filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
| ● | Sales change ex. currency refers to the increase or decrease in net sales, excluding the estimated impact of foreign currency translation, and, where applicable, the calendar shift resulting from the extra week in the prior fiscal year and currency adjustment for transitional reporting of highly inflationary economies. The estimated impact of foreign currency translation is calculated on a constant currency basis, with prior period results translated at current period average exchange rates to exclude the effect of currency fluctuations. |
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| ● | Organic sales change refers to sales change ex. currency, excluding the estimated impact of acquisitions and product line divestitures. |
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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.
| ● | Free cash flow refers to cash flow provided by operating activities, less payments for property, plant and equipment, software and other deferred charges, plus proceeds from sales of property, plant and equipment, plus (minus) net proceeds from insurance and sales (purchases) of investments. Free cash flow is also adjusted for, where applicable, certain acquisition-related transaction costs. We believe that free cash flow assists investors by showing the amount of cash we have available for debt reductions, dividends, share repurchases and acquisitions. |
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| ● | Operational working capital as a percentage of annualized current quarter net sales refers to trade accounts receivable and inventories, net of accounts payable, and excludes cash and cash equivalents, short-term borrowings, deferred taxes, other current assets and other current liabilities, as well as net current assets or liabilities held-for-sale divided by annualized current quarter net sales. We believe that operational working capital as a percentage of annualized current quarter net sales assists investors in assessing our working capital requirements because it excludes the impact of fluctuations attributable to our financing and other activities (which affect cash and cash equivalents, deferred taxes, other current assets, and other current liabilities) that tend to be disparate in amount, frequency, or timing, and may increase the volatility of working capital as a percentage of sales from period to period. The items excluded from this measure are not significantly influenced by our day-to-day activities managed at the operating level and do not necessarily reflect the underlying trends in our operations. |
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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.
| Three Months Ended October 2, 2021 | Nine Months Ended October 2, 2021 | |||||||
| Reported sales change | 20 | % | 25 | % | ||||
| Foreign currency translation Extra week impact | (3 — | ) | (5 (1 | ) ) | ||||
| Sales change ex. currency (1) | 17 | 19 | ||||||
| Acquisitions and product line divestitures | (3 | ) | (2 | ) | ||||
| Organic sales change (1) | 14 | % | 17 | % |
| (1) | Totals may not sum due to rounding |
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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:
| ● | Higher volume/mix |
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| ● | Favorable currency translation |
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| ● | Benefits from productivity initiatives, including savings from restructuring actions, net of transition costs |
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| ● | Benefit from the Brazil indirect tax credit |
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| ● | Lower allowances for credit losses |
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Offsetting factors:
| ● | Higher employee-related costs |
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| ● | The impact of prior-year temporary cost reduction actions |
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| ● | Higher tax provision |
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| ● | Net impact of higher selling prices, higher raw material costs, and higher freight costs |
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| ● | Contingent liability related to patent infringement litigation |
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| ● | Higher transaction and related costs |
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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
| Nine Months Ended | ||||||||
| (In millions) | October 2, 2021 | September 26, 2020 | ||||||
| Net cash provided by operating activities | $ | 762.8 | $ | 441.8 | ||||
| Purchases of property, plant and equipment | (130.6 | ) | (91.7 | ) | ||||
| Purchases of software and other deferred charges | (9.8 | ) | (13.8 | ) | ||||
| Proceeds from sales of property, plant and equipment | 1.1 | .2 | ||||||
| Proceeds from insurance and sales (purchases) of investments, net | 1.2 | 5.2 | ||||||
| Payments for certain acquisition-related transaction costs | 14.5 | — | ||||||
| Free cash flow | $ | 639.2 | $ | 341.7 |
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.
