filings.toolsItem 1. FINANCIAL STATEMENTS
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Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| (Dollars in millions, except per share amount) | July 1, 2023 | December 31, 2022 | |||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 217.1 | $ | 167.2 | |||||||
| Trade accounts receivable, less allowances of $32.3 and $34.4 at July 1, 2023 and December 31, 2022, respectively | 1,415.2 | 1,374.4 | |||||||||
| Inventories | 990.5 | 1,009.9 | |||||||||
| Other current assets | 228.2 | 230.5 | |||||||||
| Total current assets | 2,851.0 | 2,782.0 | |||||||||
| Property, plant and equipment, net | 1,567.0 | 1,540.2 | |||||||||
| Goodwill | 1,985.1 | 1,862.4 | |||||||||
| Other intangibles resulting from business acquisitions, net | 883.8 | 840.3 | |||||||||
| Deferred tax assets | 119.7 | 115.1 | |||||||||
| Other assets | 859.7 | 810.5 | |||||||||
| $ | 8,266.3 | $ | 7,950.5 | ||||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Short-term borrowings and current portion of long-term debt and finance leases | $ | 635.8 | $ | 598.6 | |||||||
| Accounts payable | 1,234.8 | 1,339.3 | |||||||||
| Accrued payroll and employee benefits | 178.9 | 228.5 | |||||||||
| Other current liabilities | 559.2 | 633.4 | |||||||||
| Total current liabilities | 2,608.7 | 2,799.8 | |||||||||
| Long-term debt and finance leases | 2,909.7 | 2,503.5 | |||||||||
| Long-term retirement benefits and other liabilities | 475.0 | 367.1 | |||||||||
| Deferred tax liabilities and income taxes payable | 257.7 | 247.9 | |||||||||
| Commitments and contingencies (see Note 11) | |||||||||||
| Shareholders’ equity: | |||||||||||
| Common stock, $1 par value per share, authorized – 400,000,000 shares at July 1, 2023 and December 31, 2022; issued – 124,126,624 shares at July 1, 2023 and December 31, 2022; outstanding – 80,650,885 shares and 80,810,016 shares at July 1, 2023 and December 31, 2022, respectively | 124.1 | 124.1 | |||||||||
| Capital in excess of par value | 851.3 | 879.3 | |||||||||
| Retained earnings | 4,526.9 | 4,414.6 | |||||||||
| Treasury stock at cost, 43,475,739 shares and 43,316,608 shares at July 1, 2023 and December 31, 2022, respectively | (3,093.9) | (3,021.8) | |||||||||
| Accumulated other comprehensive loss | (393.2) | (364.0) | |||||||||
| Total shareholders’ equity | 2,015.2 | 2,032.2 | |||||||||
| $ | 8,266.3 | $ | 7,950.5 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Avery Dennison Corporation
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (In millions, except per share amounts) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Net sales | $ | 2,090.5 | $ | 2,347.0 | $ | 4,155.5 | $ | 4,696.3 | |||||||||||||||
| Cost of products sold | 1,537.1 | 1,703.5 | 3,059.8 | 3,411.5 | |||||||||||||||||||
| Gross profit | 553.4 | 643.5 | 1,095.7 | 1,284.8 | |||||||||||||||||||
| Marketing, general and administrative expense | 319.6 | 332.7 | 654.0 | 687.7 | |||||||||||||||||||
| Other expense (income), net | 68.3 | 3.4 | 86.1 | 1.8 | |||||||||||||||||||
| Interest expense | 31.9 | 20.8 | 58.3 | 40.4 | |||||||||||||||||||
| Other non-operating expense (income), net | (6.6) | (1.3) | (11.2) | (2.7) | |||||||||||||||||||
| Income before taxes | 140.2 | 287.9 | 308.5 | 557.6 | |||||||||||||||||||
| Provision for income taxes | 39.8 | 73.4 | 86.9 | 144.9 | |||||||||||||||||||
| Net income | $ | 100.4 | $ | 214.5 | $ | 221.6 | $ | 412.7 | |||||||||||||||
| Per share amounts: | |||||||||||||||||||||||
| Net income per common share | $ | 1.24 | $ | 2.63 | $ | 2.74 | $ | 5.03 | |||||||||||||||
| Net income per common share, assuming dilution | $ | 1.24 | $ | 2.61 | $ | 2.73 | $ | 5.00 | |||||||||||||||
| Weighted average number of shares outstanding: | |||||||||||||||||||||||
| Common shares | 80.7 | 81.7 | 80.8 | 82.0 | |||||||||||||||||||
| Common shares, assuming dilution | 81.0 | 82.1 | 81.2 | 82.6 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Avery Dennison Corporation
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (In millions) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Net income | $ | 100.4 | $ | 214.5 | $ | 221.6 | $ | 412.7 | |||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Foreign currency translation | (27.3) | (53.7) | (26.9) | (33.4) | |||||||||||||||||||
| Pension and other postretirement benefits | (.2) | .9 | (.4) | 1.7 | |||||||||||||||||||
| Cash flow hedges | (4.7) | 1.7 | (1.9) | 3.5 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | (32.2) | (51.1) | (29.2) | (28.2) | |||||||||||||||||||
| Total comprehensive income, net of tax | $ | 68.2 | $ | 163.4 | $ | 192.4 | $ | 384.5 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Avery Dennison Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended | |||||||||||
| (In millions) | July 1, 2023 | July 2, 2022 | |||||||||
| Operating Activities | |||||||||||
| Net income | $ | 221.6 | $ | 412.7 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 91.5 | 88.2 | |||||||||
| Amortization | 54.8 | 57.0 | |||||||||
| Provision for credit losses and sales returns | 18.9 | 23.9 | |||||||||
| Stock-based compensation | 12.2 | 23.9 | |||||||||
| Deferred taxes and other non-cash taxes | (17.5) | 8.6 | |||||||||
| Other non-cash expense and loss (income and gain), net | 17.0 | 15.0 | |||||||||
| Changes in assets and liabilities and other adjustments | (207.0) | (234.9) | |||||||||
