Avery Dennison 10-Q 2023-04-01

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 1, 2023.

OR

o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________________ to ________________________

Commission file number 1-7685

AVERY DENNISON CORPORATION

(Exact name of registrant as specified in its charter)

Delaware						95-1492269
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)
8080 Norton Parkway Mentor, Ohio						44060
(Address of Principal Executive Offices)						(Zip Code)

Registrant’s telephone number, including area code: (440) 534-6000

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

Title of each class						Trading Symbol(s)						Name of each exchange on which registered
Common stock, $1 par value						AVY						New York Stock Exchange
1.25% Senior Notes due 2025						AVY25						Nasdaq Stock Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

x Large accelerated filer						o Accelerated filer						o Non-accelerated filer						o Smaller reporting company						o Emerging growth company

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

Number of shares of $1 par value common stock outstanding as of April 29, 2023: 80,728,286

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AVERY DENNISON CORPORATION

FISCAL FIRST QUARTER 2023 QUARTERLY REPORT ON FORM 10-Q

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						Page
SAFE HARBOR STATEMENT						1
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1.			Financial Statements:
			Condensed Consolidated Balance Sheets April 1, 2023 and December 31, 2022			2
			Condensed Consolidated Statements of Income Three Months Ended April 1, 2023 and April 2, 2022			3
			Condensed Consolidated Statements of Comprehensive Income Three Months Ended April 1, 2023 and April 2, 2022			4
			Condensed Consolidated Statements of Cash Flows Three Months Ended April 1, 2023 and April 2, 2022			5
			Notes to Unaudited Condensed Consolidated Financial Statements			6
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
			Non-GAAP Financial Measures			17
			Overview and Outlook			18
			Analysis of Results of Operations for the First Quarter			19
			Results of Operations by Reportable Segment for the First Quarter			20
			Financial Condition			22
Item 3.			Quantitative and Qualitative Disclosures About Market Risk			25
Item 4.			Controls and Procedures			26
PART II. OTHER INFORMATION
Item 1.			Legal Proceedings			27
Item 1A.			Risk Factors			27
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 3.			Defaults Upon Senior Securities			27
Item 4.			Mine Safety Disclosures			27
Item 5.			Other Information			27
Item 6.			Exhibits			28
Signatures						29
Exhibits

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Safe Harbor Statement

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

We believe that the most significant risk factors that could affect our financial performance in the near term include: (i) the impacts to underlying demand for our products from global economic conditions, political uncertainty and changes in environmental standards and governmental regulations; (ii) the cost and availability of raw materials; (iii) competitors’ actions, including pricing, expansion in key markets and product offerings; (iv) the degree to which higher costs can be offset with productivity measures and/or passed on to customers through price increases, without a significant loss of volume; (v) foreign currency fluctuations; and (vi) the execution and integration of acquisitions.

The more significant risks and uncertainties that may impact us are discussed in more detail under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report on Form 10-K filed on February 22, 2023. Actual results and trends may differ materially from historical or anticipated results depending on a variety of factors, including but not limited to, risks and uncertainties related to the following:

• International Operations – worldwide and local economic and market conditions; changes in political conditions, including those related to China and those related to the Russian invasion of Ukraine; and fluctuations in foreign currency exchange rates and other risks associated with foreign operations, including in emerging markets

• Our Business – fluctuations in demand affecting sales to customers; fluctuations in the cost and availability of raw materials and energy; changes in our markets due to competitive conditions, technological developments, environmental standards, laws and regulations, and customer preferences; the impact of competitive products and pricing; execution and integration of acquisitions; selling prices; customer and supplier concentrations or consolidations; financial condition of distributors; outsourced manufacturers; product and service quality; timely development and market acceptance of new products, including sustainable or sustainably-sourced products; investment in development activities and new production facilities; successful implementation of new manufacturing technologies and installation of manufacturing equipment; our ability to generate sustained productivity improvement; our ability to achieve and sustain targeted cost reductions; collection of receivables from customers; and our environmental, social and governance practices

• Income Taxes – fluctuations in tax rates; changes in tax laws and regulations, and uncertainties associated with interpretations of such laws and regulations; retention of tax incentives; outcome of tax audits; and the realization of deferred tax assets

