Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, provides management’s views on our financial condition and results of operations and should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and related notes thereto.

NON-GAAP FINANCIAL MEASURES

We report our financial results in conformity with accounting principles generally accepted in the United States of America, or GAAP, and also communicate with investors using certain non-GAAP financial measures. These non-GAAP financial measures are not in accordance with, nor are they a substitute for or superior to, the comparable GAAP financial measures. These non-GAAP financial measures are intended to supplement the presentation of our financial results prepared in accordance with GAAP. We use these non-GAAP financial measures internally to evaluate trends in our underlying performance, as well as to facilitate comparisons with the results of competitors for quarters and year-to-date periods, as applicable. Based on feedback from investors and financial analysts, we believe that the supplemental non-GAAP financial measures we provide are also useful to their assessments of our performance and operating trends, as well as liquidity. Reconciliations of our non-GAAP financial measures from the most directly comparable GAAP financial measures are provided in accordance with Regulations G and S-K.

Our non-GAAP financial measures exclude the impact of certain events, activities or strategic decisions. The accounting effects of these events, activities or decisions, which are included in the GAAP financial measures, may make it more difficult to assess our underlying performance in a single period. By excluding the accounting effects, positive or negative, of certain items (e.g., restructuring charges, outcomes of certain legal matters and settlements, certain effects of strategic transactions and related costs, losses from debt extinguishments, gains or losses from curtailment or settlement of pension obligations, gains or losses on sales of certain assets, gains or losses on venture investments, currency adjustments due to highly inflationary economies, and other items), we believe that we are providing meaningful supplemental information that facilitates an understanding of our core operating results and liquidity measures. While some of the items we exclude from GAAP financial measures recur, they tend to be disparate in amount, frequency or timing.

We use the non-GAAP financial measures defined below in this MD&A.

Sales change ex. currency refers to the increase or decrease in net sales, excluding the estimated impact of foreign currency translation, and, where applicable, an extra week in our fiscal year, the calendar shift resulting from an extra week in the prior fiscal year, currency adjustments for transitional reporting of highly inflationary economies, and the reclassification of sales between segments. The estimated impact of foreign currency translation is calculated on a constant currency basis, with prior-period results translated at current period average exchange rates to exclude the effect of foreign currency fluctuations.
Organic sales change refers to sales change ex. currency, excluding the estimated impact of acquisitions and product line divestitures.

We believe that sales change ex. currency and organic sales change assist investors in evaluating the sales change from the ongoing activities of our businesses and enhance their ability to evaluate our results from period to period.

Adjusted free cash flow refers to cash flow provided by operating activities, less payments for property, plant and equipment, software and other deferred charges, plus proceeds from company-owned life insurance policies, plus proceeds from sales of property, plant and equipment, plus (minus) net proceeds from insurance and sales (purchases) of investments, less net cash used for Argentine Blue Chip Swap securities. Where applicable, adjusted free cash flow is also adjusted for certain acquisition-related transaction costs. We believe that adjusted free cash flow assists investors by showing the amount of cash we have available for debt reductions, dividends, share repurchases and acquisitions.
Operational working capital as a percentage of annualized current quarter net sales refers to trade accounts receivable and inventories, net of accounts payable, and excludes cash and cash equivalents, short-term borrowings, deferred taxes, other current assets and other current liabilities, as well as net current assets or liabilities held-for-sale divided by annualized current quarter net sales. We believe that operational working capital as a percentage of annualized current quarter net sales assists investors in assessing our working capital requirements because it excludes the impact of fluctuations attributable to our financing and other activities (which affect cash and cash equivalents, deferred taxes, other current assets and other current liabilities) that tend to be disparate in amount, frequency or timing, and may increase the volatility of working capital as a percentage of sales from period to period. The items excluded from this measure are not significantly influenced by our day-to-day activities managed at the operating level and do not necessarily reflect the underlying trends in our operations.

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OVERVIEW AND OUTLOOK

Net Sales

The factors impacting reported net sales change, as compared to the prior-year period, are shown in the table below.


	Three Months Ended June 29, 2024		Six Months Ended June 29, 2024
Reported net sales change	7	%	6	%
Foreign currency translation	1		1
Sales change ex. currency(1)	8		6
Acquisitions	(1)		(1)
Organic sales change(1)	7	%	5	%

(1) Totals may not sum due to rounding

In the three months and six months ended June 29, 2024, net sales increased on an organic basis compared to the same period in the prior year primarily due to higher volume, partially offset by the impact of raw material deflation-related price reductions.

