Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

x         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2016.

 

OR

 

o            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                                  to                                                

 

Commission file number 1-7685

 

AVERY DENNISON CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

95-1492269

 

 

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

 

 

incorporation or organization)

 

 

 

 

 

 

 

 

 

207 Goode Avenue
Glendale, California

 

91203

 

 

(Address of Principal Executive Offices)

 

(Zip Code)

 

 

Registrant’s telephone number, including area code: (626) 304-2000

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

x Large accelerated filer

o Accelerated filer

o Non-accelerated filer

o Smaller reporting company

 

(Do not check if a smaller reporting company)

 

 

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

 

Number of shares of $1 par value common stock outstanding as of October 29, 2016: 88,991,587

 



Table of Contents

 

AVERY DENNISON CORPORATION

 

FISCAL THIRD QUARTER 2016 QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

Page

SAFE HARBOR STATEMENT

1

 

 

PART I. FINANCIAL INFORMATION (UNAUDITED)

 

 

 

 

Item 1.

Financial Statements:

 

 

Condensed Consolidated Balance Sheets
October 1, 2016 and January 2, 2016

2

 

Condensed Consolidated Statements of Income
Three and Nine Months ended October 1, 2016 and October 3, 2015

3

 

Condensed Consolidated Statements of Comprehensive Income
Three and Nine Months ended October 1, 2016 and October 3, 2015

4

 

Condensed Consolidated Statements of Cash Flows
Three and Nine Months ended October 1, 2016 and October 3, 2015

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

Non-GAAP Financial Measures

19

 

Overview and Outlook

20

 

Analysis of Results of Operations for the Third Quarter

22

 

Results of Operations by Reportable Segment for the Third Quarter

23

 

Analysis of Results of Operations for the Nine Months Year-to-Date

25

 

Results of Operations by Reportable Segment for the Nine Months Year-to-Date

27

 

Financial Condition

29

 

Recent Accounting Requirements

32

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

33

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

34

Item 1A.

Risk Factors

34

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

Item 3.

Defaults Upon Senior Securities

34

Item 4.

Mine Safety Disclosures

34

Item 5.

Other Information

35

Item 6.

Exhibits

35

Signatures

 

36

Exhibits

 

 

 



Table of Contents

 

SAFE HARBOR STATEMENT

 

The matters discussed in this Quarterly Report contain “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. These 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.

 

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 Annual Report on Form 10-K for the fiscal year ended January 2, 2016, and subsequent quarterly reports on Form 10-Q, and include, but are not limited to, risks and uncertainties relating to the following: fluctuations in demand affecting sales to customers; worldwide and local economic conditions; fluctuations in currency exchange rates and other risks associated with foreign operations, including in emerging markets; the financial condition and inventory strategies of customers; changes in customer preferences; fluctuations in cost and availability of raw materials; our ability to generate sustained productivity improvement; our ability to achieve and sustain targeted cost reductions; the impact of competitive products and pricing; loss of significant contracts or customers; collection of receivables from customers; selling prices; business mix shift; timely development and market acceptance of new products, including sustainable or sustainably-sourced products; investment in development activities and new production facilities; integration of acquisitions and completion of potential dispositions; amounts of future dividends and share repurchases; customer and supplier concentrations; successful implementation of new manufacturing technologies and installation of manufacturing equipment; disruptions in information technology systems, including cyber-attacks or other intrusions to network security; successful installation of new or upgraded information technology systems; data security breaches; volatility of financial markets; impairment of capitalized assets, including goodwill and other intangibles; credit risks; our ability to obtain adequate financing arrangements and maintain access to capital; fluctuations in interest and tax rates; changes in tax laws and regulations, and uncertainties associated with interpretations of such laws and regulations; outcome of tax audits; fluctuations in pension, insurance, and employee benefit costs; the impact of legal and regulatory proceedings, including with respect to environmental, health and safety; changes in governmental laws and regulations; protection and infringement of intellectual property; changes in political conditions; the impact of epidemiological events on the economy and our customers and suppliers; acts of war, terrorism, and natural disasters; and other factors.

 

We believe that the most significant risk factors that could affect our financial performance in the near-term include: (1) the impacts of economic conditions on underlying demand for our products and foreign currency fluctuations; (2) competitors’ actions, including pricing, expansion in key markets, and product offerings; and (3) the degree to which higher costs can be offset with productivity measures and/or passed on to customers through selling price increases, without a significant loss of volume.

 

Our forward-looking statements are made only as of the date hereof.  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.

 

1


 


Table of Contents

 

Avery Dennison Corporation

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(Dollars in millions, except per share amount)

 

October 1, 2016

 

January 2, 2016

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

189.4

 

$

158.8

 

Trade accounts receivable, less allowances of $40.6 and $31.5 at October 1, 2016 and January 2, 2016, respectively

 

1,069.7

 

964.7

 

Inventories, net

 

565.3

 

478.7

 

Assets held for sale

 

5.9

 

2.5

 

Other current assets

 

183.3

 

170.7

 

Total current assets

 

2,013.6

 

1,775.4

 

Property, plant and equipment

 

2,685.5

 

2,599.9

 

Accumulated depreciation

 

(1,780.1

)

(1,752.0

)

Property, plant and equipment, net

 

905.4

 

847.9

 

Goodwill

 

821.6

 

686.2

 

Other intangibles resulting from business acquisitions, net

 

70.9

 

45.8

 

Non-current deferred income taxes

 

390.7

 

372.2

 

Other assets

 

398.2

 

406.2

 

 

 

$

4,600.4

 

$

4,133.7

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings and current portion of long-term debt and capital leases

 

$

587.6

 

$

95.3

 

Accounts payable

 

866.7

 

814.6

 

Accrued payroll and employee benefits

 

207.8

 

194.6

 

Other current liabilities

 

394.0

 

354.6

 

Total current liabilities

 

2,056.1

 

1,459.1

 

Long-term debt and capital leases

 

713.0

 

963.6

 

Long-term retirement benefits and other liabilities

 

684.5

 

637.4

 

Non-current deferred and payable income taxes

 

104.4

 

107.9

 

Commitments and contingencies (see Note 15)

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $1 par value per share, authorized — 400,000,000 shares at October 1, 2016 and January 2, 2016; issued — 124,126,624 shares at October 1, 2016 and January 2, 2016; outstanding — 89,194,833 shares and 89,967,697 shares at October 1, 2016 and January 2, 2016, respectively

 

124.1

 

124.1

 

Capital in excess of par value

 

843.1

 

834.0

 

Retained earnings

 

2,444.1

 

2,277.6

 

Treasury stock at cost, 34,931,791 shares and 34,158,927 shares at October 1, 2016 and January 2, 2016, respectively

 

(1,699.9

)

(1,587.0

)

Accumulated other comprehensive loss

 

(669.0

)

(683.0

)

Total shareholders’ equity

 

1,042.4

 

965.7

 

 

 

$

4,600.4

 

$

4,133.7

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

2



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Avery Dennison Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(In millions, except per share amounts)

 

October 1, 2016

 

October 3, 2015

 

 

October 1, 2016

 

October 3, 2015

 

Net sales

 

$

1,508.7

 