• Information Technology – disruptions in information technology systems or data security breaches, including cyber-attacks or other intrusions to network security; and successful installation of new or upgraded information technology systems

• Human Capital – recruitment and retention of employees and collective labor arrangements

• Our Indebtedness – credit risks; our ability to obtain adequate financing arrangements and maintain access to capital; fluctuations in interest rates; volatility of financial markets; and compliance with our debt covenants

• Ownership of Our Stock – potential significant variability of our stock price and amounts of future dividends and share repurchases

• Legal and Regulatory Matters – protection and infringement of intellectual property; impact of legal and regulatory proceedings, including with respect to environmental, anti-corruption, health and safety, and trade compliance

• Other Financial Matters – fluctuations in pension costs and goodwill impairment

Our forward-looking statements are made only as of the date of this Form 10-Q. We assume no duty to update these forward-looking statements to reflect new, changed or unanticipated events or circumstances, other than as may be required by law.

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Avery Dennison Corporation

PART I. FINANCIAL INFORMATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in millions, except per share amount)			April 1, 2023						December 31, 2022
Assets
Current assets:
Cash and cash equivalents			$	351.3					$	167.2
Trade accounts receivable, less allowances of $33.9 and $34.4 at April 1, 2023 and December 31, 2022, respectively			1,369.1						1,374.4
Inventories			1,050.6						1,009.9
Other current assets			218.2						230.5
Total current assets			2,989.2						2,782.0
Property, plant and equipment, net			1,565.6						1,540.2
Goodwill			1,887.5						1,862.4
Other intangibles resulting from business acquisitions, net			833.1						840.3
Deferred tax assets			118.3						115.1
Other assets			828.6						810.5
			$	8,222.3					$	7,950.5
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term borrowings and current portion of long-term debt and finance leases			$	648.3					$	598.6
Accounts payable			1,236.2						1,339.3
Accrued payroll and employee benefits			188.0						228.5
Other current liabilities			571.2						633.4
Total current liabilities			2,643.7						2,799.8
Long-term debt and finance leases			2,910.8						2,503.5
Long-term retirement benefits and other liabilities			367.5						367.1
Deferred tax liabilities and income taxes payable			257.4						247.9
Commitments and contingencies (see Note 11)
Shareholders’ equity:
Common stock, $1 par value per share, authorized – 400,000,000 shares at April 1, 2023 and December 31, 2022; issued – 124,126,624 shares at April 1, 2023 and December 31, 2022; outstanding – 80,833,507 shares and 80,810,016 shares at April 1, 2023 and December 31, 2022, respectively			124.1						124.1
Capital in excess of par value			850.8						879.3
Retained earnings			4,486.4						4,414.6
Treasury stock at cost, 43,293,117 shares and 43,316,608 shares at April 1, 2023 and December 31, 2022, respectively			(3,057.4)						(3,021.8)
Accumulated other comprehensive loss			(361.0)						(364.0)
Total shareholders’ equity			2,042.9						2,032.2
			$	8,222.3					$	7,950.5

See Notes to Unaudited Condensed Consolidated Financial Statements

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Avery Dennison Corporation

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

									Three Months Ended
(In millions, except per share amounts)															April 1, 2023						April 2, 2022
Net sales															$	2,065.0					$	2,349.3
Cost of products sold															1,522.7						1,708.0
Gross profit															542.3						641.3
Marketing, general and administrative expense															334.4						355.0
Other expense (income), net															17.8						(1.6)
Interest expense															26.4						19.6
Other non-operating expense (income), net															(4.6)						(1.4)
Income before taxes															168.3						269.7
Provision for income taxes															47.1						71.5
Net income															$	121.2					$	198.2
Per share amounts:
Net income per common share															$	1.50					$	2.41
Net income per common share, assuming dilution															$	1.49					$	2.39
Weighted average number of shares outstanding:
Common shares															80.9						82.4
Common shares, assuming dilution															81.5						83.0

See Notes to Unaudited Condensed Consolidated Financial Statements

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Avery Dennison Corporation

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

									Three Months Ended
(In millions)															April 1, 2023						April 2, 2022
Net income															$	121.2					$	198.2
Other comprehensive income (loss), net of tax:
Foreign currency translation															.4						20.3
Pension and other postretirement benefits															(.2)						.8
Cash flow hedges															2.8						1.8
Other comprehensive income, net of tax															3.0						22.9
Total comprehensive income, net of tax															$	124.2					$	221.1

