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 prepared in accordance with GAAP. Based on 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 more 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 venture 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 the reclassification of sales between segments, and, where applicable, an extra week in our fiscal year and 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.

• Organic sales change refers to sales change ex. currency, excluding the estimated impact of acquisitions and product line divestitures.

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.

• 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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OVERVIEW AND OUTLOOK

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 1, 2022						Nine Months Ended October 1, 2022
Reported net sales change			12		%				13		%
Foreign currency translation			7						5
Sales change ex. currency(1)			19						18
Acquisitions			(4)						(5)
Organic sales change(1)			16		%				13		%

(1) Totals may not sum due to rounding

In the three and nine months ended October 1, 2022, net sales increased on an organic basis compared to the same period in the prior year primarily due to pricing actions.

Net Income

Net income increased from approximately $557 million in the first nine months of 2021 to approximately $634 million in the first nine months of 2022. Major factors affecting the change in net income included the following:

• Net benefit of pricing, freight, energy and raw material costs, including material re-engineering

• Higher income from acquisitions, net of associated amortization of other intangibles

• Lower transaction and related costs

Offsetting factors:

• Unfavorable foreign currency translation

• Higher employee-related costs

• Growth investments

Acquisitions

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

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

The 2022 Acquisitions were not material, individually or in the aggregate, to the 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 1, 2022, we recorded $8.8 million in restructuring charges related to our 2019/2020 actions. These charges consisted of severance and related costs for the reduction of approximately 430 positions at numerous locations across our company. These actions, which were primarily taken in our RBIS reportable segment, largely related to global headcount and footprint reductions. Accruals for severance and related costs, as well as lease cancellation costs, were not material as of October 1, 2022.

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Restructuring charges were included in “Other expense (income), net” in the unaudited Condensed Consolidated Statements of Income. Refer to Note 5, “Cost Reduction Actions,” to the unaudited Condensed Consolidated Financial Statements for more information.

Cash Flow

			Nine Months Ended
(In millions)			October 1, 2022						October 2, 2021
Net cash provided by operating activities			$	615.2					$	762.8
Purchases of property, plant and equipment			(183.2)						(130.6)
Purchases of software and other deferred charges			(13.9)						(9.8)
Proceeds from sales of property, plant and equipment			2.2						1.1
Proceeds from insurance and sales (purchases) of investments, net			1.9						1.2
Payments for certain acquisition-related transaction costs			.6						14.5
Free cash flow			$	422.8					$	639.2

During the first nine months of 2022, net cash provided by operating activities decreased compared to the same period last year primarily due to changes in operational working capital, higher incentive compensation payments and the timing of payroll payments, partially offset by higher net income and lower tax payments. During the first nine months of 2022, free cash flow decreased compared to the same period last year primarily due to a decrease in net cash provided by operating activities and an increase in purchases of property, plant and equipment.

Outlook

Certain factors that we believe may contribute to our 2022 results are described below.

• We expect net sales to increase by approximately 10%, which includes a decrease of approximately 6% from the effect of foreign currency translation and an increase of approximately 3% from the effect of acquisitions.

• Based on recent exchange rates, we expect foreign currency translation to decrease our operating income by approximately $77 million.

• We expect our full year effective tax rate to be in the mid-20% range.

• We expect fixed and IT capital expenditures of up to $350 million.

ANALYSIS OF RESULTS OF OPERATIONS FOR THE THIRD QUARTER

Income Before Taxes

			Three Months Ended
(In millions, except percentages)			October 1, 2022						October 2, 2021
Net sales			$	2,317.1					$	2,071.8
Cost of products sold			1,697.9						1,517.4
Gross profit			619.2						554.4
Marketing, general and administrative expense			330.8						296.9
Other expense (income), net			(3.9)						16.0
Interest expense			21.2						18.0
Other non-operating expense (income), net			(1.4)						(.9)
Income before taxes			$	272.5					$	224.4
Gross profit margin			26.7		%				26.8		%

Gross Profit Margin

Gross profit margin for the third quarter of 2022 was relatively unchanged from the same period last year as higher volume/mix primarily related to the impact of acquisitions offset higher employee-related costs.

Marketing, General and Administrative Expense

Marketing, general and administrative expense increased in the third quarter of 2022 compared to the same period last year primarily due to higher employee-related costs, growth investments and the impact of acquisitions, partially offset by the impact of favorable foreign currency translation.