$

1,468.1

 

 

$

4,535.7

 

$

4,512.1

 

Cost of products sold

 

1,091.1

 

1,062.2

 

 

3,261.4

 

3,258.6

 

Gross profit

 

417.6

 

405.9

 

 

1,274.3

 

1,253.5

 

Marketing, general and administrative expense

 

270.3

 

268.1

 

 

817.7

 

841.8

 

Interest expense

 

14.7

 

14.7

 

 

45.4

 

45.3

 

Other expense, net

 

4.6

 

7.0

 

 

60.4

 

49.0

 

Income from continuing operations before taxes

 

128.0

 

116.1

 

 

350.8

 

317.4

 

Provision for income taxes

 

38.9

 

34.8

 

 

92.1

 

99.5

 

Income from continuing operations

 

89.1

 

81.3

 

 

258.7

 

217.9

 

Income (loss) from discontinued operations

 

 

.4

 

 

 

(.6

)

Net income

 

$

89.1

 

$

81.7

 

 

$

258.7

 

$

217.3

 

 

 

 

 

 

 

 

 

 

 

 

Per share amounts:

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.00

 

$

.89

 

 

$

2.90

 

$

2.39

 

Discontinued operations

 

 

 

 

 

 

Net income per common share

 

$

1.00

 

$

.89

 

 

$

2.90

 

$

2.39

 

Net income (loss) per common share, assuming dilution:

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

.98

 

$

.87

 

 

$

2.85

 

$

2.35

 

Discontinued operations

 

 

.01

 

 

 

(.01

)

Net income per common share, assuming dilution

 

$

.98

 

$

.88

 

 

$

2.85

 

$

2.34

 

Dividends per common share

 

$

.41

 

$

.37

 

 

$

1.19

 

$

1.09

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

Common shares

 

89.1

 

91.5

 

 

89.2

 

91.1

 

Common shares, assuming dilution

 

90.6

 

93.2

 

 

90.9

 

92.9

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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Avery Dennison Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

October 1, 2016

 

October 3, 2015

 

October 1, 2016

 

October 3, 2015

 

Net income

 

$

89.1

 

$

81.7

 

$

258.7

 

$

217.3

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

15.5

 

(60.5

)

21.1

 

(129.6

)

Pension and other postretirement benefits

 

4.4

 

5.1

 

(6.9

)

17.7

 

Cash flow hedges

 

(.1

)

(.2

)

(.2

)

(.8

)

Other comprehensive income (loss), net of tax

 

19.8

 

(55.6

)

14.0

 

(112.7

)

Total comprehensive income, net of tax

 

$

108.9

 

$

26.1

 

$

272.7

 

$

104.6

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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Avery Dennison Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended

 

(In millions)

 

October 1, 2016

 

October 3, 2015

 

Operating Activities

 

 

 

 

 

Net income

 

$

258.7

 

$

217.3

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

88.8

 

95.3

 

Amortization

 

46.7

 

47.5

 

Provision for doubtful accounts and sales returns

 

33.8

 

36.6

 

Net losses from asset impairments and sales/disposals of assets

 

3.8

 

10.9

 

Stock-based compensation

 

20.1

 

18.4

 

Loss from settlement of pension obligations

 

41.4

 

 

Other non-cash expense and loss

 

34.7

 

38.9

 

Changes in assets and liabilities and other adjustments

 

(162.3

)

(182.7

)

Net cash provided by operating activities

 

365.7

 

282.2

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(104.9

)

(89.6

)

Purchases of software and other deferred charges

 

(16.6

)

(9.0

)

Proceeds from sales of property, plant and equipment

 

4.3

 

7.1

 

Purchases of investments, net

 

(.8

)

(.2

)

Payments for acquisitions, net of cash acquired

 

(227.5

)

 

Other

 

 

1.5

 

Net cash used in investing activities

 

(345.5

)

(90.2

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net increase (decrease) in borrowings (maturities of three months or less)

 

242.0

 

(109.8

)

Payments of debt (maturities greater than three months)

 

(1.9

)

(6.2

)

Dividends paid

 

(106.2

)

(99.6

)

Share repurchases

 

(181.5

)

(108.5

)

Proceeds from exercises of stock options, net

 

63.4

 

78.4

 

Other

 

(4.4

)

(1.2

)

Net cash provided by (used in) financing activities

 

11.4

 

(246.9

)

 

 

 

 

 

 

Effect of foreign currency translation on cash balances

 

(1.0

)

(8.5

)

Increase (decrease) in cash and cash equivalents

 

30.6

 

(63.4

)

Cash and cash equivalents, beginning of year

 

158.8

 

207.2

 

Cash and cash equivalents, end of period

 

$

189.4

 

$

143.8

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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Avery Dennison Corporation

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.  General

 

The unaudited Condensed Consolidated Financial Statements and 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 notes thereto in our 2015 Annual Report on Form 10-K, which should be read in conjunction with this Quarterly Report on Form 10-Q. The accompanying unaudited Condensed Consolidated Financial Statements include normal recurring adjustments necessary for a fair statement of our interim results.  Interim results of operations are not necessarily indicative of future results.

 

Fiscal Periods

The third quarters of 2016 and 2015 consisted of thirteen-week periods ending October 1, 2016 and October 3, 2015, respectively. The nine months ended October 1, 2016 and October 3, 2015 each consisted of thirty-nine-week periods.

 

Prior Period Financial Statement Revision

In the fourth quarter of 2015, we identified certain liquid short-term bank drafts with maturities greater than three months that were improperly classified as cash and cash equivalents instead of other current assets, which resulted in an overstatement of operating cash flows, and tax effects related to certain foreign pension plans that were not properly accounted for in our consolidated financial statements. We assessed the materiality of these errors on our financial statements for prior periods in accordance with United States Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 99, Materiality, codified in Accounting Standards Codification (“ASC”) 250, Presentation of Financial Statements, and concluded that they were not material to any prior annual or interim periods.  Consequently, in accordance with ASC 250 (SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), we corrected these errors for all prior periods presented by revising the unaudited Condensed Consolidated Financial Statements and other financial information included herein.

 

The effects of the revision on our unaudited Condensed Consolidated Statements of Cash Flows were as follows:

 

 

 

Nine Months Ended October 3, 2015

 

(In millions)

 

As
Previously
Reported

 

Adjustment

 

As
Revised

 

Net cash provided by operating activities

 

$

290.3

 

$

(8.1

)

$

282.2

 

Decrease in cash and cash equivalents

 

(55.3

)

(8.1

)

(63.4

)

Cash and cash equivalents, beginning of year

 

227.0

 

(19.8

)

207.2

 

Cash and cash equivalents, end of period

 

171.7

 

(27.9

)

143.8

 

 

Sale of Product Line

In May 2015, we sold certain assets and transferred certain liabilities associated with a product line in our Retail Branding and Information Solutions (“RBIS”) reportable segment for $1.5 million.  The pre-tax loss from the sale, when combined with exit costs related to the sale, totaled $8.5 million. In the first quarter of 2015, we recorded an impairment charge of approximately $2 million related to certain long-lived assets of this product line, as well as $.6 million of other costs related to this sale. This loss and these costs were included in “Other expense, net” in the unaudited Condensed Consolidated Statements of Income.