See Notes to Unaudited Condensed Consolidated Financial Statements

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Avery Dennison Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

			Three Months Ended
(In millions)			April 1, 2023						April 2, 2022
Operating Activities
Net income			$	121.2					$	198.2
Adjustments to reconcile net income to net cash provided by operating activities:

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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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Avery Dennison Corporation

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 April 1, 2023
Reported net sales change									(12)		%
Foreign currency translation									3
Sales change ex. currency(1)									(9)
Acquisitions									—
Organic sales change(1)									(9)		%

(1) Totals may not sum due to rounding

In the three months ended April 1, 2023, net sales decreased on an organic basis compared to the same period in the prior year primarily due to lower sales volume, partially offset by pricing actions.

Net Income

Net income decreased from approximately $198 million in the first three months of 2022 to approximately $121 million in the first three months of 2023. Major factors affecting the change in net income included the following:

• Lower sales volume driven by inventory destocking

• Higher restructuring charges

• Unfavorable foreign currency translation

Offsetting factors:

• The net benefit of pricing and raw material costs

• Benefits from productivity initiatives, including material re-engineering and savings from restructuring actions, net of transition costs

• Lower provision for income taxes

Acquisitions

Subsequent to the end of the first quarter of 2023, in April 2023, we entered into an agreement to acquire LG Group, Inc. ("Lion Brothers"), a Maryland-based designer and manufacturer of apparel brand embellishments. We believe this acquisition will expand the product portfolio in our Solutions Group reportable segment. We expect to complete this acquisition in the second quarter of 2023.

On March 6, 2023, we completed our business acquisition of Thermopatch, Inc. ("Thermopatch"), a New York-based manufacturer specializing in labeling, embellishments and transfers for the sports, industrial laundry, workwear and hospitality industries. We believe this acquisition will expand the product portfolio in our Solutions Group reportable segment. The purchase consideration for this acquisition was approximately $44 million, which we funded using cash and commercial paper borrowings.

The Thermopatch acquisition was not material 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

2023 Actions

During the three months ended April 1, 2023, we recorded $18.6 million in restructuring charges related to our 2023 actions. These charges consisted of severance and related costs for the reduction of approximately 340 positions at numerous locations across our company. These actions, which were primarily taken in our Materials Group reportable segment, largely related to headcount reductions.

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.

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Avery Dennison Corporation

Cash Flow

			Three Months Ended
(In millions)			April 1, 2023						April 2, 2022
Net cash provided by operating activities			$	1.9					$	126.2
Purchases of property, plant and equipment			(64.5)						(49.7)
Purchases of software and other deferred charges			(5.3)						(5.6)
Proceeds from sales of property, plant and equipment			.2						.3
Proceeds from insurance and sales (purchases) of investments, net			(3.5)						1.8
Payments for certain acquisition-related transaction costs			—						.3
Free cash flow			$	(71.2)					$	73.3

During the first three months of 2023, net cash provided by operating activities decreased compared to the same period last year primarily due to lower net income and higher tax payments, partially offset by lower incentive compensation payments and changes in operational working capital. During the first three months of 2023, 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 2023 results are described below.

• We expect net sales change of (2%) to 0%, which includes a negligible effect from foreign currency translation.

• We expect incremental savings from restructuring actions, net of transition costs, of approximately $50 million.

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

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

ANALYSIS OF RESULTS OF OPERATIONS FOR THE FIRST QUARTER

Income Before Taxes

			Three Months Ended
(In millions, except percentages)			April 1, 2023						April 2, 2022
Net sales			$	2,065.0					$	2,349.3
Cost of products sold			1,522.7						1,708.0
Gross profit			542.3						641.3
Marketing, general and administrative expense			334.4						355.0
Other expense (income), net			17.8						(1.6)
Interest expense			26.4						19.6
Other non-operating expense (income), net			(4.6)						(1.4)
Income before taxes			$	168.3					$	269.7
Gross profit margin			26.3		%				27.3		%

Gross Profit Margin

Gross profit margin for the first quarter of 2023 decreased from the same period last year due to lower volume, partially offset by the net benefit of pricing, energy and raw material costs and productivity initiatives, including material re-engineering and savings from restructuring actions, net of transition costs.

