Avery Dennison 10-Q 2024-09-28

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 28, 2024.

OR

For the transition period from ________________________ to ________________________

Commission file number 1-7685

AVERY DENNISON CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

Number of shares of $1 par value common stock outstanding as of October 26, 2024: 80,346,413

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AVERY DENNISON CORPORATION

FISCAL THIRD QUARTER 2024 QUARTERLY REPORT ON FORM 10-Q

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Safe Harbor Statement

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

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

Certain risks and uncertainties are discussed in more detail under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Annual Report on Form 10-K filed on February 21, 2024, and subsequent quarterly reports on Form 10-Q. Actual results and trends may differ materially from historical or anticipated results depending on a variety of factors, including but not limited to, risks and uncertainties related to the following:

• International Operations – worldwide economic, social, political and market conditions; changes in political conditions, including those related to China, the Russia-Ukraine war, and the Israel-Hamas war and related hostilities in the Middle East; fluctuations in foreign currency exchange rates; and other risks associated with international operations, including in emerging markets

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

• Information Technology – disruptions in information technology systems, cyber attacks or other security breaches; and successful installation of new or upgraded information technology systems

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

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

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

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

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

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

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

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PART I. FINANCIAL INFORMATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited**)**

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

(1) Totals may not sum due to rounding

In the three months and nine months ended September 28, 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 $360 million in the first nine months of 2023 to approximately $531 million in the first nine 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

• The impact of the accrual for a legacy legal matter in the prior year

Offsetting factors were:

• Higher employee-related costs

• Higher provision for income taxes

Cost Reduction Actions

2023 Actions

We recorded $25.6 million in restructuring charges, net of reversals, during the nine months ended September 28, 2024. These charges consisted of severance and related costs for the reduction of approximately 1,100 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

During the first nine 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 changes in operational working capital and the settlement payment for the Adasa legal matter. During the first nine 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 lower purchases of property, plant and equipment, partially offset by lower proceeds from company-owned life insurance policies.

Outlook

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

• We expect 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. We expect this increase to be partially offset by raw material deflation-related price reductions.

• We expect 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 THIRD QUARTER

Income Before Taxes

Gross Profit Margin

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

Marketing, General and Administrative Expense

Marketing, general and administrative expense increased in the third quarter of 2024 compared to the same period last year primarily due to higher employee-related costs, higher foreign currency transaction 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

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 third quarter of 2024 compared to the same period last year primarily due to lower commercial paper borrowings.

Net Income and Earnings per Share

Provision for Income Taxes

Our effective tax rate for the three months ended September 28, 2024 decreased compared to the same period last year primarily due to lower tax charges from the recognition of uncertain tax positions and lower non-deductible expenses resulting from foreign currency fluctuations, partially offset by a lower return-to-provision discrete benefit upon completion of our U.S. federal income tax returns. 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 THIRD QUARTER

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

Materials Group

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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.

In the third 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, decreased by a low single-digit rate in Western Europe and increased by a mid-to-high single-digit rate in emerging markets.

Operating Income

Operating income increased in the third quarter of 2024 compared to the same period last year primarily due to higher volume/mix, lower restructuring charges and benefits from productivity initiatives, including material re-engineering and savings from restructuring actions, net of transition costs, partially offset by the net impact of pricing and raw material input costs and higher employee-related costs.

Solutions Group

Net Sales

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

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

Operating Income

Operating income increased in the third quarter of 2024 compared to the same period last year primarily due to 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 NINE MONTHS YEAR-TO-DATE

Income Before Taxes

Gross Profit Margin

Gross profit margin for the first nine 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 nine 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

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 legal proceedings.

Interest Expense

Interest expense decreased for the nine months of 2024 compared to the same period last year primarily due to a decrease in commercial paper borrowings, partially offset by higher debt balances.

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Net Income and Earnings per Share

Provision for Income Taxes

Our effective tax rate for the nine months ended September 28, 2024 decreased compared to the same period last year primarily due to lower tax charges from the recognition of uncertain tax positions and lower non-deductible expenses resulting from foreign currency fluctuations, partially offset by a lower return-to-provision discrete benefit upon completion of our U.S. federal income tax returns. 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 NINE MONTHS YEAR-TO-DATE

Materials Group

Net Sales

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

(1) Totals may not sum due to rounding

In the first nine 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 low-to-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 nine 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, loss on venture investment and the net impact of pricing and raw material input costs.

Solutions Group

Net Sales

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

(1)Totals may not sum due to rounding

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

Operating Income

Operating income increased in the first nine months of 2024 compared to the same period last year primarily due to higher volume, the impact of the accrual for a legacy 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 and growth investments.

FINANCIAL CONDITION

Liquidity

Operating Activities

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During the first nine 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 changes in operational working capital and the settlement payment for the Adasa legal matter.

Investing Activities

Purchases of Property, Plant and Equipment

During the first nine 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 certain countries in Europe, primarily France. During the first nine 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 countries in Asia, primarily Malaysia; in our Materials Group reportable segment, we primarily invested in buildings and equipment in the U.S. and certain countries in Europe, primarily France.