Net Income

Net income increased from approximately $222 million in the first six months of 2023 to approximately $349 million in the first six months of 2024. The major factors impacting this increase were:

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

Offsetting factors were:

Higher employee-related costs
Higher provision for income taxes

Cost Reduction Actions

2023 Actions

We recorded $13.2 million in restructuring charges, net of reversals, during the six months ended June 29, 2024. These charges consisted of severance and related costs for the reduction of approximately 380 positions, as well as asset impairment and lease cancellation charges, 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.

Restructuring charges were included in “Other expense (income), net” in the unaudited Condensed Consolidated Statements of Income. Refer to Note 4, “Cost Reduction Actions,” to the unaudited Condensed Consolidated Financial Statements for more information.

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Cash Flow


	Six Months Ended
(In millions)	June 29, 2024		July 1, 2023
Net cash provided by operating activities	$	317.5	$	191.5
Purchases of property, plant and equipment	(96.3)		(115.9)
Purchases of software and other deferred charges	(12.9)		(11.0)
Purchases of Argentine Blue Chip Swap securities	(34.2)		—
Proceeds from sales of Argentine Blue Chip Swap securities	24.0		—
Proceeds from sales of property, plant and equipment	.3		.3
Proceeds from insurance and sales (purchases) of investments, net	2.2		(1.2)

Adjusted free cash flow	$	200.6	$	63.7

During the first six months of 2024, net cash provided by operating activities increased compared to the same period last year primarily due to higher net income, lower incentive compensation payments and lower tax payments, net of refunds, partially offset by the settlement payment for the Adasa legal matter and changes in operational working capital. During the first six months of 2024, adjusted free cash flow increased compared to the same period last year primarily due to an increase in net cash provided by operating activities and a decrease in purchases of property, plant and equipment.

Outlook

Certain factors that we believe may contribute to our 2024 results are described below.

We anticipate net sales to increase due to higher volume as our markets improve following significant inventory destocking downstream from our company in 2023, as well as growth in Intelligent Labels. This increase may be partially offset by raw material deflation-related price reductions.
We anticipate incremental savings from restructuring actions, net of transition costs.
Based on recent rates, we expect foreign currency translation to have an unfavorable impact on our full-year operating income.
We expect our full-year effective tax rate to be in the mid-twenty percent range.

ANALYSIS OF RESULTS OF OPERATIONS FOR THE SECOND QUARTER

Income Before Taxes


	Three Months Ended
(In millions, except percentages)	June 29, 2024			July 1, 2023
Net sales	$	2,235.3		$	2,090.5
Cost of products sold	1,572.6			1,537.1
Gross profit	662.7			553.4
Marketing, general and administrative expense	373.9			319.6
Other expense (income), net	27.0			68.3
Interest expense	29.2			31.9
Other non-operating expense (income), net	(5.8)			(6.6)
Income before taxes	$	238.4		$	140.2
Gross profit margin	29.6		%	26.5		%

Gross Profit Margin

Gross profit margin for the second quarter of 2024 increased from the same period last year due to higher volume, benefits from productivity initiatives, including material re-engineering and savings from restructuring actions, net of transition costs, and the net impact of pricing and raw material input costs, partially offset by higher employee-related costs.

Marketing, General and Administrative Expense

Marketing, general and administrative expense increased in the second quarter of 2024 compared to the same period last year primarily due to higher employee-related costs and growth investments, partially offset by benefits from productivity initiatives, including savings from restructuring actions, net of transition costs.

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Other Expense (Income), Net


	Three Months Ended
(In millions)	June 29, 2024		July 1, 2023
Other expense (income), net, by type
Restructuring charges:
Severance and related costs, net of reversals	$	6.3	$	8.8
Asset impairment and lease cancellation charges	.9		1.2
Other items:
(Gain) loss on venture investments	15.0		—
Losses from Argentine peso remeasurement and Blue Chip Swap transactions	4.1		—
Outcomes of legal matters and settlements, net	.4		53.8
Transaction and related costs	.3		4.0
(Gain) loss on sales of assets, net	—		.5



Other expense (income), net	$	27.0	$	68.3

Refer to Note 4, “Cost Reduction Actions,” to the unaudited Condensed Consolidated Financial Statements for more information regarding restructuring charges. Refer to Note 10, “Commitments and Contingencies,” to the unaudited Condensed Consolidated Financial Statements for more information regarding the outcomes of legal matters and settlements, net.