Marketing, General and Administrative Expense

Marketing, general and administrative expense decreased in the first quarter of 2023 compared to the same period last year primarily due to the benefits from productivity initiatives, including savings from restructuring actions, net of transition costs, and the impact of favorable foreign currency translation.

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Avery Dennison Corporation

Other Expense (Income), Net

			Three Months Ended
(In millions)			April 1, 2023						April 2, 2022
Other expense (income), net, by type
Restructuring charges:
Severance and related costs			$	17.1					$	.9
Asset impairment charges			.5						—
Other items:
Transaction and related costs			.2						.2
Outcome of legal proceedings			—						1.0
Gain on venture investments			—						(3.7)
Other expense (income), net			$	17.8					$	(1.6)

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 first quarter of 2023 compared to the same period last year primarily as a result of higher interest rates on short-term borrowings.

Net Income and Earnings per Share

			Three Months Ended
(In millions, except per share amounts and percentages)			April 1, 2023						April 2, 2022
Income before taxes			$	168.3					$	269.7
Provision for income taxes			47.1						71.5
Net income			$	121.2					$	198.2
Per share amounts:
Net income per common share			$	1.50					$	2.41
Net income per common share, assuming dilution			1.49						2.39
Effective tax rate			28.0		%				26.5		%

Provision for Income Taxes

Our effective tax rate for the three months ended April 1, 2023 increased compared to the same period last year primarily due to higher non-deductible expenses driven by foreign currency and interest rate fluctuations, as well as lower tax incentives in certain foreign jurisdictions, partially offset by the benefit related to our current year GILTI exclusion election. Refer to Note 7, “Taxes Based on Income,” to the unaudited Condensed Consolidated Financial Statements for more information.

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 FIRST QUARTER

Operating income refers to income before taxes, interest and other non-operating expense (income), net.

Materials Group

			Three Months Ended
(In millions)			April 1, 2023						April 2, 2022
Net sales including intersegment sales			$	1,495.4					$	1,702.8
Less intersegment sales			(34.9)						(32.5)
Net sales			$	1,460.5					$	1,670.3
Operating income(1)			160.5						222.8
(1)Included charges associated with restructuring actions in both years and gain on venture investment in 2022.			$	14.3					$	(3.2)

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Avery Dennison Corporation

Net Sales

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

			Three Months Ended
			April 1, 2023
Reported net sales change			(13)		%
Foreign currency translation			3
Sales change ex. currency(1)			(9)
Organic sales change(1)			(9)		%
(1) Totals may not sum due to rounding.

In the first quarter of 2023, net sales decreased on an organic basis compared to the same period in the prior year primarily due to lower volume driven by inventory destocking, partially offset by pricing actions. On an organic basis, net sales decreased by a mid-single digit rate in emerging markets, a high-single digit rate in North America and a mid-teens rate in Western Europe.

Operating Income

Operating income decreased in the first quarter of 2023 compared to the same period last year primarily due to lower volume/mix, higher restructuring charges and the impact of unfavorable foreign currency translation, partially offset by the net benefit of pricing, energy and raw material input costs and benefits from productivity initiatives, including material re-engineering and savings from restructuring actions, net of transition costs.

Solutions Group

			Three Months Ended
(In millions)			April 1, 2023						April 2, 2022
Net sales including intersegment sales			$	614.5					$	690.0
Less intersegment sales			(10.0)						(11.0)
Net sales			$	604.5					$	679.0
Operating income(1)			51.5						90.3
(1)Included charges associated with restructuring actions and transaction and related costs in both years and outcome of legal proceedings in 2022.			$	3.6					$	1.6

Net Sales

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

			Three Months Ended
			April 1, 2023
Reported net sales change			(11)		%
Foreign currency translation			3
Sales change ex. currency(1)			(8)
Acquisitions			(1)
Organic sales change(1)			(9)		%
(1) Totals may not sum due to rounding.

In the first quarter of 2023, on an organic basis, sales increased by a low-single digit rate in high value categories, which was more than offset by roughly a 20% decrease in the base business. Company-wide, on an organic basis, sales of Intelligent Label solutions increased by a low-single digit rate.

