,” to the unaudited Condensed Consolidated Financial Statements for more information regarding outcomes of legal proceedings.

Interest Expense

Interest expense decreased in the first nine months of 2021 compared to the same period last year reflecting lower borrowing rates on outstanding indebtedness.

Net Income and Earnings per Share

Provision for (Benefit from) Income Taxes

Our effective tax rate for the nine months ended October 2, 2021 was 25.1% compared to 23.8% in the same period last year. The increase was primarily due to net discrete tax charges related to tax effects on outcomes of certain legal proceedings and transaction costs related to the Vestcom acquisition, partially offset by higher discrete benefits from return-to-provision adjustments for tax years 2018 and 2020. Refer to Note 8, “Taxes Based on Income,” to the unaudited Condensed Consolidated Financial Statements for more information.

Avery Dennison Corporation

We estimate our effective tax rate for fiscal year 2021 to be in the

mid-twenty

percent range. Our effective tax rate can vary from quarter to quarter due to a variety of factors, such as changes in the mix of earnings in countries with differing statutory tax rates, changes in tax reserves, settlements of income tax audits, changes in tax laws and regulations,

return-to-provision

adjustments, tax impacts related to stock-based payments and execution of tax planning strategies.

RESULTS OF OPERATIONS BY REPORTABLE SEGMENT FOR THE NINE MONTHS

YEAR-TO-DATE

Operating income refers to income before taxes, interest and other

non-operating

expense (income), net.

Label and Graphic Materials

Net Sales

The factors impacting reported net sales change are shown in the table below.

(1)

Totals may not sum due to rounding

In the first nine months of 2021, net sales increased on an organic basis compared to the same period in the prior year due to favorable volume/mix. On an organic basis, net sales increased by a mid-teens rate in emerging markets, a

mid-to-high

single digit rate in North America, and a mid-teens rate in Western Europe.

Operating Income

Operating income increased in the first nine months of 2021 compared to the same period last year primarily due to favorable volume/mix, the Brazil indirect tax credit, lower restructuring charges, favorable foreign currency translation, and lower allowances for credit losses. These benefits were partially offset by the net impact of higher selling prices, higher raw material costs, and higher freight costs and higher employee-related costs.

Retail Branding and Information Solutions

Avery Dennison Corporation

Net Sales

The factors impacting reported net sales change are shown in the table below.

(1)

Totals may not sum due to rounding

On an organic basis, net sales in the segment related to Intelligent Labels increased by approximately 30%. Net sales in the base business increased approximately 25% in the first nine months of 2021, partially due to the recovery from the prior-period impact of

COVID-19.

Operating Income

Operating income increased in the first nine months of 2021 compared to the same period last year primarily due to higher volume, benefits from productivity initiatives, including savings from restructuring actions, net of transition costs, and lower restructuring charges, partially offset by higher employee-related costs, outcomes of legal proceedings, the impact of prior-year temporary cost reduction actions, growth investments, and higher transaction and related costs.

Industrial and Healthcare Materials

Net Sales

The factors impacting reported net sales change are shown in the table below.

(1)

Totals may not sum due to rounding

In the first nine months of 2021, net sales increased on an organic basis compared to the same period in the prior year primarily due to an increase of approximately 30% in industrial categories, partially offset by a

low-single

digit rate decline in healthcare categories.

Operating Income

Operating income increased in the first nine months of 2021 compared to the same period last year primarily due to higher volume/mix and lower restructuring charges, partially offset by the impact of prior-year temporary cost reduction actions, the net impact of higher selling prices, higher raw material costs, and higher freight costs and higher employee-related costs.

Avery Dennison Corporation

FINANCIAL CONDITION

Liquidity

Operating Activities

During the first nine months of 2021, net cash provided by operating activities increased compared to the same period last year primarily due to higher net income and improved operational working capital, partially offset by higher income tax payments, net of refunds.

Investing Activities

Purchases of Property, Plant and Equipment

During the first nine months of 2021, we primarily invested in equipment to support growth in the U.S. and certain countries in Europe and Asia for our Labels and Graphic Materials (“LGM”) reportable segment, in the U.S. for our IHM reportable segment, and in the U.S. and certain countries in Asia for our RBIS reportable segment. During the first nine months of 2020, we primarily invested in equipment and expanded manufacturing facilities to support growth in the U.S. and certain countries in Europe and Asia for our LGM reportable segment, in the U.S. and certain countries in Europe for our IHM reportable segment, and in the U.S. and certain countries in Asia for our RBIS reportable segment.

