filings.toolsItem 1. FINANCIAL STATEMENTS
62K characters. Original on sec.gov · Markdown
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| (Dollars in millions, except per share amount) | March 30, 2024 | December 30, 2023 | |||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 185.7 | $ | 215.0 | |||||||
| Trade accounts receivable, less allowances of $34.6 and $34.4 at March 30, 2024 and December 30, 2023, respectively | 1,478.0 | 1,414.9 | |||||||||
| Inventories | 972.5 | 920.7 | |||||||||
| Other current assets | 250.6 | 245.4 | |||||||||
| Total current assets | 2,886.8 | 2,796.0 | |||||||||
| Property, plant and equipment, net | 1,598.2 | 1,625.8 | |||||||||
| Goodwill | 1,993.7 | 2,013.6 | |||||||||
| Other intangibles resulting from business acquisitions, net | 823.8 | 849.1 | |||||||||
| Deferred tax assets | 115.5 | 115.7 | |||||||||
| Other assets | 837.2 | 809.6 | |||||||||
| $ | 8,255.2 | $ | 8,209.8 | ||||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Short-term borrowings and current portion of long-term debt and finance leases | $ | 1,170.5 | $ | 622.2 | |||||||
| Accounts payable | 1,301.5 | 1,277.1 | |||||||||
| Accrued payroll and employee benefits | 203.4 | 213.4 | |||||||||
| Other current liabilities | 632.8 | 586.8 | |||||||||
| Total current liabilities | 3,308.2 | 2,699.5 | |||||||||
| Long-term debt and finance leases | 2,069.9 | 2,622.1 | |||||||||
| Long-term retirement benefits and other liabilities | 418.5 | 500.3 | |||||||||
| Deferred tax liabilities and income taxes payable | 254.6 | 260.0 | |||||||||
| Commitments and contingencies (see Note 10) | |||||||||||
| Shareholders’ equity: | |||||||||||
| Common stock, $1 par value per share, authorized – 400,000,000 shares at March 30, 2024 and December 30, 2023; issued – 124,126,624 shares at March 30, 2024 and December 30, 2023; outstanding – 80,597,091 shares and 80,495,585 shares at March 30, 2024 and December 30, 2023, respectively | 124.1 | 124.1 | |||||||||
| Capital in excess of par value | 834.0 | 854.5 | |||||||||
| Retained earnings | 4,809.1 | 4,691.8 | |||||||||
| Treasury stock at cost, 43,529,533 shares and 43,631,039 shares at March 30, 2024 and December 30, 2023, respectively | (3,141.2) | (3,134.4) | |||||||||
| Accumulated other comprehensive loss | (422.0) | (408.1) | |||||||||
| Total shareholders’ equity | 2,204.0 | 2,127.9 | |||||||||
| $ | 8,255.2 | $ | 8,209.8 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Avery Dennison Corporation
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three Months Ended | |||||||||||||||||||||||
| (In millions, except per share amounts) | March 30, 2024 | April 1, 2023 | |||||||||||||||||||||
| Net sales | $ | 2,151.3 | $ | 2,065.0 | |||||||||||||||||||
| Cost of products sold | 1,519.1 | 1,522.7 | |||||||||||||||||||||
| Gross profit | 632.2 | 542.3 | |||||||||||||||||||||
| Marketing, general and administrative expense | 365.2 | 334.4 | |||||||||||||||||||||
| Other expense (income), net | 12.6 | 17.8 | |||||||||||||||||||||
| Interest expense | 28.6 | 26.4 | |||||||||||||||||||||
| Other non-operating expense (income), net | (8.6) | (4.6) | |||||||||||||||||||||
| Income before taxes | 234.4 | 168.3 | |||||||||||||||||||||
| Provision for income taxes | 62.0 | 47.1 | |||||||||||||||||||||
| Net income | $ | 172.4 | $ | 121.2 | |||||||||||||||||||
| Per share amounts: | |||||||||||||||||||||||
| Net income per common share | $ | 2.14 | $ | 1.50 | |||||||||||||||||||
| Net income per common share, assuming dilution | $ | 2.13 | $ | 1.49 | |||||||||||||||||||
| Weighted average number of shares outstanding: | |||||||||||||||||||||||
| Common shares | 80.5 | 80.9 | |||||||||||||||||||||
| Common shares, assuming dilution | 81.0 | 81.5 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Avery Dennison Corporation
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended | |||||||||||||||||||||||