| ● | We expect net sales to increase by approximately 20%, including an increase of approximately 3.5% from the effect of foreign currency translation and a decrease of approximately 1.5% related to the calendar shift resulting from the extra week in 2020. |
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| ● | We expect closed acquisitions to benefit operating income. |
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| ● | Based on recent exchange rates, we expect foreign currency translation to increase our operating income by approximately $30 million. |
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| ● | We expect incremental savings from restructuring actions, net of transition costs, of approximately $60 million. |
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| ● | We expect the pace of our investments in our businesses to accelerate throughout the year. |
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| ● | We expect our full year effective tax rate to be in the mid-twenty percent range. |
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| ● | We expect net cash provided by operating activities and free cash flow to increase. |
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ANALYSIS OF RESULTS OF OPERATIONS FOR THE THIRD QUARTER
Income Before Taxes
| Three Months Ended | ||||||||
| (In millions, except percentages) | October 2, 2021 | September 26, 2020 | ||||||
| Net sales | $ | 2,071.8 | $ | 1,729.1 | ||||
| Cost of products sold | 1,517.4 | 1,244.9 | ||||||
| Gross profit | 554.4 | 484.2 | ||||||
| Marketing, general and administrative expense | 296.9 | 258.3 | ||||||
| Other expense (income), net | 16.0 | 12.4 | ||||||
| Interest expense | 18.0 | 15.6 | ||||||
| Other non-operating expense (income), net | (.9 | ) | .1 | |||||
| Income before taxes | $ | 224.4 | $ | 197.8 | ||||
| Gross profit margin | 26.8 | % | 28.0 | % |
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
| Three Months Ended | ||||||||
| (In millions) | October 2, 2021 | September 26, 2020 | ||||||
| Other expense (income), net, by type | ||||||||
| Restructuring charges: | ||||||||
| Severance and related costs | $ | 1.1 | $ | 6.5 | ||||
| Asset impairment charges and lease cancellation costs | 1.3 | 4.4 | ||||||
| Other items: | ||||||||
| Transaction and related costs | 19.4 | — | ||||||
| (Gain) loss on investments | (4.9 | ) | 1.5 | |||||
| Gain on sale of product line | (.9 | ) | — | |||||
| Other expense (income), net | $ | 16.0 | $ | 12.4 |
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
| Three Months Ended | ||||||||
| (In millions, except per share amounts and percentages) | October 2, 2021 | September 26, 2020 | ||||||
| Income before taxes | $ | 224.4 | $ | 197.8 | ||||
| Provision for (benefit from) income taxes | 59.2 | 46.3 | ||||||
| Equity method investment (losses) gains | (1.1 | ) | (1.0 | ) | ||||
| Net income | $ | 164.1 | $ | 150.5 | ||||
| Per share amounts: | ||||||||
| Net income per common share | $ | 1.98 | $ | 1.80 | ||||
| Net income per common share, assuming dilution | 1.96 | 1.79 | ||||||
| Effective tax rate | 26.4 | % | 23.4 | % |
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
| Three Months Ended | ||||||||
| (In millions) | October 2, 2021 | September 26, 2020 | ||||||
| Net sales including intersegment sales | $ | 1,370.6 | $ | 1,165.2 | ||||
| Less intersegment sales | (24.8 | ) | (19.8 | ) | ||||
| Net sales | $ | 1,345.8 | $ | 1,145.4 | ||||
| Operating income (1) | 184.9 | 173.1 | ||||||
| (1) Included charges associated with restructuring actions in both years, transaction and related costs and gain on sale of product line in 2021. | $ | .2 | $ | 1.4 |
Net Sales
The factors impacting reported net sales change are shown in the table below.
| Three Months Ended October 2, 2021 | ||||
| Reported sales change | 18 | % | ||
| Foreign currency translation | (3 | ) | ||
| Sales change ex. currency (1) | 15 | |||
| Acquisitions and product line divestitures | (1 | ) | ||
| Organic sales change (1) | 14 | % |
(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
| Three Months Ended | ||||||||
| (In millions) | October 2, 2021 | September 26, 2020 | ||||||
| Net sales including intersegment sales | $ | 541.1 | $ | 433.4 | ||||
| Less intersegment sales | (10.4 | ) | (7.3 | ) | ||||
| Net sales | $ | 530.7 | $ | 426.1 | ||||
| Operating income (1) | 58.5 | 47.0 | ||||||
| (1) Included charges associated with restructuring actions and gain on investments and transaction and related costs in 2021, and loss on investments in 2020. | $ | 14.6 | $ | 4.4 |
Net Sales
The factors impacting reported net sales change are shown in the table below.
| Three Months Ended October 2, 2021 | ||||
| Reported sales change | 25 | % | ||
| Foreign currency translation | (2 | ) | ||
| Sales change ex. currency (1) | 22 | |||
| Acquisitions | (9 | ) | ||
| Organic sales change (1) | 14 | % |
| (1) | Totals may not sum due to rounding |
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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
| Three Months Ended | ||||||||
| (In millions) | October 2, 2021 | September 26, 2020 | ||||||
| Net sales including intersegment sales | $ | 199.0 | $ | 159.6 | ||||
| Less intersegment sales | (3.7 | ) | (2.0 | ) | ||||
| Net sales | $ | 195.3 | $ | 157.6 | ||||
| Operating income (1) | 18.7 | 12.5 | ||||||
| (1) Included charges associated with restructuring actions in both years and transaction and related costs in 2021. | $ | .7 | $ | 6.6 |
Net Sales
The factors impacting reported net sales change are shown in the table below.