Purchases of Software and Other Deferred Charges

During the first nine months of 2021, we invested in information technology upgrades in the U.S. and Europe. During the first nine months of 2020, we invested in information technology upgrades worldwide.

Proceeds from Sale of Product Line

During the first nine months of 2021, proceeds from the sale of a product line were in our LGM reportable segment.

Payments for Acquisitions, Net of Cash Acquired, and Investments in Businesses

During the first nine months of 2021, we paid consideration, net of cash acquired, of approximately $1.44 billion and $32 million for the Vestcom acquisition and the Other 2021 Acquisitions, respectively. We funded the Vestcom acquisition using the net proceeds from the $500 million and $300 million senior notes we issued in August 2021, commercial paper borrowings and cash. We funded the Other 2021 Acquisitions using cash and commercial paper borrowings. During the first nine months of 2020, we paid consideration, net of cash acquired, of approximately $255 million to acquire Smartrac, which we initially funded using commercial paper borrowings. We also invested in certain strategic unconsolidated businesses in both 2021 and 2020.

Avery Dennison Corporation

Financing Activities

Borrowings and Repayment of Debt

During the first nine months of 2021 and 2020, our commercial paper borrowings were used to fund acquisitions, dividend payments, share repurchases and capital expenditures, and for other general corporate purposes.

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 the issuance, after deducting underwriting discounts and offering expenses, were $493.8 million. Additionally, in August 2021, we issued $300 million of senior notes, due August 15, 2024, which may be repaid without penalty on or after August 15, 2022 and bear an interest rate of 0.850%, payable semiannually in arrears. Our net proceeds from the issuance, after deducting underwriting discounts and offering expenses, were $298.1 million. We used the net proceeds from these two debt issuances to finance a portion of the Vestcom acquisition.

Refer to Note 2, “Acquisitions,” and Note 4, “Debt,” to the Unaudited Condensed Consolidated Financial Statements for more information.

During the first quarter of 2020, commercial paper borrowings were also used for the Smartrac acquisition, with those borrowings subsequently repaid using a portion of the net proceeds from the $500 million of senior notes we issued in March 2020. We used the remaining proceeds from these notes to repay our $250 million of senior notes that matured in April 2020.

In the first quarter of 2020, in light of uncertainty due to

COVID-19

regarding the availability of commercial paper borrowings, which we typically rely upon to fund our

day-to-day

operational needs, and the relatively favorable terms under our $800 million revolving credit facility (the “Revolver), we borrowed $500 million from the Revolver with a

six-month

duration. This amount was repaid in June 2020.

Dividends Paid

We paid dividends of $1.98 per share in the first nine months of 2021 compared to $1.74 per share in the same period last year. In April 2021, we increased our quarterly dividend rate to $.68 per share, representing an increase of approximately 10% from our previous quarterly dividend rate of $.62 per share.

Share Repurchases

During the first nine months of 2021 and 2020, we repurchased approximately .7 million and .4 million shares of our common stock, respectively.

Net (Tax Withholding) Proceeds Related to Stock-Based Compensation

During the first nine months of 2021, tax withholding for stock-based compensation increased compared to the same period last year primarily as a result of equity awards vesting at higher share prices.

Analysis of Selected Balance Sheet Accounts

Long-lived Assets

In the nine months ended October 2, 2021, goodwill increased by approximately $760 million to $1.90 billion, which reflected the preliminary valuation of goodwill associated with the Vestcom acquisition and the Other 2021 Acquisitions, partially offset by the impact of foreign currency translation.

In the nine months ended October 2, 2021, other intangibles resulting from business acquisitions, net, increased by approximately $707 million to $931.5 million, which reflected the preliminary valuation of intangible assets associated with the Vestcom acquisition and the Other 2021 Acquisitions, partially offset by current year amortization expense and the impact of foreign currency translation.

Refer to Note 3, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” to the unaudited Condensed Consolidated Financial Statements for more information.

Avery Dennison Corporation

Shareholders’ Equity Accounts

As of October 2, 2021, the balance of our shareholders’ equity was $1.80 billion. Refer to Note 10, “Supplemental Equity and Comprehensive Income Information,” to the unaudited Condensed Consolidated Financial Statements for more information.

Impact of Foreign Currency Translation

International operations generated approximately 76% of our net sales during the nine months ended October 2, 2021. Our future results are subject to changes in political and economic conditions in the regions in which we operate and the impact of fluctuations in foreign currency exchange and interest rates.

The favorable impact of foreign currency translation on net sales in the first nine months of 2021 compared to the same period last year was primarily related to euro-denominated sales and sales in China.

