UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 3, 2021 .
OR
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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) | ||
| (Address of Principal Executive Offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (626 ) 304-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation Yes ☒ No ☐
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). 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. | ☒ |
☐ Accelerated filer | ☐ Non-accelerated filer |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule ☒
12b-2
of the Exchange Act). Yes ☐ No Number of shares of $1 par value common stock outstanding as of July 31, 2021: 82,882,992
AVERY DENNISON CORPORATION
FISCAL SECOND QUARTER 2021 QUARTERLY REPORT ON FORM
10-Q
TABLE OF CONTENTS
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| Item 2. | 17 | |||||
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| 24 | ||||||
| 25 | ||||||
| 28 | ||||||
| Item 3. | 32 | |||||
| Item 4. | 32 | |||||
| Item 1. | 33 | |||||
| Item 1A. | 33 | |||||
| Item 2. | 33 | |||||
| Item 3. | 33 | |||||
| Item 4. | 33 | |||||
| Item 5. | 34 | |||||
| Item 6. | 34 | |||||
| Signatures | 35 | |||||
| Exhibits | ||||||
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. Forward-looking statements also include those related to the pending acquisition of Vestcom, including its anticipated closing, benefits, financing and effect on our long-term targets and future financial results.
We believe that the most significant risk factors that could affect our financial performance in the near-term include: (i) the impacts to underlying demand for our products and/or foreign currency fluctuations from global economic conditions, political uncertainty, changes in environmental standards and governmental regulations, including as a result of the
coronavirus/COVID-19
pandemic (“COVID-19”);
(ii) competitors’ actions, including pricing, expansion in key markets, and product offerings; (iii) the degree to which higher costs can be offset with productivity measures and/or passed on to customers through price increases, without a significant loss of volume; and (iv) the execution and integration of acquisitions, including the pending acquisition of Vestcom. The more significant risks and uncertainties that may impact us are discussed in more detail under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form
10-K
filed on February 25, 2021, and subsequent quarterly reports on Form10-Q. These risks and uncertainties include, but are not limited to, the following: ● |
COVID-19 |
● |
International Operations – worldwide and local economic and market conditions; changes in political conditions; and fluctuations in foreign currency exchange rates and other risks associated with foreign operations, including in emerging markets |
● |
Our Business – changes in our markets due to competitive conditions, technological developments, environmental standards, laws and regulations, and customer preferences; fluctuations in demand affecting sales to customers; execution and integration of acquisitions, including the pending acquisition of Vestcom; selling prices; fluctuations in the cost and availability of raw materials and energy; the impact of competitive products and pricing; customer and supplier concentrations or consolidations; financial condition of distributors; outsourced manufacturers; product and service quality; timely development and market acceptance of new products, including sustainable or sustainably-sourced products; investment in development activities and new production facilities; successful implementation of new manufacturing technologies and installation of manufacturing equipment; our ability to generate sustained productivity improvement; our ability to achieve and sustain targeted cost reductions; and collection of receivables from customers |
● |
The Vestcom acquisition – our ability to complete the acquisition on the proposed terms or anticipated timeline, including risks and uncertainties related to securing the necessary regulatory approvals, financing and satisfaction of other closing conditions to complete the acquisition; the occurrence of any event, change or other circumstance that could give rise to the termination of the agreement related to the acquisition; significant transaction costs (which will be incurred whether or not the acquisition successfully closes) or unknown or inestimable liabilities; the risk of stockholder litigation in connection with the pending acquisition; risks related to future opportunities and plans for the combined company, including the uncertainty of expected future financial performance and results of the combined company after the acquisition closes; effects related to the announcement or completion of the acquisition on the market price of our common stock; and the possibility that, if we do not achieve the perceived benefits of the acquisition as rapidly or to the extent anticipated by financial analysts or investors, the market price of our common stock could decline |
● |
Income Taxes – fluctuations in tax rates; changes in tax laws and regulations, and uncertainties associated with interpretations of such laws and regulations; retention of tax incentives; outcome of tax audits; and the realization of deferred tax assets |
