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 September 29, 2018.

 

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 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. (Check one):

 

x Large accelerated filer

o Accelerated filer

o Non-accelerated filer

o Smaller reporting company

o Emerging growth company

 

If an emerging growth company, indicate by checkmark 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 o No x

 

Number of shares of $1 par value common stock outstanding as of October 27, 2018: 86,710,248

 


Table of Contents

 

AVERY DENNISON CORPORATION

 

FISCAL THIRD QUARTER 2018 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
September 29, 2018 and December 30, 2017

2

 

Condensed Consolidated Statements of Income
Three and Nine Months ended September 29, 2018 and September 30, 2017

3

 

Condensed Consolidated Statements of Comprehensive Income
Three and Nine Months ended September 29, 2018 and September 30, 2017

4

 

Condensed Consolidated Statements of Cash Flows
Nine Months ended September 29, 2018 and September 30, 2017

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

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

23

 

Non-GAAP Financial Measures

23

 

Overview and Outlook

24

 

Analysis of Results of Operations for the Third Quarter

26

 

Results of Operations by Reportable Segment for the Third Quarter

27

 

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

29

 

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

31

 

Financial Condition

32

 

Recent Accounting Requirements

36

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

37

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3.

Defaults Upon Senior Securities

38

Item 4.

Mine Safety Disclosures

38

Item 5.

Other Information

38

Item 6.

Exhibits

39

Signatures

 

40

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 December 30, 2017, 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; changes in political conditions; changes in governmental laws and regulations; fluctuations in foreign 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; execution and integration of acquisitions; timely development and market acceptance of new products, including sustainable or sustainably-sourced products; investment in development activities and new production facilities; 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, including the Tax Cuts and Jobs Act, and uncertainties associated with interpretations of such laws and regulations; outcome of tax audits; fluctuations in pension, insurance, and employee benefit costs, including risks related to the termination of our U.S. pension plan; the impact of legal and regulatory proceedings, including with respect to environmental, health and safety; protection and infringement of intellectual property; 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 global economic conditions and political uncertainty on underlying demand for our products and foreign currency fluctuations; (2) 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; (3) competitors’ actions, including pricing, expansion in key markets, and product offerings; and (4) the execution and integration of acquisitions.

 

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)

 

(In millions, except per share amount)

 

September 29, 2018

 

December 30, 2017

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

217.6

 

$

224.4

 

Trade accounts receivable, less allowances of $24.6 and $36.2 at September 29, 2018 and December 30, 2017, respectively

 

1,235.7

 

1,180.3

 

Inventories, net

 

682.5

 

609.6

 

Assets held for sale

 

3.6

 

6.3

 

Other current assets

 

219.4

 

217.3

 

Total current assets

 

2,358.8

 

2,237.9

 

Property, plant and equipment, net

 

1,086.9

 

1,097.9

 

Goodwill

 

953.1

 

985.1

 

Other intangibles resulting from business acquisitions, net

 

148.6

 

166.3

 

Non-current deferred income taxes

 

195.1

 

196.3

 

Other assets

 

439.4

 

453.4

 

 

 

$

5,181.9

 

$

5,136.9

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

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

 

$

571.7

 

$

265.4

 

Accounts payable

 

1,048.0

 

1,007.2

 

Accrued payroll and employee benefits

 

203.6

 

248.5

 

Other current liabilities

 

534.9

 

450.7

 

Total current liabilities

 

2,358.2

 

1,971.8

 

Long-term debt and capital leases

 

1,295.3

 

1,316.3

 

Long-term retirement benefits and other liabilities

 

353.5

 

629.3

 

Non-current deferred and payable income taxes

 

127.8

 

173.3

 

Commitments and contingencies (see Note 13)

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $1 par value per share, authorized — 400,000,000 shares at September 29, 2018 and December 30, 2017; issued — 124,126,624 shares at September 29, 2018 and December 30, 2017; outstanding — 87,013,446 shares and 88,011,541 shares at September 29, 2018 and December 30, 2017, respectively

 

124.1

 

124.1

 

Capital in excess of par value

 

862.4

 

862.6

 

Retained earnings

 

2,809.4

 

2,596.7

 

Treasury stock at cost, 37,113,178 shares and 36,115,083 shares at September 29, 2018 and December 30, 2017, respectively

 

(2,008.4

)

(1,856.7

)

Accumulated other comprehensive loss

 

(740.4

)

(680.5

)

Total shareholders’ equity

 

1,047.1

 

1,046.2

 

 

 

$

5,181.9

 

$

5,136.9

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

2


Table of Contents

 

Avery Dennison Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions, except per share amounts)

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Net sales

 

$

1,759.7

 

$

1,679.5

 

$

5,390.3

 

$

4,878.5

 

Cost of products sold

 

1,300.5

 

1,227.9

 

3,946.3

 

3,531.9

 

Gross profit

 

459.2

 

451.6

 

1,444.0

 

1,346.6

 

Marketing, general and administrative expense

 

270.5

 

273.5

 

853.0

 

824.1

 

Other (income) expense, net

 

(3.0

)

10.8

 

66.9

 

27.5

 

Interest expense

 

14.7

 

16.8

 

42.2

 

49.7

 

Other non-operating expense

 

9.0

 

3.7

 

14.9

 

13.1

 

Income before taxes

 

168.0

 

146.8

 

467.0

 

432.2

 

Provision for income taxes

 

17.7

 

38.5

 

94.9

 

90.8

 

Equity method investment net losses

 

(.8

)

 

(1.8

)

 

Net income

 

$

149.5

 

$

108.3

 

$

370.3

 

$

341.4

 

 

 

 

 

 

 

 

 

 

 

Per share amounts:

 

 

 

 

 

 

 

 

 

Net income per common share

 

$

1.71

 

$

1.23

 

$

4.22

 

$

3.86

 

Net income per common share, assuming dilution

 

$

1.69

 

$

1.20

 

$

4.16

 

$

3.79

 

Dividends per common share

 

$

.52

 

$

.45

 

$

1.49

 

$

1.31

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

Common shares

 

87.3

 

88.3

 

87.7

 

88.4

 

Common shares, assuming dilution

 

88.5

 

89.9

 

89.1

 

90.1

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

3


Table of Contents

 