 

Discontinued Operations

Income (loss) from discontinued operations during the third quarter and nine months ended October 3, 2015 included tax benefits (expense) related to the completion of certain tax return filings related to the sale of our former Office and Consumer Products (“OCP”) and Designed and Engineered Solutions (“DES”) businesses. We continue to be subject to certain indemnification obligations under the terms of the purchase agreement. In addition, the tax liability associated with the sale remains subject to the completion of tax return filings in certain foreign jurisdictions where we formerly operated the OCP and DES businesses.

 

Note 2. Acquisitions

 

On August 1, 2016, we completed the acquisition of the European business of MACtac (“Mactac”) from Platinum Equity through the purchase of Evergreen Holding V, LLC. Mactac manufactures pressure-sensitive materials that complement our existing graphics portfolio and has been included in our Pressure-sensitive Materials segment. The total consideration for this acquisition, net of cash received, was approximately $222 million, which we funded primarily through existing credit facilities. The purchase price is subject to certain adjustments in accordance with the terms of the purchase agreement

 

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Avery Dennison Corporation

 

Due to the time required to complete our assessment, the final valuation of certain acquired assets and liabilities, including property, plant and equipment, intangible assets, taxes, and environmental and asset retirement obligations, is currently pending.

 

This acquisition was not material to our condensed consolidated financial statements.

 

Note 3.  Inventories

 

Net inventories consisted of:

 

(In millions)

 

October 1, 2016

 

January 2, 2016

 

Raw materials

 

$

207.8

 

$

180.5

 

Work-in-progress

 

172.1

 

143.0

 

Finished goods

 

185.4

 

155.2

 

Inventories, net

 

$

565.3

 

$

478.7

 

 

Note 4.  Goodwill and Other Intangibles Resulting from Business Acquisitions

 

Goodwill

Changes in the net carrying amount of goodwill for the nine months ended October 1, 2016, by reportable segment, were as follows:

 

(In millions)

 

Pressure-sensitive
Materials

 

Retail Branding
and Information
Solutions

 

Total

 

Goodwill as of January 2, 2016

 

$

277.9

 

$

408.3

 

$

686.2

 

Acquired during current period(1)

 

125.0

 

 

125.0

 

Translation adjustments

 

7.2

 

3.2

 

10.4

 

Goodwill as of October 1, 2016

 

$

410.1

 

$

411.5

 

$

821.6

 

 

(1) Goodwill acquired during the current period primarily related to the Mactac acquisition.

 

The carrying amounts of goodwill at October 1, 2016 and January 2, 2016 were net of accumulated impairment losses of $820 million, which were included in our RBIS reportable segment.

 

There was no goodwill associated with our Vancive Medical Technologies reportable segment.

 

In connection with the Mactac acquisition, we recognized an estimated $120 million of preliminary goodwill based on our expectation of synergies and other benefits of combining our businesses. These synergies and benefits include use of our existing commercial infrastructure to expand sales of products of the acquired business in a cost-efficient manner. The amount of goodwill recognized is not expected to be deductible for tax purposes.

 

Other Intangibles Resulting from Business Acquisitions

In connection with the Mactac acquisition, we acquired approximately $39 million of identifiable intangible assets, which includes finite-lived and indefinite-lived intangible assets. Identifiable intangible assets consist of customer relationships, trade names and trademarks, and patents and other acquired technology.  The table below summarizes the preliminary amounts and weighted average useful lives, if applicable, of these intangible assets:

 

 

 

Amount
(in millions)

 

Weighted-average
amortization
period

(in years)

 

Customer relationships

 

$

22.8

 

 

15

 

Patents and other acquired technology

 

2.4

 

4

 

Trade names and trademarks(1)

 

14.2

 

n/a

 

 

(1) Acquired trade names and trademarks associated with the Mactac acquisition were not subject to amortization as they were classified as indefinite-lived intangible assets.

 

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Avery Dennison Corporation

 

Refer to Note 2, “Acquisitions,” to the unaudited Condensed Consolidated Financial Statements for more information.

 

Note 5.  Debt and Capital Leases

 

The estimated fair value of our long-term debt is primarily based on the credit spread above U.S. Treasury securities on notes with similar rates, credit ratings, and remaining maturities. The fair value of short-term borrowings, which includes commercial paper issuances and short-term lines of credit, approximates carrying value given the short duration of these obligations.  The fair value of our total debt was $1.35 billion at October 1, 2016 and $1.08 billion at January 2, 2016. Fair value amounts 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 $700 million revolving credit facility (the “Revolver”) contains financial covenants requiring that we maintain specified ratios of total debt and interest expense in relation to certain measures of income. As of October 1, 2016 and January 2, 2016, we were in compliance with our financial covenants.

 

In March 2016, we entered into an agreement with three commercial paper dealers to establish a Euro-Commercial Paper Program pursuant to which we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding of $500 million. Proceeds from issuances under this program may be used for general corporate purposes. The maturities of the notes may vary, but may not exceed 364 days from the date of issuance. Our payment obligations with respect to any notes issued under this program would be backed by the Revolver. There are no financial covenants under this program. As of October 1, 2016, $210.3 million was outstanding under this program.

 

We reclassified approximately $250 million of senior notes due on October 1, 2017 from long-term debt to current portion of long-term debt.

 

Note 6.  Pension and Other Postretirement Benefits

 

Defined Benefit Plans

We sponsor a number of defined benefit plans, the accrual of benefits under some of which has been frozen, covering eligible employees in the U.S. and certain other countries.  Benefits payable to an employee are based primarily on years of service and the employee’s compensation during the course of his or her employment with us.

 

We are also obligated to pay unfunded termination indemnity benefits to certain employees outside of the U.S., which are subject to applicable agreements, laws and regulations.  We have not incurred significant costs related to these benefits, and therefore, no related costs are included in the disclosures below.

 

In December 2015, we offered eligible former employees who were vested participants in the Avery Dennison Pension Plan (“ADPP”), a U.S. pension plan, the opportunity to receive their benefits immediately as either a lump-sum payment or an annuity, rather than waiting until they are retirement eligible under the terms of the plan. In the second quarter of 2016, approximately $70 million of pension obligations related to this plan were settled out of existing plan assets and a non-cash pre-tax settlement charge of $41.4 million was recorded in “Other expense, net” in the unaudited Condensed Consolidated Statements of Income.  This settlement required us to remeasure the remaining net pension obligations of the ADPP. As a result, approximately $72 million of additional net pension obligations with a corresponding increase in actuarial losses recorded in “Accumulated other comprehensive loss” was recognized primarily due to lower discount rates that were in effect when the plan was remeasured.

 

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The following table sets forth the components of net periodic benefit cost (credit), which was recorded in income from continuing operations, for our defined benefit plans:

 

 

 

Pension Benefits

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 1, 2016

 

October 3, 2015

 

 

October 1, 2016

 

October 3, 2015

 

(In millions)

 

U.S.

 

Int’l

 

U.S.

 

Int’l

 

 

U.S.

 

Int’l

 

U.S.