● |
Information Technology – disruptions in information technology systems, including cyber-attacks or other intrusions to network security; successful installation of new or upgraded information technology systems; and data security breaches |
● |
Human Capital – recruitment and retention of employees; fluctuations in employee benefit costs; and collective labor arrangements |
● |
Our Indebtedness – credit risks; our ability to obtain adequate financing arrangements and maintain access to capital; volatility of financial markets; fluctuations in interest rates; and compliance with our debt covenants |
● |
Ownership of Our Stock – potential significant variability of our stock price and amounts of future dividends and share repurchases |
● |
Legal and Regulatory Matters – protection and infringement of intellectual property and impact of legal and regulatory proceedings, including with respect to environmental, health and safety, anti-corruption and trade compliance |
● |
Other Financial Matters – fluctuations in pension costs and goodwill impairment |
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
Avery Dennison Corporation
PART I. FINANCIAL INFORMATION
ITEM 1. |
FINANCIAL STATEMENTS |
CONDENSED CONSOLIDATED BALANCE SHEETS
(
Unaudited
)
(Dollars in millions, except per share amount) |
July 3, 2021 |
January 2, 2021 |
||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | $ | ||||||
| Trade accounts receivable, less allowances of $ |
||||||||
| Inventories, net |
||||||||
| Other current assets |
||||||||
| Total current assets |
||||||||
| Property, plant and equipment, net |
||||||||
| Goodwill |
||||||||
| Other intangibles resulting from business acquisitions, net |
||||||||
| Deferred tax assets |
||||||||
| Other assets |
||||||||
| $ | $ | |||||||
| |
||||||||
| Liabilities and Shareholders’ Equity |
||||||||
| Current liabilities: |
||||||||
| Short-term borrowings and current portion of long-term debt and finance leases |
$ | $ | ||||||
| Accounts payable |
||||||||
| Accrued payroll and employee benefits |
||||||||
| Other current liabilities |
||||||||
| Total current liabilities |
||||||||
| Long-term debt and finance leases |
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| Long-term retirement benefits and other liabilities |
||||||||
| Deferred tax liabilities and income taxes payable |
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| Commitments and contingencies (see Note 12) |
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| Shareholders’ equity: |
||||||||
| Common stock, $ July 3, 2021 and January 2, 2021; issued – July 3, 2021 and January 2, 2021; outstanding – |
||||||||
| Capital in excess of par value |
||||||||
| Retained earnings |
||||||||
| Treasury stock at cost, |
( |
) | ( |
) | ||||
| Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
| Total shareholders’ equity |
||||||||
| $ | $ | |||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
2
Avery Dennison Corporation
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
()
Unaudited
Three Months Ended |
Six Months Ended |
|||||||||||||||
| (In millions, except per share amounts) | July 3, 2021 |
June 27, 2020 |
July 3, 2021 |
June 27, 2020 |
||||||||||||
| Net sales |
$ | $ | $ | $ | ||||||||||||
| Cost of products sold |
||||||||||||||||
| Gross profit |
||||||||||||||||
| Marketing, general and administrative expense |
||||||||||||||||
| Other expense (income), net |
( |
) | ||||||||||||||
| Interest expense |
||||||||||||||||
| Other non-operating expense (income), net |
( |
) | ( |
) | ( |
) | ||||||||||
| Income before taxes |
||||||||||||||||
| Provision for (benefit from) income taxes |
||||||||||||||||
| Equity method investment (losses) gains |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| |
||||||||||||||||
| Per share amounts: |
||||||||||||||||
| Net income per common share |
$ | $ | $ | $ | ||||||||||||
| Net income per common share, assuming dilution |
$ | $ | $ | $ | ||||||||||||
| |
||||||||||||||||
| Weighted average number of shares outstanding: |
||||||||||||||||
| Common shares |
||||||||||||||||
| Common shares, assuming dilution |
||||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
3
Avery Dennison Corporation
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(
Unaudited
)
Three Months Ended |
Six Months Ended |
|||||||||||||||
| (In millions) | July 3, 2021 |
June 27, 2020 |
July 3, 2021 |
June 27, 2020 |
||||||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss), net of tax: |
||||||||||||||||
| Foreign currency translation |
( |
) | ||||||||||||||
| Pension and other postretirement benefits |
||||||||||||||||
| Cash flow hedges |
( |
) | ( |
) | ||||||||||||
| Other comprehensive income (loss), net of tax |
( |
) | ||||||||||||||
| Total comprehensive income, net of tax |
$ | $ | $ | $ | ||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
4
Avery Dennison Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(
Unaudited
)
Six Months Ended |
||||||||
| (In millions) | July 3, 2021 |
June 27, 2020 |
||||||
| Operating Activities |
||||||||
| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation |
||||||||