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Other Expense (Income), Net

			Three Months Ended
(In millions)			October 1, 2022						October 2, 2021
Other expense (income), net, by type
Restructuring charges:
Severance and related costs			$	4.7					$	1.1
Asset impairment charges and lease cancellation costs			.1						1.3
Other items:
Transaction and related costs			—						19.4
Gain on venture investments			(8.7)						(4.9)
Gain on sale of product line			—						(.9)
Other expense (income), net			$	(3.9)					$	16.0

Refer to Note 5, “Cost Reduction Actions,” to the unaudited Condensed Consolidated Financial Statements for more information regarding restructuring charges.

Interest Expense

Interest expense increased in the third quarter of 2022 compared to the same period last year primarily as a result of higher interest rates on short-term borrowings and 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 1, 2022						October 2, 2021
Income before taxes			$	272.5					$	224.4
Provision for income taxes			51.0						59.2
Equity method investment (losses) gains			—						(1.1)
Net income			$	221.5					$	164.1
Per share amounts:
Net income per common share			$	2.73					$	1.98
Net income per common share, assuming dilution			2.70						1.96
Effective tax rate			18.7		%				26.4		%

Provision for Income Taxes

Our effective tax rate for the three months ended October 1, 2022 decreased compared to the same period last year primarily due to higher discrete benefits related to return-to-provision benefits upon completion of our 2021 U.S. federal tax return, the settlement of certain foreign tax audits, and the benefit from treating a portion of the Brazil indirect tax credit as non-taxable. Refer to Note 7, “Taxes Based on Income,” to the unaudited Condensed Consolidated Financial Statements for more information.

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 1, 2022						October 2, 2021
Net sales including intersegment sales			$	1,540.9					$	1,370.6
Less intersegment sales			(38.4)						(24.8)
Net sales			$	1,502.5					$	1,345.8
Operating income(1)			215.6						184.9
(1)Included charges associated with gain on venture investment in 2022, restructuring actions in both years and transaction and related costs and gain on sale of product line in 2021.			$	(8.0)					$	.2

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Net Sales

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

			Three Months Ended
			October 1, 2022
Reported net sales change			12		%
Foreign currency translation			8
Sales change ex. currency(1)			20
Organic sales change(1)			20		%
(1) Totals may not sum due to rounding

In the third quarter of 2022, net sales increased on an organic basis compared to the same period in the prior year primarily due to pricing actions. On an organic basis, net sales increased by a high-teens rate in emerging markets, a mid-teens rate in North America and approximately 40% in Western Europe.

Operating Income

Operating income increased in the third quarter of 2022 compared to the same period last year primarily due to the net benefit of pricing, freight, energy and raw material costs, including material re-engineering, partially offset by higher employee-related costs and the impact of unfavorable foreign currency translation.

Retail Branding and Information Solutions

			Three Months Ended
(In millions)			October 1, 2022						October 2, 2021
Net sales including intersegment sales			$	633.2					$	541.1
Less intersegment sales			(10.1)						(10.4)
Net sales			$	623.1					$	530.7
Operating income(1)			75.8						58.5
(1)Included charges associated with restructuring actions in both years and transaction and related costs and gain on venture investment in 2021.			$	3.4					$	14.6

Net Sales

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

			Three Months Ended
			October 1, 2022
Reported net sales change			17		%
Reclassification of sales between segments			(1)
Foreign currency translation			5
Sales change ex. currency(1)			22
Acquisitions			(14)
Organic sales change(1)			7		%
(1) Totals may not sum due to rounding

In the third quarter of 2022, on an organic basis, sales increased by a high-teens rate in high value categories, which was partially offset by a low-single digit rate decrease in the base business.

Operating Income

Operating income increased in the third quarter of 2022 compared to the same period last year primarily due to the combined benefit of higher organic volume and acquisitions, as well as lower transaction and related costs, partially offset by higher amortization of other intangibles resulting from business acquisitions, growth investments and higher employee-related costs.