Interest Expense

Interest expense decreased in the second quarter of 2024 compared to the same period last year primarily due to a decrease in commercial paper borrowings.

Net Income and Earnings per Share


	Three Months Ended
(In millions, except per share amounts and percentages)	June 29, 2024			July 1, 2023
Income before taxes	$	238.4		$	140.2
Provision for income taxes	61.6			39.8

Net income	$	176.8		$	100.4
Per share amounts:
Net income per common share	$	2.19		$	1.24
Net income per common share, assuming dilution	2.18			1.24
Effective tax rate	25.8		%	28.4		%

Provision for Income Taxes

Our effective tax rate for the three months ended June 29, 2024 decreased compared to the same period last year primarily due to higher tax incentives in certain foreign jurisdictions and the tax impacts resulting from Blue Chip Swap transactions in Argentina. Refer to Note 6, “Taxes Based on Income,” to the unaudited Condensed Consolidated Financial Statements for more information.

RESULTS OF OPERATIONS BY REPORTABLE SEGMENT FOR THE SECOND QUARTER

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

Materials Group


	Three Months Ended
(In millions)	June 29, 2024		July 1, 2023
Net sales including intersegment sales	$	1,585.1	$	1,514.2
Less intersegment sales	(38.3)		(38.2)
Net sales	$	1,546.8	$	1,476.0
Operating income(1)	223.4		193.8
(1)Included (gain) loss on venture investment, losses from Argentine peso remeasurement and Blue Chip Swap transactions, and outcomes of legal matters and settlements, net, in 2024, charges associated with restructuring actions in both years and (gain) loss on sales of assets in 2023	$	21.1	$	6.1

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Net Sales

The factors impacting reported net sales change, as compared to the prior-year period, are shown in the table below.


	Three Months Ended
	June 29, 2024
Reported net sales change	5	%
Foreign currency translation	1
Sales change ex. currency(1)	6

Organic sales change(1)	6	%
(1) Totals may not sum due to rounding.

In the second quarter of 2024, net sales increased on an organic basis compared to the same period in the prior year mainly due to higher volume/mix, partially offset by the impact of raw material deflation-related price reductions. On an organic basis, net sales increased by a low-to-mid single-digit rate in North America, a mid-single-digit rate in Western Europe and a high single-digit rate in emerging markets.

Operating Income

Operating income increased in the second quarter of 2024 compared to the same period last year primarily due to higher volume/mix and benefits from productivity initiatives, including material re-engineering and savings from restructuring actions, net of transition costs, partially offset by higher employee-related costs and loss on venture investment.

Solutions Group


	Three Months Ended
(In millions)	June 29, 2024		July 1, 2023
Net sales including intersegment sales	$	703.9	$	624.5
Less intersegment sales	(15.4)		(10.0)
Net sales	$	688.5	$	614.5
Operating income (loss)(1)	64.1		(7.2)
(1)Included charges associated with restructuring actions and transaction and related costs in both years and outcomes of legal matters and settlements, net, in 2023	$	5.7	$	62.2

Net Sales

The factors impacting reported net sales change, as compared to the prior-year period, are shown in the table below.


	Three Months Ended
	June 29, 2024
Reported net sales change	12	%

Foreign currency translation	2

Sales change ex. currency(1)	14
Acquisitions	(3)
Organic sales change(1)	11	%
(1) Totals may not sum due to rounding.

In the second quarter of 2024, net sales increased on an organic basis compared to the same period in the prior year by a mid-to-high single-digit rate in high-value categories and a mid-to-high teens rate in the base business. Company-wide, on an organic basis, net sales of Intelligent Label solutions increased by a mid-to-high teens rate compared to the same period in the prior year.

Operating Income

Operating income increased in the second quarter of 2024 compared to the same period last year primarily due to the impact of the accrual for the Adasa legal matter in the prior year, higher volume and benefits from productivity initiatives, including savings from restructuring actions, net of transition costs, partially offset by higher employee-related costs and growth investments.