| Net cash provided by operating activities | 191.5 | 394.4 | |||||||||
| Investing Activities | |||||||||||
| Purchases of property, plant and equipment | (115.9) | (106.8) | |||||||||
| Purchases of software and other deferred charges | (11.0) | (9.9) | |||||||||
| Proceeds from sales of property, plant and equipment | .3 | 2.1 | |||||||||
| Proceeds from insurance and sales (purchases) of investments, net | (1.2) | 2.0 | |||||||||
| Payments for acquisitions, net of cash acquired, and venture investments | (194.1) | (37.0) | |||||||||
| Net cash used in investing activities | (321.9) | (149.6) | |||||||||
| Financing Activities | |||||||||||
| Net increase (decrease) in borrowings with maturities of three months or less | 281.8 | 176.9 | |||||||||
| Additional long-term borrowings | 394.9 | — | |||||||||
| Repayments of long-term debt and finance leases | (252.6) | (3.4) | |||||||||
| Dividends paid | (126.2) | (117.4) | |||||||||
| Share repurchases | (89.5) | (268.7) | |||||||||
| Net (tax withholding) proceeds related to stock-based compensation | (23.7) | (25.1) | |||||||||
| Other | (1.6) | — | |||||||||
| Net cash provided by (used in) financing activities | 183.1 | (237.7) | |||||||||
| Effect of foreign currency translation on cash balances | (2.8) | (5.0) | |||||||||
| Increase (decrease) in cash and cash equivalents | 49.9 | 2.1 | |||||||||
| Cash and cash equivalents, beginning of year | 167.2 | 162.7 | |||||||||
| Cash and cash equivalents, end of period | $ | 217.1 | $ | 164.8 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Avery Dennison Corporation
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. General
The unaudited Condensed Consolidated Financial Statements and related notes in this Quarterly Report on Form 10-Q are presented as permitted by Article 10 of Regulation S-X and do not contain certain information included in the audited Consolidated Financial Statements and related notes in our 2022 Annual Report on Form 10-K, which should be read in conjunction with this Quarterly Report on Form 10-Q. These unaudited Condensed Consolidated Financial Statements contain all adjustments of a normal and recurring nature necessary for a fair statement of our interim results. Interim results of operations are not necessarily indicative of future results. These unaudited Condensed Consolidated Financial Statements reflect our current estimates and assumptions affecting (i) our reported amounts of assets and liabilities and related disclosures as of the date of the financial statements and (ii) our reported amounts of sales and expenses during the reporting periods presented.
Fiscal Periods
The three and six months ended July 1, 2023 and July 2, 2022 each consisted of thirteen-week and twenty-six week periods, respectively.
Accounting Guidance Update
Supplier Finance Programs
In the first quarter of 2023, we adopted accounting guidance to enhance the transparency of supplier finance programs to allow financial statement users to understand the programs' nature, activity during the period, changes from period to period and potential magnitude. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the provision on roll-forward information, which is effective for fiscal years beginning after December 15, 2023. See Note 13, “Supplemental Financial Information,” to the unaudited Condensed Consolidated Financial Statements for more information.
Note 2. Business Acquisitions
On May 22, 2023, we completed our business acquisition of LG Group, Inc. ("Lion Brothers"), a Maryland-based designer and manufacturer of apparel brand embellishments. 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. These acquisitions enhance the product portfolio in our Solutions Group reportable segment.
The acquisitions of Lion Brothers and Thermopatch are referred to collectively as the "2023 Acquisitions."
The aggregate purchase consideration, including purchase consideration payable, for the 2023 Acquisitions was approximately $205 million. We funded the 2023 Acquisitions using cash and commercial paper borrowings.
The final allocations of purchase consideration for the 2023 Acquisitions to assets and liabilities are ongoing as we continue to evaluate certain balances, estimates and assumptions during the measurement period (up to one year from the acquisition date). Consistent with the allowable time to complete our assessment, the valuation of certain acquired assets and liabilities, including tangible and intangible assets, environmental liabilities and income taxes, is currently pending finalization.
The 2023 Acquisitions were not material, individually or in the aggregate, to the unaudited Condensed Consolidated Financial Statements.
Note 3. Goodwill and Other Intangibles Resulting from Business Acquisitions
Changes in the net carrying amount of goodwill for the six months ended July 1, 2023 by reportable segment are shown below.
| (In millions) | Materials Group | Solutions Group | Total | ||||||||||||||||||||
| Goodwill as of December 31, 2022 | $ | 618.7 | $ | 1,243.7 | $ | 1,862.4 | |||||||||||||||||
| Acquisitions(1) | — | 119.7 | 119.7 | ||||||||||||||||||||
| Translation adjustments | 3.5 | (.5) | 3.0 | ||||||||||||||||||||
| Goodwill as of July 1, 2023 | $ | 622.2 | $ | 1,362.9 | $ | 1,985.1 |
(1) Goodwill acquired related to the 2023 Acquisitions. We expect substantially all of the recognized goodwill related to the 2023 Acquisitions not to be deductible for income tax purposes.