 

Int’l

 

Service cost

 

$

.1

 

$

3.5

 

$

.1

 

$

3.3

 

 

$

.3

 

$

10.4

 

$

.3

 

$

10.3

 

Interest cost

 

8.1

 

4.1

 

10.8

 

4.3

 

 

26.4

 

12.4

 

32.5

 

13.1

 

Actuarial loss

 

.7

 

 

 

 

 

2.4

 

 

 

 

Expected return on plan assets

 

(10.4

)

(5.4

)

(12.8

)

(5.4

)

 

(32.3

)

(16.1

)

(38.6

)

(16.2

)

Recognized net actuarial loss

 

4.9

 

1.7

 

5.2

 

2.4

 

 

14.1

 

5.3

 

15.4

 

7.2

 

Amortization of prior service cost (credit)

 

.3

 

 

.2

 

 

 

.9

 

(.2

)

.8

 

(.1

)

Recognized loss on settlements(1)

 

 

 

 

 

 

41.4

 

 

 

3.8

 

Net periodic benefit cost

 

$

3.7

 

$

3.9

 

$

3.5

 

$

4.6

 

 

$

53.2

 

$

11.8

 

$

10.4

 

$

18.1

 

 

 (1)In 2016, we recognized a loss on settlements related to our U.S. pension plan as a result of making the lump-sum pension payments described above; in 2015, we recognized a loss on settlements related to pension plans in Germany and France as a result of the sale of a product line in our RBIS reportable segment.  These losses on settlements were recorded in “Other expense, net” in the unaudited Condensed Consolidated Statements of Income.

 

 

 

U.S. Postretirement Health Benefits

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

October 1, 2016

 

October 3, 2015

 

October 1, 2016

 

October 3, 2015

 

Interest cost

 

$

 

$

.1

 

$

.1

 

$

.2

 

Recognized net actuarial loss

 

.5

 

.5

 

1.3

 

1.6

 

Amortization of prior service credit

 

(.9

)

(.8

)

(2.5

)

(2.4

)

Net periodic benefit credit

 

$

(.4

)

$

(.2

)

$

(1.1

)

$

(.6

)

 

Note 7.  Research and Development

 

Research and development expense from continuing operations was $22.4 million and $67.4 million for the three and nine months ended October 1, 2016, respectively, and $22.2 million and $70.6 million for the three and nine months ended October 3, 2015, respectively. This expense was included in “Marketing, general and administrative expense” in the unaudited Condensed Consolidated Statements of Income.

 

Note 8.  Long-Term Incentive Compensation

 

Equity Awards

Stock-based compensation expense from continuing operations was $6 million and $20.1 million for the three and nine months ended October 1, 2016, respectively, and $5.2 million and $18.4 million for the three and nine months ended October 3, 2015, respectively.  This expense was included in “Marketing, general and administrative expense” in the unaudited Condensed Consolidated Statements of Income.

 

As of October 1, 2016, we had approximately $44 million of unrecognized compensation expense from continuing operations related to unvested stock-based awards, which is expected to be recognized over the remaining weighted-average period of approximately two years.

 

Cash Awards

Compensation expense from continuing operations related to long-term incentive units was $7 million and $21.7 million for the three and nine months ended October 1, 2016, respectively, and $1.4 million and $16.7 million for the three and nine months ended October 3, 2015, respectively. This expense was included in “Marketing, general and administrative expense” in the unaudited Condensed Consolidated Statements of Income.

 

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Note 9.  Cost Reduction Actions

 

2015/2016 Actions

During the nine months ended October 1, 2016, we recorded $15 million in restructuring charges, net of reversals, related to restructuring actions initiated during the third quarter of 2015 that we expect to continue through 2016 (“2015/2016 Actions”). These charges consisted of severance and related costs for the reduction of approximately 310 positions, lease cancellation costs, and asset impairment charges.

 

During fiscal year 2015, we recorded $26.1 million in restructuring charges, net of reversals, related to our 2015/2016 Actions. These charges consisted of severance and related costs for the reduction of approximately 430 positions, lease cancellation costs, and asset impairment charges.

 

No employees impacted by our 2015/2016 Actions taken through October 1, 2016 remained employed with us as of such date. We expect charges and payments related to these actions to be substantially completed in 2016.

 

2014/2015 Actions

During fiscal year 2015, we recorded $33.4 million in restructuring charges, net of reversals, related to restructuring actions we initiated in 2014 that continued through the second quarter of 2015 (“2014/2015 Actions”). These charges consisted of severance and related costs for the reduction of approximately 605 positions, lease cancellation costs, and asset impairment charges.

 

Approximately 25 employees impacted by our 2014/2015 Actions remained employed with us as of October 1, 2016. We expect charges and payments related to these actions to be substantially completed in 2016.

 

Accruals for severance and related costs and lease cancellation costs were included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets. Asset impairment charges were based on the estimated market value of the assets, less selling costs, if applicable.  Restructuring charges were included in “Other expense, net” in the unaudited Condensed Consolidated Statements of Income.

 

During the nine months ended October 1, 2016, restructuring charges and payments were as follows:

 

(In millions)

 

Accrual at
January 2,
2016

 

Charges
(Reversals),
net

 

Cash
Payments

 

Non-cash
Impairment

 

Foreign
Currency
Translation

 

Accrual at
October 1,
2016

 

2015/2016 Actions

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and related costs

 

$

8.4

 

$

11.1

 

$

(18.8

)

$

 

$

.2

 

$

.9

 

Asset impairment charges

 

 

2.9

 

 

(2.9

)

 

 

Lease cancellation costs

 

.2

 

1.0

 

(.8

)

 

 

.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014/2015 Actions

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and related costs

 

4.8

 

(.3

)

(3.3

)

 

 

1.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior actions

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and related costs

 

.7

 

(.1

)

 

 

 

.6

 

Total

 

$

14.1

 

$

14.6

 

$

(22.9

)

$

(2.9

)

$

.2

 

$

3.1

 

 

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Avery Dennison Corporation

 

The table below shows the total amount of restructuring charges incurred by reportable segment and Corporate:

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

October 1, 2016

 

October 3, 2015

 

October 1, 2016

 

October 3, 2015

 

Restructuring charges by reportable segment and Corporate

 

 

 

 

 

 

 

 

 

Pressure-sensitive Materials

 

$

.7

 

$

1.1

 

$

7.5

 

$

15.5

 

Retail Branding and Information Solutions

 

1.5

 

3.7

 

6.6

 

19.4

 

Vancive Medical Technologies

 

.4

 

1.7

 

.5

 

3.4

 

Corporate

 

 

.1

 

 

2.2

 

 

 

$

2.6

 

$

6.6

 

$

14.6

 

$

40.5

 

 

Note 10.  Financial Instruments

 

We enter into foreign exchange hedge contracts to reduce our risk from exchange rate fluctuations associated with receivables, payables, loans and firm commitments denominated in certain foreign currencies that arise primarily as a result of our operations outside the U.S.  We enter into interest rate contracts to help manage our exposure to certain interest rate fluctuations.  We also enter into futures contracts to hedge certain price fluctuations for a portion of our anticipated domestic purchases of natural gas. The maximum length of time for which we hedge our exposure to the variability in future cash flows for forecasted transactions is 36 months.