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ANALYSIS OF RESULTS OF OPERATIONS FOR THE SIX MONTHS YEAR-TO-DATE

Income Before Taxes


	Six Months Ended
(In millions, except percentages)	June 29, 2024			July 1, 2023
Net sales	$	4,386.6		$	4,155.5
Cost of products sold	3,091.7			3,059.8
Gross profit	1,294.9			1,095.7
Marketing, general and administrative expense	739.1			654.0
Other expense (income), net	39.6			86.1
Interest expense	57.8			58.3
Other non-operating expense (income), net	(14.4)			(11.2)
Income before taxes	$	472.8		$	308.5
Gross profit margin	29.5		%	26.4		%

Gross Profit Margin

Gross profit margin for the first six months of 2024 increased from the same period last year primarily due to benefits from productivity initiatives, including material re-engineering and savings from restructuring actions, net of transition costs, higher volume and the net impact of pricing and raw material input costs, partially offset by higher employee-related costs.

Marketing, General and Administrative Expense

Marketing, general and administrative expense increased in the first six months of 2024 compared to the same period last year primarily due to higher employee-related costs and growth investments, partially offset by benefits from productivity initiatives, including temporary cost-saving actions and savings from restructuring actions, net of transition costs.

Other Expense (Income), Net


	Six Months Ended
(In millions)	June 29, 2024		July 1, 2023
Other expense (income), net, by type
Restructuring charges:
Severance and related costs	$	11.2	$	25.9
Asset impairment and lease cancellation charges	2.0		1.7
Other items:
(Gain) loss on venture investments	17.2		—
Losses from Argentine peso remeasurement and Blue Chip Swap transactions	15.4		—
Outcomes of legal matters and settlements, net	(6.5)		53.8
Transaction and related costs	.3		4.2
(Gain) loss on sales of assets	—		.5


Other expense (income), net	$	39.6	$	86.1

Interest Expense

Interest expense for the first six months of 2024 was comparable to the same period last year.

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Net Income and Earnings per Share


	Six Months Ended
(In millions, except per share amounts and percentages)	June 29, 2024			July 1, 2023
Income before taxes	$	472.8		$	308.5
Provision for income taxes	123.6			86.9

Net income	$	349.2		$	221.6
Per share amounts:
Net income per common share	$	4.34		$	2.74
Net income per common share, assuming dilution	4.31			2.73
Effective tax rate	26.1		%	28.2		%

Provision for Income Taxes

Our effective tax rate for the six months ended June 29, 2024 decreased compared to the same period last year primarily due to higher tax incentives in certain foreign jurisdictions and the tax impacts resulting from Blue Chip Swap transactions in Argentina. Refer to Note 6, “Taxes Based on Income,” to the unaudited Condensed Consolidated Financial Statements for more information.

The global minimum tax under the Pillar Two framework became effective for us in 2024. While the impact of this framework is currently not expected to be material to our full-year effective tax rate, our analysis is ongoing as the Organization for Economic Cooperation and Development continues to release additional guidance and countries enact related legislation.

Our effective tax rate can vary from quarter to quarter due to a variety of factors, such as changes in the mix of earnings in countries with differing statutory tax rates, changes in tax reserves, settlements of income tax audits, changes in tax laws and regulations, return-to-provision adjustments, tax impacts related to stock-based payments and execution of tax planning strategies.

RESULTS OF OPERATIONS BY REPORTABLE SEGMENT FOR THE SIX MONTHS YEAR-TO-DATE

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

Materials Group


	Six Months Ended
(In millions)	June 29, 2024		July 1, 2023
Net sales including intersegment sales	$	3,128.6	$	3,009.6
Less intersegment sales	(85.3)		(73.1)
Net sales	$	3,043.3	$	2,936.5
Operating income(1)	449.5		354.3
(1)Included losses from Argentine peso remeasurement and Blue Chip Swap transactions, (gain) loss on venture investment and outcomes of legal matters and settlements, net, in 2024, charges associated with restructuring actions in both years and (gain) loss on sales of assets in 2023.	$	35.5	$	20.4

Net Sales

The factors impacting reported net sales change, as compared to the prior-year period, are shown in the table below.


	Six Months Ended
	June 29, 2024
Reported net sales change	4	%
Foreign currency translation	—
Sales change ex. currency(1)	4

Organic sales change(1)	4	%

(1) Totals may not sum due to rounding

In the first six months of 2024, net sales increased on an organic basis compared to the same period in the prior year mainly due to higher volume/mix, partially offset by the impact of raw material deflation-related price reductions. On an organic basis, net sales increased by a low single-digit rate in North America, a mid-single-digit rate in Western Europe and a mid-to-high single-digit rate in emerging markets.