In connection with the 2023 Acquisitions, we acquired approximately $88 million of identifiable finite-lived intangible assets, which consisted of customer relationships, patented and other developed technology, and trade names and trademarks. We utilized the income approach to estimate the fair values of acquired identifiable intangibles, primarily using Level 3 inputs. We applied significant judgment in determining the fair value of intangible assets, which included our estimates and assumptions with respect to future revenue and
Avery Dennison Corporation
related profit margins, customer retention rates, technology migration curves, royalty rates, discount rates and economic lives assigned to the acquired intangible assets.
The table below summarizes the amounts and weighted average useful lives of these intangible assets as of the respective acquisition dates.
| Amount (in millions) | Weighted average amortization period (in years) | |||||||||||||
| Customer relationships | $ | 64.9 | 11 | |||||||||||
| Patented and other developed technology | 19.7 | 7 | ||||||||||||
| Trade names and trademarks | 3.0 | 6 | ||||||||||||
Amortization expense for all finite-lived intangible assets resulting from business acquisitions, including the 2023 Acquisitions, was $21.6 million and $20.6 million for the three months ended July 1, 2023 and July 2, 2022, respectively, and $42.1 million and $41.1 million for the six months ended July 1, 2023 and July 2, 2022, respectively.
Estimated future amortization expense related to existing finite-lived intangible assets for the remainder of fiscal year 2023 and for each of the next four fiscal years and thereafter is shown below. These amounts include the impact of the 2023 Acquisitions.
| (In millions) | Estimated Amortization Expense | ||||
| 2023 (remainder of year) | $ | 44.2 | |||
| 2024 | 88.3 | ||||
| 2025 | 87.5 | ||||
| 2026 | 84.5 | ||||
| 2027 | 84.2 | ||||
| 2028 and thereafter | 340.1 |
Note 4. Debt
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 our $250 million aggregate principal amount of senior notes that matured on April 15, 2023.
The estimated fair value of our long-term debt is primarily based on the credit spread above U.S. Treasury securities or euro government bond securities, as applicable, on notes with similar rates, credit ratings and remaining maturities. The fair value of short-term borrowings, which include commercial paper issuances and short-term lines of credit, approximates their carrying value given the short duration of these obligations. The fair value of our total debt was $3.31 billion at July 1, 2023 and $2.85 billion at December 31, 2022. Fair values were determined based primarily on Level 2 inputs, which are inputs other than quoted prices in active markets that are either directly or indirectly observable.
In January 2023, we extended the maturity date of our revolving credit facility (the “Revolver”) by one year to February 13, 2026 and increased the commitments by $400 million, from $800 million to $1.20 billion. Additionally, we amended the Revolver to replace the LIBOR benchmark interest rate with Term SOFR, Euribor and SONIA benchmark interest rates. The Revolver contains a financial covenant requiring that we maintain a specified ratio of total debt in relation to a certain measure of income. As of both July 1, 2023 and December 31, 2022, we were in compliance with this financial covenant. No balance was outstanding under the Revolver as of July 1, 2023 or December 31, 2022.
Note 5. Cost Reduction Actions
2023 Actions
During the six months ended July 1, 2023, we recorded $28.6 million in restructuring charges related to our 2023 actions. These charges consisted of severance and related costs for the reduction of approximately 700 positions at numerous locations across our company. These actions, which were primarily taken in our Materials Group reportable segment, largely related to headcount reductions.
Avery Dennison Corporation
During the six months ended July 1, 2023, restructuring charges and payments were as follows:
| (In millions) | Accrual at December 31, 2022 | Charges, Net of Reversals | Cash Payments | Non-cash Impairment | Foreign Currency Translation | Accrual at July 1, 2023 | |||||||||||||||||||||||||||||
| 2023 Actions | |||||||||||||||||||||||||||||||||||
| Severance and related costs | $ | — | $ | 26.9 | $ | (23.5) | $ | — | $ | — | $ | 3.4 | |||||||||||||||||||||||
| Asset impairment charges | — | 1.7 | — | (1.7) | — | — | |||||||||||||||||||||||||||||
| 2019/2020 Actions | |||||||||||||||||||||||||||||||||||
| Severance and related costs | 5.1 | (1.0) | (4.1) | — | — | — | |||||||||||||||||||||||||||||
| Total | $ | 5.1 | $ | 27.6 | $ | (27.6) | $ | (1.7) | $ | — | $ | 3.4 |
Accruals for severance and related costs, as well as lease cancellation costs, were included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets. Asset impairment charges were based on the estimated market value of the assets, less selling costs, if applicable. Restructuring charges were included in “Other expense (income), net” in the unaudited Condensed Consolidated Statements of Income.
The table below shows the total amount of restructuring charges, net of reversals, incurred by reportable segment and Corporate.
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (In millions) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Restructuring charges, net of reversals, by reportable segment and Corporate | |||||||||||||||||||||||
| Materials Group | $ | 5.6 | $ | .6 | $ | 19.9 | $ | 1.1 | |||||||||||||||
| Solutions Group | 4.4 | 1.7 | 7.8 | 2.1 | |||||||||||||||||||
| Corporate | — | .8 | (.1) | .8 | |||||||||||||||||||
| Total | $ | 10.0 | $ | 3.1 | $ | 27.6 | $ | 4.0 |
Note 6. Financial Instruments
We enter into foreign exchange hedge contracts to reduce our risk from foreign exchange rate fluctuations associated with receivables, payables, loans and firm commitments denominated in certain foreign currencies that arise primarily as a result of our operations outside the U.S. We also enter into futures contracts to hedge certain price fluctuations for a portion of our anticipated domestic purchases of natural gas. The impact of these foreign exchange and commodities hedge activities on the unaudited Condensed Consolidated Financial Statements was not material.