 

As of October 1, 2016, the aggregate U.S. dollar equivalent notional value of our outstanding commodity contracts and foreign exchange contracts was $2.3 million and $1.5 billion, respectively.

 

We recognize all derivative instruments as either assets or liabilities at fair value in the unaudited Condensed Consolidated Balance Sheets. We designate commodity forward contracts on forecasted purchases of commodities and foreign exchange contracts on forecasted transactions as cash flow hedges and designate foreign exchange contracts on existing balance sheet items as fair value hedges.

 

The following table provides the fair value and balance sheet locations of derivatives as of October 1, 2016:

 

 

 

Asset

 

Liability

 

(In millions)

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Foreign exchange contracts

 

Other current assets

 

$

2.0

 

Other current liabilities

 

$

3.1

 

Commodity contracts

 

Other current assets

 

.1

 

Other current liabilities

 

 

 

 

 

 

$

2.1

 

 

 

$

3.1

 

 

The following table provides the fair value and balance sheet locations of derivatives as of January 2, 2016:

 

 

 

Asset

 

Liability

 

(In millions)

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Foreign exchange contracts

 

Other current assets

 

$

5.6

 

Other current liabilities

 

$

4.5

 

Commodity contracts

 

Other current assets

 

 

Other current liabilities

 

.7

 

 

 

 

 

$

5.6

 

 

 

$

5.2

 

 

Fair Value Hedges

For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative and the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings, resulting in no material net impact to income.

 

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Avery Dennison Corporation

 

The following table provides the components of net gains (losses) recognized in income related to fair value hedge contracts. The corresponding gains or losses on the underlying hedged items approximated the net gains (losses) on these fair value hedge contracts.

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

Location of Net Gains
(Losses) in Income

 

October 1, 2016

 

October 3, 2015

 

October 1, 2016



October 3, 2015

 

Foreign exchange contracts

 

Cost of products sold

 

$

(.2

)

$

2.3

 

$

1.5

 

$

3.3

 

Foreign exchange contracts

 

Marketing, general and administrative expense

 

(2.8

)

(19.9

)

(.4

)

(15.9

)

 

 

 

 

$

(3.0

)

$

(17.6

)

$

1.1

 

$

(12.6

)

 

Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of “Accumulated other comprehensive loss” and reclassified into earnings in the same period(s) during which the hedged transaction impacts earnings.  Gains and losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

 

Gains (losses) recognized in “Accumulated other comprehensive loss” (effective portion) on derivatives related to cash flow hedge contracts were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

October 1, 2016

 

October 3, 2015

 

October 1, 2016

 

October 3, 2015

 

Foreign exchange contracts

 

$

(1.3

)

$

2.7

 

$

(3.1

)

$

1.2

 

Commodity contracts

 

(.2

)

(1.7

)

.1

 

(.5

)

 

 

$

(1.5

)

$

1.0

 

$

(3.0

)

$

.7

 

 

The amount of gain or loss recognized in income related to the ineffective portion of, and the amount excluded from, effectiveness testing for cash flow hedges and derivatives not designated as hedging instruments was not material for the three and nine months ended October 1, 2016 and October 3, 2015, respectively.

 

As of October 1, 2016, we expected a net loss of approximately $2 million to be reclassified from “Accumulated other comprehensive loss” to earnings within the next 12 months.  See Note 13, “Comprehensive Income,” for more information.

 

Note 11.  Taxes Based on Income

 

The following table summarizes our income from continuing operations before taxes, provision for income taxes from continuing operations, and effective tax rate:

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

October 1, 2016

 

October 3, 2015

 

October 1, 2016

 

October 3, 2015

 

Income from continuing operations before taxes

 

$

128.0

 

$

116.1

 

$

350.8

 

$

317.4

 

Provision for income taxes

 

38.9

 

34.8

 

92.1

 

99.5

 

Effective tax rate

 

30.4

%

30.0

%

26.3

%

31.3

%

 

The effective tax rate for continuing operations for the three and nine months ended October 1, 2016 reflected the impact of favorable geographic mixture of pretax income and included the following: $4.8 million and $3.1 million of tax expense, respectively, resulting from return to provision adjustments pursuant to the completion of the 2015 U.S. federal tax return; $1 million and $7.1 million of tax benefit, respectively, from our change in judgment about tax filing positions in certain foreign jurisdictions as a result of new information gained from our interactions with tax authorities; and $17.7 million and $26.9 million of tax expense, respectively, associated with the tax cost to repatriate non-permanently reinvested earnings of certain foreign subsidiaries. The effective tax rate for the three and nine months ended October 1, 2016 also included $11.1 million of tax benefit resulting from effective settlements of tax examinations in various foreign jurisdictions.  Included in the $11.1 million of tax benefit is an effective settlement for certain members of a consolidated tax group under examination. Additionally, the effective tax rate for the nine months ended October 1, 2016 included $6.7 million of tax benefit from the release of valuation allowances against certain deferred tax assets in a foreign jurisdiction associated with a structural simplification approved by the tax authority and $3.3 million of tax benefit due to decreases in certain tax reserves as a result of closing tax years.

 

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The effective tax rate for the nine months ended October 1, 2016 compared to the effective tax rate for the nine months ended October 3, 2015 was impacted by favorable effective settlements in various foreign jurisdictions, favorable geographic mixture of pretax income, and a tax benefit from the release of valuation allowances against deferred tax assets.

 

The effective tax rate for continuing operations for the three and nine months ended October 3, 2015 included $4.2 million of tax benefit resulting from return to provision adjustments pursuant to the completion of the 2014 U.S. federal tax return and $.9 million of tax benefit from a favorable foreign tax law change.  Additionally, the effective tax rate for the nine months ended October 3, 2015 included $1.6 million of net tax benefit related to changes in the effective tax rates in certain foreign municipalities; $4.2 million of tax benefit due to decreases in certain tax reserves as a result of closing tax years; and $5.4 million of tax expense associated with the tax cost to repatriate non-permanently reinvested 2015 earnings of certain foreign subsidiaries.

 

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.  With some exceptions, we and our subsidiaries are no longer subject to income tax examinations by tax authorities for years prior to 2006.

 

It is reasonably possible that, during the next 12 months, we may realize a decrease in our uncertain tax positions, including interest and penalties, of approximately $26 million, primarily as a result of audit settlements and closing tax years.