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Operating Income

Operating income increased in the first six months of 2024 compared to the same period last year primarily due to higher volume/mix, benefits from productivity initiatives, including material re-engineering and savings from restructuring actions, net of transition costs, and lower restructuring charges, partially offset by higher employee-related costs, losses from Argentine peso remeasurement and Blue Chip Swap transactions, and loss on venture investment.

Solutions Group


	Six Months Ended
(In millions)	June 29, 2024		July 1, 2023
Net sales including intersegment sales	$	1,369.6	$	1,239.0
Less intersegment sales	(26.3)		(20.0)
Net sales	$	1,343.3	$	1,219.0
Operating income(1)	120.2		44.3
(1) Included (gain) loss on venture investment in 2024 and charges associated with restructuring actions, outcomes of legal matters and settlements, net, and transaction and related costs in both years.	$	10.5	$	65.8

Net Sales

The factors impacting reported net sales change, as compared to the prior-year period, are shown in the table below.


	Six Months Ended
	June 29, 2024
Reported net sales change	10	%

Foreign currency translation	2
Sales change ex. currency(1)	12
Acquisitions	(4)
Organic sales change(1)	8	%

(1)Totals may not sum due to rounding

In the first six months of 2024, net sales increased on an organic basis compared to the same period in the prior year by a high single-digit rate in both high-value categories and the base business, Company-wide, on an organic basis, net sales of Intelligent Label solutions increased by a mid-to-high-teens rate compared to the same period in the prior year.

Operating Income

Operating income increased in the first six months of 2024 compared to the same period last year primarily due to higher volume, the impact of the accrual for the Adasa legal matter in the prior year and benefits from productivity initiatives, including savings from restructuring actions, net of transition costs, partially offset by higher employee-related costs.

FINANCIAL CONDITION

Liquidity

Operating Activities


	Six months ended
(In millions)	June 29, 2024		July 1, 2023
Net income	$	349.2	$	221.6
Depreciation	98.7		91.5
Amortization	57.2		54.8
Provision for credit losses and sales returns	28.2		18.9
Stock-based compensation	17.4		12.2

Deferred taxes and other non-cash taxes	(3.8)		(17.5)
Other non-cash expense and loss (income and gain), net	46.6		17.0
Changes in assets and liabilities and other adjustments	(276.0)		(207.0)
Net cash provided by operating activities	$	317.5	$	191.5

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Investing Activities


	Six months ended
(In millions)	June 29, 2024		July 1, 2023
Purchases of property, plant and equipment	$	(96.3)	$	(115.9)
Purchases of software and other deferred charges	(12.9)		(11.0)
Purchases of Argentine Blue Chip Swap securities	(34.2)		—
Proceeds from sales of Argentine Blue Chip Swap securities	24.0		—
Proceeds from sales of property, plant and equipment	.3		.3
Proceeds from insurance and sales (purchases) of investments, net	2.2		(1.2)

Payments for acquisitions, net of cash acquired, and venture investments	(1.9)		(194.1)
Net cash used in investing activities	$	(118.8)	$	(321.9)

Purchases of Property, Plant and Equipment

During the first six months of 2024, in our Solutions Group reportable segment, we primarily invested in buildings and equipment in certain countries in Asia Pacific, including China and Vietnam, in the U.S. and in certain countries in Latin America, primarily Mexico; in our Materials Group reportable segment, we primarily invested in buildings and equipment to support growth in the U.S. and in certain countries in Europe, primarily France. During the first six months of 2023, in our Solutions Group reportable segment, we primarily invested in buildings and equipment to support growth in the U.S., in certain countries in Latin America, primarily Mexico, and in certain counties in Asia, primarily Malaysia; in our Materials Group reportable segment, we primarily invested in buildings and equipment in the U.S. and in certain countries in Europe, primarily France.

Purchases of Software and Other Deferred Charges

During the first six months of 2024 and 2023, we primarily invested in information technology upgrades in the U.S.

Purchases and Proceeds from Sales of Argentine Blue Chip Swap Securities

During the first six months of 2024, we entered into Blue Chip Swap transactions that resulted in losses of approximately $10 million. Refer to Note 12, “Supplemental Financial Information,” to the unaudited Condensed Consolidated Financial Statements for more information.