In March 2020, we entered into U.S. dollar to euro cross-currency swap contracts with a total notional amount of $250 million to have the effect of converting the fixed-rate U.S. dollar-denominated debt to euro-denominated debt, including semiannual interest payments and the payment of principal at maturity. During the term of the contract, which ends on April 30, 2030, we pay fixed-rate interest in euros and receive fixed-rate interest in U.S. dollars. These contracts have been designated as cash flow hedges. The fair value of these contracts was $9.7 million and $15.5 million as of July 1, 2023 and December 31, 2022, respectively, which was included in "Other Assets" in the unaudited Condensed Consolidated Balance Sheets. Refer to Note 10, “Fair Value Measurements,” to the unaudited Condensed Consolidated Financial Statements for more information.
We recorded no ineffectiveness from our cross-currency swap to earnings during the three or six months ended July 1, 2023 or July 2, 2022.
Avery Dennison Corporation
Note 7. Taxes Based on Income
The following table summarizes our income before taxes, provision for income taxes, and effective tax rate:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (Dollars in millions) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Income before taxes | $ | 140.2 | $ | 287.9 | $ | 308.5 | $ | 557.6 | |||||||||||||||
| Provision for income taxes | 39.8 | 73.4 | 86.9 | 144.9 | |||||||||||||||||||
| Effective tax rate | 28.4 | % | 25.5 | % | 28.2 | % | 26.0 | % |
Our provision for income taxes for the three and six months ended July 1, 2023 included a net tax charge related to the tax on global intangible low-taxed income (“GILTI”) of our foreign subsidiaries after benefiting from our current year exclusion election as well as the recognition of foreign withholding taxes on current year earnings, partially offset by the benefit from foreign-derived intangible income (“FDII”). Our provision for income taxes for the three and six months ended July 1, 2023 was also adversely affected by higher non-deductible expenses primarily resulting from foreign currency and interest rate fluctuations, as well as lower tax incentives in certain foreign jurisdictions. In addition, our provision for income taxes for the three and six months ended July 1, 2023 included discrete tax benefits from decreases in certain tax reserves as a result of favorable court rulings in a foreign jurisdiction.
In 2020, the U.S. Department of Treasury issued final regulations that provide certain U.S. taxpayers with an annual election to exclude certain foreign income subject to a high effective tax rate from their GILTI inclusions. We reflected the benefit related to a GILTI exclusion election we plan to make for tax year 2023, but we have yet to determine whether to make the election for tax year 2022. We continue to evaluate the impact of the election and currently anticipate that the benefit from making this election on our 2022 U.S. federal tax return may be significant.
Our provision for income taxes for the three and six months ended July 2, 2022 included $7.0 million and $13.7 million, respectively, of net tax charge related to the tax on GILTI of our foreign subsidiaries and the recognition of foreign withholding taxes on current year earnings, partially offset by the benefit from FDII. Our provision for income taxes for the three and six months ended July 2, 2022 also included net discrete tax benefits primarily from decreases in certain tax reserves, including interest and penalties, as a result of closing tax years.
The amount of income taxes we pay is subject to ongoing audits by taxing jurisdictions around the world. Our estimate of the potential outcome of any uncertain tax issue is subject to our assessment of the relevant risks, facts and circumstances existing at the time. We believe that we have adequately provided for reasonably foreseeable outcomes related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, which may impact our effective tax rate. The final determination of tax audits and any related legal proceedings could materially differ from the amounts currently reflected in our tax provision for income taxes and the related liabilities. We and our U.S. subsidiaries have completed the Internal Revenue Service's ("IRS") Compliance Assurance Process through 2018. With limited exceptions, we are no longer subject to income tax examinations by tax authorities for years prior to 2010.
It is reasonably possible that, during the next 12 months, we may realize a net decrease in our uncertain tax positions, including interest and penalties, of approximately $7 million, primarily as a result of closing tax years.
Subsequent to the end of our second quarter 2023, the IRS issued a notice providing temporary relief for taxpayers in determining whether certain foreign taxes are eligible for foreign tax credits. Taxpayers have the option to apply the notice to their 2022 and 2023 tax years. We are evaluating the impact of this notice and currently anticipate that the benefit related thereto may be significant.
Avery Dennison Corporation
Note 8. Net Income Per Common Share
Net income per common share was computed as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (In millions, except per share amounts) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| (A)Net income | $ | 100.4 | $ | 214.5 | $ | 221.6 | $ | 412.7 | |||||||||||||||
| (B)Weighted average number of common shares outstanding | 80.7 | 81.7 | 80.8 | 82.0 | |||||||||||||||||||
| Dilutive shares (additional common shares issuable under stock-based awards) | .3 | .4 | .4 | .6 | |||||||||||||||||||
| (C) Weighted average number of common shares outstanding, assuming dilution | 81.0 | 82.1 | 81.2 | 82.6 | |||||||||||||||||||
| Net income per common share: (A) ÷ (B) | $ | 1.24 | $ | 2.63 | $ | 2.74 | $ | 5.03 | |||||||||||||||
| Net income per common share, assuming dilution: (A) ÷ (C) | $ | 1.24 | $ | 2.61 | $ | 2.73 | $ | 5.00 |
Certain stock-based compensation awards were excluded from the computation of net income per common share, assuming dilution, because they would not have had a dilutive effect. Stock-based compensation awards excluded from the computation totaled 0.1 million shares for the three months ended July 1, 2023 and were not significant for the three months ended July 2, 2022. Stock-based compensation awards excluded from the computation totaled 0.1 million shares for the six months ended July 1, 2023 and were not significant for the six months ended July 2, 2022.