 

Note 12.  Net Income Per Common Share

 

Net income per common share was computed as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(In millions, except per share amounts)

 

October 1, 2016

 

October 3, 2015

 

 

October 1, 2016

 

October 3, 2015

 

(A) Income from continuing operations

 

$

89.1

 

$

81.3

 

 

$

258.7

 

$

217.9

 

(B) Income (loss) from discontinued operations

 

 

.4

 

 

 

(.6

)

(C) Net income available to common shareholders

 

$

89.1

 

$

81.7

 

 

$

258.7

 

$

217.3

 

(D) Weighted average number of common shares outstanding

 

89.1

 

91.5

 

 

89.2

 

91.1

 

Dilutive shares (additional common shares issuable under stock-based awards)

 

1.5

 

1.7

 

 

1.7

 

1.8

 

(E) Weighted average number of common shares outstanding, assuming dilution

 

90.6

 

93.2

 

 

90.9

 

92.9

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

Continuing operations (A) ÷ (D)

 

$

1.00

 

$

.89

 

 

$

2.90

 

$

2.39

 

Discontinued operations (B) ÷ (D)

 

 

 

 

 

 

Net income per common share (C) ÷ (D)

 

$

1.00

 

$

.89

 

 

$

2.90

 

$

2.39

 

Net income (loss) per common share, assuming dilution:

 

 

 

 

 

 

 

 

 

 

Continuing operations (A) ÷ (E)

 

$

.98

 

$

.87

 

 

$

2.85

 

$

2.35

 

Discontinued operations (B) ÷ (E)

 

 

.01

 

 

 

(.01

)

Net income per common share, assuming dilution (C) ÷ (E) 

 

$

.98

 

$

.88

 

 

$

2.85

 

$

2.34

 

 

Certain stock-based compensation awards were not included in 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 approximately .1 million shares and .2 million shares for the three and nine months ended October 1, 2016, respectively, and approximately .5 million and 1 million shares for the three and nine months ended October 3, 2015, respectively.

 

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Note 13.  Comprehensive Income

 

The changes in “Accumulated other comprehensive loss” (net of tax) for the nine months ended October 1, 2016 were as follows:

 

(In millions)

 

Foreign
Currency
Translation

 

Pension and
Other
Postretirement
Benefits

 

Cash Flow
Hedges

 

Total

 

Balance as of January 2, 2016

 

$

(158.9

)

$

(521.6

)

$

(2.5

)

$

(683.0

)

Other comprehensive income (loss) before reclassifications, net of tax

 

21.1

 

(46.7

)

(2.2

)

(27.8

)

Reclassifications to net income, net of tax

 

 

39.8

 

2.0

 

41.8

 

Net current-period other comprehensive income (loss), net of tax

 

21.1

 

(6.9

)

(.2

)

14.0

 

Balance as of October 1, 2016

 

$

(137.8

)

$

(528.5

)

$

(2.7

)

$

(669.0

)

 

The changes in “Accumulated other comprehensive loss” (net of tax) for the nine months ended October 3, 2015 were as follows:

 

(In millions)

 

Foreign
Currency
Translation

 

Pension and
Other
Postretirement
Benefits

 

Cash Flow
Hedges

 

Total

 

Balance as of January 3, 2015

 

$

(19.9

)

$

(525.6

)

$

 

$

(545.5

)

Other comprehensive (loss) income before reclassifications, net of tax

 

(129.6

)

(.5

)

.6

 

(129.5

)

Reclassifications to net income, net of tax

 

 

18.2

 

(1.4

)

16.8

 

Net current-period other comprehensive (loss) income, net of tax

 

(129.6

)

17.7

 

(.8

)

(112.7

)

Balance as of October 3, 2015

 

$

(149.5

)

$

(507.9

)

$

(.8

)

$

(658.2

)

 

The amounts reclassified from “Accumulated other comprehensive loss” to increase (decrease) income from continuing operations were as follows:

 

 

 

Amounts Reclassified from Accumulated
Other Comprehensive Loss

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

(In millions)

 

October 1, 2016

 

October 3, 2015

 

October 1, 2016

 

October 3, 2015

 

Affected Line Item
in the Statements
Where Net Income
is Presented

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

(1.2

)

$

1.4

 

$

(2.1

)

$

2.7

 

Cost of products sold

 

Commodity contracts

 

 

(.1

)  

(.6

)  

(.9

)  

Cost of products sold

 

Interest rate contracts

 

(.1

)  

(.1

)

(.1

)

(.1

)

Interest expense

 

 

 

(1.3

)

1.2

 

(2.8

)

1.7

 

Total before tax

 

 

 

.4

 

(.2

)

.8

 

(.3

)

Provision for income taxes

 

 

 

(.9

)

1.0

 

(2.0

)

1.4

 

Net of tax

 

Pension and other postretirement benefits(1)

 

(6.5

)

(7.5

)

(60.3

)

(26.3

)

 

 

 

 

2.1

 

2.4

 

20.5

 

8.1

 

Provision for income taxes

 

 

 

(4.4

)

(5.1

)

(39.8

)

(18.2

)

Net of tax

 

Total reclassifications for the period

 

$

(5.3

)

$

(4.1

)

$

(41.8

)

$

(16.8

)

Total, net of tax

 

 

(1) See Note 6, “Pension and Other Postretirement Benefits,” for more information.

 

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The following table sets forth the income tax expense (benefit) allocated to each component of other comprehensive income (loss):

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

October 1, 2016

 

October 3, 2015

 

October 1, 2016

 

October 3, 2015

 

Pension and other postretirement benefits

 

$

2.0

 

$

2.4

 

$

(4.7

)   

$

9.1

 

Cash flow hedges

 

(.1

)   

(.1

)   

 

(.2

)

Income tax expense (benefit) related to components of other comprehensive income (loss)

 

$

1.9

 

$

2.3

 

$

(4.7

)

$

8.9

 

 

Note 14.  Fair Value Measurements

 

Recurring Fair Value Measurements

The following table provides the assets and liabilities carried at fair value, measured on a recurring basis, as of October 1, 2016:

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Trading securities

 

$

18.9

 

$

12.7

 

$

6.2

 

$

 

Derivative assets

 

2.1

 

.1

 

2.0

 

 

Bank drafts

 

15.9

 

15.9

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

3.1

 

$

 

$

3.1

 

$

 

 

The following table provides the assets and liabilities carried at fair value, measured on a recurring basis, as of January 2, 2016:

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Trading securities

 

$

17.9

 

$

11.3

 

$

6.6

 

$

 

Derivative assets

 

5.6

 

 

5.6

 

 

Bank drafts

 

24.8

 

24.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

5.2

 

$

.7

 

$

4.5

 

$

 

 

Trading securities 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 October 1, 2016, trading securities of $.4 million and $18.5 million were included in “Cash and cash equivalents” and “Other current assets,” respectively, in the unaudited Condensed Consolidated Balance Sheets. As of January 2, 2016, trading securities of $.3 million and $17.6 million were included in “Cash and cash equivalents” and “Other current assets,” respectively, in the unaudited Condensed Consolidated Balance Sheets.  Derivatives that are exchange-traded are measured at fair value using quoted market prices and classified within Level 1 of the valuation hierarchy.  Derivatives measured based on foreign exchange rate inputs that are readily available in public markets are classified within Level 2 of the valuation hierarchy. Bank drafts (maturities greater than three months) are valued at face value due to their short-term nature and were included in “Other current assets” in the unaudited Condensed Consolidated Balance Sheets.

 

We utilized an income approach to estimate the fair values of the identifiable intangibles acquired from Mactac, using primarily Level 3 inputs. The discount rates we used to value these assets were between 10% and 12%.