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Industrial and Healthcare Materials

			Three Months Ended
(In millions)			October 1, 2022						October 2, 2021
Net sales including intersegment sales			$	198.1					$	199.0
Less intersegment sales			(6.6)						(3.7)
Net sales			$	191.5					$	195.3
Operating income(1)			20.3						18.7
(1) Included charges associated with restructuring actions in both years and transaction and related costs in 2021.			$	.7					$	.7

Net Sales

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

			Three Months Ended
			October 1, 2022
Reported net sales change			(2)		%
Foreign currency translation			6
Sales change ex. currency(1)			4
Acquisitions			1
Organic sales change(1)			5		%
(1) Totals may not sum due to rounding

In the third quarter of 2022, net sales increased on an organic basis compared to the same period in the prior year primarily due to increases by a mid-teens rate in healthcare categories and a mid-to-high single digit rate in industrial categories.

Operating Income

Operating income increased in the third quarter of 2022 compared to the same period last year primarily due to the net benefit of pricing, freight, energy and raw material costs, including material re-engineering, partially offset by lower volume/mix 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 1, 2022						October 2, 2021
Net sales			$	7,013.4					$	6,225.1
Cost of products sold			5,109.4						4,497.4
Gross profit			1,904.0						1,727.7
Marketing, general and administrative expense			1,018.5						916.2
Other expense (income), net			(2.1)						16.3
Interest expense			61.6						50.2
Other non-operating expense (income), net			(4.1)						(3.6)
Income before taxes			$	830.1					$	748.6
Gross profit margin			27.1		%				27.8		%

Gross Profit Margin

Gross profit margin for the first nine months of 2022 decreased from the same period last year primarily due to the net impact of pricing, freight, energy and raw material costs, including material re-engineering, as well as higher employee-related costs, partially offset by higher volume/mix primarily related to the impact of acquisitions.

Marketing, General and Administrative Expense

Marketing, general and administrative expense increased in the first nine months of 2022 compared to the same period last year primarily due to the impact of acquisitions, growth investments and higher employee-related costs, partially offset by the impact of favorable foreign currency translation.

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Other Expense (Income), Net

			Nine Months Ended
(In millions)			October 1, 2022						October 2, 2021
Other expense (income), net, by type
Restructuring charges:
Severance and related costs			$	8.7					$	5.1
Asset impairment charges and lease cancellation costs			.1						1.9
Other items:
Transaction and related costs			.3						20.1
Outcomes of legal proceedings, net			1.7						(.4)
Gain on venture investments			(12.4)						(4.9)
(Gain) loss on sales of assets, net			(.5)						.2
Gain on sale of product line			—						(5.7)
Other expense (income), net			$	(2.1)					$	16.3

Refer to Note 5, “Cost Reduction Actions,” to the unaudited Condensed Consolidated Financial Statements for more information regarding restructuring charges. Refer to Note 12, “Segment and Disaggregated Revenue Information,” to the unaudited Condensed Consolidated Financial Statements for more information regarding outcomes of legal proceedings.

Interest Expense

Interest expense increased in the first nine months of 2022 compared to the same period last year primarily as a result of additional interest costs related to the $800 million of senior notes we issued in August 2021 and higher interest rates on short-term borrowings.

Net Income and Earnings per Share

			Nine Months Ended
(In millions, except per share amounts and percentages)			October 1, 2022						October 2, 2021
Income before taxes			$	830.1					$	748.6
Provision for income taxes			195.9						187.7
Equity method investment (losses) gains			—						(3.5)
Net income			$	634.2					$	557.4
Per share amounts:
Net income per common share			$	7.75					$	6.72
Net income per common share, assuming dilution			7.70						6.64
Effective tax rate			23.6		%				25.1		%

Provision for Income Taxes

Our effective tax rate for the nine months ended October 1, 2022 decreased compared to the same period last year primarily due to higher discrete benefits related to the settlement of certain foreign tax audits and the benefit from treating a portion of the Brazil indirect tax credit as non-taxable, as well as U.S. federal return-to-provision benefits that were lower than in the previous year. Refer to Note 7, “Taxes Based on Income,” to the unaudited Condensed Consolidated Financial Statements for more information.

On August 16, 2022, the U.S. government enacted the Inflation Reduction Act ("IRA"), which, among other things, implements a 15% corporate alternative minimum tax based on the adjusted financial statement income for certain large corporations and a 1% excise tax on net share repurchases. The minimum tax and the excise tax, if applicable, are effective for fiscal years beginning after December 31, 2022. We do not expect the IRA to have a material impact on our financial position, results of operations or cash flows. We will continue to monitor additional guidance from the IRS.

We estimate our effective tax rate for fiscal year 2022 to be in the mid-20% 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.