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

During the first six months of 2023, we paid consideration, net of cash acquired, of approximately $194 million for the acquisitions of Thermopatch, Inc. ("Thermopatch") and LG Group, Inc. ("Lion Brothers"). We funded the Thermopatch and Lion Brothers acquisitions using cash and commercial paper borrowings.

Financing Activities


	Six months ended
(In millions)	June 29, 2024		July 1, 2023
Net increase (decrease) in borrowings with maturities of three months or less	$	(2.2)	$	281.8


Additional long-term borrowings	—		394.9
Repayments of long-term debt and finance leases	(3.5)		(252.6)
Dividends paid	(136.2)		(126.2)
Share repurchases	(40.7)		(89.5)
Net (tax withholding) proceeds related to stock-based compensation	(18.4)		(23.7)
Other	(1.1)		(1.6)
Net cash (used in) provided by financing activities	$	(202.1)	$	183.1

Borrowings and Repayment of Debt

During the first six months of 2024 and 2023, our commercial paper borrowings were used to fund acquisitions, dividend payments, share repurchases, capital expenditures and other general corporate purposes.

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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 indebtedness under our commercial paper programs and the $250 million aggregate principal amount of senior notes that matured on April 15, 2023.

Refer to Note 3, “Debt,” to the unaudited Condensed Consolidated Financial Statements for more information.

Dividends Paid

We paid dividends of $1.69 per share in the first six months of 2024 compared to $1.56 per share in the same period last year. In April 2024, we increased our quarterly dividend rate to $0.88 per share, representing an increase of approximately 9% from our previous quarterly dividend rate of $0.81 per share.

Share Repurchases

During the first six months of 2024 and 2023, we repurchased approximately 0.2 million and 0.5 million shares of our common stock, respectively.

Long-lived Assets

In the six months ended June 29, 2024, goodwill decreased by approximately $24 million to $1.99 billion, primarily reflecting the impact of foreign currency translation.

In the six months ended June 29, 2024, other intangibles resulting from business acquisitions, net, decreased by approximately $48 million to $800.9 million, reflecting current year amortization expense and the impact of foreign currency translation.

Refer to Note 2, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” to the unaudited Condensed Consolidated Financial Statements for more information.

Shareholders’ Equity Accounts

As of June 29, 2024, the balance of our shareholders’ equity was $2.29 billion. Refer to Note 8, “Supplemental Equity and Comprehensive Income Information,” to the unaudited Condensed Consolidated Financial Statements for more information.

Impact of Foreign Currency Translation


	Six Months Ended
(In millions)	June 29, 2024
Change in net sales	$	(21)

International operations generated approximately 70% of our net sales during the six months ended June 29, 2024. Our future results are subject to changes in political, social and economic conditions globally and in the regions in which we operate and the impact of fluctuations in foreign currency exchange and interest rates.

The unfavorable impact of foreign currency translation on net sales in the first six months of 2024 compared to the same period last year was primarily related to sales in China.

Effect of Foreign Currency Transactions

The impact on net income from transactions denominated in foreign currencies is largely mitigated because the costs of our products are generally denominated in the same currencies in which they are sold. In addition, to reduce our income and cash flow exposure to transactions in foreign currencies, we enter into foreign exchange forward, option and swap contracts where available and appropriate. Refer to Note 5, “Financial Instruments,” to the unaudited Condensed Consolidated Financial Statements for more information.

Analysis of Selected Financial Ratios

We utilize the financial ratios discussed below to assess our financial condition and operating performance. We believe this information assists our investors in understanding the factors impacting our cash flow other than net income and capital expenditures.

Operational Working Capital Ratio

Operational working capital, as a percentage of annualized current-quarter net sales, is reconciled to working capital (deficit) below. Working capital (deficit) (current assets minus current liabilities) as of the second quarter of 2024 decreased by approximately $575 million compared to the second quarter of 2023 primarily due to the reclassification of our $300 million of senior notes due in the third quarter of 2024, €500 million of senior notes due in the first quarter of 2025 and $25 million of medium-term notes due in the second quarter of 2025, partially offset by lower commercial paper borrowings of approximately $321 million. Our objective is to minimize our investment in operational working capital, as a percentage of annualized current-quarter net sales, to maximize our cash flow and return

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on investment. As shown below, operational working capital, as a percentage of annualized current-quarter net sales, in the second quarter of 2024 decreased compared to the second quarter of 2023.