Purchases of Software and Other Deferred Charges

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

Proceeds from Company-Owned Life Insurance Policies

During the first nine months of 2023, we utilized approximately $48 million of the cash surrender value available under our company-owned life insurance policies.

Purchases and Proceeds from Sales of Argentine Blue Chip Swap Securities

During the first nine 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 nine months of 2023, we paid consideration, net of cash acquired, of approximately $203 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

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Borrowings and Repayment of Debt

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

In August 2024, we repaid our $300 million of senior notes at maturity using cash flows from operations and commercial paper borrowings.

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 our $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 $2.57 per share in the first nine months of 2024 compared to $2.37 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 nine months of 2024 and 2023, we repurchased approximately 0.5 million and 0.7 million shares of our common stock, respectively.

Net (Tax Withholding) Proceeds Related to Stock-based Compensation

During the first nine months of 2024, the number of stock options exercised was approximately 0.1 million. Tax withholding for stock-based compensation was lower in the first nine months of 2024 compared to 2023 primarily due to a lower number of shares vesting.

Long-lived Assets

In the nine months ended September 28, 2024, other intangibles resulting from business acquisitions, net, decreased by approximately $66 million to $783.2 million, primarily reflecting current year amortization expense.

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 September 28, 2024, the balance of our shareholders’ equity was $2.39 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

International operations generated approximately 70% of our net sales during the nine months ended September 28, 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 nine 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.

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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 third quarter of 2024 decreased by approximately $334 million compared to the third quarter of 2023 primarily due to the reclassification of our €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 the repayment of our $300 million of senior notes in August 2024. 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 on investment. As shown below, operational working capital, as a percentage of annualized current-quarter net sales, in the third quarter of 2024 increased compared to the third quarter of 2023.

Accounts Receivable Ratio

The average number of days sales outstanding was 66 days in the third quarter of 2024 compared to 62 days in the third quarter of 2023, calculated using the accounts receivable balance at quarter-end divided by the average daily sales in the respective quarter. The increase in average number of days sales outstanding was primarily due to the timing of collections and the impact of foreign currency translation.

Inventory Ratio

Average inventory turnover was 6.1 in the third quarter of 2024 compared to 6.5 in the third quarter of 2023, calculated using the annualized third-quarter cost of products sold in 2024 and 2023, respectively, and divided by the inventory balance at quarter-end. The decrease in average inventory turnover was primarily due to the impact of foreign currency translation.

Accounts Payable Ratio

The average number of days payable outstanding was 79 days in the third quarter of 2024 compared to 76 days in the third quarter of 2023, calculated using the accounts payable balance at quarter-end divided by the respective annualized third-quarter cost of products sold. The increase in average number of days payable outstanding primarily reflected the impact of foreign currency translation.

Capital Resources

Capital resources 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 September 28, 2024 or our prior revolving credit facility as of December 30, 2023.

As of September 28, 2024, we had cash and cash equivalents of $212.7 million held in accounts at third-party financial institutions. Our cash balances are held in numerous locations around the world. As of September 28, 2024, the majority of our cash and cash equivalents was held by our foreign subsidiaries, primarily in Asia Pacific.

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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 debt financings, to repay approximately €500 million of senior notes, $25 million of medium-term notes and $5 million of medium-term notes maturing in the first quarter of 2025, second quarter of 2025 and third quarter of 2025, respectively.

Capital from Debt

The carrying value of our total debt decreased by approximately $85 million in the first nine months of 2024 to $3.16 billion, primarily reflecting our repayment of $300 million of senior notes, partially offset by higher commercial paper borrowings.

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

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

Refer to Note 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.

There have been no material changes to the information provided in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 30, 2023 that have not been disclosed in our periodic filings with the U.S. Securities and Exchange Commission (SEC).

Evaluation of Disclosure Controls and Procedures

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

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

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

Changes in Internal Control Over Financial Reporting

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

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Refer to “Legal Proceedings” in Note 10, “Commitments and Contingencies,” to the unaudited Condensed Consolidated Financial Statements in Part 1, Item 1 for this information.

There have been no material changes to the risk factors included in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 30, 2023 that have not been disclosed in our periodic filings with the SEC.

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

(a)Not Applicable

(b)Not Applicable

(c)Repurchases of Equity Securities by Issuer

Repurchases by us or our “affiliated purchasers” (as defined in Rule 10b-18(a)(3) of the Exchange Act) of registered equity securities in the third quarter of 2024 are shown in the table below. Repurchased shares may be reissued under our long-term incentive plan or used for other corporate purposes.

(1)The periods shown are our fiscal months during the thirteen-week quarter ended September 28, 2024.

(2)Shares in thousands.

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

(4)In April 2022, our Board authorized the repurchase of shares of our common stock with a fair market value of up to $750 million, excluding any fees, commissions or other expenses related to such purchases, in addition to the amount then outstanding under our previous Board authorization. Board authorizations remain in effect until shares in the amount authorized thereunder have been repurchased.

(5)Dollars in millions.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

There were no Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements (as defined in Item 408(c) of Regulation S-K) adopted or terminated by any of our directors or executive officers during the third quarter of 2024.

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SIGNATURES

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