Operating Income

Operating income decreased in the first quarter of 2023 compared to the same period last year primarily due to lower volume, higher employee-related costs, growth investments and the impact of unfavorable foreign currency translation, partially offset by the net benefit of pricing and raw material costs and productivity initiatives, including savings from restructuring actions, net of transition costs, and other items.

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Avery Dennison Corporation

FINANCIAL CONDITION

Liquidity

Operating Activities

			Three months ended
(In millions)			April 1, 2023						April 2, 2022
Net income			$	121.2					$	198.2
Depreciation			44.8						43.8
Amortization			27.5						28.2
Provision for credit losses and sales returns			10.6						16.1
Stock-based compensation			10.5						11.1
Deferred taxes and other non-cash taxes			(4.5)						1.9
Other non-cash expense and loss (income and gain), net			10.1						6.5
Changes in assets and liabilities and other adjustments			(218.3)						(179.6)
Net cash provided by operating activities			$	1.9					$	126.2

During the first three months of 2023, net cash provided by operating activities decreased compared to the same period last year primarily due to lower net income and higher tax payments, partially offset by lower incentive compensation payments and changes in operational working capital.

Investing Activities

			Three months ended
(In millions)			April 1, 2023						April 2, 2022
Purchases of property, plant and equipment			$	(64.5)					$	(49.7)
Purchases of software and other deferred charges			(5.3)						(5.6)
Proceeds from sales of property, plant and equipment			.2						.3
Proceeds from insurance and sales (purchases) of investments, net			(3.5)						1.8
Payments for acquisitions, net of cash acquired, and venture investments			(43.5)						(33.4)
Net cash used in investing activities			$	(116.6)					$	(86.6)

Purchases of Property, Plant and Equipment

During the first three months of 2023, in our Materials Group reportable segment, we primarily invested in buildings and equipment to support growth in certain countries in Europe, including France and the Netherlands, in the U.S. and in certain countries in Latin America, primarily Brazil; in our Solutions Group reportable segment, these investments were made in certain countries in Latin America, primarily Mexico, and Asia, including Malaysia, Hong Kong and China, and in the U.S. During the first three months of 2022, we primarily invested in buildings and equipment to support growth in certain countries in Europe, primarily France, in the U.S. and in certain countries in Latin America, primarily Brazil, for our Materials Group reportable segment, as well as in certain countries in Asia, including Vietnam, China and Malaysia, and in the U.S. for our Solutions Group reportable segment.

Purchases of Software and Other Deferred Charges

During the first three months of 2023 and 2022, we primarily invested in information technology upgrades in the U.S.

Payments for Acquisitions, Net of Cash Acquired, and Venture Investments

During the first three months of 2023, we paid consideration, net of cash acquired, of approximately $44 million for the acquisition of Thermopatch. We funded the Thermopatch acquisition using cash and commercial paper borrowings. During the first three months of 2022, we paid consideration, net of cash acquired, of approximately $30 million for the acquisitions of TexTrace AG ("TexTrace") and Rietveld Serigrafie B.V. and Rietveld Screenprinting Serigrafi Baski Matbaa Tekstil Ithalat Ihracat Sanayi ve Ticaret Limited Sirketi ("Rietveld"). We funded the TexTrace and Rietveld acquisitions using cash and commercial paper borrowings. We also made certain venture investments in the first three months of 2022.

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Financing Activities

			Three months ended
(In millions)			April 1, 2023						April 2, 2022
Net increase (decrease) in borrowings with maturities of three months or less			$	42.9					$	179.4
Additional long-term borrowings			394.9						—
Repayments of long-term debt and finance leases			(1.4)						(1.9)
Dividends paid			(60.8)						(56.2)
Share repurchases			(50.7)						(151.5)
Net (tax withholding) proceeds related to stock-based compensation			(23.6)						(24.9)
Other			(1.5)						—
Net cash provided by (used in) financing activities			$	299.8					$	(55.1)

Borrowings and Repayment of Debt

During the first three months of 2023 and 2022, our commercial paper borrowings were used to fund acquisitions, dividend payments, share repurchases, capital expenditures and other general corporate purposes.