(In millions, except percentages)	June 29, 2024			July 1, 2023
(A) Working capital (deficit)	$	(332.4)		$	242.3
Reconciling items:
Cash and cash equivalents	(208.8)			(217.1)
Other current assets	(250.5)			(228.2)
Short-term borrowings and current portion of long-term debt and finance leases	1,172.3			635.8
Accrued payroll and employee benefits and other current liabilities	814.5			738.1
(B) Operational working capital	$	1,195.1		$	1,170.9
(C) Second-quarter net sales, annualized	$	8,941.2		$	8,362.0
Operational working capital, as a percentage of annualized current-quarter net sales: (B) ÷ (C)	13.4		%	14.0		%

Accounts Receivable Ratio

The average number of days sales outstanding was 62 days in the second quarters of 2024 and 2023, calculated using the accounts receivable balance at quarter-end divided by the average daily sales in the respective quarter.

Inventory Ratio

Average inventory turnover was 6.4 in the second quarter of 2024 compared to 6.2 in the second quarter of 2023, calculated using the annualized second-quarter cost of products sold in 2024 and 2023, respectively, and divided by the inventory balance at quarter-end.

Accounts Payable Ratio

The average number of days payable outstanding was 76 days in the second quarter of 2024 compared to 73 days in the second quarter of 2023, calculated using the accounts payable balance at quarter-end divided by the respective annualized second-quarter cost of products sold. The increase in average number of days payable outstanding primarily reflected the timing of vendor payments.

Capital Resources

Capital resources used to fund our operational needs include cash flows from operations, cash and cash equivalents and debt financing, including access to commercial paper borrowings supported by our $1.20 billion revolving credit facility (the “Revolver”).

In June 2024, we entered into a Credit Agreement (the "Credit Agreement") under which we can borrow up to an aggregate of $1.20 billion through its maturity date of June 26, 2029. The Revolver refinanced our Fifth Amended and Restated Credit Agreement dated as of February 13, 2020, as amended. Pursuant to the Credit Agreement, the commitments under the Revolver may be increased by up to $600 million, subject to lender approvals and customary requirements. Under certain circumstances, we may request that the commitments under the Revolver be extended for one-year periods in accordance with the terms and conditions of the Credit Agreement.

The Revolver is used as a back-up facility for our commercial paper borrowings and can be used for other corporate purposes. No balance was outstanding under the Revolver as of June 29, 2024 or our prior revolving credit facility as of December 30, 2023.

As of June 29, 2024, we had cash and cash equivalents of $208.8 million held in accounts at third-party financial institutions. Our cash balances are held in numerous locations around the world. As of June 29, 2024, the majority of our cash and cash equivalents was held by our foreign subsidiaries, primarily in Asia Pacific.

To meet our U.S. cash requirements, we have several cost-effective liquidity options available. These options include borrowing funds at reasonable rates, including borrowings from foreign subsidiaries, and repatriating foreign earnings and profits. However, if we were to repatriate foreign earnings and profits, a portion would be subject to cash payments of withholding taxes imposed by foreign tax authorities. Additional U.S. taxes may also result from the impact of foreign currency fluctuations related to these earnings and profits.

We are currently considering various sources, including cash flows from operations, commercial paper borrowings and other financings, to repay approximately $300 million of senior notes, €500 million of senior notes and $25 million of medium-term notes maturing in the third quarter of 2024, first quarter of 2025 and second quarter of 2025, respectively.

Capital from Debt

The carrying value of our total debt decreased by approximately $26 million in the first six months of 2024 to $3.22 billion, primarily reflecting the revaluation of our euro-denominated senior notes.

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Avery Dennison Corporation

Credit ratings are a significant factor in our ability to raise short- and long-term financing. The credit ratings assigned to us also impact the interest rates we pay and our access to commercial paper, credit facilities and other borrowings. A downgrade of our short-term credit ratings could impact our ability to access commercial paper markets. If our access to commercial paper markets were to become limited, we believe that the Revolver and our other credit facilities would be available to meet our short-term funding requirements. When determining a credit rating, we believe that rating agencies primarily consider our competitive position, business outlook, consistency of cash flows, debt level and liquidity, geographic dispersion and management team. We remain committed to maintaining an investment grade rating.

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

Refer to Note 10, “Commitments and Contingencies,” to the unaudited Condensed Consolidated Financial Statements for this information. Except as indicated therein, we have no material off-balance sheet arrangements as described in Item 303(b) of Regulation S-K.

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