| Amortization |
||||||||
| Provision for credit losses and sales returns |
||||||||
| Stock-based compensation |
||||||||
| Pension plan settlement loss |
— | |||||||
| Deferred taxes and other non-cash taxes |
||||||||
| Other non-cash expense and loss (income and gain), net |
||||||||
| Changes in assets and liabilities and other adjustments |
( |
) | ( |
) | ||||
| Net cash provided by operating activities |
||||||||
| |
||||||||
| Investing Activities |
||||||||
| Purchases of property, plant and equipment |
( |
) | ( |
) | ||||
| Purchases of software and other deferred charges |
( |
) | ( |
) | ||||
| Proceeds from sales of property, plant and equipment |
||||||||
| Proceeds from insurance and sales (purchases) of investments, net |
( |
) | ||||||
| Proceeds from sale of product line |
— | |||||||
| Payments for acquisitions, net of cash acquired, and investments in businesses |
( |
) | ( |
) | ||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| |
||||||||
| Financing Activities |
||||||||
| Net increase (decrease) in borrowings with maturities of three months or less |
( |
) | ||||||
| Additional borrowings under revolving credit facility |
— | |||||||
| Repayments of revolving credit facility |
— | ( |
) | |||||
| Additional long-term borrowings |
— | |||||||
| Repayments of long-term debt and finance leases |
( |
) | ( |
) | ||||
| Dividends paid |
( |
) | ( |
) | ||||
| Share repurchases |
( |
) | ( |
) | ||||
| Net (tax withholding) proceeds related to stock-based compensation |
( |
) | ( |
) | ||||
| Net cash (used in) provided by financing activities |
( |
) | ||||||
| |
||||||||
| Effect of foreign currency translation on cash balances |
( |
) | ( |
) | ||||
| Increase (decrease) in cash and cash equivalents |
||||||||
| Cash and cash equivalents, beginning of year |
||||||||
| Cash and cash equivalents, end of period |
$ | $ | ||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
5
Avery Dennison Corporation
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. General
The unaudited Condensed Consolidated Financial Statements and related notes in this Quarterly Report on Form
10-Q
are presented as permitted by Article 10 of Regulation S-X
and do not contain certain information included in the audited Consolidated Financial Statements and notes thereto in our 2020 Annual Report on Form 10-K,
which should be read in conjunction with this Quarterly Report on Form 10-Q.
These unaudited Condensed Consolidated Financial Statements contain all adjustments of a normal and recurring nature necessary for a fair statement of our interim results. Interim results of operations are not necessarily indicative of future results. These unaudited Condensed Consolidated Financial Statements reflect our current estimates and assumptions that affect our reported amounts of assets and liabilities and related disclosures as of the date of the financial statements and our reported amounts of sales and expenses during the reporting periods presented. Fiscal Periods
The three and six months ended July 3, 2021 and June 27, 2020 consisted of and
periods, respectively.
Note 2. Acquisitions
On March 18, 2021, we completed our acquisition of the net assets of ZippyYum, LLC (“ZippyYum”), a California-based developer of software products used in the food service and food preparation industries. We believe this acquisition enhances the product portfolio in our Retail Branding and Information Solutions (“RBIS“) reportable segment.
On March 1, 2021, we completed our acquisition of the issued and outstanding stock of JDC Solutions, Inc. (“JDC”), a Tennessee-based manufacturer of pressure-sensitive specialty tapes. We believe this acquisition expands the product portfolio in our Industrial and Healthcare Materials (“IHM“) reportable segment.
The acquisitions of ZippyYum and JDC are referred to collectively as the “2021 Acquisitions.”
The aggregate purchase consideration for the 2021
Acquisitions was approximately
$
million. The 2021 Acquisitions were funded using cash and existing credit facilities. In addition to the cash paid at closing, the sellers in one of these acquisitions are eligible for
earn-out
payments of up to approximately $
million subject to their achievement of certain performance targets. We estimated the fair value of these
earn-out payments as of July 3, 2021 to be approximately
$
million,
which has been included in the
$
million of aggregate purchase consideration.
The 2021 Acquisitions were not material, individually or in the aggregate, to the unaudited Condensed Consolidated Financial Statements.
S
ubsequent to the end of the second quarter of 2021, on July 27, 2021, we entered into an agreement to acquire Vestcom, an Arkansas-based provider of shelf-edge pricing, productivity and consumer engagement solutions for retailers and consumer packaged goods companies for a purchase price of $
billion, subject to customary closing and post-closing adjustments. We expect to complete this acquisition in the third quarter of 2021, subject to regulatory approvals and other customary closing conditions. We believe Vestcom’s solutions expand our position in high value categories while adding channel access and data management capabilities to our RBIS reportable segment.