Effect of Foreign Currency Transactions

The impact on our net income from transactions denominated in foreign currencies is largely mitigated because the costs of our products are generally denominated in the same currencies in which they are sold. In addition, to reduce our income and cash flow exposure to transactions in foreign currencies, we enter into foreign exchange forward, option and swap contracts where available and appropriate. Refer to Note 7, “Financial Instruments,” to the unaudited Condensed Consolidated Financial Statements for more information.

Analysis of Selected Financial Ratios

We utilize the financial ratios discussed below to assess our financial condition and operating performance. We believe this information assists our investors in understanding the drivers of our cash flow other than net income and capital expenditures.

Operational Working Capital Ratio

Operational working capital, as a percentage of annualized current-quarter net sales, is reconciled to working capital below. Our objective is to minimize our investment in operational working capital, as a percentage of annualized current-quarter net sales, to maximize cash flow and return on investment. Operational working capital, as a percentage of annualized current-quarter net sales, in the third quarter of 2021 was lower compared to the third quarter of 2020.

(1)

Included 2021 estimated annualized sales for Vestcom.

Accounts Receivable Ratio

The average number of days sales outstanding was 62 days in the third quarter of 2021 compared to 64 days in the third quarter of 2020, calculated using the accounts receivable balance at

quarter-end

divided by the average daily sales, including the 2021 estimated annualized sales for Vestcom, in the third quarter of 2021 and 2020, respectively. The higher average number of days sales outstanding in 2020 primarily reflected the impact of

COVID-19

on our customers. Additionally, the average number of days sales outstanding in 2021 decreased due to higher volume, the impact of foreign currency translation, and focused collection efforts, partially offset by the impact of acquisitions.

Inventory Ratio

Average inventory turnover was 7.1 in the third quarter of 2021 compared to 7.5 in the third quarter of 2020, calculated using the annualized third-quarter cost of products sold, including the 2021 estimated annualized cost of products sold for Vestcom, in 2021 and 2020, respectively, and divided by the inventory balance at

quarter-end.

Avery Dennison Corporation

The decrease in average inventory turnover primarily reflected higher inventory balances to manage supply chain disruptions, anticipated increased demand, and the impact of increasing raw material costs, partially offset by volume-driven higher cost of products sold. Additionally, inventory turnover in the third quarter of 2020 reflected lower cost of products sold as a result of lower demand due to

COVID-19.

Accounts Payable Ratio

The average number of days payable outstanding was 74 days in the third quarter of 2021 compared to 68 days in the third quarter of 2020, calculated using the accounts payable balance at

quarter-end

divided by the annualized third-quarter cost of products sold, including the 2021 estimated annualized cost of products sold for Vestcom, in 2021 and 2020, respectively. The increase in the average number of days payable outstanding from the prior year primarily reflected the impact of higher accounts payable balances due to our inventory build-up to manage supply chain disruptions, anticipated increased demand and the impact of increasing raw material costs, partially offset by volume-driven higher cost of products sold and the impact of acquisitions.

Capital Resources

Capital resources include cash flows from operations, cash and cash equivalents, and debt financing, including access to commercial paper borrowings supported by our Revolver. We use these resources to fund our operational needs.

As of October 2, 2021, we had cash and cash equivalents of $207.2 million held in accounts at third-party financial institutions. Our cash balances are held in numerous locations throughout the world. As of October 2, 2021, the majority of our cash and cash equivalents was held by our foreign subsidiaries, primarily in Asia Pacific and Europe.

To meet our U.S. cash requirements, we have several cost-effective liquidity options available. These options include borrowing funds at reasonable rates, including borrowings from foreign subsidiaries, and repatriating foreign earnings and profits. However, if we were to repatriate foreign earnings and profits, a portion would be subject to cash payments of withholding taxes imposed by foreign tax authorities. Additional U.S. taxes may also result from the impact of foreign currency movements related to these earnings and profits.

The Revolver, which matures in February 2025, is used as a

back-up

facility for our commercial paper borrowings and can be used for other corporate purposes. No balance was outstanding under the Revolver as of October 2, 2021 or January 2, 2021.

Capital from Debt

The carrying value of our total debt increased by approximately $1.08 billion in the first nine months of 2021 to $3.20 billion, primarily reflecting our issuance of the $500 million and $300 million senior notes in August 2021 and a net increase in commercial paper borrowings.