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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 1, 2022						October 2, 2021
Net sales including intersegment sales			$	4,571.5					$	4,170.1
Less intersegment sales			(97.0)						(71.1)
Net sales			$	4,474.5					$	4,099.0
Operating income(1)			649.1						639.2
(1)Included gain on venture investment in 2022, charges associated with restructuring actions in both years and transaction and related costs, outcomes of legal proceedings and gain on sale of product line in 2021.			$	(10.7)					$	(30.2)

Net Sales

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

			Nine Months Ended
			October 1, 2022
Reported net sales change			9		%
Foreign currency translation			6
Sales change ex. currency(1)			15
Organic sales change(1)			16		%

(1) Totals may not sum due to rounding

In the first nine months of 2022, net sales increased on an organic basis compared to the same period in the prior year due to pricing actions, partially offset by lower volume/mix. On an organic basis, net sales increased by a low-double digit rate in emerging markets, a high-teens rate in North America and over 20% in Western Europe.

Operating Income

Operating income increased in the first nine months of 2022 compared to the same period last year primarily due to the net benefit of pricing, freight, energy and raw material costs, including material re-engineering, partially offset by the impact of unfavorable foreign currency translation, higher employee-related costs and the impact of the Brazilian indirect tax credit in the prior year.

Retail Branding and Information Solutions

			Nine Months Ended
(In millions)			October 1, 2022						October 2, 2021
Net sales including intersegment sales			$	1,988.8					$	1,570.8
Less intersegment sales			(29.2)						(28.1)
Net sales			$	1,959.6					$	1,542.7
Operating income(1)			250.7						160.6
(1) Included charges associated with restructuring actions, outcome of legal proceedings, transaction and related costs and (gain) loss on sale of assets in both years and gain on venture investment in 2021.			$	6.3					$	44.2

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Net Sales

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

			Nine Months Ended
			October 1, 2022
Reported net sales change			27		%
Reclassification of sales between segments			(1)
Foreign currency translation			4
Sales change ex. currency(1)			30
Acquisitions			(20)
Organic sales change(1)			10		%

(1)Totals may not sum due to rounding

In the first nine months of 2022, on an organic basis, sales increased by roughly 20% in high value categories and a low-to-mid-single digit rate in the base business.

Company-wide, on an organic basis, sales of Intelligent Label solutions increased by roughly 20%.

Operating Income

Operating income increased in the first nine months of 2022 compared to the same period last year primarily due to the combined benefit of higher organic volume and acquisitions, the impact of the outcome of legal proceedings in the prior year, as well as lower transaction and related costs, partially offset by higher amortization of other intangibles resulting from business acquisitions, growth investments and employee-related costs.

Industrial and Healthcare Materials

			Nine Months Ended
(In millions)			October 1, 2022						October 2, 2021
Net sales including intersegment sales			$	595.7					$	591.4
Less intersegment sales			(16.4)						(8.0)
Net sales			$	579.3					$	583.4
Operating income(1)			56.3						64.7
(1) Included charges associated with restructuring actions in both years and transaction and related costs and gain on sale of assets in 2021.			$	.8					$	1.3

Net Sales

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

			Nine Months Ended
			October 1, 2022
Reported net sales change			(1)		%
Foreign currency translation			4
Sales change ex. currency(1)			3
Acquisitions			1
Organic sales change(1)			4		%

(1) Totals may not sum due to rounding

In the first nine months of 2022, net sales increased on an organic basis compared to the same period in the prior year primarily due to increases by a mid-teens rate in healthcare categories and a low-to-mid single digit rate in industrial categories.

Operating Income

Operating income decreased in the first nine months of 2022 compared to the same period last year primarily due to lower volume/mix and higher employee-related costs, partially offset by the net benefit of pricing, freight, energy and raw material costs, including material re-engineering.

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FINANCIAL CONDITION

Liquidity

Operating Activities

			Nine months ended
(In millions)			October 1, 2022						October 2, 2021
Net income			$	634.2					$	557.4
Depreciation			132.2						122.9
Amortization			85.0						48.6
Provision for credit losses and sales returns			36.9						26.1
Stock-based compensation			34.5						27.1
Pension plan settlement loss			—						1.0
Deferred taxes and other non-cash taxes			(8.5)						(1.5)
Other non-cash expense and loss (income and gain), net			14.7						17.7
Changes in assets and liabilities and other adjustments			(313.8)						(36.5)
Net cash provided by operating activities			$	615.2					$	762.8

During the first nine months of 2022, net cash provided by operating activities decreased compared to the same period last year primarily due to changes in operational working capital, higher incentive compensation payments and the timing of payroll payments, partially offset by higher net income and lower tax payments.