Note 3. Goodwill and Other Intangibles Resulting from Business Acquisitions
C
hanges in the net carrying amount of goodwill for the six months ended July 3, 2021 by reportable segment are shown below. | (In millions) | Label and Graphic Materials |
Retail Branding and Information Solutions |
Industrial and Healthcare Materials |
Total |
||||||||||||
| Goodwill as of January 2, 2021 |
$ | $ | $ | $ | |
|||||||||||
| Acquisitions (1) |
— | |||||||||||||||
| Acquisition adjustment (2) |
— | — | ||||||||||||||
| Translation adjustments |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Goodwill as of July 3, 2021 |
$ | $ | $ | $ | ||||||||||||
(1) |
Goodwill acquired related to the acquisitions of JDC and ZippyYum. We expect the recognized goodwill related to the JDC acquisition not to be deductible for income tax purposes and the recognized goodwill related to the ZippyYum acquisition to be deductible for income tax purposes. |
(2) |
Measurement period adjustment related to the finalization of the purchase price allocation for the acquisition of ACPO, Ltd. completed in December 2020. |
6
Avery Dennison Corporation
Finite-Lived Intangible Assets
The intangibles assets from the 2021 Acquisitions were not material to the unaudited Condensed Consolidated Financial Statements.
R
efer to Note 2, “Acquisitions,” to the unaudited Condensed Consolidated Financial Statements for more information. Note 4. Debt
The estimated fair value of our long-term debt is primarily based on the credit spread above U.S. Treasury securities or euro government bond securities, as applicable, on notes with similar rates, credit ratings, and remaining maturities. The fair value of short-term borrowings, which include commercial paper issuances and short-term lines of credit, approximates their carrying value given the short duration of these obligations. The fair value of our total debt was $2.24 billion at July 3, 2021 and $2.34 billion at January 2, 2021. Fair values were determined based primarily on Level 2 inputs, which are inputs other than quoted prices in active markets that are either directly or indirectly observable.
Our $800 we were in compliance with this financial covenant No
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 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 his or her employment with us. For the three and six months ended July 3, 2021 and June 27, 2020, the net periodic benefit cost related to our U.S. and international plans was not material.
Service cost and the components of net periodic benefit cost (credit) other than service cost were included in “Marketing, general and administrative expense” and “Other
non-operating
expense (income), net” in the unaudited Condensed Consolidated Statements of Income, respectively. 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 did not incur significant costs related to these benefits in the three and six months ended July 3, 2021 or June 27, 2020.
Note 6. Cost Reduction Actions
2019/2020 Actions
During the six months ended July 3, 2021, we recorded $4.5 million in restructuring charges related to our 2019/2020 actions. These charges consisted of severance and related costs for the reduction of approximately 160 positions at numerous locations across our company, which primarily included actions in our RBIS reportable segment.
The actions were primarily related to global headcount and footprint reductions, with some actions accelerated or expanded in response to the
coronavirus/COVID-19
pandemic (“COVID-19”).
During the six months ended July 3, 2021, restructuring charges and payments were as follows:
| (In millions) | Accrual at January 2, 2021 |
Charges, Net of Reversals |
Cash Payments |
Non-cash Impairment |
Foreign Currency Translation |
Accrual at July 3, 2021 |
||||||||||||||||||
| 2019/2020 Actions |
||||||||||||||||||||||||
| Severance and related costs |
$ | $ | $ | ( |
) | $ | — | $ | ( |
) | $ | |||||||||||||
| Asset impairment |
— | — | ( |
) | — | — | ||||||||||||||||||
| Total |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||
Accruals for severance and related costs, as well as 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 (income), net” in the unaudited Condensed Consolidated Statements of Income.
7
Avery Dennison Corporation
The table below shows the total amount of restructuring charges, net of reversals, incurred by reportable segment and Corporate.
Three Months Ended |
Six Months Ended |
|||||||||||||||
| (In millions) | July 3, 2021 |
June 27, 2020 |
July 3, 2021 |
June 27, 2020 |
||||||||||||
| Restructuring charges, net of reversals, by reportable segment and Corporate |
||||||||||||||||
| Label and Graphic Materials |
$ | ( |
) | $ | $ | $ | ||||||||||
| Retail Branding and Information Solutions |
||||||||||||||||
| Industrial and Healthcare Materials |
||||||||||||||||
| Corporate |
( |
) |
( |
) | ( |
) | ||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
Note 7. 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 also enter into futures contracts to hedge certain price fluctuations for a portion of our anticipated domestic purchases of natural gas. The impact of these foreign exchange and commodities hedge activities on the unaudited Condensed Consolidated Financial Statements was not material.