Avery Dennison Corporation
Note 9. Supplemental Equity and Comprehensive Income Information
Consolidated Changes in Shareholders’ Equity
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (In millions) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Common stock issued, $1 par value per share | $ | 124.1 | $ | 124.1 | $ | 124.1 | $ | 124.1 | |||||||||||||||
| Capital in excess of par value | |||||||||||||||||||||||
| Beginning balance | $ | 850.8 | $ | 844.6 | $ | 879.3 | $ | 862.3 | |||||||||||||||
| Issuance of shares under stock-based compensation plans(1) | .5 | 11.3 | (28.0) | (6.4) | |||||||||||||||||||
| Ending balance | $ | 851.3 | $ | 855.9 | $ | 851.3 | $ | 855.9 | |||||||||||||||
| Retained earnings | |||||||||||||||||||||||
| Beginning balance | $ | 4,486.4 | $ | 4,023.2 | $ | 4,414.6 | $ | 3,880.7 | |||||||||||||||
| Net income | 100.4 | 214.5 | 221.6 | 412.7 | |||||||||||||||||||
| Issuance of shares under stock-based compensation plans(1) | .8 | .9 | 5.6 | (4.9) | |||||||||||||||||||
| Contribution of shares to 401(k) plan(1) | 4.7 | 4.6 | 11.3 | 10.9 | |||||||||||||||||||
| Dividends | (65.4) | (61.2) | (126.2) | (117.4) | |||||||||||||||||||
| Ending balance | $ | 4,526.9 | $ | 4,182.0 | $ | 4,526.9 | $ | 4,182.0 | |||||||||||||||
| Treasury stock at cost | |||||||||||||||||||||||
| Beginning balance | $ | (3,057.4) | $ | (2,799.4) | $ | (3,021.8) | $ | (2,659.8) | |||||||||||||||
| Repurchase of shares for treasury | (38.8) | (117.2) | (89.5) | (268.7) | |||||||||||||||||||
| Issuance of shares under stock-based compensation plans(1) | .4 | .7 | 13.0 | 10.4 | |||||||||||||||||||
| Contribution of shares to 401(k) plan(1) | 1.9 | 1.9 | 4.4 | 4.1 | |||||||||||||||||||
| Ending balance | $ | (3,093.9) | $ | (2,914.0) | $ | (3,093.9) | $ | (2,914.0) | |||||||||||||||
| Accumulated other comprehensive loss | |||||||||||||||||||||||
| Beginning balance | $ | (361.0) | $ | (260.0) | $ | (364.0) | $ | (282.9) | |||||||||||||||
| Other comprehensive income (loss), net of tax | (32.2) | (51.1) | (29.2) | (28.2) | |||||||||||||||||||
| Ending balance | $ | (393.2) | $ | (311.1) | $ | (393.2) | $ | (311.1) |
(1)We fund a portion of our employee-related costs using shares of our common stock held in treasury. We reduce capital in excess of par value based on the grant date fair value of vesting awards and record net gains or losses associated with using treasury shares to retained earnings.
Dividends per common share were as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||
| Dividends per common share | $ | .81 | $ | .75 | $ | 1.56 | $ | 1.43 |
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 July 1, 2023, shares of our common stock in the aggregate amount of $640.6 million remained authorized for repurchase under our outstanding Board authorization.
Avery Dennison Corporation
Changes in Accumulated Other Comprehensive Loss
The changes in “Accumulated other comprehensive loss” (net of tax) for the six-month period ended July 1, 2023 were as follows:
| (In millions) | Foreign Currency Translation | Pension and Other Postretirement Benefits | Cash Flow Hedges | Total | |||||||||||||||||||
| Balance as of December 31, 2022 | $ | (314.0) | $ | (51.3) | $ | 1.3 | $ | (364.0) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of tax | (26.9) | — | (4.0) | (30.9) | |||||||||||||||||||
| Reclassifications to net income, net of tax | — | (.4) | 2.1 | 1.7 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | (26.9) | (.4) | (1.9) | (29.2) | |||||||||||||||||||
| Balance as of July 1, 2023 | $ | (340.9) | $ | (51.7) | $ | (.6) | $ | (393.2) |
The changes in “Accumulated other comprehensive loss” (net of tax) for the six-month period ended July 2, 2022 were as follows:
| (In millions) | Foreign Currency Translation | Pension and Other Postretirement Benefits | Cash Flow Hedges | Total | |||||||||||||||||||
| Balance as of January 1, 2022 | $ | (217.4) | $ | (60.4) | $ | (5.1) | $ | (282.9) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of tax | (33.4) | — | 4.6 | (28.8) | |||||||||||||||||||
| Reclassifications to net income, net of tax | — | 1.7 | (1.1) | .6 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | (33.4) | 1.7 | 3.5 | (28.2) | |||||||||||||||||||
| Balance as of July 2, 2022 | $ | (250.8) | $ | (58.7) | $ | (1.6) | $ | (311.1) |
Note 10. Fair Value Measurements
Recurring Fair Value Measurements
Assets and liabilities carried at fair value, measured on a recurring basis, as of July 1, 2023 were as follows:
| Fair Value Measurements Using | |||||||||||||||||||||||
| (In millions) | Total | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Other Unobservable Inputs (Level 3) | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investments | $ | 36.3 | $ | 19.0 | $ | 17.3 | $ | — | |||||||||||||||
| Derivative assets | 7.3 | — | 7.3 | — | |||||||||||||||||||
| Bank drafts | 3.7 | 3.7 | — | — | |||||||||||||||||||
| Cross-currency swap | 9.7 | — | 9.7 | — | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivative liabilities | $ | 11.8 | $ | 1.1 | $ | 10.7 | $ | — | |||||||||||||||
| Contingent consideration liabilities | 4.9 | — | — | 4.9 |
Avery Dennison Corporation
Assets and liabilities carried at fair value, measured on a recurring basis, as of December 31, 2022 were as follows:
| Fair Value Measurements Using | |||||||||||||||||||||||
| (In millions) | Total | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Other Unobservable Inputs (Level 3) | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investments | $ | 31.3 | $ | 22.6 | $ | 8.7 | $ | — | |||||||||||||||
| Derivative assets | 4.3 | — | 4.3 | — | |||||||||||||||||||