| (In millions) | March 30, 2024 | April 1, 2023 | |||||||||||||||||||||
| Net income | $ | 172.4 | $ | 121.2 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Foreign currency translation | (11.9) | .4 | |||||||||||||||||||||
| Pension and other postretirement benefits | .2 | (.2) | |||||||||||||||||||||
| Cash flow hedges | (2.2) | 2.8 | |||||||||||||||||||||
| Other comprehensive income (loss), net of tax | (13.9) | 3.0 | |||||||||||||||||||||
| Total comprehensive income, net of tax | $ | 158.5 | $ | 124.2 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Avery Dennison Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended | |||||||||||
| (In millions) | March 30, 2024 | April 1, 2023 | |||||||||
| Operating Activities | |||||||||||
| Net income | $ | 172.4 | $ | 121.2 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 49.0 | 44.8 | |||||||||
| Amortization | 28.3 | 27.5 | |||||||||
| Provision for credit losses and sales returns | 11.8 | 10.6 | |||||||||
| Stock-based compensation | 7.5 | 10.5 | |||||||||
| Deferred taxes and other non-cash taxes | (3.0) | (4.5) | |||||||||
| Other non-cash expense and loss (income and gain), net | 18.1 | 10.1 | |||||||||
| Changes in assets and liabilities and other adjustments | (164.3) | (218.3) | |||||||||
| Net cash provided by operating activities | 119.8 | 1.9 | |||||||||
| Investing Activities | |||||||||||
| Purchases of property, plant and equipment | (48.8) | (64.5) | |||||||||
| Purchases of software and other deferred charges | (6.9) | (5.3) | |||||||||
| Purchases of Argentine Blue Chip Swap securities | (20.2) | — | |||||||||
| Proceeds from sales of Argentine Blue Chip Swap securities | 14.0 | — | |||||||||
| Proceeds from sales of property, plant and equipment | .1 | .2 | |||||||||
| Proceeds from insurance and sales (purchases) of investments, net | .1 | (3.5) | |||||||||
| Payments for acquisitions, net of cash acquired, and venture investments | (.3) | (43.5) | |||||||||
| Net cash used in investing activities | (62.0) | (116.6) | |||||||||
| Financing Activities | |||||||||||
| Net increase (decrease) in borrowings with maturities of three months or less | 15.9 | 42.9 | |||||||||
| Additional long-term borrowings | — | 394.9 | |||||||||
| Repayments of long-term debt and finance leases | (1.7) | (1.4) | |||||||||
| Dividends paid | (65.3) | (60.8) | |||||||||
| Share repurchases | (15.6) | (50.7) | |||||||||
| Net (tax withholding) proceeds related to stock-based compensation | (18.3) | (23.6) | |||||||||
| Other | — | (1.5) | |||||||||
| Net cash (used in) provided by financing activities | (85.0) | 299.8 | |||||||||
| Effect of foreign currency translation on cash balances | (2.1) | (1.0) | |||||||||
| Increase (decrease) in cash and cash equivalents | (29.3) | 184.1 | |||||||||
| Cash and cash equivalents, beginning of year | 215.0 | 167.2 | |||||||||
| Cash and cash equivalents, end of period | $ | 185.7 | $ | 351.3 |
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 2023 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 months ended March 30, 2024 and April 1, 2023 each consisted of a thirteen-week period.
Note 2. Goodwill and Other Intangibles Resulting from Business Acquisitions
Changes in the net carrying amount of goodwill for the three months ended March 30, 2024 by reportable segment are shown below.
| (In millions) | Materials Group | Solutions Group | Total | ||||||||||||||||||||
| Goodwill as of December 30, 2023 | $ | 630.7 | $ | 1,382.9 | $ | 2,013.6 | |||||||||||||||||
| Acquisition adjustments(1) | — | (3.0) | (3.0) | ||||||||||||||||||||
| Translation adjustments | (10.5) | (6.4) | (16.9) | ||||||||||||||||||||
| Goodwill as of March 30, 2024 | $ | 620.2 | $ | 1,373.5 | $ | 1,993.7 |
(1) Measurement period adjustments related to the purchase price allocation for the 2023 acquisitions of Silver Crystal Group, LG Group, Inc., and Thermopatch, Inc.