In March 2020, we entered into U.S. dollar to euro cross-currency swap contracts with a total notional amount of $250 million to have the effect of converting the fixed-rate U.S. dollar-denominated debt to euro-denominated debt, including semiannual interest payments and the payment of principal at maturity. During the term of the contract, which ends on April 30, 2030, we pay fixed-rate interest in euros and receive fixed-rate interest in U.S. dollars. These contracts have been designated as cash flow hedges. The fair value of these contracts as of July 3, 2021 was $(25.2 ) million and was included in “Long-term retirement benefits and other liabilities” in the unaudited Condensed Consolidated Balance Sheets. Refer to Note 11, “Fair Value Measurements,” to the unaudited Condensed Consolidated Financial Statements for more information.
We recorded no
swap to earnings during the three and six months ended July 3, 2021 or June 27, 2020.
Note 8. Taxes Based on Income
The following table summarizes our income before taxes, provision for (benefit from) income taxes, and effective tax rate:
Three Months Ended |
Six Months Ended |
|||||||||||||||
| (Dollars in millions) | July 3, 2021 |
June 27, 2020 |
July 3, 2021 |
June 27, 2020 |
||||||||||||
| Income before taxes |
$ | $ | $ | $ | ||||||||||||
| Provision for (benefit from) income taxes |
||||||||||||||||
| Effective tax rate |
% | % | % | % | ||||||||||||
Our provision for (benefit from) income taxes for the three months and six months
ended July 3, 2021 included $
million and $14 million, respectively, of net tax charge related to the tax on global intangible low-taxed income (“GILTI”) of our foreign subsidiaries and the recognition of foreign withholding taxes on current year earnings, partially offset by the benefit from foreign-derived intangible income (“FDII”). 3.5 3.6
Our provision for (benefit from) income taxes for the three months and six months ended July 3, 2021 also reflected $
million of net discrete tax charge related to tax effects on outcomes of certain legal proceedings and $
$
million return-to-provision benefit related to a GILTI exclusion election made on our amended 2018 U.S. tax return.
O
ur provision for (benefit from) income taxes for the three and six months ended June 27, 2020 included $
million and $10.5
million, respectively, of net tax charge related to the tax on GILTI of our foreign subsidiaries and the recognition of foreign withholding taxes on current year earnings, partially offset by the benefit from FDII. Our provision for (benefit from) income taxes for the three and six months ended June 27, 2020 also reflected
$
million of net discrete tax benefit primarily from decreases in certain tax reserves, including associated interest and penalties, as a result of closing tax years and the effective settlement of certain foreign tax audits.
8
Avery Dennison Corporation
In fiscal year 2020, the U.S. Department of Treasury issued final regulations that provide certain U.S. taxpayers with an annual election to exclude foreign income that is subject to a high effective tax rate from their GILTI inclusions. This annual election included an option for retroactive application to tax years 2018 through 2020. We determined to make the election for tax years 2018 and 2019 and recognized related tax benefits in the first quarter of 2021 and the fourth quarter of 2020, respectively. We have not yet determined whether to make the election for tax years 2020 and 2021. We continue to evaluate the impact of these regulations and currently anticipate to recognize a benefit from making this election in connection with the completion of our 2020 U.S. tax return in the third quarter of 2021.
The amount of income taxes we pay is subject to ongoing audits by taxing jurisdictions around the world. Our estimate of the potential outcome of any uncertain tax issue is subject to our assessment of the relevant risks, facts, and circumstances existing at the time. We believe that we have adequately provided for reasonably foreseeable outcomes related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, which may impact our effective tax rate. The final determination of tax audits and any related legal proceedings could materially differ from the amounts currently reflected in our tax provision and the related liabilities. To date, we and our U.S. subsidiaries have completed the Internal Revenue Service’s Compliance Assurance Process Program through 2017. With limited exceptions, we are no longer subject to income tax examinations by tax authorities for years prior to 2010.
It is reasonably possible that, during the next 12 months, we may realize a net decrease in our uncertain tax positions, including interest and penalties, of approximately $9 million, primarily as a result of closing tax years.
Note 9. Net Income Per Common Share
Net income per common share was computed as follows:
Three Months Ended |
Six Months Ended |
|||||||||||||||
| (In millions, except per share amounts) | July 3, 2021 |
June 27, 2020 |
July 3, 2021 |
June 27, 2020 |
||||||||||||
| (A) Net income |
$ | $ | $ | $ | ||||||||||||
| (B) Weighted average number of common shares outstanding |
||||||||||||||||
| Dilutive shares (additional common shares issuable under stock-based awards) |
||||||||||||||||
| (C) Weighted average number of common shares outstanding, assuming dilution |
||||||||||||||||
| Net income per common share: (A) ÷ (B) |
$ | $ | $ | $ | ||||||||||||
| Net income per common share, assuming dilution: (A) ÷ (C) |
$ | $ | $ | $ | ||||||||||||
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 were not significant for the three and six months ended July 3, 2021 or June 27, 2020.