| Bank drafts | 3.2 | 3.2 | — | — | |||||||||||||||||||
| Cross-currency swap | 15.5 | — | 15.5 | — | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivative liabilities | $ | 12.2 | $ | .3 | $ | 11.9 | $ | — | |||||||||||||||
| Contingent consideration liabilities | 6.0 | — | — | 6.0 |
Investments include fixed income securities (primarily U.S. government and corporate debt securities) measured at fair value using quoted prices/bids and a money market fund measured at fair value using net asset value. As of July 1, 2023, investments of $0.8 million and $35.5 million were included in “Cash and cash equivalents” and “Other current assets,” respectively, in the unaudited Condensed Consolidated Balance Sheets. As of December 31, 2022, investments of $0.7 million and $30.6 million were included in “Cash and cash equivalents” and “Other current assets,” respectively, in the unaudited Condensed Consolidated Balance Sheets. Derivatives that are exchange-traded are measured at fair value using quoted market prices and classified within Level 1 of the valuation hierarchy. Derivatives measured based on foreign exchange rate inputs that are readily available in public markets are classified within Level 2 of the valuation hierarchy. Bank drafts (maturities greater than three months) are valued at face value due to their short-term nature and were included in “Other current assets” in the unaudited Condensed Consolidated Balance Sheets.
Contingent consideration liabilities as of July 1, 2023 relate to estimated earn-out payments associated with one of our acquisitions completed in 2022, which are subject to the respective acquired company achieving certain post-acquisition performance targets. These liabilities were recorded based on the expected payments as of July 1, 2023 and have been classified as Level 3.
In addition to the items described above, we also have made venture investments in privately held companies and utilize the measurement alternative for equity investments that do not have readily determinable fair values, measuring them at cost less impairment plus or minus observable price changes in orderly transactions. We recognized no net gains on these investments in the three or six months ended July 1, 2023. We recognized no net gains on these investments in the three months ended July 2, 2022 and recognized net gains of $3.7 million in the six months ended July 2, 2022. These investment net gains were recorded in "Other expense (income), net” in the unaudited Condensed Consolidated Income Statements. The total carrying value of our venture investments was approximately $71 million and $70 million as of July 1, 2023 and December 31, 2022, respectively, and included in “Other assets” in the unaudited Condensed Consolidated Balance Sheets.
Note 11. Commitments and Contingencies
Legal Proceedings
We are involved in various lawsuits, claims, inquiries and other regulatory and compliance matters, most of which are routine to the nature of our business. When it is probable that a loss will be incurred and where a range of the loss can be reasonably estimated, the best estimate within the range is accrued. When the best estimate within the range cannot be determined, the low end of the range is accrued. The ultimate resolution of these claims could affect future results of operations should our exposure be materially different from our estimates or should we incur liabilities that were not previously accrued. Potential insurance reimbursements are not offset against potential liabilities.
We are currently party to a litigation in which ADASA Inc. (“Adasa”), an unrelated third party, alleged that certain of our RFID products within our Solutions Group reportable segment infringed its patent. The case was filed on October 24, 2017 in the United States District Court in the District of Oregon (Eugene Division) and is captioned ADASA Inc. v. Avery Dennison Corporation. We recorded a contingent liability in the amount of $26.6 million related to this matter in the second quarter of 2021 based on a jury verdict issued on May 14, 2021.
During the fourth quarter of 2021, the first instance judgment associated with the jury verdict was issued. This resulted in additional potential liability for the RFID tags sold during the period from the jury verdict to the issuance of the first instance judgment and a royalty on additional late-disclosed tags, as well as sanctions, prejudgment interest, costs, and attorneys’ fees. In addition, Adasa was awarded an ongoing royalty on in-scope tags sold after October 14, 2021. On October 22, 2021, we appealed the judgment to the United States Court of Appeals for the Federal Circuit ("CAFC").
Avery Dennison Corporation
During the fourth quarter of 2022, the CAFC issued its opinion, reversing the grant of summary judgment of validity as to anticipation and obviousness, vacating the sanctions ruling, and remanding the case for retrial with respect to validity for anticipation and obviousness over the prior art. The CAFC affirmed subject-matter eligibility and damages if liability is determined on retrial. On remand, the trial court was required to reconsider the amount of sanctions consistent with the CAFC's instruction to limit sanctions to the late-disclosed tags. With continued evaluation of the matter and our defenses, as well as consultation with our outside counsel, we believed that Adasa’s patent is invalid and that the sanctions sought by Adasa were unreasonable. In addition, we believed that there were appealable grounds in the CAFC’s decision; as a result, we sought U.S. Supreme Court review on February 27, 2023.