Credit ratings are a significant factor in our ability to raise short- and long-term financing. The credit ratings assigned to us also impact the interest rates we pay and our access to commercial paper, credit facilities, and other borrowings. A downgrade of our short-term credit ratings could impact our ability to access commercial paper markets. If our access to commercial paper markets were to become limited, as it did in the first quarter of 2020 as a result of

COVID-19,

we believe that the Revolver and our other credit facilities would be available to meet our short-term funding requirements. When determining a credit rating, we believe that rating agencies primarily consider our competitive position, business outlook, consistency of cash flows, debt level and liquidity, geographic dispersion and management team. There has been no change to the credit ratings assigned to us as a result of

COVID-19.

We remain committed to maintaining an investment grade rating.

Off-Balance

Sheet Arrangements, Contractual Obligations, and Other Matters

Refer to Note 12, “Commitments and Contingencies,” to the unaudited Condensed Consolidated Financial Statements for this information. Except as indicated therein, we have no material

off-balance

sheet arrangements as described in Item 303(b) of Regulation

S-K.

Avery Dennison Corporation

There have been no material changes to the information provided in Part II, Item 7A of our Annual Report on Form

10-K

for the fiscal year ended January 2, 2021 that have not been disclosed in our periodic filings with the SEC.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Exchange Act Rules

13a-15(f))

that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure.

In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our disclosure controls system is based upon a global chain of financial and general business reporting lines that converge in our headquarters in Glendale, California. As required by SEC Rule

13a-15(b),

we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such time to provide reasonable assurance that information was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We have excluded CB Velocity Holdings, LLC (“Vestcom”) from our assessment of internal control over financial reporting as of the end of the third quarter 2021 because we acquired the company in a purchase business combination during the third quarter 2021. Vestcom is a wholly-owned subsidiary, the total assets of which, excluding goodwill and other intangibles resulting from business acquisitions, and total revenues of which have been excluded from our assessment of internal control over financial reporting. These items represent 3% and less than 1%, respectively, of the related unaudited consolidated financial statement amounts as of and for the nine months ended October 2, 2021.

Avery Dennison Corporation

PART II. OTHER INFORMATION

Refer to “Legal Proceedings” in Note 12, “Commitments and Contingencies,” to the unaudited Condensed Consolidated Financial Statements in Part 1, Item 1 for this information.

There have been no material changes to the risk factors included in Part I, Item 1A, of our Annual Report on Form

10-K

for the fiscal year ended January 2, 2021 that have not been disclosed in our periodic filings with the SEC, except as set forth below.

The successful execution of our business strategy following the consummation of the acquisition of Vestcom involves risks and may not be successful.

On July 27, 2021, we entered into an Agreement and Plan of Merger by and among the Company, CB Velocity Holdings, LLC (“Vestcom”), Lobo Merger Sub, LLC (“Merger Sub”) and Charlesbank Equity Fund VIII, Limited Partnership (the “Merger Agreement”) pursuant to which, on the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub would merge with and into Vestcom, with Vestcom surviving the merger as a wholly-owned subsidiary of the Company (the “Acquisition”).

The Acquisition closed on August 31, 2021. The success of the Acquisition depends, in part, on the ability of the combined company to realize the anticipated benefits from combining our business with that of Vestcom. Realizing these benefits depends, in part, on maintaining adequate focus on executing the business strategies of the combined company as well as the successful integration of assets, operations, functions and personnel. At this time, there can be no assurance that any cost savings, economies of scale, enhanced liquidity or other operational efficiencies, as well as revenue enhancement opportunities anticipated from the combination, or other synergies, will be realized.

If management of the combined company is unable to continue minimizing the potential disruption of the combined company’s ongoing business during the integration process, the anticipated benefits of the Acquisition may not be partially or fully realized. In addition, the inability to successfully manage the implementation of appropriate systems, policies, benefits and compliance programs for the combined company could have a material adverse effect on our business.

Any or all of these events could adversely affect the combined company’s ability to maintain relationships with service providers, customers and employees as a result of the Acquisition or realize the anticipated benefits of the Acquisition.

Potential new U.S. tax legislation could materially and adversely affect our effective tax rate.

The U.S. government has proposed significant changes to the taxation of corporations, which may include the following: an increase in the corporate income tax rate, the imposition of minimum taxes or surtaxes on certain types of income, significant changes to the taxation of income derived from international business activities, and the addition of further limitations on interest deductions. While various proposals are under active consideration, it is unclear at this time what, if any, changes will be enacted and the impact and timing thereof.

Avery Dennison Corporation

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Repurchases by us or our “affiliated purchasers” (as defined in Rule

10b-18(a)(3)

of the Exchange Act) of registered equity securities in the third quarter of 2021 are shown in the table below. Repurchased shares may be reissued under our long-term incentive plan or used for other corporate purposes.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

Avery Dennison Corporation

Not Applicable

Avery Dennison Corporation

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.