9
Avery Dennison Corporation
Note 10. Supplemental Equity and Comprehensive Income Information
Consolidated Changes in Shareholders’ Equity
Three Months Ended |
Six Months Ended |
|||||||||||||||
(In millions) |
July 3, 2021 |
June 27, 2020 |
July 3, 2021 |
June 27, 2020 |
||||||||||||
| Common stock issued, $1 par value per share |
$ |
$ |
$ |
$ |
||||||||||||
| Capital in excess of par value |
||||||||||||||||
| Beginning balance |
$ |
$ |
$ |
$ |
||||||||||||
| Issuance of shares under stock-based compensation plans (1) |
( |
) |
( |
) |
( |
) | ||||||||||
| Ending balance |
$ |
$ |
$ |
$ |
||||||||||||
| Retained earnings |
||||||||||||||||
| Beginning balance |
$ |
$ |
$ |
$ |
||||||||||||
| Net income |
||||||||||||||||
| Issuance of shares under stock-based compensation plans (1) |
( |
) |
( |
) | ||||||||||||
| Contribution of shares to 401(k) Plan (1) |
||||||||||||||||
| Dividends |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
| Ending balance |
$ |
$ |
$ |
$ |
||||||||||||
| Treasury stock at cost |
||||||||||||||||
| Beginning balance |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) | ||||
| Repurchase of shares for treasury |
( |
) |
— |
( |
) |
( |
) | |||||||||
| Issuance of shares under stock-based compensation plans (1) |
||||||||||||||||
| Contribution of shares to 401(k) Plan (1) |
||||||||||||||||
| Ending balance |
$ |
( |
) | $ |
( |
) |
$ |
( |
) | $ |
( |
) | ||||
| Accumulated other comprehensive loss |
||||||||||||||||
| Beginning balance |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) | ||||
| Other comprehensive income (loss), net of tax |
( |
) | ||||||||||||||
| Ending balance |
$ |
( |
) | $ |
( |
) |
$ |
( |
) | $ |
( |
) | ||||
(1) |
We fund a portion of our employee-related expenses using shares of our common stock held in treasury. We reduce capital in excess of par value based on the grant date fair value of the awards vested and record net gains or losses associated with our use of treasury shares to retained earnings. |
Dividends per common share were as follows:
Three Months Ended |
Six Months Ended |
|||||||||||||||
July 3, 2021 |
June 27, 2020 |
July 3, 2021 |
June 27, 2020 |
|||||||||||||
| Dividends per common shar e |
$ | $ | $ | $ | ||||||||||||
10
Avery Dennison Corporation
Changes in Accumulated Other Comprehensive Loss
The changes in “Accumulated other comprehensive loss” (net of tax) for the
six-month
period ended July 3, 2021 were as follows: | (In millions) | Foreign Currency Translation |
Pension and Other Postretirement Benefits |
Cash Flow Hedges |
Total |
||||||||||||
| Balance as of January 2, 2021 |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Other comprehensive income (loss) before reclassifications, net of tax |
— | |||||||||||||||
| Reclassifications to net income, net of tax |
— | ( |
) | |||||||||||||
| Other comprehensive income (loss), net of tax |
||||||||||||||||
| Balance as of July 3, 2021 |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
The changes in “Accumulated other comprehensive loss” (net of tax) for the
six-month
period ended June 27, 2020 were as follows: (In millions) |
Foreign Currency Translation |
Pension and Other Postretirement Benefits |
Cash Flow Hedges |
Total |
||||||||||||
| Balance as of December 28, 2019 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) | ||||
| Other comprehensive income (loss) before reclassifications, net of tax |
( |
) |
— |
( |
) |
( |
) | |||||||||
| Reclassifications to net income, net of tax |
— |
|||||||||||||||
| Other comprehensive income (loss), net of tax |
( |
) |
( |
) |
( |
) | ||||||||||
| Balance as of June 27, 2020 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) | ||||
11
Avery Dennison Corporation
Note 11. Fair Value Measurements
Recurring Fair Value Measurements
The assets and liabilities carried at fair value, measured on a recurring basis, as of July 3, 2021 were as follows:
Fair Value Measurements Using |
||||||||||||||||
| (In millions) | Total |
Quoted Prices in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Other Unobservable Inputs (Level 3) |
||||||||||||
| Assets |
||||||||||||||||
| Investments |
$ | $ | $ | $ | — | |||||||||||
| Derivative assets |
— | |||||||||||||||
| Bank drafts |
— | — | ||||||||||||||
| Liabilities |
||||||||||||||||
| Cross-currency swap |
$ | $ | — | $ | $ | — | ||||||||||
| Derivative liabilities |
— | |||||||||||||||
| Contingent consideration liabilities |
— | — | ||||||||||||||
The assets and liabilities carried at fair value, measured on a recurring basis, as of January 2, 2021 were as follows:
Fair Value Measurements Using |
||||||||||||||||
| (In millions) | Total |
Quoted Prices in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Other Unobservable Inputs (Level 3) |