Amortization expense for finite-lived intangible assets resulting from business acquisitions was $22.4 million and $20.5 million for the three months ended March 30, 2024 and April 1, 2023, respectively.
Estimated future amortization expense related to existing finite-lived intangible assets for the remainder of fiscal year 2024 and for each of the next four fiscal years and thereafter is shown below.
| (In millions) | Estimated Amortization Expense | ||||
| 2024 (remainder of year) | $ | 66.8 | |||
| 2025 | 88.4 | ||||
| 2026 | 85.6 | ||||
| 2027 | 85.2 | ||||
| 2028 | 77.4 | ||||
| 2029 and thereafter | 265.5 |
Note 3. Debt
In the first quarter of 2024, we reclassified our €500 million senior notes due in the first quarter of 2025 from "Long-term debt and finance leases" to "Short-term borrowings and current portion of long-term debt and finance leases" in the unaudited Condensed Consolidated Balance Sheets.
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 $3.08 billion at March 30, 2024 and $3.11 billion at December 30, 2023. 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.
Our $1.20 billion revolving credit facility (the “Revolver”) contains a financial covenant requiring that we maintain a specified ratio of total debt to a certain measure of income. As of both March 30, 2024 and December 30, 2023, we were in compliance with this financial covenant. No balance was outstanding under the Revolver as of March 30, 2024 or December 30, 2023.
Avery Dennison Corporation
Note 4. Cost Reduction Actions
2023 Actions
We recorded $6.0 million in restructuring charges, net of reversals, during the three months ended March 30, 2024. These charges consisted of severance and related costs for the reduction of approximately 100 positions at various locations across our company.
In the third quarter of 2023, we approved a restructuring plan (the “2023 Plan”) to further optimize the European footprint of our Materials Group reportable segment by reducing operations in a manufacturing facility in Belgium. The cumulative charges associated with the 2023 Plan, which we recorded in 2023, consisted of severance and related costs for the reduction of approximately 210 positions, as well as asset impairment charges. We do not anticipate additional charges related to the 2023 Plan and expect it to be substantially completed by mid-2025.
During the three months ended March 30, 2024, restructuring charges and payments were as follows:
| (In millions) | Accrual at December 30, 2023 | Charges, Net of Reversals | Cash Payments | Non-cash Impairment | Foreign Currency Translation | Accrual at March 30, 2024 | |||||||||||||||||||||||||||||
| 2023 Actions | |||||||||||||||||||||||||||||||||||
| Severance and related costs | $ | 27.7 | $ | 4.9 | $ | (12.8) | $ | — | $ | (.5) | $ | 19.3 | |||||||||||||||||||||||
| Asset impairment charges | — | .7 | — | (.7) | — | — | |||||||||||||||||||||||||||||
| Lease cancellation charges | — | .4 | (.4) | — | — | — | |||||||||||||||||||||||||||||
| Total | $ | 27.7 | $ | 6.0 | $ | (13.2) | $ | (.7) | $ | (.5) | $ | 19.3 |
Accruals for severance and related costs, as well as lease cancellation charges, were included in “Other current liabilities” and "Long-term retirement benefits and other 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 | |||||||||||||||||||||||
| (In millions) | March 30, 2024 | April 1, 2023 | |||||||||||||||||||||
| Restructuring charges, net of reversals, by reportable segment and Corporate | |||||||||||||||||||||||
| Materials Group | $ | 2.5 | $ | 14.3 | |||||||||||||||||||
| Solutions Group | 3.4 | 3.4 | |||||||||||||||||||||
| Corporate | .1 | (.1) | |||||||||||||||||||||
| Total | $ | 6.0 | $ | 17.6 |
Note 5. Financial Instruments
We enter into foreign exchange hedge contracts to reduce the risk from foreign exchange rate fluctuations associated with our 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 contracts, which end 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 $5.3 million and $2.3 million as of March 30, 2024 and December 30, 2023, respectively, which was included in "Other Assets" in the unaudited Condensed Consolidated Balance Sheets. Refer to Note 9, “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 months ended March 30, 2024 or April 1, 2023.