Avery Dennison Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Net income

 

$

149.5

 

$

108.3

 

$

370.3

 

$

341.4

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(32.1

)

12.1

 

(83.7

)

39.3

 

Pension and other postretirement benefits

 

11.8

 

5.0

 

23.5

 

14.6

 

Cash flow hedges

 

(.4

)

.2

 

.3

 

(1.1

)

Other comprehensive (loss) income, net of tax

 

(20.7

)

17.3

 

(59.9

)

52.8

 

Total comprehensive income, net of tax

 

$

128.8

 

$

125.6

 

$

310.4

 

$

394.2

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

4


Table of Contents

 

Avery Dennison Corporation

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended

 

(In millions)

 

September 29, 2018

 

September 30, 2017

 

Operating Activities

 

 

 

 

 

Net income

 

 

$

370.3

 

 

$

341.4

 

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

 

 

 

 

 

Depreciation

 

106.2

 

92.6

 

Amortization

 

29.8

 

42.2

 

Provision for doubtful accounts and sales returns

 

34.3

 

28.1

 

Net losses from impairments, sales of assets, and investment settlements

 

5.9

 

1.2

 

Stock-based compensation

 

24.8

 

22.2

 

Loss from settlement of pension obligations

 

7.4

 

 

Deferred income taxes

 

(7.8

)

(7.6

)

Other non-cash expense and loss

 

41.5

 

41.0

 

Changes in assets and liabilities and other adjustments

 

(424.7

)

(171.2

)

Net cash provided by operating activities

 

187.7

 

389.9

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(132.7

)

(111.4

)

Purchases of software and other deferred charges

 

(21.5

)

(23.5

)

Proceeds from sales of property, plant and equipment

 

9.4

 

3.0

 

Sales (purchases) of investments and proceeds from insurance, net

 

17.6

 

(2.0

)

Payments for acquisitions, net of cash acquired, and investments in businesses

 

(.2

)

(309.5

)

Net cash used in investing activities

 

(127.4

)

(443.4

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

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

 

301.4

 

(220.1

)

Additional long-term borrowings

 

 

526.6

 

Repayments of long-term debt and capital leases

 

(4.4

)

(2.5

)

Dividends paid

 

(130.6

)

(115.8

)

Share repurchases

 

(175.1

)

(104.8

)

Proceeds from exercises of stock options, net

 

1.0

 

17.7

 

Tax withholding for stock-based compensation

 

(32.9

)

(20.3

)

Payments of contingent consideration

 

(17.3

)

 

Net cash (used in) provided by financing activities

 

(57.9

)

80.8

 

 

 

 

 

 

 

Effect of foreign currency translation on cash balances

 

(9.2

)

9.9

 

(Decrease) increase in cash and cash equivalents

 

(6.8

)

37.2

 

Cash and cash equivalents, beginning of year

 

224.4

 

195.1

 

Cash and cash equivalents, end of period

 

 

$

217.6

 

 

$

232.3

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

5


Table of Contents

 

Avery Dennison Corporation

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.  General

 

The unaudited Condensed Consolidated Financial Statements and notes thereto 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 2017 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 contain all adjustments of a normal and recurring nature necessary for a fair statement of our interim results. Interim results of operations are not necessarily indicative of future results.

 

Fiscal Periods

The three and nine months ended September 29, 2018 and September 30, 2017 consisted of thirteen-week and thirty-nine week periods, respectively.

 

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

Highly Inflationary Economy

On July 1, 2018, we began accounting for our operations in Argentina as highly inflationary, as the country’s three-year cumulative inflation rate exceeded 100%.  As a result, the functional currency of our Argentine subsidiary became the U.S. dollar.

 

Accounting Guidance Updates

Revenue Recognition

In the first quarter of 2018, we adopted an accounting guidance update that provides a single comprehensive model on accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. We adopted this guidance using the modified retrospective method, which means that reporting periods beginning in 2018 are presented in accordance with this guidance, while prior period amounts continue to be reported in accordance with the previous guidance. As allowed by this guidance, we began to apply it to contracts with customers that were not completed as of the beginning of 2018. As a result of the adoption of this guidance, our allowance for customer returns, presented as a reduction of trade accounts receivable in prior years, is now presented as a returns liability in “Other current liabilities.” As of September 29, 2018, the returns liability was $12.6 million.  Our adoption of this guidance did not have a material impact on our financial position, results of operations, or cash flows. The disclosures required by this guidance are included in Note 2, “Revenue Recognition,” and Note 14, “Segment and Disaggregated Revenue Information.”

 

Presentation of Net Periodic Benefit Costs

In the first quarter of 2018, we adopted an accounting guidance update that requires employers with defined benefit plans to present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. Employers are required to present the other components of net periodic benefit cost, including gains or losses from settlements or terminations, separately from the line item(s) that includes the service cost and outside of any subtotal of operating income. Components other than the service cost component are no longer eligible for capitalization in assets. Employers are required to apply the portion of this guidance on the presentation of the components of net periodic benefit cost in the income statement retrospectively, while the portion of this guidance that limits the capitalization of net periodic benefit cost in assets to the service cost component must be applied prospectively.

 

Prior year results have been reclassified as required by this guidance. The effects of our adoption of this guidance on our unaudited Condensed Consolidated Statements of Income for the prior year were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

September 30, 2017

 

September 30, 2017

 

 

 

As
Previously
Reported

 

Reclassification

 

As
Reclassified

 

As
Previously
Reported

 

Reclassification

 

As
Reclassified

 

Marketing, general and administrative expense

 

$

277.2

 

$

(3.7

)

$

273.5

 

$

837.2

 

$

(13.1

)

$

824.1

 

Other non-operating expense

 

 

3.7

 

3.7

 

 

13.1

 

13.1

 

 

6


Table of Contents

 

Avery Dennison Corporation

 

Classification of Certain Cash Payments

In the first quarter of 2018, we adopted an accounting guidance update that reduces the diversity in the presentation and classification of certain cash receipts and cash payments in statements of cash flows.