Investing Activities

			Nine months ended
(In millions)			October 1, 2022						October 2, 2021
Purchases of property, plant and equipment			$	(183.2)					$	(130.6)
Purchases of software and other deferred charges			(13.9)						(9.8)
Proceeds from sales of property, plant and equipment			2.2						1.1
Proceeds from insurance and sales (purchases) of investments, net			1.9						1.2
Proceeds from sale of product line			—						6.7
Payments for acquisitions, net of cash acquired, and investments in businesses			(37.0)						(1,474.3)
Net cash used in investing activities			$	(230.0)					$	(1,605.7)

Purchases of Property, Plant and Equipment

During the first nine months of 2022, we primarily invested in buildings and equipment to support growth in certain countries in Asia and the U.S. for our RBIS reportable segment, in certain countries in Europe, the U.S. and certain countries in Latin America for our Labels and Graphic Materials (“LGM”) reportable segment, and in the U.S. for our Industrial and Healthcare Materials ("IHM") reportable segment. 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 LGM reportable segment, in certain countries in Asia for our RBIS reportable segment, and in the U.S. for our IHM reportable segment.

Purchases of Software and Other Deferred Charges

During the first nine months of 2022, we primarily invested in information technology upgrades in the U.S. and Asia. During the first nine months of 2021, we primarily invested in information technology upgrades in the U.S. and Europe.

Proceeds from Sale of Product Line

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

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

During the first nine months of 2022, we paid consideration, net of cash acquired, of approximately $30 million for the 2022 Acquisitions. We funded the 2022 Acquisitions using cash and commercial paper borrowings. During the first nine months of 2021, we paid consideration, net of cash acquired, of approximately $1.44 billion and $32 million for the CB Velocity Holdings, LLC (“Vestcom”) acquisition and other acquisitions, respectively. We funded the Vestcom acquisition using the net proceeds from the senior notes we issued in August 2021, commercial paper borrowings and cash. Our other acquisitions in 2021 were funded using cash and commercial paper borrowings. We also made certain venture investments in the first nine months of both 2022 and 2021.

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Financing Activities

			Nine months ended
(In millions)			October 1, 2022						October 2, 2021
Net increase (decrease) in borrowings with maturities of three months or less			$	115.9					$	332.0
Additional long-term borrowings			—						791.9
Repayments of long-term debt and finance leases			(4.4)						(8.0)
Dividends paid			(178.3)						(164.3)
Share repurchases			(318.6)						(126.0)
Net (tax withholding) proceeds related to stock-based compensation			(25.1)						(25.5)
Net cash (used in) provided by financing activities			$	(410.5)					$	800.1

Borrowings and Repayment of Debt

During the first nine months of 2022 and 2021, our commercial paper borrowings were used to fund acquisitions, dividend payments, share repurchases, capital expenditures and 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 this 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 we can repay without penalty and bear an interest rate of 0.850%, payable semiannually in arrears. Our net proceeds from this issuance, after deducting underwriting discounts and offering expenses, were $298.1 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.

Dividends Paid

We paid dividends of $2.18 per share in the first nine months of 2022 compared to $1.98 per share in the same period last year. In April 2022, we increased our quarterly dividend rate to $.75 per share, representing an increase of approximately 10% from our previous quarterly dividend rate of $.68 per share.

Share Repurchases

During the first nine months of 2022 and 2021, we repurchased approximately 1.8 million and 0.7 million shares of our common stock, respectively.

In April 2022, our Board authorized the repurchase of shares of our common stock with a fair market value of up to $750 million, excluding any fees, commissions or other expenses related to such purchases and in addition to the amount outstanding under our previous Board authorization. Board authorizations remain in effect until shares in the amount authorized thereunder have been repurchased. As of October 1, 2022, shares of our common stock in the aggregate amount of $791 million remained authorized for repurchase under our outstanding Board authorizations.

Analysis of Selected Balance Sheet Accounts

Long-lived Assets

In the nine months ended October 1, 2022, goodwill decreased by approximately $57 million to $1.82 billion, reflecting the impact of foreign currency translation, partially offset by the preliminary goodwill associated with the 2022 Acquisitions.