Avery Dennison Corporation
Note 6. Taxes Based on Income
The following table summarizes our income before taxes, provision for income taxes, and effective tax rate:
| Three Months Ended | |||||||||||||||||||||||
| (Dollars in millions) | March 30, 2024 | April 1, 2023 | |||||||||||||||||||||
| Income before taxes | $ | 234.4 | $ | 168.3 | |||||||||||||||||||
| Provision for income taxes | 62.0 | 47.1 | |||||||||||||||||||||
| Effective tax rate | 26.5 | % | 28.0 | % |
Our provision for income taxes for the three months ended March 30, 2024 included a net tax charge related to the tax on global intangible low-taxed income (“GILTI”) of our foreign subsidiaries and 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 months ended March 30, 2024 was favorably affected by the tax impacts resulting from Blue Chip Swap transactions in Argentina, partially offset by tax charges driven by higher interest expense in a foreign jurisdiction.
Our provision for income taxes for the three months ended April 1, 2023 included a 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 months ended April 1, 2023 was also adversely affected by higher non-deductible expenses primarily driven by foreign currency and interest rate fluctuations, as well as lower tax incentives in certain foreign jurisdictions.
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 IRS Compliance Assurance Process through 2021. 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 $6 million, primarily as a result of closing tax years.
Note 7. Net Income Per Common Share
Net income per common share was computed as follows:
| Three Months Ended | |||||||||||||||||||||||
| (In millions, except per share amounts) | March 30, 2024 | April 1, 2023 | |||||||||||||||||||||
| (A)Net income | $ | 172.4 | $ | 121.2 | |||||||||||||||||||
| (B)Weighted average number of common shares outstanding | 80.5 | 80.9 | |||||||||||||||||||||
| Dilutive shares (additional common shares issuable under stock-based awards) | .5 | .6 | |||||||||||||||||||||
| (C) Weighted average number of common shares outstanding, assuming dilution | 81.0 | 81.5 | |||||||||||||||||||||
| Net income per common share: (A) ÷ (B) | $ | 2.14 | $ | 1.50 | |||||||||||||||||||
| Net income per common share, assuming dilution: (A) ÷ (C) | $ | 2.13 | $ | 1.49 |
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 March 30, 2024 and were not significant for the three months ended April 1, 2023.
Avery Dennison Corporation
Note 8. Supplemental Equity and Comprehensive Income Information
Consolidated Changes in Shareholders’ Equity
| Three Months Ended | |||||||||||||||||||||||
| (In millions) | March 30, 2024 | April 1, 2023 | |||||||||||||||||||||
| Common stock issued, $1 par value per share | $ | 124.1 | $ | 124.1 | |||||||||||||||||||
| Capital in excess of par value | |||||||||||||||||||||||
| Beginning balance | $ | 854.5 | $ | 879.3 | |||||||||||||||||||
| Issuance of shares under stock-based compensation plans(1) | (20.5) | (28.5) | |||||||||||||||||||||
| Ending balance | $ | 834.0 | $ | 850.8 | |||||||||||||||||||
| Retained earnings | |||||||||||||||||||||||
| Beginning balance | $ | 4,691.8 | $ | 4,414.6 | |||||||||||||||||||
| Net income | 172.4 | 121.2 | |||||||||||||||||||||
| Issuance of shares under stock-based compensation plans(1) | 3.2 | 4.8 | |||||||||||||||||||||
| Contribution of shares to 401(k) plan(1) | 7.0 | 6.6 | |||||||||||||||||||||
| Dividends | (65.3) | (60.8) | |||||||||||||||||||||
| Ending balance | $ | 4,809.1 | $ | 4,486.4 | |||||||||||||||||||
| Treasury stock at cost | |||||||||||||||||||||||
| Beginning balance | $ | (3,134.4) | $ | (3,021.8) | |||||||||||||||||||
| Repurchase of shares for treasury | (15.6) | (50.7) | |||||||||||||||||||||
| Issuance of shares under stock-based compensation plans(1) | 6.5 | 12.6 | |||||||||||||||||||||
| Contribution of shares to 401(k) plan(1) | 2.3 | 2.5 | |||||||||||||||||||||
| Ending balance | $ | (3,141.2) | $ | (3,057.4) | |||||||||||||||||||
| Accumulated other comprehensive loss | |||||||||||||||||||||||
| Beginning balance | $ | (408.1) | $ | (364.0) | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | (13.9) | 3.0 | |||||||||||||||||||||
| Ending balance | $ | (422.0) | $ | (361.0) |
(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 | |||||||||||||||||||||||
| March 30, 2024 | April 1, 2023 | ||||||||||||||||||||||
| Dividends per common share | $ | .81 | $ | .75 |
Avery Dennison Corporation
Changes in Accumulated Other Comprehensive Loss
The changes in “Accumulated other comprehensive loss” (net of tax) for the three-month period ended March 30, 2024 were as follows:
| (In millions) | Foreign Currency Translation | Pension and Other Postretirement Benefits | Cash Flow Hedges | Total | |||||||||||||||||||
| Balance as of December 30, 2023 | $ | (328.6) | $ | (77.5) | $ | (2.0) | $ | (408.1) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of tax | (11.9) | — | (2.6) | (14.5) | |||||||||||||||||||
| Reclassifications to net income, net of tax | — | .2 | .4 | .6 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | (11.9) | .2 | (2.2) | (13.9) | |||||||||||||||||||
| Balance as of March 30, 2024 | $ | (340.5) | $ | (77.3) | $ | (4.2) | $ | (422.0) |
The changes in “Accumulated other comprehensive loss” (net of tax) for the three-month period ended April 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 | .4 | — | 1.8 | 2.2 | |||||||||||||||||||
| Reclassifications to net income, net of tax | — | (.2) | 1.0 | .8 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | .4 | (.2) | 2.8 | 3.0 | |||||||||||||||||||
| Balance as of April 1, 2023 | $ | (313.6) | $ | (51.5) | $ | 4.1 | $ | (361.0) |
Note 9. Fair Value Measurements
Recurring Fair Value Measurements
Assets and liabilities carried at fair value, measured on a recurring basis, as of March 30, 2024 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 | $ | 38.1 | $ | 18.5 | $ | 19.6 | $ | — | |||||||||||||||
| Derivative assets | 6.5 | — | 6.5 | — | |||||||||||||||||||
| Bank drafts | 8.4 | 8.4 | — | — | |||||||||||||||||||
| Cross-currency swap | 5.3 | — | 5.3 | — | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivative liabilities | $ | 8.3 | $ | 1.1 | $ | 7.2 | $ | — | |||||||||||||||
| Contingent consideration liabilities | 10.1 | — | — | 10.1 |
Avery Dennison Corporation
Assets and liabilities carried at fair value, measured on a recurring basis, as of December 30, 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 | $ | 37.8 | $ | 19.6 | $ | 18.2 | $ | — | |||||||||||||||
| Derivative assets | 6.3 | — | 6.3 | — | |||||||||||||||||||
| Bank drafts | 5.3 | 5.3 | — | — | |||||||||||||||||||
| Cross-currency swap | 2.3 | — | 2.3 | — | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivative liabilities | $ | 7.6 | $ | 1.6 | $ | 6.0 | $ | — | |||||||||||||||
| Contingent consideration liabilities | 10.0 | — | — | 10.0 |
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 March 30, 2024, investments of $2.1 million and $36.0 million were included in “Cash and cash equivalents” and “Other current assets,” respectively, in the unaudited Condensed Consolidated Balance Sheets. As of December 30, 2023, investments of $2.7 million and $35.1 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 March 30, 2024 relate to estimated earn-out payments associated with certain acquisitions completed in 2023, 2022 and 2021, which are subject to the acquired companies achieving certain post-acquisition performance targets. These liabilities were recorded based on the expected payments and have been classified as Level 3. Activity related to contingent consideration was immaterial for the three months ended March 30, 2024 and April 1, 2023.
In addition to the investments described above, we hold venture investments that had a total carrying value of approximately $68 million and $71 million as of March 30, 2024 and December 30, 2023, respectively, which was included in “Other assets” in the unaudited Condensed Consolidated Balance Sheets. We recognized $2.2 million in net losses on these investments in the three months ended March 30, 2024. We recognized no net gains or losses on these investments in the three months ended April 1, 2023. These net gains or losses were recorded in "Other expense (income), net” in the unaudited Condensed Consolidated Statements of Income.
Note 10. 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 were 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 was 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.
We appealed the first instance judgment associated with the jury verdict – which 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, a higher royalty imposed by the judge applicable to tags sold after the judgment and a royalty on additional late-disclosed tags, as well as sanctions, prejudgment interest, costs, and attorneys’ fees, as well as an ongoing royalty on in-scope tags sold after October 14, 2021 – to the United States Court of Appeals for the Federal Circuit (the “CAFC”). 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 was
Avery Dennison Corporation
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.