| Three Months Ended October 2, 2021 | ||||
| Reported sales change | 24 | % | ||
| Foreign currency translation | (4 | ) | ||
| Sales change ex. currency (1) | 20 | |||
| Acquisitions | (5 | ) | ||
| Organic sales change (1) | 15 | % |
(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
| Nine Months Ended | ||||||||
| (In millions, except percentages) | October 2, 2021 | September 26, 2020 | ||||||
| Net sales | $ | 6,225.1 | $ | 4,980.6 | ||||
| Cost of products sold | 4,497.4 | 3,628.4 | ||||||
| Gross profit | 1,727.7 | 1,352.2 | ||||||
| Marketing, general and administrative expense | 916.2 | 758.7 | ||||||
| Other expense (income), net | 16.3 | 57.3 | ||||||
| Interest expense | 50.2 | 54.4 | ||||||
| Other non-operating expense (income), net | (3.6 | ) | (.2 | ) | ||||
| Income before taxes | $ | 748.6 | $ | 482.0 | ||||
| Gross profit margin | 27.8 | % | 27.1 | % |
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
| Nine Months Ended | ||||||||
| (In millions) | October 2, 2021 | September 26, 2020 | ||||||
| Other expense (income), net, by type | ||||||||
| Restructuring charges: | ||||||||
| Severance and related costs | $ | 5.1 | $ | 46.4 | ||||
| Asset impairment charges and lease cancellation costs | 1.9 | 6.2 | ||||||
| Other items: | ||||||||
| Transaction and related costs | 20.1 | 3.2 | ||||||
| Loss on sale of assets, net | .2 | — | ||||||
| (Gain) loss on investment | (4.9 | ) | 1.5 | |||||
| Gain on sale of product line | (5.7 | ) | — | |||||
| Outcomes of legal proceedings, net | (.4 | ) | — | |||||
| Other expense (income), net | $ | 16.3 | $ | 57.3 |
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
| Nine Months Ended | ||||||||
| (In millions, except per share amounts and percentages) | October 2, 2021 | September 26, 2020 | ||||||
| Income before taxes | $ | 748.6 | $ | 482.0 | ||||
| Provision for (benefit from) income taxes | 187.7 | 114.8 | ||||||
| Equity method investment (losses) gains | (3.5 | ) | (2.8 | ) | ||||
| Net income | $ | 557.4 | $ | 364.4 | ||||
| Per share amounts: | ||||||||
| Net income per common share | $ | 6.72 | $ | 4.37 | ||||
| Net income per common share, assuming dilution | 6.64 | 4.34 | ||||||
| Effective tax rate | 25.1 | % | 23.8 | % |
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
| Nine Months Ended | ||||||||
| (In millions) | October 2, 2021 | September 26, 2020 | ||||||
| Net sales including intersegment sales | $ | 4,170.1 | $ | 3,475.5 | ||||
| Less intersegment sales | (71.1 | ) | (55.1 | ) | ||||
| Net sales | $ | 4,099.0 | $ | 3,420.4 | ||||
| Operating income (1) | 639.2 | 483.1 | ||||||
| (1) Included charges associated with restructuring actions and transaction and related costs in both years, and outcomes of legal proceedings and gain on sale of product line in 2021. | $ | (30.2 | ) | $ | 28.3 |
Net Sales
The factors impacting reported net sales change are shown in the table below.
| Nine Months Ended October 2, 2021 | ||||
| Reported sales change | 20 | % | ||
| Foreign currency translation Extra week impact | (5 (1 | ) ) | ||
| Sales change ex. currency (1) | 13 | |||
| Acquisitions and product line divestitures | (1 | ) | ||
| Organic sales change (1) | 12 | % |
(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
| Nine Months Ended | ||||||||
| (In millions) | October 2, 2021 | September 26, 2020 | ||||||
| Net sales including intersegment sales | $ | 1,570.8 | $ | 1,142.3 | ||||
| Less intersegment sales | (28.1 | ) | (19.4 | ) | ||||
| Net sales | $ | 1,542.7 | $ | 1,122.9 | ||||
| Operating income (1) | 160.6 | 67.2 | ||||||
| (1) Included charges associated with restructuring actions and transaction and related costs in both years, outcome of legal proceedings, loss on sale of asset and gain on investments in 2021, and loss on investments in 2020. | $ | 44.2 | $ | 20.6 |
Avery Dennison Corporation
Net Sales
The factors impacting reported net sales change are shown in the table below.