 

Prior year results have been reclassified as required by this guidance. The effects of our adoption of this guidance, which primarily relate to the classification of corporate-owned life insurance cash flows, on our unaudited Condensed Consolidated Statements of Cash Flows for the prior year were as follows:

 

 

 

Nine Months Ended September 30, 2017

(In millions)

 

As Previously
Reported

 

Reclassification

 

As Reclassified

 

Net cash provided by operating activities

 

$

392.6

 

$

(2.7

)

$

389.9

 

Net cash used in investing activities

 

(446.1

)

2.7

 

(443.4

)

 

Intra-Entity Transfers of Assets Other Than Inventory

In the first quarter of 2018, we adopted an accounting guidance update that requires companies to recognize the income tax effects of intra-entity sales and transfers of assets other than inventory in the period in which they occur. Upon adoption, we derecognized tax-related deferred charges and recognized deferred tax assets related to certain intra-entity asset transfers as a $14 million net reduction to retained earnings.

 

Implementation Costs Incurred in a Cloud Computing Arrangement

In the third quarter of 2018, we adopted an accounting guidance update that requires companies to capitalize implementation costs incurred in a hosting arrangement that is a service contract. We adopted this guidance early and on a prospective basis.  Our adoption of this guidance did not have a material impact on our financial position, results of operations, or cash flows.

 

Note 2.  Revenue Recognition

 

Sales are recognized when or as we satisfy a performance obligation by transferring control of a product or service to a customer, in an amount that reflects the consideration to which we expect to be entitled in exchange for the product or service. We consider a number of factors in determining when we have transferred control to a customer, including the following: (i) our present right to payment; (ii) the customer’s legal title to the asset; (iii) physical possession of the asset; (iv) the customer’s significant risks and rewards of ownership of the asset; and (v) the customer’s acceptance of the asset.

 

Generally, payment terms with our customers are consistent with those used in our industries and the regions in which we operate.

 

Sales returns are accepted in certain limited circumstances. We record an estimate for returns liabilities and a corresponding reduction to sales, in the amount we expect to repay or credit customers, which we base on historical returns and outstanding customer claims. Changes in estimates are updated each reporting period.

 

Sales rebates, discounts, and other customer concessions are common in the industries in which we operate and are accounted for as a reduction to sales based on estimates at the time at which products are sold.  These estimates are based on our historical experience, as well as current information such as sales forecasts.  We review our estimates regularly and, as additional information becomes available, we adjust our sales and the respective accruals, if necessary.

 

Sales tax, value-added tax, and other taxes we collect from customers are excluded from sales.

 

Shipping and handling activities after control of a product is transferred to a customer are accounted for as a fulfillment cost and not as a separate performance obligation.

 

We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of less than one year.

 

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded in “Marketing, general and administrative expense” in the unaudited Condensed Consolidated Income Statements.

 

Deferred Revenue

Deferred revenue primarily relates to constrained variable consideration on supply agreements for sales of products, as well as to payments received in advance of performance under a contract. Deferred revenue is recognized as revenue as or when we perform under a contract.

 

7


Table of Contents

 

Avery Dennison Corporation

 

The following table shows the amounts and balance sheet locations of deferred revenue as of September 29, 2018 and December 30, 2017:

 

(In millions)

 

September 29, 2018

 

December 30, 2017

 

Other current liabilities

 

$

16.1

 

$

15.3

 

Long-term retirement benefits and other liabilities

 

.3

 

.4

 

Total deferred revenue

 

$

16.4

 

$

15.7

 

 

Revenue recognized from amounts included in deferred revenue as of December 30, 2017 was $1.1 million and $11.4 million for the three and nine months ended September 29, 2018, respectively, which was included in “Net sales” in the unaudited Condensed Consolidated Statements of Income.

 

Note 3.  Goodwill

 

Changes in the net carrying amount of goodwill for the nine months ended September 29, 2018 by reportable segment were as follows:

 

(In millions)

 

Label and
Graphic
Materials

 

Retail Branding
and Information
Solutions

 

Industrial and
Healthcare
Materials

 

Total

 

Goodwill as of December 30, 2017

 

$

429.5

 

$

355.4

 

$

200.2

 

$

985.1

 

Acquisition adjustments(1)

 

 

 

(17.7

)

(17.7

)

Translation adjustments

 

(5.5

)

(3.9

)

(4.9

)

(14.3

)

Goodwill as of September 29, 2018

 

$

424.0

 

$

351.5

 

$

177.6

 

$

953.1

 

 

(1)Goodwill purchase price allocation adjustments and measurement period adjustments for contingent consideration liabilities, in each case related to the acquisition of Yongle Tape Ltd. completed in June 2017.

 

The carrying amounts of goodwill at September 29, 2018 and December 30, 2017 were net of accumulated impairment losses of $820 million recognized in fiscal year 2009 by our Retail Branding and Information Solutions (“RBIS”) reportable segment.

 

Note 4.  Debt

 

In March 2017, we issued €500 million of senior notes, due March 2025. The senior notes bear an interest rate of 1.25% per year, payable annually in arrears. The net proceeds from the offering, after deducting underwriting discounts and estimated offering expenses, were $526.6 million (€495.5 million), a portion of which was used to repay commercial paper borrowings that we used to finance a portion of our acquisition of the European business of Mactac and the remainder of which was used for general corporate purposes, including other acquisitions. We designate a portion of these senior notes as a net investment hedge of our investment in foreign operations.  Refer to Note 8, “Financial Instruments,” for more information.

 

The estimated fair value of our long-term debt is primarily based on the credit spread above U.S. Treasury securities or euro government bond securities, as applicable, on notes with similar rates, credit ratings, and remaining maturities. The fair value of short-term borrowings, which includes commercial paper issuances and short-term lines of credit, approximates the carrying value given the short duration of these obligations. The fair value of our total debt was $1.86 billion at September 29, 2018 and $1.60 billion at December 30, 2017. 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 $800 million revolving credit facility (the “Revolver”) contains financial covenants requiring that we maintain specified ratios, including total debt and interest expense in relation to certain measures of income. No balance was outstanding under the Revolver as of September 29, 2018 or December 30, 2017. As of September 29, 2018 and December 30, 2017, we were in compliance with our financial covenants.

 

Note 5.  Pension and Other Postretirement Benefits

 

Defined Benefit Plans

We sponsor a number of defined benefit plans, the accrual of benefits under some of which have 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.