 

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Note 15.  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.  We have accrued liabilities for matters where it is probable that a loss will be incurred and the amount of loss can be reasonably estimated.  Because of the uncertainties associated with claims resolution and litigation, future expenses to resolve these matters could be higher than the liabilities we have accrued; however, we are unable to reasonably estimate a range of potential expenses.  If information were to become available that allowed us to reasonably estimate a range of potential expenses 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 such resolution cannot be determined. Based upon current information, we believe that the impact of the resolution of these matters would not be, individually or in the aggregate, material to our financial position, results of operations or cash flows.

 

Environmental

As of October 1, 2016, we have been designated by the U.S. Environmental Protection Agency (“EPA”) and/or other responsible state agencies as a potentially responsible party (“PRP”) at thirteen 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 the 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.

 

We have accrued liabilities for sites where it is probable that a loss or cost will be incurred and the amount of loss or cost can be reasonably estimated.  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, 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.  If information were to become available that allowed us to reasonably estimate a range of potential expenses in an amount higher or lower than what we have accrued, we would adjust our environmental liabilities accordingly.  In addition, we may be identified as a PRP at additional sites in the future.  The range of expenses for remediation of any future-identified sites would be addressed as they arise; until then, a range of expenses for such remediation cannot be determined.

 

The activity for the nine months ended October 1, 2016 related to our environmental liabilities was as follows:

 

(In millions)

 

 

 

Balance at January 2, 2016

 

$

17.7

 

Charges (reversals), net

 

6.1

 

Payments

 

(5.9

)

Balance at October 1, 2016

 

$

17.9

 

 

As of October 1, 2016 and January 2, 2016, approximately $9 million and $7 million, respectively, of the balance was classified as short-term and included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets.

 

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Note 16.  Segment Information

 

Financial information from continuing operations by reportable segment is set forth below:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(In millions)

 

October 1, 2016

 

October 3, 2015

 

 

October 1, 2016

 

October 3, 2015

 

Net sales to unaffiliated customers

 

 

 

 

 

 

 

 

 

 

Pressure-sensitive Materials

 

$

1,123.8

 

$

1,083.7

 

 

$

3,360.9

 

$

3,318.4

 

Retail Branding and Information Solutions

 

370.9

 

366.8

 

 

1,127.0

 

1,138.7

 

Vancive Medical Technologies

 

14.0

 

17.6

 

 

47.8

 

55.0

 

Net sales to unaffiliated customers

 

$

1,508.7

 

$

1,468.1

 

 

$

4,535.7

 

$

4,512.1

 

Intersegment sales

 

 

 

 

 

 

 

 

 

 

Pressure-sensitive Materials

 

$

16.3

 

$

14.6

 

 

$

49.0

 

$

46.5

 

Retail Branding and Information Solutions

 

.5

 

.3

 

 

1.6

 

1.5

 

Vancive Medical Technologies

 

.1

 

1.2

 

 

.4

 

4.4

 

Intersegment sales

 

$

16.9

 

$

16.1

 

 

$

51.0

 

$

52.4

 

Income from continuing operations before taxes

 

 

 

 

 

 

 

 

 

 

Pressure-sensitive Materials

 

$

138.7

 

$

130.5

 

 

$

425.6

 

$

383.2

 

Retail Branding and Information Solutions

 

28.4

 

25.1

 

 

82.8

 

54.3

 

Vancive Medical Technologies

 

(.9

)

(1.2

)

 

(.2

)

(4.7

)

Corporate expense

 

(23.5

)

(23.6

)

 

(112.0

)

(70.1

)

Interest expense

 

(14.7

)

(14.7

)

 

(45.4

)

(45.3

)

Income from continuing operations before taxes

 

$

128.0

 

$

116.1

 

 

$

350.8

 

$

317.4

 

Other expense, net by reportable segment

 

 

 

 

 

 

 

 

 

 

Pressure-sensitive Materials

 

$

2.7

 

$

1.1

 

 

$

11.2

 

$

13.8

 

Retail Branding and Information Solutions

 

1.5

 

3.9

 

 

7.3

 

29.4

 

Vancive Medical Technologies

 

.4

 

1.7

 

 

.5

 

3.4

 

Corporate

 

 

.3

 

 

41.4

 

2.4

 

Other expense, net

 

$

4.6

 

$

7.0

 

 

$

60.4

 

$

49.0

 

Other expense, net by type

 

 

 

 

 

 

 

 

 

 

Restructuring charges:

 

 

 

 

 

 

 

 

 

 

Severance and related costs

 

$

1.9

 

$

4.7

 

 

$

10.7

 

$

35.0

 

Asset impairment charges and lease cancellation costs

 

.7

 

1.9

 

 

3.9

 

5.5

 

Other items:

 

 

 

 

 

 

 

 

 

 

Loss from settlement of pension obligations

 

 

 

 

41.4

 

 

Transaction costs

 

2.0

 

 

 

4.1

 

 

Loss (gain) on sale of assets

 

 

 

 

.3

 

(1.7

)

Loss on sale of product line and related transaction and exit costs

 

 

.2

 

 

 

10.5

 

Legal settlements

 

 

.2

 

 

 

(.3

)

Other expense, net

 

$

4.6

 

$

7.0

 

 

$

60.4

 

$

49.0

 

 

Note 17.  Recent Accounting Requirements

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued guidance to reduce the diversity in the presentation of certain cash receipts and cash payments presented and classified in the statement of cash flows.  This guidance requires retrospective adoption and will be effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted. We are currently assessing the impact of this guidance on our cash flows.

 

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance will be effective for fiscal years and interim periods beginning after December 15, 2016, and early adoption is permitted. Different components of the guidance require prospective, retrospective and/or modified retrospective adoption. We are currently assessing the timing of our adoption of this guidance and its impact on our financial position, results of operations, cash flows, and disclosures.

 

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In March 2016, the FASB issued guidance on accounting for leases that requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. This guidance also requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases and will be effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective approach is required for adoption with respect to all leases that exist at or commence after the date of initial application with an option to use certain practical expedients. We are currently assessing the impact of this guidance on our financial position, results of operations, cash flows, and disclosures.

 

In July 2015, the FASB issued amended guidance to simplify the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years. We elected to early adopt this amended guidance in the first quarter of 2016 prospectively. The adoption of this guidance did not have an impact on our financial position, results of operations, cash flows, or disclosures.

 

In August 2014, the FASB issued a new standard that requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern.  Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. Under this new standard, substantial doubt exists when it is probable that the entity will be unable to meet its obligations as they become due within one year of the date the financial statements are issued.  If applicable, certain disclosures are required, including management’s plans to mitigate those relevant conditions or events to alleviate the substantial doubt.  This standard is effective for annual periods and interim periods within those annual periods ending after December 15, 2016.  Early adoption is permitted. We do not expect that adoption of this standard will have an impact on our financial position, results of operations, cash flows, or disclosures.

 

In May 2014, and in subsequent updates, the FASB issued revised guidance on revenue recognition. This revised guidance provides a single comprehensive model for accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This revised guidance will require an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. This revised guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This revised guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and can be applied retrospectively either to each prior reporting period presented or with the cumulative effect of adoption recognized at the date of initial application. Early adoption is permitted for fiscal periods beginning after December 15, 2016. We are currently evaluating which transition method to elect and we expect to adopt this guidance in the first quarter of 2018. Based on the information we have evaluated to date, we do not anticipate that the adoption of this revised guidance will have a significant impact on our financial position, results of operations, or cash flows.