After the U.S. Supreme Court denied our writ of certiorari petition on May 30, 2023, the trial court’s retrial began on July 10, 2023. On July 18, 2023, the jury in the retrial issued a verdict that Adasa’s patent is valid. Although the court has not issued its judgment, including its decision on sanctions, we increased our contingent liability to $80.4 million as of July 1, 2023 to reflect our current best estimate of the anticipated judgment. We have grounds to appeal and plan to appeal any judgment based on the jury verdict; therefore, we classified the total contingent liability as non-current due to the time expected for this matter to be fully resolved. We have largely completed our migration to alternative encoding methods for our RFID tags.
Because of the uncertainties associated with claims resolution and litigation, future expenses to resolve these matters could be higher than the liabilities we have accrued; however, we are unable to reasonably estimate a range of potential expenses. If information were to become available that allowed us to reasonably estimate a range of potential expenses determined to be probable in an amount higher or lower than what we have accrued and determined such to be probable, we would adjust our accrued liabilities accordingly. Additional lawsuits, claims, inquiries and other regulatory and compliance matters could arise in the future. The range of expenses for resolving any future matters would be assessed as they arise; until then, a range of potential expenses for such resolution cannot be determined. Based upon current information, we believe that the impact of the resolution of these matters would not be, individually or in the aggregate, material to our financial position, results of operations or cash flows.
Environmental Expenditures
Environmental expenditures are generally expensed. When it is probable that a loss will be incurred and where a range of the loss can be reasonably estimated, the best estimate within the range is accrued. When the best estimate within the range cannot be determined, the low end of the range is accrued. The ultimate resolution of these matters could affect future results of operations should our exposure be materially different from our estimates or should we incur liabilities that were not previously accrued. Potential insurance reimbursements are not offset against potential liabilities. We review our estimates of the costs of complying with environmental laws related to remediation and cleanup of various sites, including sites in which governmental agencies have designated us as a potentially responsible party (“PRP”). However, environmental expenditures for newly acquired assets and those that extend or improve the economic useful life of existing assets are capitalized and amortized over the shorter of the estimated useful life of the acquired asset or the remaining life of the existing asset.
As of July 1, 2023, we have been designated by the U.S. Environmental Protection Agency (“EPA”) and/or other responsible state agencies as a PRP at eleven waste disposal or waste recycling sites that are the subject of separate investigations or proceedings concerning alleged soil and/or groundwater contamination. No settlement of our liability related to any of these sites has been agreed upon. We are participating with other PRPs at these sites and anticipate that our share of remediation costs will be determined pursuant to agreements that we negotiate with the EPA or other governmental authorities.
These estimates could change as a result of changes in planned remedial actions, remediation technologies, site conditions, the estimated time to complete remediation, environmental laws and regulations, and other factors. Because of the uncertainties associated with environmental assessment and remediation activities, our future expenses to remediate these sites could be higher than the liabilities we have accrued; however, we are unable to reasonably estimate a range of potential expenses determined to be probable. If information were to become available that allowed us to reasonably estimate a range of potential expenses in an amount higher or lower than what we have accrued, we would adjust our environmental liabilities accordingly. In addition, we may be identified as a PRP at additional sites in the future. The range of expenses for remediation of any future-identified sites would be addressed as they arise; until then, a range of expenses for such remediation cannot be determined.
The activity related to our environmental liabilities for the six months ended July 1, 2023 is shown below.
| (In millions) | |||||
| Balance at December 31, 2022 | $ | 24.3 | |||
| Charges, net of reversals | (.2) | ||||
| Payments | (1.2) | ||||
| Balance at July 1, 2023 | $ | 22.9 |
Approximately $10 million and $9 million, respectively, of this balance was classified as short-term and included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets as of July 1, 2023 and December 31, 2022.
Avery Dennison Corporation
Note 12. Segment and Disaggregated Revenue Information
Disaggregated Revenue Information
Disaggregated revenue information is shown below in the manner that best reflects how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Revenue from our Materials Group reportable segment is attributed to geographic areas based on the location from which products are shipped. Revenue from our Solutions Group reportable segment is shown by product group.
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (In millions) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Net sales to unaffiliated customers | |||||||||||||||||||||||
| Materials Group: | |||||||||||||||||||||||
| U.S. | $ | 430.7 | $ | 491.1 | $ | 877.1 | $ | 979.9 | |||||||||||||||
| Europe | 510.3 | 645.2 | 1,009.2 | 1,267.9 | |||||||||||||||||||
| Asia | 338.1 | 344.3 | 653.7 | 705.5 | |||||||||||||||||||
| Latin America | 117.2 | 118.7 | 230.9 | 228.5 | |||||||||||||||||||
| Other international | 79.7 | 90.2 | 165.6 | 178.0 | |||||||||||||||||||
| Total Materials Group | 1,476.0 | 1,689.5 | 2,936.5 | 3,359.8 | |||||||||||||||||||
| Solutions Group: | |||||||||||||||||||||||
| Apparel | 398.9 | 486.7 | 817.7 | 1,001.3 | |||||||||||||||||||
| Identification Solutions and Vestcom | 215.6 | 170.8 | 401.3 | 335.2 | |||||||||||||||||||
| Total Solutions Group | 614.5 | 657.5 | 1,219.0 | 1,336.5 | |||||||||||||||||||
| Net sales to unaffiliated customers | $ | 2,090.5 | $ | 2,347.0 | $ | 4,155.5 | $ | 4,696.3 | |||||||||||||||
Additional Segment Information
Additional financial information by reportable segment and Corporate is shown below.