In March 2023, we issued $400 million of senior notes, due March 15, 2033, which bear an interest rate of 5.750% per year, payable semiannually in arrears. Our net proceeds from this issuance, after deducting underwriting discounts and offering expenses, were $394.9 million, which we used to repay both existing indebtedness under our commercial paper programs and the $250 million aggregate principal amount of senior notes that matured on April 15, 2023.

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 $0.75 per share in the first three months of 2023 compared to $0.68 per share in the same period last year. In April 2023, subsequent to the end of our first quarter 2023, we increased our quarterly dividend rate to $0.81 per share, representing an increase of approximately 8% from our previous quarterly dividend rate of $0.75 per share.

Share Repurchases

During the first three months of 2023 and 2022, we repurchased approximately 0.3 million and 0.8 million shares of our common stock, respectively.

Long-lived Assets

In the three months ended April 1, 2023, goodwill increased by approximately $25 million to $1.89 billion, reflecting the impact of the preliminary goodwill associated with the Thermopatch acquisition and the impact of foreign currency translation.

In the three months ended April 1, 2023, other intangibles resulting from business acquisitions, net, decreased by approximately $7 million to $833.1 million, reflecting current year amortization expense, partially offset by the preliminary valuation of the intangible assets associated with the Thermopatch acquisition 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.

Shareholders’ Equity Accounts

As of April 1, 2023, the balance of our shareholders’ equity was $2.04 billion. Refer to Note 9, “Supplemental Equity and Comprehensive Income Information,” to the unaudited Condensed Consolidated Financial Statements for more information.

Impact of Foreign Currency Translation

			Three Months Ended
(In millions)			April 1, 2023
Change in net sales			$	(79)

International operations generated approximately 70% of our net sales during the three months ended April 1, 2023. 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.

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The unfavorable impact of foreign currency translation on net sales in the first three months of 2023 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 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 first quarter of 2023 was higher compared to the first quarter of 2022.

(In millions, except percentages)			April 1, 2023						April 2, 2022
(A) Working capital			$	345.5					$	171.1
Reconciling items:
Cash and cash equivalents			(351.3)						(147.1)
Other current assets			(218.2)						(234.9)
Short-term borrowings and current portion of long-term debt and finance leases			648.3						494.9
Accrued payroll and employee benefits and other current liabilities			759.2						855.8
(B) Operational working capital			$	1,183.5					$	1,139.8
(C) First-quarter net sales, annualized			$	8,260.0					$	9,397.2
Operational working capital, as a percentage of annualized current-quarter net sales: (B) ÷ (C)			14.3		%				12.1		%

Accounts Receivable Ratio

The average number of days sales outstanding was 60 days in both the first quarter of 2023 and 2022, calculated using the accounts receivable balance at quarter-end divided by the average daily sales in the respective quarter.

Inventory Ratio

Average inventory turnover was 5.8 in the first quarter of 2023 compared to 7.1 in the first quarter of 2022, calculated using the annualized first-quarter cost of products sold in 2023 and 2022, respectively, and divided by the inventory balance at quarter-end. The decrease in average inventory turnover reflected increased inventory due to the planned inventory pre-build for Intelligent Label programs and lower volumes from customer destocking.

Accounts Payable Ratio

The average number of days payable outstanding was 74 days in the first quarter of 2023 compared to 73 days in the first quarter of 2022, calculated using the accounts payable balance at quarter-end divided by the respective annualized first-quarter cost of products sold. The increase in average number of days payable outstanding primarily reflected the impact of foreign currency translation.

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 $1.20 billion revolving credit facility (the “Revolver”). We use these resources to fund our operational needs.

In January 2023, we extended the maturity date of the Revolver by one year to February 13, 2026 and increased the commitments by $400 million, from $800 million to $1.20 billion.

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As of April 1, 2023, we had cash and cash equivalents of $351.3 million held in accounts at third-party financial institutions. Our cash balances are held in numerous locations throughout the world. As of April 1, 2023, the majority of our cash and cash equivalents was held by our foreign subsidiaries, primarily in the Asia Pacific region 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 fluctuations related to these earnings and profits.

The Revolver, which matures in February 2026, 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 April 1, 2023 or December 31, 2022.