||||||||||||
| Assets |
||||||||||||||||
| Investments |
$ | $ | $ | $ | — | |||||||||||
| Derivative assets |
— | |||||||||||||||
| Bank drafts |
— | — | ||||||||||||||
| Liabilities |
||||||||||||||||
| Cross-currency swap |
$ | $ | — | $ | $ | — | ||||||||||
| Derivative liabilities |
— | |||||||||||||||
Investments include fixed income securities (primarily U.S. government and corporate debt securities) measured at fair value using quoted prices/bids and a money market fund measured at fair value using net asset value. As of July 3, 2021, investments of $.8 million and $33.1 million were included in “Cash and cash equivalents” and “Other current assets,” respectively, in the unaudited Condensed Consolidated Balance Sheets. As of January 2, 2021, investments of $1 million and $32.6 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.
Contingent consideration liabilities relate to estimated earn-out payments associated with one of the 2021 Acquisitions. These payments are based on the achievement of certain performance targets based on the terms of the purchase agreement, and our estimates are based on the expected payments related to these targets as of July 3, 2021.
We have classified these liabilities as Level 3. As of July 3, 2021, contingent consideration liabilities of approximately $12
Avery Dennison Corporation
T
he activity related to contingent consideration for the six months ended July 3, 2021 is shown below. (In millions) |
||||
| Acquisition |
$ |
|||
| Payments |
( |
) | ||
| Balance at July 3, 2021 |
$ |
|||
Note 12. 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.
W
e are currently party to a litigation in which ADASA Inc. (“ADASA”), an unrelated third party, alleged that certain of our radiofrequency identification (“RFID”) products infringed on its patent. We recorded a contingent liability during the second quarter of 2021 in the amount of $26.6
million based on a jury verdict issued on May 14, 2021. The jury awarded ADASA damages based on a royalty rate. We believe that ADASA’s patent is invalid and that, even if valid, any liability would be substantially lower and we are appealing the decision. Although we believe we have meritorious defenses that will be presented as part of the appeal process with an anticipated favorable final outcome, we recorded a liability based on the jury verdict. The court has not yet issued its first instance judgment. We intend to pursue the appeal process as soon as the first instance judgment is issued.
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. When it is probable that a loss will be incurred and where a range of the loss can be reasonably estimated, the best estimate within the range is accrued. When the best estimate within the range cannot be determined, the low end of the range is accrued. The ultimate resolution of these matters could affect future results of operations should our exposure be materially different from our estimates or should liabilities be incurred that were not previously accrued. Potential insurance reimbursements are not offset against potential liabilities. We review our estimates of the costs of complying with environmental laws related to remediation and cleanup of various sites, including sites in which governmental agencies have designated us as a potentially responsible party (“PRP”). However, environmental expenditures for newly acquired assets and those that extend or improve the economic useful life of existing assets are capitalized and amortized over the shorter of the estimated useful life of the acquired asset or the remaining life of the existing asset.
As of July 3, 2021, we have been designated by the U.S. Environmental Protection Agency (“EPA”) and/or other responsible state agencies as a PRP at
These estimates could change as a result of changes in planned remedial actions, remediation technologies, site conditions, the estimated time to complete remediation, environmental laws and regulations, and other factors. Because of the uncertainties associated with environmental assessment and remediation activities, our future expenses to remediate these sites could be higher than the liabilities we have accrued; however, we are unable to reasonably estimate a range of potential expenses. 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 related to our environmental liabilities for the six months ended July 3, 2021 is shown below.
| (In millions) | ||||
| Balance at January 2, 2021 |
$ | |||
| Charges, net of reversals |
||||
| Payments |
( |
) | ||
| Balance at July 3, 2021 |
$ | |
||
Approximately $2 million and $9 million of the balance was classified as short-term and included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets as of July 3, 2021 and January 2, 2021, respectively.