 

8


Table of Contents

 

Avery Dennison Corporation

 

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.

 

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

 

 

 

Pension Benefits

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29, 2018

 

September 30, 2017

 

September 29, 2018

 

September 30, 2017

 

(In millions)

 

U.S.

 

Int’l

 

U.S.

 

Int’l

 

U.S.

 

Int’l

 

U.S.

 

Int’l

 

Service cost

 

$

 

$

4.7

 

$

.1

 

$

4.6

 

$

 

$

14.5

 

$

.3

 

$

13.4

 

Interest cost

 

8.6

 

3.8

 

8.1

 

3.7

 

25.9

 

11.8

 

26.2

 

10.6

 

Actuarial (gain) loss

 

(.6

)

 

.2

 

 

(1.3

)

 

1.1

 

 

Expected return on plan assets

 

(10.6

)

(5.8

)

(10.1

)

(5.4

)

(31.9

)

(18.0

)

(30.4

)

(15.6

)

Recognized net actuarial loss

 

5.2

 

1.9

 

4.7

 

2.8

 

15.9

 

6.1

 

14.1

 

8.0

 

Amortization of prior service cost (credit)

 

.2

 

(.1

)

.3

 

(.1

)

.6

 

(.4

)

.7

 

(.3

)

Recognized loss on settlements(1)

 

6.7

 

.1

 

 

 

7.4

 

.1

 

 

 

Net periodic benefit cost

 

$

9.5

 

$

4.6

 

$

3.3

 

$

5.6

 

$

16.6

 

$

14.1

 

$

12.0

 

$

16.1

 

 

(1)In 2018, settlements in the U.S. were related to lump-sum payments associated with two nonqualified benefit plans.

 

 

 

U.S. Postretirement Health Benefits

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Interest cost

 

$

 

$

 

$

 

$

.1

 

Recognized net actuarial loss

 

.4

 

.4

 

1.1

 

1.1

 

Amortization of prior service credit

 

(.8

)

(.9

)

(2.4

)

(2.5

)

Net periodic benefit credit

 

$

(.4

)

$

(.5

)

$

(1.3

)

$

(1.3

)

 

Service cost and components of net periodic benefit cost other than service cost were included in “Marketing, general and administrative expense” and “Other non-operating expense” in the unaudited Condensed Consolidated Statements of Income, respectively. Refer to Note 1, “General,” for more information.

 

In July 2018, our Board of Directors (“Board”) approved the termination of the Avery Dennison Pension Plan (the “ADPP”), a U.S. defined benefit plan, effective as of September 28, 2018. In connection with the termination, we contributed $200 million to the ADPP in August 2018 using U.S. commercial paper borrowings. The ADPP’s net pension benefit obligation based on 2017 year end discount rates was underfunded by approximately $24 million as of September 29, 2018.  We expect to settle the long-term liability associated with the ADPP termination through a combination of (i) lump-sum payments in 2018 to eligible participants who elect to receive them and (ii) the purchase of a group annuity contract from one or more yet-to-be-identified highly rated insurance companies in the first half of 2019. The actual amount of our long-term liability when it is transferred will depend upon the nature and timing of participant settlements, as well as prevailing market conditions. We currently estimate the total non-cash charge associated with the termination of the ADPP to be between $575 million and $600 million, approximately $100 million of which we expect to recognize during the fourth quarter of 2018 and the remainder of which we expect to recognize at the time the remaining pension liability is transferred in 2019.

 

Note 6.  Long-Term Incentive Compensation

 

Stock-Based Awards

Stock-based compensation expense was $8.4 million and $24.8 million for the three and nine months ended September 29, 2018, respectively, and $9 million and $22.2 million for the three and nine months ended September 30, 2017, respectively. This expense was included in “Marketing, general and administrative expense” in the unaudited Condensed Consolidated Statements of Income.

 

As of September 29, 2018, we had approximately $48 million of unrecognized compensation expense related to unvested stock-based awards, which is expected to be recognized over the remaining weighted-average requisite service period of approximately two years.

 

9


Table of Contents

 

Avery Dennison Corporation

 

Cash-Based Awards

The compensation expense related to long-term incentive units was $3.9 million and $12.7 million for the three and nine months ended September 29, 2018, respectively, and $7.8 million and $24.6 million for the three and nine months ended September 30, 2017, respectively. This expense was included in “Marketing, general and administrative expense” in the unaudited Condensed Consolidated Statements of Income.

 

Note 7.  Cost Reduction Actions

 

2018 Plan

In April 2018, we approved a restructuring plan (the “2018 Plan”) associated with the consolidation of the European footprint of our Label and Graphic Materials (“LGM”) reportable segment that is expected to result in a headcount reduction of 350 to 400 positions related to the closure of a manufacturing facility. This reduction is expected to be partially offset by headcount additions in other locations, resulting in a net reduction of approximately 150 positions. We expect the 2018 Plan to be largely complete by the end of 2019.

 

During the nine months ended September 29, 2018, we recorded $54.8 million in restructuring charges, net of reversals, related to the 2018 Plan. These charges consisted of severance and related costs for the reduction of approximately 345 positions, as well as asset impairment charges.

 

During the three months ended September 29, 2018, we recorded a reduction in restructuring charges related to the 2018 Plan due to a change in management’s estimate of severance and related costs.

 

2015/2016 Actions

During the nine months ended September 29, 2018, we recorded $10.9 million in restructuring charges, net of reversals, related to restructuring actions initiated during the third quarter of 2015 (“2015/2016 Actions”). These charges consisted of severance and related costs for the reduction of approximately 500 positions, lease cancellation costs, and asset impairment charges.

