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 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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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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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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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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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.