13
Avery Dennison Corporation
Note 13. Segment and Disaggregated Revenue Information
Disaggregated Revenue Information
Disaggregated revenue information is shown 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 Label and Graphic Materials 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 |
Six Months Ended |
|||||||||||||||
(In millions) |
July 3, 2021 |
June 27, 2020 |
July 3, 2021 |
June 27, 2020 |
||||||||||||
Net sales to unaffiliated customers |
||||||||||||||||
Label and Graphic Materials: |
||||||||||||||||
U.S. |
$ |
$ |
$ |
$ |
||||||||||||
Europe, Middle East and North Africa |
||||||||||||||||
Asia |
||||||||||||||||
Latin America |
||||||||||||||||
Other international |
||||||||||||||||
Total Label and Graphic Materials |
||||||||||||||||
Retail Branding and Information Solutions: |
||||||||||||||||
Apparel |
||||||||||||||||
Printer Solutions |
||||||||||||||||
Total Retail Branding and Information Solutions |
||||||||||||||||
Industrial and Healthcare Materials |
||||||||||||||||
Net sales to unaffiliated customers |
$ |
$ |
$ |
$ |
||||||||||||
14
Avery Dennison Corporation
Additional Segment Information
Additional financial information by reportable segment and Corporate is shown below.
Three Months Ended |
Six Months Ended |
|||||||||||||||
(In millions) |
July 3, 2021 |
June 27, 2020 |
July 3, 2021 |
June 27, 2020 |
||||||||||||
Intersegment sales |
||||||||||||||||
Label and Graphic Materials |
$ |
$ |
$ |
$ |
||||||||||||
Retail Branding and Information Solutions |
||||||||||||||||
Industrial and Healthcare Materials |
||||||||||||||||
Intersegment sales |
$ |
$ |
$ |
$ |
||||||||||||
Income before taxes |
||||||||||||||||
Label and Graphic Materials |
$ |
$ |
$ |
$ |
||||||||||||
Retail Branding and Information Solutions |
( |
) |
||||||||||||||
Industrial and Healthcare Materials |
||||||||||||||||
Corporate expense |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
Interest expense |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
Other non-operating expense (income), net |
( |
) |
||||||||||||||
Income before taxes |
$ |
$ |
$ |
$ |
||||||||||||
Other expense (income), net, by reportable segment and Corporate |
||||||||||||||||
Label and Graphic Materials |
$ |
( |
) | $ |
$ |
( |
) |
$ |
||||||||
Retail Branding and Information Solutions |
||||||||||||||||
Industrial and Healthcare Materials |
||||||||||||||||
Corporate |
( |
) |
( |
) |
( |
) | ||||||||||
Other expense (income), net |
$ |
( |
) | $ |
$ |
$ |
||||||||||
Other expense (income), net, by type |
||||||||||||||||
Restructuring charges: |
||||||||||||||||
Severance and related costs |
$ |
$ |
$ |
$ |
||||||||||||
Asset impairment charges and lease cancellation costs |
||||||||||||||||
Other items: |
||||||||||||||||
Loss on sale of assets, net |
||||||||||||||||
Transaction and related costs |
||||||||||||||||
Gain on sale of product line |
( |
) |
||||||||||||||
Outcomes of legal proceedings, net (1) |
( |
) |
( |
) |
||||||||||||
Other expense (income), net |
$ |
( |
) | $ |
$ |
$ |
||||||||||
(1) |
Second quarter and first half of 2021 include an indirect tax credit based on a Brazilian Federal Supreme Court ruling in our favor in the amount o f $ million, partially offset by a contingent liability related to a jury verdict issued in a patent infringement lawsuit in the amount of $ million. Refer to Note 12, “Commitments and Contingencies,” to the unaudited Condensed Consolidated Financial Statements for more information related to the patent infringement lawsuit. |
Note 14. Supplemental Financial Information
Inventories
The table below summarizes the amounts in inventories, net.
(In millions) |
July 3, 2021 |
January 2, 2021 |
||||||
Raw materials |
$ |
$ |
||||||
Work-in-progress |
||||||||
Finished goods |
||||||||
Inventories, net |
$ |
$ |
||||||
15
Avery Dennison Corporation
Property, Plant and Equipment
The table below summarizes the amounts in property, plant and equipment, net.
(In millions) |
July 3, 2021 |
January 2, 2021 |
||||||
| Property, plant and equipment |
$ |
$ |
||||||
| Accumulated depreciation |
( |
) |
( |
) | ||||
| Property, plant and equipment, net |
$ |
$ |
||||||
Allowance for Credit Losses
The activity related to our allowance for credit losses is shown below.