 

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 September 29, 2018, restructuring charges and payments were as follows:

 

(In millions)

 

Accrual at
December 30,
2017

 

Charges
(Reversals),
net

 

Cash
Payments

 

Non-cash
Impairment

 

Foreign
Currency
Translation

 

Accrual at
September 29,
2018

 

2018 Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and related costs

 

$

 

$

47.6

 

$

(3.1

)

$

 

$

(.3

)

$

44.2

 

Asset impairment charges

 

 

7.2

 

 

(7.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015/2016 Actions

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and related costs

 

4.3

 

8.4

 

(12.7

)

 

 

 

Lease cancellation costs

 

.6

 

.8

 

(1.0

)

 

 

.4

 

Asset impairment charges

 

 

1.7

 

 

(1.7

)

 

 

Total

 

$

4.9

 

$

65.7

 

$

(16.8

)

$

(8.9

)

$

(.3

)

$

44.6

 

 

10


Table of Contents

 

Avery Dennison Corporation

 

The table below shows the total amount of restructuring charges, net of reversals, incurred by reportable segment:

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Restructuring charges, net of reversals, by reportable segment

 

 

 

 

 

 

 

 

 

Label and Graphic Materials

 

$

(9.4

)

$

3.1

 

$

55.9

 

$

9.9

 

Retail Branding and Information Solutions

 

3.0

 

7.4

 

9.6

 

13.7

 

Industrial and Healthcare Materials

 

 

 

.2

 

.2

 

Total

 

$

(6.4

)

$

10.5

 

$

65.7

 

$

23.8

 

 

Note 8.  Financial Instruments

 

We enter into foreign exchange hedge contracts to reduce our risk from foreign exchange rate fluctuations associated with receivables, payables, loans and firm commitments denominated in certain foreign currencies that arise primarily as a result of our operations outside the U.S.  We 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 September 29, 2018, the aggregate U.S. dollar equivalent notional value of our outstanding commodity contracts and foreign exchange contracts was $3.8 million and $1.44 billion, respectively.

 

We recognize 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. We also enter into foreign exchange contracts to offset risks arising from foreign exchange rate fluctuations.

 

The following table shows the fair values and balance sheet locations of cash flow hedges as of September 29, 2018 and December 30, 2017:

 

 

 

 

 

Asset

(In millions)

 

Balance Sheet Location

 

September 29, 2018

 

December 30, 2017

 

Foreign exchange contracts

 

Other current assets

 

$

.7

 

$

.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability

(In millions)

 

Balance Sheet Location

 

September 29, 2018

 

December 30, 2017

 

Foreign exchange contracts

 

Other current liabilities

 

$

1.2

 

$

.6

 

Commodity contracts

 

Long-term retirement benefits and other liabilities

 

.1

 

 

 

 

 

 

$

1.3

 

$

.6

 

 

The following table shows the fair values and balance sheet locations of other derivatives as of September 29, 2018 and December 30, 2017:

 

 

 

 

 

Asset

(In millions)

 

Balance Sheet Location

 

September 29, 2018

 

December 30, 2017

 

Foreign exchange contracts

 

Other current assets

 

$

3.7

 

$

3.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability

(In millions)

 

Balance Sheet Location

 

September 29, 2018

 

December 30, 2017

 

Foreign exchange contracts

 

Other current liabilities

 

$

3.5

 

$

5.6

 

 

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 derivatives, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

 

11


Table of Contents

 

Avery Dennison Corporation

 

Gains (losses), before taxes, 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)

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Foreign exchange contracts

 

$

.7

 

$

1.3

 

$

1.2

 

$

(2.2

)

Commodity contracts

 

 

 

 

(.4

)

Total

 

$

.7

 

$

1.3

 

$

1.2

 

$

(2.6

)

 

Neither the amount recognized in income related to the ineffective portion of, nor the amount excluded from, effectiveness testing for cash flow hedges and derivatives not designated as hedging instruments was material for the three and nine months ended September 29, 2018 or September 30, 2017.

 

As of September 29, 2018, we did not expect a significant amount to be reclassified from “Accumulated other comprehensive loss” to earnings within the next 12 months.

 

Other Derivatives

For other derivative instruments, which are not designated as hedging instruments, the gain or loss is recognized in current earnings.  These derivatives are intended to offset certain of our economic exposures.  The following table shows the components of the net gains (losses) recognized in income related to these derivative instruments.

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

Location of Net Gains
(Losses) in Income

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Foreign exchange contracts

 

Cost of products sold

 

$

1.6

 

$

(.1

)

$

2.9

 

$

(1.1

)

Foreign exchange contracts

 

Marketing, general and administrative expense

 

2.7

 

(18.9

)

(13.4

)

(41.6

)

Total

 

 

 

$

4.3

 

$

(19.0

)

$

(10.5

)

$

(42.7

)

 

Net Investment Hedge

In March 2017, we designated €500 million of our 1.25% senior notes due 2025 as a net investment hedge of our investment in foreign operations. In January 2018, we reduced the amount we designate as a net investment hedge to €255 million. The net assets from the investment in foreign operations were greater than the senior notes, and as such, the net investment hedge was effective.

 

Gains (losses), before tax, recognized in “Accumulated other comprehensive loss” (effective portion) related to the net investment hedge were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Foreign currency denominated debt

 

$

(3.1

)

$

(22.7

)

$

(6.7

)

$

(60.4

)

 

We recorded no ineffectiveness from our net investment hedge in net income during the three or nine months ended September 29, 2018 and September 30, 2017.

 

12


Table of Contents

 

Avery Dennison Corporation

Note 9.  Taxes Based on Income

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions, except percentages)

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Income before taxes

 

$

168.0

 

$

146.8

 

$

467.0

 

$

432.2

 

Provision for income taxes

 

17.7

 

38.5

 

94.9

 

90.8

 

Effective tax rate

 

10.5

%

26.2

%

20.3

%

21.0

%

 

Our effective tax rate for the three and nine months ended September 29, 2018 compared to the same periods last year reflected a decrease in the U.S. federal statutory tax rate from 35% to 21%, offset by net tax charges related to certain U.S. international tax provisions, the loss of domestic manufacturing deductions, and limitations on the deductibility of our executive compensation, all as a result of the Tax Cuts and Jobs Act (“TCJA”) enacted in December 2017.

 

Our effective tax rate for the three and nine months ended September 29, 2018 included net discrete tax benefits of $36.6 million and $37.3 million, respectively, reflecting return to provision adjustments recognized in the third quarter primarily related to an incremental $31 million tax benefit from our U.S. pension plan contributions and an $8.6 million tax benefit from recognition of a net foreign currency loss, both of which were deducted at a tax rate higher than 21%, concurrent with the completion of our 2017 U.S. federal income tax return.  The $31 million tax benefit was related to the ADPP termination approved by our Board in July 2018, as well as lump-sum payments associated with two U.S. nonqualified benefit plans.  Refer to Note 5, “Pension and Other Postretirement Benefits,” to the unaudited Condensed Consolidated Financial Statements for more information. The $8.6 million tax benefit was related to our election of a mark-to-market method of accounting on our 2017 U.S. federal income tax return to realize certain fair value adjustments.