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (In millions) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Intersegment sales | |||||||||||||||||||||||
| Materials Group | $ | 38.2 | $ | 31.8 | $ | 73.1 | $ | 64.3 | |||||||||||||||
| Solutions Group | 10.0 | 8.1 | 20.0 | 19.1 | |||||||||||||||||||
| Intersegment sales | $ | 48.2 | $ | 39.9 | $ | 93.1 | $ | 83.4 | |||||||||||||||
| Income before taxes | |||||||||||||||||||||||
| Materials Group | $ | 193.8 | $ | 246.7 | $ | 354.3 | $ | 469.5 | |||||||||||||||
| Solutions Group | (7.2) | 84.6 | 44.3 | 174.9 | |||||||||||||||||||
| Corporate expense | (21.1) | (23.9) | (43.0) | (49.1) | |||||||||||||||||||
| Interest expense | (31.9) | (20.8) | (58.3) | (40.4) | |||||||||||||||||||
| Other non-operating expense (income), net | 6.6 | 1.3 | 11.2 | 2.7 | |||||||||||||||||||
| Income before taxes | $ | 140.2 | $ | 287.9 | $ | 308.5 | $ | 557.6 | |||||||||||||||
| Other expense (income), net, by reportable segment and Corporate | |||||||||||||||||||||||
| Materials Group | $ | 6.1 | $ | .6 | $ | 20.4 | $ | (2.6) | |||||||||||||||
| Solutions Group | 62.2 | 1.3 | 65.8 | 2.9 | |||||||||||||||||||
| Corporate | — | 1.5 | (.1) | 1.5 | |||||||||||||||||||
| Other expense (income), net | $ | 68.3 | $ | 3.4 | $ | 86.1 | $ | 1.8 | |||||||||||||||
Avery Dennison Corporation
Other expense (income), net, by type were as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (In millions) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Other expense (income), net, by type | |||||||||||||||||||||||
| Restructuring charges: | |||||||||||||||||||||||
| Severance and related costs | $ | 8.8 | $ | 3.1 | $ | 25.9 | $ | 4.0 | |||||||||||||||
| Asset impairment charges | 1.2 | — | 1.7 | — | |||||||||||||||||||
| Other items: | |||||||||||||||||||||||
| Outcomes of legal proceedings | 53.8 | .7 | 53.8 | 1.7 | |||||||||||||||||||
| Transaction and related costs | 4.0 | .1 | 4.2 | .3 | |||||||||||||||||||
| (Gain) loss on sales of assets | .5 | (.5) | .5 | (.5) | |||||||||||||||||||
| Gain on venture investment | — | — | — | (3.7) | |||||||||||||||||||
| Other expense (income), net | $ | 68.3 | $ | 3.4 | $ | 86.1 | $ | 1.8 | |||||||||||||||
Note 13. Supplemental Financial Information
Inventories
The table below summarizes amounts in inventories.
| (In millions) | July 1, 2023 | December 31, 2022 | |||||||||
| Raw materials | $ | 444.4 | $ | 457.6 | |||||||
| Work-in-progress | 235.1 | 255.1 | |||||||||
| Finished goods | 311.0 | 297.2 | |||||||||
| Inventories | $ | 990.5 | $ | 1,009.9 |
Property, Plant and Equipment, Net
The table below summarizes the amounts in property, plant and equipment, net.
| (In millions) | July 1, 2023 | December 31, 2022 | |||||||||
| Property, plant and equipment | $ | 3,829.7 | $ | 3,747.7 | |||||||
| Accumulated depreciation | (2,262.7) | (2,207.5) | |||||||||
| Property, plant and equipment, net | $ | 1,567.0 | $ | 1,540.2 |
Allowance for Credit Losses
The activity related to our allowance for credit losses is shown below.
| Six Months Ended | |||||||||||
| (In millions) | July 1, 2023 | July 2, 2022 | |||||||||
| Beginning balance | $ | 34.4 | $ | 33.0 | |||||||
| Provision for credit losses | — | 5.7 | |||||||||
| Amounts written off | (3.0) | (1.9) | |||||||||
| Other, including foreign currency translation | .9 | (1.2) | |||||||||
| Ending balance | $ | 32.3 | $ | 35.6 |
Supplier Finance Programs
We have agreements with third-party financial institutions to facilitate payments to suppliers. These third-party financial institutions offer voluntary supply chain finance programs that enable certain of our suppliers, at the supplier’s sole discretion, to sell our payment obligations to a financial institution on terms directly negotiated with the financial institution. Participating suppliers decide which payment obligations are sold to the financial institution and we have no economic interest in a supplier’s decision to sell these payment obligations. We make payments to the financial institution on the invoice due date, regardless of whether an individual invoice is sold by the supplier to the financial institution. Our obligations to our suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers' decisions to sell amounts under these arrangements. Amounts due under our supply chain finance programs are included in accounts payable on our unaudited Condensed Consolidated Balance Sheets and activities related to these programs are
Avery Dennison Corporation
presented as operating activities in our unaudited Condensed Consolidated Statements of Cash Flows. As of July 1, 2023 and December 31, 2022, the amounts due to financial institutions for suppliers that participate in these programs were $354.9 million and $430.1 million, respectively.
Avery Dennison Corporation
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