Subsequent to the end of the first quarter of 2023, in April 2023, we used a portion the net proceeds from the $400 million of senior notes we issued in March 2023 to repay the $250 million of senior notes that matured on April 15, 2023.

Capital from Debt

The carrying value of our total debt increased by approximately $457 million in the first three months of 2023 to $3.56 billion, primarily reflecting the $400 million of senior notes issued in March 2023 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, 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

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.

There have been no material changes to the information provided in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 that have not been disclosed in our periodic filings with the U.S. Securities and Exchange Commission (SEC).

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Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(f)) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure.

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

Our disclosure controls system is based upon a global chain of financial and general business reporting lines that converge in our headquarters in Mentor, Ohio. As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such time to provide reasonable assurance that information was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure.

Changes in Internal Control Over Financial Reporting

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

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Refer to “Legal Proceedings” in Note 11, “Commitments and Contingencies,” to the unaudited Condensed Consolidated Financial Statements in Part 1, Item 1 for this information.

There have been no material changes to the risk factors included in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 that have not been disclosed in our periodic filings with the SEC.

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

(a)Not Applicable

(b)Not Applicable

(c)Repurchases of Equity Securities by Issuer

Repurchases by us or our “affiliated purchasers” (as defined in Rule 10b-18(a)(3) of the Exchange Act) of registered equity securities in the first quarter of 2023 are shown in the table below. Repurchased shares may be reissued under our long-term incentive plan or used for other corporate purposes.

Period**(1)**			Total number of shares purchased**(2)**						Average price paid per share**(3)**						Total number of shares purchased as part of publicly announced plans**(2)(4)**						Approximate dollar value of shares that may yet be purchased under the plans**(5)**
January 1, 2023 – January 28, 2023			42.4						$	185.84					42.4						$	722.2
January 29, 2023 – February 25, 2023			65.3						183.00						65.3						710.3
February 26, 2023 – April 1, 2023			176.0						173.60						176.0						679.7
Total			283.7						$	177.59					283.7						$	679.7

(1)The periods shown are our fiscal periods during the thirteen-week quarter ended April 1, 2023.

(2)Shares in thousands.

(3)Average price paid per share includes transaction costs to acquire the shares and excludes the non-deductible 1% excise tax on the net value of repurchases imposed under the Inflation Reduction Act of 2022.

(4)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, 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.

(5)Dollars in millions.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

Not Applicable

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Exhibit 3.1			Amended and Restated Bylaws of Avery Dennison Corporation, effective as of February 23, 2023 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on February 27, 2023)
Exhibit 4.1			Ninth Supplemental Indenture between Avery Dennison Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, dated as of March 15, 2023 (including Form of 5.750% Senior Notes due 2033 on Exhibit A thereto) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on March 15, 2023)
Exhibit 10.1†			Offer letter to Hassan Rmaile
Exhibit 10.2†			Offer letter to Francisco Melo
Exhibit 10.3			Amendment No. 2 to Credit Agreement, dated as of January 24, 2023, by and among Avery Dennison Corporation, a Delaware corporation, as the borrower, Bank of America, N.A., as the administrative agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 30, 2023)
Exhibit 31.1*			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2*			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1**			Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2**			Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101.INS***			Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Exhibit 101.SCH***			Inline XBRL Extension Schema Document
Exhibit 101.CAL***			Inline XBRL Extension Calculation Linkbase Document
Exhibit 101.LAB***			Inline XBRL Extension Label Linkbase Document
Exhibit 101.PRE***			Inline XBRL Extension Presentation Linkbase Document
Exhibit 101.DEF***			Inline XBRL Extension Definition Linkbase Document
Exhibit 104***			Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included as part of this Exhibit 101 Inline XBRL document set

---

†			Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-Q.
*			Filed herewith.
**			Furnished herewith.
***			Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, are deemed not filed for purposes of Section 18 of the Exchange Act and otherwise are not subject to liability under those sections.

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SIGNATURES

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

			AVERY DENNISON CORPORATION
			(Registrant)
			/s/ Gregory S. Lovins
			Gregory S. Lovins
			Senior Vice President and Chief Financial Officer
			(Principal Financial Officer)
			/s/ Lori J. Bondar
			Lori J. Bondar
			Vice President, Controller, Treasurer, and Chief Accounting Officer
			(Principal Accounting Officer)
			May 2, 2023