 

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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, should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and notes thereto, and includes the following sections:

 

Non-GAAP Financial Measures

19

Overview and Outlook

20

Analysis of Results of Operations for the Third Quarter

22

Results of Operations by Reportable Segment for the Third Quarter

23

Analysis of Results of Operations for the Nine Months Year-to-Date

25

Results of Operations by Reportable Segment for the Nine Months Year-to-Date

27

Financial Condition

29

Recent Accounting Requirements

32

 

NON-GAAP FINANCIAL MEASURES

 

We report 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 presentation of our financial results that are prepared in accordance with GAAP. Based upon feedback from investors and financial analysts, we believe that the supplemental non-GAAP financial measures we provide are useful to their assessment of our performance and operating trends, as well as our liquidity.

 

Our non-GAAP financial measures exclude the impact of certain events, activities, and strategic decisions. The accounting effects of these events, activities or decisions, which are included in the GAAP financial measures, may make it difficult to assess our underlying performance in a single period. By excluding the accounting effects, both positive and negative, of certain items, we believe that we are providing meaningful supplemental information that facilitates an understanding of our core operating results and liquidity measures. These non-GAAP financial measures are used internally to evaluate trends in our underlying performance, as well as to facilitate comparison to the results of competitors for a single period. 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 following non-GAAP financial measures in this MD&A:

 

·            Organic sales change refers to the increase or decrease in sales excluding the estimated impact of currency translation, product line exits, acquisitions and divestitures, and, where applicable, the extra week in our fiscal year. The estimated impact of currency translation is calculated on a constant currency basis, with prior period results translated at current period average exchange rates to exclude the effect of currency fluctuations. We believe that organic sales change assists investors in evaluating the sales growth from the ongoing activities of our businesses and provides improved comparability of our results from period to period.

·            Free cash flow refers to cash flow from operations, less payments for property, plant and equipment, software and other deferred charges, plus proceeds from sales of property, plant and equipment, plus (minus) net proceeds from sales (purchases) of investments, plus (minus) free cash outflow (inflow) from discontinued operations. We believe that free cash flow assists investors by showing the amount of cash we have available for debt reductions, dividends, share repurchases, and acquisitions.

·            Operational working capital 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 current assets held for sale. We believe that operational working capital 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 that 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

 

Prior Period Financial Statement Revision

 

Certain prior period amounts have been revised to reflect the impact of certain adjustments. Refer to Note 1, “General,” to the unaudited Condensed Consolidated Financial Statements for more information.

 

Net Sales

 

The factors impacting the reported sales change are shown in the table below:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 1, 2016

 

October 1, 2016

 

Reported sales change

 

3

%

1

%

Foreign currency translation

 

2

 

3

 

Acquisitions/divestiture

 

(2

)

 

Organic sales change

 

3

%

4

%

 

In the three and nine months ended October 1, 2016, net sales increased on an organic basis primarily due to higher volume.

 

Income from Continuing Operations

 

Income from continuing operations increased approximately $41 million in the first nine months of 2016 compared to the same period last year. The primary factors affecting income from continuing operations for the first nine months of 2016 were as follows:

 

Positive factors:

·                  Benefits from productivity initiatives, including savings from restructuring actions, net of transition costs

·                  Higher volume

·                  Lower restructuring charges

 

Offsetting factors:

·                  Higher employee-related costs

·                  Loss from settlement of pension obligations

·                  Net impact of pricing and raw material input costs

·                  Unfavorable mix

 

Cost Reduction Actions

 

2015/2016 Actions

During the first nine months ended October 1, 2016, we recorded $15 million in restructuring charges, net of reversals, related to restructuring actions initiated during the third quarter of 2015 that we expect to continue through 2016 (“2015/2016 Actions”). These charges consisted of severance and related costs for the reduction of approximately 310 positions, lease cancellation costs, and asset impairment charges.

 

During fiscal year 2015, we recorded $26.1 million in restructuring charges, net of reversals, related to our 2015/2016 Actions. These charges consisted of severance and related costs for the reduction of approximately 430 positions, lease cancellation costs, and asset impairment charges.

 

No employees impacted by our 2015/2016 Actions taken through October 1, 2016 remained employed with us as of such date. We expect charges and payments related to these actions to be substantially completed in 2016.

 

2014/2015 Actions

During fiscal year 2015, we recorded $33.4 million in restructuring charges, net of reversals, related to restructuring actions we initiated in 2014 that continued through the second quarter of 2015 (“2014/2015 Actions”). These charges consisted of severance and related costs for the reduction of approximately 605 positions, lease cancellation costs, and asset impairment charges.

 

Approximately 25 employees impacted by our 2014/2015 Actions remained employed with us as of October 1, 2016. We expect charges and payments related to these actions to be substantially completed in 2016.

 

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Impact of Cost Reduction Actions

In 2016, we expect to realize more than $75 million in savings, net of transition costs, from our 2015/2016 Actions and 2014/2015 Actions.  We anticipate carryover savings from these actions in 2017.

 

Restructuring charges were included in “Other expense, net” in the unaudited Condensed Consolidated Statements of Income. Refer to Note 9, “Cost Reduction Actions,” to the unaudited Condensed Consolidated Financial Statements for more information.

 

Acquisitions

 

On August 1, 2016, we completed the acquisition of the European business of MACtac (“Mactac”) from Platinum Equity through the purchase of Evergreen Holding V, LLC. Mactac manufactures pressure-sensitive materials that complement our existing graphics portfolio and has been included in our Pressure-sensitive Materials segment. The total consideration for this acquisition, net of cash received, was approximately $222 million, which we funded primarily through existing credit facilities. The purchase price is subject to certain adjustments in accordance with the terms of the purchase agreement.

 

Due to the time required to complete our assessment, the final valuation of certain acquired assets and liabilities, including property, plant and equipment, intangible assets, taxes, and environmental and asset retirement obligations, is currently pending.

 

This acquisition was not material to our condensed consolidated financial statements.

 

Free Cash Flow

 

 

 

Nine Months Ended

 

(In millions)

 

October 1, 2016

 

October 3, 2015

 

Net cash provided by operating activities

 

$

365.7

 

$

282.2

 

Purchases of property, plant and equipment

 

(104.9

)

(89.6

)

Purchases of software and other deferred charges

 

(16.6

)

(9.0

)

Proceeds from sales of property, plant and equipment

 

4.3

 

7.1

 

Purchases of investments, net

 

(.8

)

(.2

)

Plus: free cash outflow from discontinued operations

 

 

.6

 

Free cash flow

 

$

247.7

 

$

191.1

 

 

During the first nine months of 2016, cash flow from operating activities increased compared to the same period last year primarily due to higher net income, lower income tax payments, and benefits from changes in operational working capital, partially offset by higher incentive compensation payments. During the first nine months of 2016, free cash flow increased compared to the same period last year primarily due to higher cash flow from operating activities, partially offset by higher capital and software expenditures in 2016.

 

Outlook