| Nine Months Ended October 2, 2021 | ||||
| Reported sales change | 37 | % | ||
| Foreign currency translation | (3 | ) | ||
| Extra week impact | (1 | ) | ||
| Sales change ex. currency (1) | 33 | |||
| Acquisitions | (5 | ) | ||
| Organic sales change (1) | 28 | % |
(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
| Nine Months Ended | ||||||||
| (In millions) | October 2, 2021 | September 26, 2020 | ||||||
| Net sales including intersegment sales | $ | 591.4 | $ | 442.1 | ||||
| Less intersegment sales | (8.0 | ) | (4.8 | ) | ||||
| Net sales | $ | 583.4 | $ | 437.3 | ||||
| Operating income (1) | 64.7 | 34.9 | ||||||
| (1) Included charges associated with restructuring actions in both years and transaction and related costs and gain on sale of assets in 2021. | $ | 1.3 | $ | 8.6 |
Net Sales
The factors impacting reported net sales change are shown in the table below.
| Nine Months Ended October 2, 2021 | ||||
| Reported sales change | 33 | % | ||
| Foreign currency translation | (6 | ) | ||
| Extra week impact | (2 | ) | ||
| Sales change ex. currency (1) | 25 | |||
| Acquisitions | (5 | ) | ||
| Organic sales change (1) | 21 | % |
(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
| Nine Months Ended | ||||||||
| (In millions) | October 2, 2021 | September 26, 2020 | ||||||
| Net income | $ | 557.4 | $ | 364.4 | ||||
| Depreciation | 122.9 | 113.7 | ||||||
| Amortization | 48.6 | 36.1 | ||||||
| Provision for credit losses and sales returns | 26.1 | 50.4 | ||||||
| Stock-based compensation | 27.1 | 12.1 | ||||||
| Pension plan settlement loss | 1.0 | — | ||||||
| Deferred taxes and other non-cash taxes | (1.5 | ) | 17.1 | |||||
| Other non-cash expense and loss (income and gain), net | 17.7 | 35.3 | ||||||
| Changes in assets and liabilities and other adjustments | (36.5 | ) | (187.3 | ) | ||||
| Net cash provided by operating activities | $ | 762.8 | $ | 441.8 |
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
| Nine Months Ended | ||||||||
| (In millions) | October 2, 2021 | September 26, 2020 | ||||||
| Purchases of property, plant and equipment | $ | (130.6 | ) | $ | (91.7 | ) | ||
| Purchases of software and other deferred charges | (9.8 | ) | (13.8 | ) | ||||
| Proceeds from sales of property, plant and equipment | 1.1 | .2 | ||||||
| Proceeds from insurance and sales (purchases) of investments, net | 1.2 | 5.2 | ||||||
| Proceeds from sale of product line | 6.7 | — | ||||||
| Payments for acquisitions, net of cash acquired, and investments in businesses | (1,474.3 | ) | (262.8 | ) | ||||
| Net cash used in investing activities | $ | (1,605.7 | ) | $ | (362.9 | ) |
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
| Nine Months Ended | ||||||||
| (In millions) | October 2, 2021 | September 26, 2020 | ||||||
| Net increase (decrease) in borrowings with maturities of three months or less | $ | 332.0 | $ | (57.1 | ) | |||
| Additional borrowings under revolving credit facility | — | 500.0 | ||||||
| Repayments of revolving credit facility | — | (500.0 | ) | |||||
| Additional long-term borrowings | 791.9 | 493.7 | ||||||
| Repayments of long-term debt and finance leases | (8.0 | ) | (268.9 | ) | ||||
| Dividends paid | (164.3 | ) | (145.2 | ) | ||||
| Share repurchases | (126.0 | ) | (52.2 | ) | ||||
| Net (tax withholding) proceeds related to stock-based compensation | (25.5 | ) | (20.0 | ) | ||||
| Net cash (used in) provided by financing activities | $ | 800.1 | $ | (49.7 | ) |
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
| (In millions) | Nine Months Ended October 2, 2021 | |||
| Change in net sales | $ | 169 |
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.
| (In millions, except percentages) | October 2, 2021 | September 26, 2020 | ||||||
| ( A) Working capital | $ | 169.1 | $ | 558.5 | ||||
| Reconciling items: | ||||||||
| Cash and cash equivalents | (207.2 | ) | (284.7 | ) | ||||
| Other current assets | (251.0 | ) | (214.5 | ) | ||||
| Short-term borrowings and current portion of long-term debt and finance leases | 398.8 | 124.1 | ||||||
| Accrued payroll and employee benefits and other current liabilities | 942.4 | 759.1 | ||||||
| ( B) Operational working capital | $ | 1,052.1 | $ | 942.5 | ||||
| ( C) Third-quarter net sales, annualized (1) | $ | 8,523.4 | $ | 6,916.4 | ||||
| Operational working capital, as a percentage of annualized current-quarter net sales: (B) ÷ (C) | 12.3 | % | 13.6 | % |
(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
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