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. We increased our contingent liability to reflect our then-best estimate of the anticipated judgment to $80.4 million as of July 1, 2023, with an expectation to continue adjusting our accrual quarterly, as appropriate. As of December 30, 2023, our contingent liability for this matter was $82.9 million.
On January 25, 2024, the district court issued a revised sanction order lowering the sanction against us from approximately $20 million to $5.2 million, based on a rate of $0.0025/late-reported tag, which was consistent with the amount we had accrued. In February 2024, the district court issued its decision denying our motion for judgment as a matter of law and our motion for a new trial. On March 7, 2024, the Court issued an amended final judgment, assessing damages, pre- and post-judgment interest, costs, attorneys' fees, sanctions, and on-going royalties.
Subsequent to the end of the first quarter of 2024, on April 25, 2024, we executed a Settlement Agreement, License and Mutual Release with Adasa pursuant to which, among other things, (i) we agreed to pay $75.0 million to Adasa without any concessions or admissions of liability; (ii) Adasa agreed to grant us a worldwide, nonexclusive, nontransferable fully-paid up, and ongoing royalty-free perpetual license, without the right to sublicense, to the patents at issue in the litigation; and (iii) the parties mutually released all claims against one another. We paid the agreed-upon settlement amount to Adasa on April 26, 2024. No court approval of the settlement is required, however, as required by the settlement agreement, Adasa filed a Stipulation of Satisfaction of Judgment with the trial court on April 29, 2024.
Because of the uncertainties associated with claims resolution and litigation, future expenses to resolve legal proceedings 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, 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 their resolution cannot be determined. Based upon current information, we believe that the impact of the resolution of legal proceedings 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 March 30, 2024, 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 their remediation cannot be determined.
The activity related to our environmental liabilities for the three months ended March 30, 2024 is shown below.
| (In millions) | |||||
| Balance at December 30, 2023 | $ | 24.5 | |||
| Charges, net of reversals | .5 | ||||
| Payments | (2.0) | ||||
| Balance at March 30, 2024 | $ | 23.0 |
Avery Dennison Corporation
Approximately $9 million and $11 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 March 30, 2024 and December 30, 2023.
Note 11. 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 | |||||||||||||||||||||||
| (In millions) | March 30, 2024 | April 1, 2023 | |||||||||||||||||||||
| Net sales to unaffiliated customers | |||||||||||||||||||||||
| Materials Group: | |||||||||||||||||||||||
| U.S. | $ | 437.4 | $ | 446.4 | |||||||||||||||||||
| Europe, the Middle East and North Africa | 534.7 | 498.9 | |||||||||||||||||||||
| Asia | 326.2 | 315.6 | |||||||||||||||||||||
| Latin America | 120.6 | 113.7 | |||||||||||||||||||||
| Other | 77.6 | 85.9 | |||||||||||||||||||||
| Total Materials Group | 1,496.5 | 1,460.5 | |||||||||||||||||||||
| Solutions Group: | |||||||||||||||||||||||
| Apparel | 459.6 | 418.8 | |||||||||||||||||||||
| Identification Solutions and Vestcom | 195.2 | 185.7 | |||||||||||||||||||||
| Total Solutions Group | 654.8 | 604.5 | |||||||||||||||||||||
| Net sales to unaffiliated customers | $ | 2,151.3 | $ | 2,065.0 | |||||||||||||||||||
Additional Segment Information
Additional financial information by reportable segment and Corporate is shown below.