 

Our effective tax rate for the nine months ended September 29, 2018 also included net tax charges related to: (i) the effects of certain U.S. international tax provisions imposed by TCJA, such as Global Intangible Low-taxed Income (“GILTI”), Base Erosion Antiabuse Tax (“BEAT”), and Foreign Derived Intangible Income (“FDII”); (ii) tax charges for foreign withholding taxes on our current year earnings; and (iii) discrete items primarily from excess tax benefits associated with stock-based payments and changes in our uncertain tax positions.

 

Our effective tax rate for the nine months ended September 30, 2017 included net tax benefits related to releases of valuation allowance on certain U.S. state deferred tax assets and changes in our uncertain tax positions.

 

Our effective tax rate for the three and nine months ended September 29, 2018 also included certain measurement period adjustments to our 2017 provisional amounts related to the enactment of the TCJA in accordance with guidance provided under SEC Staff Accounting Bulletin No. 118 (“SAB 118”). SAB 118 provides for a measurement period up to one year from the enactment of the TCJA within which we must complete our final assessment of the legislation’s impact. For the nine months ended September 29, 2018, we adjusted our provisional amounts by recognizing net tax charges of $2.7 million. This amount included: (i) $3.6 million of charges for changes in our indefinite reinvestment assertions related to our investments in certain foreign subsidiaries after information required to make such determinations was obtained;  (ii) an $8.5 million of charge for adjustments made to the one-time transition tax, primarily due to a change in filing position and regulatory guidance subsequently issued by the Internal Revenue Service (“IRS”); and (iii) a $9.4 million of benefit from releasing a previously recorded uncertain tax position after the position was not included on our 2017 U.S. federal income tax return. We have not finalized any aspects of the previously disclosed provisional amounts. Furthermore, we have not yet made a determination on our accounting policy choice related to our GILTI provision nor have we completed the assessment of our indefinite reinvestment assertions. We will continue to assess any future guidance and accounting interpretations on the effects of the TCJA and expect to complete our analysis within the measurement period afforded by SAB 118.

 

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.  We and our U.S. subsidiaries completed the IRS’ Compliance Assurance Process Program for 2016 in the second quarter of 2018. With some exceptions, our foreign subsidiaries are no longer subject to income tax examinations by tax authorities for years prior to 2006.

 

13


Table of Contents

 

Avery Dennison Corporation

 

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 $29 million, primarily as a result of audit settlements and closing tax years.

 

Note 10.  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)

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

(A) Net income available to common shareholders

 

$

149.5

 

$

108.3

 

$

370.3

 

$

341.4

 

(B) Weighted average number of common shares outstanding

 

87.3

 

88.3

 

87.7

 

88.4

 

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

 

1.2

 

1.6

 

1.4

 

1.7

 

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

 

88.5

 

89.9

 

89.1

 

90.1

 

Net income per common share: (A) ÷ (B)

 

$

1.71

 

$

1.23

 

$

4.22

 

$

3.86

 

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

 

$

1.69

 

$

1.20

 

$

4.16

 

$

3.79

 

 

Stock-based compensation awards excluded from the computation of net income per common share, assuming dilution, because they would not have had a dilutive effect were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Antidilutive shares excluded from computation of net income per common share, assuming dilution

 

 

 

 

 

 

 

 

.1

 

 

14


Table of Contents

 

Avery Dennison Corporation

 

Note 11.  Supplemental Equity and Comprehensive Income Information

 

Consolidated Statements of Shareholders’ Equity

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions, except per share amount)

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Common stock issued, $1 par value per share

 

$

124.1

 

$

124.1

 

$

124.1

 

$

124.1

 

Capital in excess of par value

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

854.5

 

$

845.9

 

$

862.6

 

$

852.0

 

Issuance of shares under stock-based compensation plans

 

 

7.9

 

 

8.7

 

 

(.2

)

 

2.6

 

Ending balance

 

$

862.4

 

$

854.6

 

$

862.4

 

$

854.6

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,702.1

 

$

2,621.8

 

$

2,596.7

 

$

2,473.3

 

Net income

 

 

149.5

 

 

108.3

 

 

370.3

 

 

341.4

 

Issuance of shares under stock-based compensation plans(1)

 

 

(.1

)

 

 

 

(23.9

)

 

(14.3

)

Contribution of shares to 401(k) Plan(1)

 

 

3.2

 

 

2.8

 

 

10.7

 

 

8.7

 

Dividends

 

 

(45.3

)

 

(39.6

)

 

(130.6

)

 

(115.8

)

Other changes(2)

 

 

 

 

 

 

(13.8

)

 

 

Ending balance

 

$

2,809.4

 

$

2,693.3

 

$

2,809.4

 

$

2,693.3

 

Treasury stock at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

(1,939.1

)

$

(1,805.6

)

$

(1,856.7

)

$

(1,772.0

)

Repurchase of shares for treasury

 

 

(72.2

)

 

(34.5

)

 

(175.1

)

 

(104.8

)

Issuance of shares under stock-based compensation plans

 

 

.9

 

 

.2

 

 

17.4

 

 

31.7

 

Contribution of shares to 401(k) Plan

 

 

2.0

 

 

1.9

 

 

6.0

 

 

7.1

 

Ending balance

 

$

(2,008.4

)

$

(1,838.0

)

$

(2,008.4

)

$

(1,838.0

)

Accumulated other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

(719.7

)

$

(716.4

)

$

(680.5

)

$

(751.9

)

Other comprehensive (loss) income, net of tax

 

 

(20.7

)

 

17.3

 

 

(59.9

)

 

52.8

 

Ending balance

 

$

(740.4

)

$

(699.1

)

$

(740.4

)

$

(699.1

)

(1) We fund a portion of our employee-related expenses using shares of our common stock held in treasury.  We record net gains or losses associated with our use of treasury shares to retained earnings.

(2) In the first quarter of 2018, we adopted an accounting guidance update that requires companies to recognize the income tax effects of intra-entity sales and transfers of assets other than inventory in the period in which they occur. Refer to Note 1, “Accounting Guidance Updates.”

 

15


Table of Contents

 

Avery Dennison Corporation

 

Changes in Accumulated Other Comprehensive Loss

 

The changes in “Accumulated other comprehensive loss” (net of tax) for the nine-month period ended September 29, 2018 were as follows:

 

(In millions)

 

Foreign
Currency
Translation

 

Pension and
Other
Postretirement
Benefits

 

Cash Flow
Hedges

 

Total

 

Balance as of December 30, 2017

 

$

(156.2

)

$

(524.0

)

$

(.3

)

$

(680.5

)

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

 

(83.7

)

1.7

 

.9

 

(81.1

)

Reclassifications to net income, net of tax

 

 

21.8

 

(.6

)

21.2

 

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

 

(83.7

)

23.5

 

.3

 

(59.9

)

Balance as of September 29, 2018

 

$

(239.9

)

$

(500.5

)

$

 

$

(740.4

)

 

The changes in “Accumulated other comprehensive loss” (net of tax) for the nine-month period ended September 30, 2017 were as follows:

 

 

(In millions)

 

Foreign
Currency
Translation

 

Pension and
Other
Postretirement
Benefits

 

Cash Flow
Hedges

 

Total

 

Balance as of December 31, 2016

 

$

(212.6

)

$

(540.3

)

$

1.0

 

$

(751.9

)

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

 

39.3

 

 

(2.1

)

37.2

 

Reclassifications to net income, net of tax

 

 

14.6

 

1.0

 

15.6

 

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

 

39.3

 

14.6

 

(1.1

)

52.8

 

Balance as of September 30, 2017

 

$

(173.3

)

$

(525.7

)

$

(.1

)

$

(699.1

)

 

16


Table of Contents

 

Avery Dennison Corporation

 

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

 

 

 

Amounts Reclassified from Accumulated
Other Comprehensive Loss

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

(In millions)

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Affected Line Item
in the Statements
Where Net Income
is Presented

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

1.2

 

$

1.0

 

$

.9

 

$

.1

 

Cost of products sold

Commodity contracts

 

 

 

(.1

)

.2

 

Cost of products sold

Interest rate contracts

 

 

 

 

(1.8

)

Interest expense

 

 

1.2

 

1.0

 

.8

 

(1.5

)

Total before tax

 

 

(.3

)

(.3

)

(.2

)

.5

 

Provision for income taxes

 

 

.9

 

.7

 

.6

 

(1.0

)

Net of tax

Pension and other postretirement benefits

 

(13.6

)

(7.2

)

(28.4

)

(21.1

)

Other non-operating expense

 

 

3.5

 

2.2

 

6.6

 

6.5

 

Provision for income taxes

 

 

(10.1

)

(5.0

)

(21.8

)

(14.6

)

Net of tax

Total reclassifications for the period

 

$

(9.2

)

$

(4.3

)

$

(21.2

)

$

(15.6

)

Total, net of tax

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Foreign currency translation

 

$

.3

 

$

(5.3

)

$

(.5

)

$

(12.0

)

Pension and other postretirement benefits

 

4.0

 

2.2

 

7.1

 

6.5

 

Cash flow hedges

 

(.1

)

 

.1

 

 

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

 

$

4.2

 

$

(3.1

)

$

6.7

 

$

(5.5

)

 

Note 12.  Fair Value Measurements

 

Recurring Fair Value Measurements

The following table shows the assets and liabilities carried at fair value, measured on a recurring basis, as of September 29, 2018:

 

 

 

 

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

 

$

26.3

 

$

21.6

 

$

4.7

 

$

 

Derivative assets

 

4.4

 

 

4.4

 

 

Bank drafts

 

16.8

 

16.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

4.8

 

$

.1

 

$

4.7

 

$

 

Contingent consideration liabilities

 

5.9

 

 

 

5.9

 

 

17


Table of Contents

 

Avery Dennison Corporation

 

The following table shows the assets and liabilities carried at fair value, measured on a recurring basis, as of December 30, 2017:

 

 

 

 

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

 

$

22.7

 

$

17.7

 

$

5.0

 

$

 

Derivative assets

 

3.9

 

 

3.9

 

 

Bank drafts

 

18.4

 

18.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

6.2

 

$

.1

 

$

6.1

 

$

 

Contingent consideration liabilities

 

45.0

 

 

 

45.0

 

 

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 September 29, 2018, trading securities of $.9 million and $25.4 million were included in “Cash and cash equivalents” and “Other current assets,” respectively, in the unaudited Condensed Consolidated Balance Sheets. As of December 30, 2017, trading securities of $.4 million and $22.3 million were included in “Cash and cash equivalents” and “Other current assets,” respectively, in the Consolidated Balance Sheets.  Derivatives that are exchange-traded are measured at fair value using quoted market prices and classified within Level 1 of the valuation hierarchy. Derivatives measured based on foreign exchange rate inputs that are readily available in public markets are classified within Level 2 of the valuation hierarchy. Bank drafts (maturities greater than three months) are valued at face value due to their short-term nature and were included in “Other current assets” in the unaudited Condensed Consolidated Balance Sheets. Contingent consideration liabilities relate to estimated earn-out payments associated with certain acquisitions we completed in 2017. These payments are based on the achievements of certain performance targets in 2017 and 2018 based on the applicable terms of the purchase agreements, and our estimates are based on the expected payments related to these targets under the terms of their respective agreements. We have classified these liabilities as Level 3. As of September 29, 2018, contingent consideration liabilities were included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets. As of December 30, 2017, contingent consideration liabilities of approximately $18 million and $27 million were included in “Other current liabilities” and “Long-term retirement benefits and other liabilities,” respectively, in the Consolidated Balance Sheets.

 

The following table presents a reconciliation of Level 3 contingent consideration liabilities for the nine months ended September 29, 2018:

 

 

 

Level 3 Liabilities

 

(In millions)

 

Contingent Consideration

 

Balance at December 30, 2017

 

$

45.0

 

Payments

 

(17.3

)

Adjustments(1)

 

(21.8

)

Balance at September 29, 2018

 

$

5.9

 

(1)Adjustments primarily relate to measurement period adjustments. Refer to Note 3, “Goodwill,” for more information.

 

Non-Recurring Fair Value Measurements

During the nine months ended September 29, 2018, long-lived assets with carrying amounts totaling $18.1 million were written down to their fair value of $10.6 million, resulting in an impairment charge of $7.5 million, which was included in “Other expense, net” in the unaudited Condensed Consolidated Statements of Income. The fair value was based on the estimated sale price of the assets, less estimated broker fees, which is primarily a Level 3 input.

 

Note 13.  Commitments and Contingencies

 

Legal Proceedings

We are involved in various lawsuits, claims, inquiries, and other regulatory and compliance matters, most of which are routine to the nature of our business.  When it is probable that a loss will be incurred and where a range of the loss can be reasonably estimated, the best estimate within the range is accrued. When the best estimate within the range cannot be determined, the low end of the range is accrued.  The ultimate resolution of these claims could affect future results of operations should our exposure be materially different from our estimates or should liabilities be incurred that were not previously accrued.  Potential insurance reimbursements are not offset against potential liabilities.

 

18


Table of Contents

 

Avery Dennison Corporation

 

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 Expenditures

Environmental expenditures are generally expensed.  However, environmental expenditures for newly acquired assets and those which extend or improve the economic useful life of existing assets are capitalized and amortized over the shorter of the estimated useful life of the acquired asset or the remaining life of the existing asset.  We review our estimates of the costs of complying with environmental laws related to remediation and cleanup of various sites, including sites in which governmental agencies have designated us as a potentially responsible party (“PRP”).  When it is probable that a loss will be incurred and where a range of the loss can be reasonably estimated, the best estimate within the range is accrued. When the best estimate within the range cannot be determined, the low end of the range is accrued.  Potential insurance reimbursements are not offset against potential liabilities.

 

As of September 29, 2018, we have been designated by the U.S. Environmental Protection Agency (“EPA”) and/or other responsible state agencies as a 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 these sites has been agreed upon.  We are participating with other PRPs at these sites and anticipate that our share of remediation costs will be determined pursuant to agreements that we negotiate with the EPA or other governmental authorities.

 

These estimates could change as a result of changes in planned remedial actions, remediation technologies, site conditions, the estimated time to complete remediation, environmental laws and regulations, and other factors.  Because of the uncertainties associated with environmental assessment and remediation activities, 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 September 29, 2018 related to our environmental liabilities was as follows:

 

(In millions)

 

 

 

Balance at December 30, 2017

 

$

21.1

 

Charges (reversals), net

 

1.2

 

Payments

 

(4.4

)

Balance at September 29, 2018

 

$

17.9

 

 

Approximately $5 million of the balance was classified as short-term and included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets as of September 29, 2018 and December 30, 2017.

 

19


Table of Contents

 

Avery Dennison Corporation

 

Note 14.  Segment and Disaggregated Revenue Information

 

Disaggregated Revenue Information

Disaggregated revenue information is set forth below in the manner that best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Revenue from our LGM reportable segment is attributed to geographic areas based on the location from which products are shipped.  Revenue from our RBIS reportable segment is shown by product group.

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Net sales to unaffiliated customers

 

 

 

 

 

 

 

 

 

Label and Graphic Materials:

 

 

 

 

 

 

 

 

 

U.S.

 

$

315.6

 

$

299.5

 

$

948.5

 

$

908.1

 

Europe

 

441.5

 

419.8

 

1,416.6

 

1,246.4

 

Asia

 

266.4

 

256.3

 

804.5

 

735.4

 

Latin America

 

94.4

 

92.2

 

280.7

 

266.5

 

Other international

 

76.3

 

69.5

 

219.4

 

193.6

 

Total Label and Graphic Materials

 

1,194.2

 

1,137.3

 

3,669.7

 

3,350.0

 

Retail Branding and Information Solutions:

 

 

 

 

 

 

 

 

 

Apparel

 

354.4

 

336.0

 

1,074.9

 

998.0

 

Printer Solutions

 

44.0

 

37.8

 

126.2

 

117.7

 

Total Retail Branding and Information Solutions

 

398.4

 

373.8

 

1,201.1

 

1,115.7

 

Industrial and Healthcare Materials

 

167.1

 

168.4

 

519.5

 

412.8

 

Net sales to unaffiliated customers

 

$

1,759.7

 

$

1,679.5

 

$

5,390.3

 

$

4,878.5

 

 

20


Table of Contents

 

Avery Dennison Corporation

 

Additional Segment Information

Additional financial information by reportable segment is set forth below.

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In millions)

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Intersegment sales

 

 

 

 

 

 

 

 

 

Label and Graphic Materials

 

$

20.9

 

$

16.2

 

$

59.6

 

$

47.9

 

Retail Branding and Information Solutions

 

1.3

 

.7

 

2.9

 

2.3

 

Industrial and Healthcare Materials

 

2.6

 

2.1

 

6.8

 

5.3

 

Intersegment sales

 

$

24.8

 

$

19.0

 

$

69.3

 

$

55.5

 

Income before taxes

 

 

 

 

 

 

 

 

 

Label and Graphic Materials

 

$

152.9

 

$

147.5

 

$

 418.1

 

$

436.6

 

Retail Branding and Information Solutions

 

42.4

 

26.1

 

122.4

 

82.9

 

Industrial and Healthcare Materials

 

15.3

 

14.2

 

44.9

 

39.1

 

Corporate expense

 

(18.9

)

(20.5

)

(61.3

)

(63.6

)

Interest expense

 

(14.7

)

(16.8

)

(42.2

)

(49.7

)

Other non-operating expense

 

(9.0

)

(3.7

)

(14.9

)

(13.1

)

Income before taxes

 

$

168.0

 

$

146.8

 

$

467.0

 

$

432.2

 

Other (income) expense, net by reportable segment

 

 

 

 

 

 

 

 

 

Label and Graphic Materials

 

$

(6.0

)

$

 3.2

 

$

59.9

 

$

10.4

 

Retail Branding and Information Solutions

 

3.0

 

7.4

 

9.1

 

14.0

 

Industrial and Healthcare Materials

 

 

.2

 

.2

 

3.1