In the nine months ended October 1, 2022, other intangibles resulting from business acquisitions, net, decreased by approximately $56 million to $855.1 million, reflecting current year amortization expense and the impact of foreign currency translation, partially offset by the preliminary valuation of intangible assets associated with the 2022 Acquisitions.

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

Shareholders’ Equity Accounts

As of October 1, 2022, the balance of our shareholders’ equity was $2.01 billion. Refer to Note 9, “Supplemental Equity and Comprehensive Income Information,” to the unaudited Condensed Consolidated Financial Statements for more information.

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Avery Dennison Corporation

Impact of Foreign Currency Translation

			Nine Months Ended
(In millions)			October 1, 2022
Change in net sales			$	(275)

International operations generated approximately 72% of our net sales during the nine months ended October 1, 2022. Our future results are subject to changes in political and economic conditions globally and in the regions in which we operate and the impact of fluctuations in foreign currency exchange and interest rates.

The unfavorable impact of foreign currency translation on net sales in the first nine months of 2022 compared to the same period last year was primarily related to euro-denominated sales.

Effect of Foreign Currency Transactions

The impact on 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 6, “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 factors impacting 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 2022 was higher compared to the third quarter of 2021.

(In millions, except percentages)			October 1, 2022						October 2, 2021
(A) Working capital			$	22.5					$	169.1
Reconciling items:
Cash and cash equivalents			(128.2)						(207.2)
Other current assets			(233.6)						(251.0)
Short-term borrowings and current portion of long-term debt and finance leases			669.9						398.8
Accrued payroll and employee benefits and other current liabilities			886.3						942.4
(B) Operational working capital			$	1,216.9					$	1,052.1
(C) Third-quarter net sales, annualized(1)			$	9,268.4					$	8,523.4
Operational working capital, as a percentage of annualized current-quarter net sales: (B) ÷ (C)			13.1		%				12.3		%

(1) Included estimated 2021 annualized sales for Vestcom

Accounts Receivable Ratio

The average number of days sales outstanding was 62 days in both the third quarter of 2022 and 2021, calculated using the accounts receivable balance at quarter-end divided by the average daily sales in the respective quarter. The third quarter of 2021 included estimated sales for Vestcom.

Inventory Ratio

Average inventory turnover was 6.7 in the third quarter of 2022 compared to 7.1 in the third quarter of 2021, calculated using the annualized third-quarter cost of products sold in 2022 and 2021, respectively, and divided by the inventory balance at quarter-end. The third quarter of 2021 included estimated cost of products sold for Vestcom. The decrease in average inventory turnover primarily reflected increased inventory to manage through supply chain constraints.

Accounts Payable Ratio

The average number of days payable outstanding was 74 days in both the third quarter of 2022 and 2021, calculated using the accounts payable balance at quarter-end divided by the respective annualized third-quarter cost of products sold. The third quarter of 2021 included estimated cost of products sold for Vestcom.

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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 $800 million revolving credit facility (the “Revolver”). We use these resources to fund our operational needs.

As of October 1, 2022, we had cash and cash equivalents of $128.2 million held in accounts at third-party financial institutions. Our cash balances are held in numerous locations throughout the world. As of October 1, 2022, the majority of our cash and cash equivalents was held by our foreign subsidiaries, primarily in the Asia Pacific region.

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 fluctuations 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 1, 2022 or January 1, 2022.

We currently anticipate using cash flows from operations and commercial paper borrowings to repay approximately $250 million of senior notes maturing in the second quarter of 2023.

Capital from Debt

The carrying value of our total debt increased by approximately $28 million in the first nine months of 2022 to $3.13 billion, primarily reflecting a net increase in commercial paper borrowings, partially offset by the revaluation of our euro-denominated senior notes, due in 2025.

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, 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. We remain committed to maintaining an investment grade rating.

Off-Balance Sheet Arrangements, Contractual Obligations, and Other Matters

As of October 1, 2022, we have a commitment to purchase approximately $220 million of raw materials in fiscal year 2023. Additionally, in October 2022, subsequent to the end of the third quarter of 2022, we entered into a separate commitment to purchase approximately $70 million of raw materials in the first half of 2023.

Refer to Note 11, “Commitments and Contingencies,” to the unaudited Condensed Consolidated Financial Statements for further information. Except as indicated therein, we have no material off-balance sheet arrangements as described in Item 303(b) of Regulation S-K.