| Three Months Ended | |||||||||||||||||||||||
| (In millions) | March 30, 2024 | April 1, 2023 | |||||||||||||||||||||
| Intersegment sales | |||||||||||||||||||||||
| Materials Group | $ | 47.0 | $ | 34.9 | |||||||||||||||||||
| Solutions Group | 10.9 | 10.0 | |||||||||||||||||||||
| Intersegment sales | $ | 57.9 | $ | 44.9 | |||||||||||||||||||
| Income before taxes | |||||||||||||||||||||||
| Materials Group | $ | 226.1 | $ | 160.5 | |||||||||||||||||||
| Solutions Group | 56.1 | 51.5 | |||||||||||||||||||||
| Corporate expense | (27.8) | (21.9) | |||||||||||||||||||||
| Interest expense | (28.6) | (26.4) | |||||||||||||||||||||
| Other non-operating expense (income), net | 8.6 | 4.6 | |||||||||||||||||||||
| Income before taxes | $ | 234.4 | $ | 168.3 | |||||||||||||||||||
| Other expense (income), net, by reportable segment and Corporate | |||||||||||||||||||||||
| Materials Group | $ | 14.4 | $ | 14.3 | |||||||||||||||||||
| Solutions Group | (1.9) | 3.6 | |||||||||||||||||||||
| Corporate | .1 | (.1) | |||||||||||||||||||||
| Other expense (income), net | $ | 12.6 | $ | 17.8 | |||||||||||||||||||
Avery Dennison Corporation
Other expense (income), net, by type were as follows:
| Three Months Ended | |||||||||||||||||||||||
| (In millions) | March 30, 2024 | April 1, 2023 | |||||||||||||||||||||
| Other expense (income), net, by type | |||||||||||||||||||||||
| Restructuring charges, net of reversals: | |||||||||||||||||||||||
| Severance and related costs, net of reversals | $ | 4.9 | $ | 17.1 | |||||||||||||||||||
| Asset impairment and lease cancellation charges | 1.1 | .5 | |||||||||||||||||||||
| Other items: | |||||||||||||||||||||||
| Losses from Argentine peso remeasurement and Blue Chip Swap transactions | 11.3 | — | |||||||||||||||||||||
| (Gain) loss on venture investment | 2.2 | — | |||||||||||||||||||||
| Outcomes of legal matters and settlements, net | (6.9) | — | |||||||||||||||||||||
| Transaction and related costs | — | .2 | |||||||||||||||||||||
| Other expense (income), net | $ | 12.6 | $ | 17.8 | |||||||||||||||||||
Note 12. Supplemental Financial Information
Inventories
The table below summarizes amounts in inventories.
| (In millions) | March 30, 2024 | December 30, 2023 | |||||||||
| Raw materials | $ | 404.4 | $ | 415.4 | |||||||
| Work-in-progress | 230.9 | 238.2 | |||||||||
| Finished goods | 337.2 | 267.1 | |||||||||
| Inventories | $ | 972.5 | $ | 920.7 |
Property, Plant and Equipment, Net
The table below summarizes the amounts in property, plant and equipment, net.
| (In millions) | March 30, 2024 | December 30, 2023 | |||||||||
| Property, plant and equipment | $ | 3,923.9 | $ | 3,970.4 | |||||||
| Accumulated depreciation | (2,325.7) | (2,344.6) | |||||||||
| Property, plant and equipment, net | $ | 1,598.2 | $ | 1,625.8 |
Allowance for Credit Losses
The activity related to our allowance for credit losses is shown below.
| Three Months Ended | |||||||||||
| (In millions) | March 30, 2024 | April 1, 2023 | |||||||||
| Beginning balance | $ | 34.4 | $ | 34.4 | |||||||
| Provision for credit losses | 1.7 | .1 | |||||||||
| Amounts written off | (1.4) | (1.3) | |||||||||
| Other, including foreign currency translation | (.1) | .7 | |||||||||
| Ending balance | $ | 34.6 | $ | 33.9 |
Avery Dennison Corporation
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 presented as operating activities in our unaudited Condensed Consolidated Statements of Cash Flows. As of March 30, 2024 and December 30, 2023, the amounts due to financial institutions for suppliers that participate in these programs were $383.0 million and $397.4 million, respectively.
Argentine Blue Chip Swap
During 2019, the Argentine government instituted exchange controls restricting the ability of entities and individuals to exchange Argentine pesos for foreign currencies or remit foreign currency out of Argentina. Due to these currency exchange restrictions, markets in Argentina use a legal trading mechanism known as the Blue Chip Swap that allows entities to transfer U.S. dollars in and out of Argentina. During the first quarter of 2024, we entered into Blue Chip Swap transactions that resulted in losses of approximately $6 million that we recorded in "Other expense (income), net" in the unaudited Condensed Consolidated Statements of Income. Purchases and the proceeds from sales of Argentine Blue Chip Swap securities are presented as investing activities in our unaudited Condensed Consolidated Statements of Cash Flows.
Avery Dennison Corporation
Previous: Cover and table of contents · Next: Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS