UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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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. ¨
Section 2 - Financial Information
Item 2.02 Results of Operations and Financial Condition.
Avery Dennison Corporation’s (the “Company’s”) press release, dated July 27, 2020, regarding the Company’s preliminary, unaudited financial results for the second quarter of 2020 and providing an update on the impact of the COVID-19 pandemic on the Company, is attached hereto as Exhibit 99.1 and is being furnished (not filed) with this Form 8-K.
The Company’s supplemental presentation materials, dated July 27, 2020, regarding the Company’s preliminary, unaudited financial review and analysis for the second quarter of 2020 and providing an update on the impact of the COVID-19 pandemic on the Company, is attached hereto as Exhibit 99.2 and is being furnished (not filed) with this Form 8-K. The press release and presentation materials are also available on the Company's website at www.investors.averydennison.com.
The Company will discuss its preliminary, unaudited financial results during a webcast and teleconference to be held on July 27, 2020, at 1:00 p.m. ET. To access the webcast and teleconference, please go to the Company’s website at www.investors.averydennison.com.
Section 9 - Financial Statements and Exhibits
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995
Certain statements contained in this report on Form 8-K and in Exhibits 99.1 and 99.2 are forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements, and financial or other business targets, are subject to certain risks and uncertainties. The Company believes that the most significant risk factors that could affect its financial performance in the near-term include: (1) the impacts to the Company’s business from global economic conditions, political uncertainty, and changes in governmental regulations, including as a result of the coronavirus/COVID-19 pandemic; (2) competitors' actions, including pricing, expansion in key markets, and product offerings; (3) 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 (4) the execution and integration of acquisitions.
Actual results and trends may differ materially from historical or anticipated results depending on a variety of factors, including but are not limited to, risks and uncertainties relating to the following: the coronavirus/COVID-19 pandemic; fluctuations in demand affecting sales to customers; worldwide and local economic and market conditions; changes in political conditions; fluctuations in foreign currency exchange rates and other risks associated with foreign operations, including in emerging markets; changes in our markets due to competitive conditions, technological developments, laws and regulations, and customer preferences; fluctuations in the cost and availability of raw materials and energy; changes in governmental laws and regulations; the impact of competitive products and pricing; the financial condition and inventory strategies of customers; our ability to generate sustained productivity improvement; our ability to achieve and sustain targeted cost reductions; loss of significant contracts or customers; collection of receivables from customers; selling prices; business mix shift; execution and integration of acquisitions; 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; amounts of future dividends and share repurchases; customer and supplier concentrations or consolidations; fluctuations in interest and 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; 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; the realization of deferred tax assets; fluctuations in interest rates; compliance with our debt covenants; fluctuations in pension, insurance, and employee benefit costs; goodwill impairment; the impact of legal and regulatory proceedings, including with respect to environmental, health and safety, anti-corruption and trade compliance; 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.
For a more detailed discussion of the more significant of these factors, see Part I, Item 1A. “Risk Factors” and Part II, Item 7. “Management’s Discussion and Analysis of Results of Operations and Financial Condition” in the Company’s 2019 Form 10-K, filed with the Securities and Exchange Commission on February 26, 2020, and subsequent quarterly reports on Form 10-Q. The forward-looking statements included in this Form 8-K are made only as of the date of this Form 8-K, and the Company undertakes no obligation to update these statements to reflect subsequent events or circumstances, other than as may be required by law.
EXHIBIT INDEX
| Exhibit No. | Description | |
| 99.1 | Press release, dated July 27, 2020, regarding the Company’s preliminary, unaudited second quarter 2020 financial results. | |
| 99.2 | Supplemental presentation materials, dated July 27, 2020, regarding the Company’s preliminary, unaudited financial review and analysis for second quarter 2020. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| AVERY DENNISON CORPORATION | |||
| Date: July 27, 2020 | By: | /s/ Gregory S. Lovins | |
| Name: |
Gregory S. Lovins | ||
| Title: | Senior Vice President and Chief Financial Officer | ||
Exhibit 99.1
 |
| For Immediate Release |
AVERY DENNISON ANNOUNCES
SECOND QUARTER 2020 RESULTS
Highlights:
| ● | 2Q20 Reported EPS of $0.95 |
| ○ | Adjusted EPS (non-GAAP) of $1.27 |
| ● | 2Q20 Net sales declined 14.9% to $1.53 billion |
| ○ | Sales change ex. currency (non-GAAP) of (12.0%) |
| ○ | Organic sales change (non-GAAP) of (13.7%) |
| ● | Anticipate Q3 sales decline ex. currency of 5% to 7% |
| ● | Strong balance sheet (net debt to adj. EBITDA ratio of 2.1) with ample liquidity; strong annual free cash flow (~$500 mil.) targeted across range of scenarios |
GLENDALE, Calif., July 27, 2020 – Avery Dennison Corporation (NYSE:AVY) today announced preliminary, unaudited results for its second quarter ended June 27, 2020 and provided an update related to the impact of the COVID-19 pandemic on the company. Non-GAAP financial measures referenced in this document are reconciled to GAAP in the attached tables. Unless otherwise indicated, comparisons are to the same period in the prior year.
“The team has come together extraordinarily well in navigating what is proving to be one of the most challenging periods we have experienced as a company. The compounding effects of the health, economic and societal crises are having an unprecedented impact on our teams, our markets, and our communities,” said Mitch Butier, Chairman, President and CEO. “Our focus continues to be on ensuring the health and welfare of our employees, delivering for our customers, supporting our communities, and minimizing the impact of the recession for our shareholders. I’m pleased to report that we are making solid progress on all fronts.
“Second quarter revenue came in better than we expected,” added Butier. “Following a sharp decline in April, total company sales improved sequentially in May and June. In this environment, a key focus is protecting our profitability for the year, which we reported in the first half, with adjusted EBITDA margin above prior year.
“Our strategic priorities are unchanged. We are protecting our investments to expand in high value categories, particularly RFID, while driving long-term profitable growth of our base businesses, and we remain confident in our ability to create significant long-term value for all our stakeholders.
“Once again, I want to thank our entire team for their tireless efforts to keep one another safe while delivering for our customers during this challenging period, bringing a whole new level of agility and dedication to address the unique challenges at hand.”
Ensuring the Safety and Well-being of Our Team and Our Communities
The safety and well-being of employees has been and will continue to be the company’s top priority during this global health crisis. The company has taken steps to both ensure employee safety, as well as help mitigate the financial impact to employees resulting from mandated facility closures and necessary layoffs.
During the second quarter, the company continued to adapt its safety protocols based on new information, and shifted its focus to ensuring a safe return to the workplace following the lifting of government-mandated lockdowns.
The company has helped mitigate the financial impact of furloughs and layoffs through limited salary continuation programs, as well as employee assistance grants through the Avery Dennison Foundation, which significantly increased its annual grant-making to fund a new, global employee assistance program. The company also shifted internal resources to produce personal protective equipment and hand sanitizer, donating supplies to the local communities in which it operates.
In response to heightened awareness of profound societal issues of racial and other sources of inequality, the company is sharpening its focus on diversity and inclusion to sustain equal opportunity and mutual respect, starting with significant efforts enterprise-wide to listen to and learn from the experiences of employees who represent racial minorities and other marginalized groups. The company is incorporating these learnings in comprehensive plans that will further support its goal of promoting a diverse and inclusive culture within the organization.
Market / Operations Update
The company’s Label and Packaging Materials (LPM) business, which serves a critical role in supply chains globally, remained substantially open to serve customers as the COVID-19 pandemic unfolded across the world, with the exception of sites in India, which are now operational. The company’s operations in Europe and North America experienced significant demand surges in mid-March through April, resulting in backlogs that carried into early June, driven by food, hygiene, and pharmaceutical product labeling, as well as variable information labeling related to e-commerce. Demand for these categories slowed later in June in both Europe and North America, as overall supply chain destocking began to impact demand for labels. Demand in emerging markets weakened through the months of April and May, with improvement in June.
In contrast, late in the first quarter, the company began to experience a significant decline in demand for Retail Branding and Information Solutions (RBIS) tickets, tags, and labels for apparel, reflecting the widespread closure of retail stores and apparel manufacturing hubs, as well as a decline in demand for graphics and products serving durable and industrial end markets. These trends continued through April, followed by sequential improvement in May and June, as lockdowns were eased and demand improved.
All manufacturing sites impacted by government-mandated closures are now open.
Meeting Customer Needs / Mitigating Supply Chain Risk
To meet the surge in demand for label materials in Europe and North America, the company took a number of steps to address backlogs, which included leveraging its operational excellence to maximize production capacity; providing pay premiums to hourly employees in certain facilities delivering record production levels; and temporarily allocating a portion of graphics capacity to manufacture material for labels.
In RBIS, the competitive advantage from the company’s global footprint has been beneficial during the pandemic, as supply chain issues caused by shutdowns in one country were addressed by facilities that remained open in other parts of the world.
Overall, the company has had negligible disruptions to its supply chain. As the largest customer for many of its suppliers, the company has been able to secure continuity of material supply, while also benefiting from its global footprint and dual sourcing for most commodities. The company has also strategically built inventory of some key products to enhance its ability to meet customer needs during this period of supply chain uncertainty.
Managing Dynamic Environment
Relentlessly focusing on productivity is a key tenet of the company’s strategy for long-term value creation, serving as a key source of strength to ensure the long-term health and sustainability of its businesses through different economic scenarios. In particular, this focus has enabled sustainable improvements in the profitability of its base business, while freeing up resources to support growth of higher value categories.
In light of the near-term demand decline impacting some businesses, in addition to continuing its focus on long-term strategic restructuring, the company has undertaken temporary actions to reduce costs, including reductions in travel and other discretionary spending, reduced usage of overtime and temporary employees, delays of merit increases, and furloughs.
The company estimates incremental savings from restructuring actions, net of transition costs, of $60 million to $70 million during 2020, and anticipates carryover savings, net of transition costs, of approximately $70 million in 2021, up approximately $10 million since the company’s April outlook for both years. In addition, the company is targeting net temporary savings of approximately $150 million in 2020 (over half of which has been realized in the first half of the year), with the vast majority of the savings expected to be a headwind as markets recover.
In the second quarter, the company realized approximately $15 million in savings from restructuring actions, net of transition costs, and incurred net restructuring charges of approximately $39 million.
Balance Sheet, Liquidity, and Capital Deployment
The company’s balance sheet remains strong, with ample liquidity.
The company’s net debt to adjusted EBITDA ratio (non-GAAP) was 2.1 as of the end of the second quarter, below its long-term target of 2.3 to 2.6. The company currently has $800 million available under its revolving credit facility, and approximately $260 million in cash and cash equivalents on hand at quarter-end.
The company’s long-term priorities for capital allocation support its primary objectives of delivering faster growth in high value categories alongside profitable growth of its base businesses. These priorities are unchanged in the current environment. In particular, the company continues to protect its investments in high value categories, while curtailing its original capital spending plans for the year by approximately $55 million in other areas of the business, and heightening its focus on working capital management.
The company is maintaining its dividend rate. The company has not yet resumed the repurchase of shares, following its decision to temporarily pause its share repurchase program during the first quarter of this year as the global pandemic spread.
Second Quarter 2020 Results
Net sales were $1.53 billion, down 14.9 percent. Sales were down 12.0 percent ex. currency, and down 13.7% on an organic basis.
Reported operating margin declined 350 basis points to 8.1 percent. Adjusted EBITDA margin declined 60 basis points to 14.0 percent, while adjusted operating margin declined 140 basis points to 10.7 percent.
Reported net income was $0.95 per share, compared to $1.69 per share in the prior year second quarter. Adjusted net income was $1.27 per share, down 26 percent, above the company’s expectations, reflecting a sales decline below the low end of its outlook range in April.
The company’s second quarter effective tax rate was 21.5 percent. Its adjusted tax rate (non-GAAP) for the quarter was 24.7 percent, in line with the company’s current expectation for a full year adjusted tax rate in the mid-twenty percent range.
Year-to-date free cash flow was $109 million, down 34 percent. Free cash flow in the second half of the year is expected to accelerate reflecting normal seasonality as well as higher net income and an increased focus on working capital productivity.
Net of dilution from long-term incentive awards, the company’s share count at the end of the quarter was down by 1.1 million compared to the same time last year.
Second Quarter 2020 Results by Segment
Label and Graphic Materials
| ● | Reported sales declined 8.7 percent. Sales were down 4.9 percent on an organic basis, driven largely by volume/mix. |
| ○ | Label and Packaging Materials was unchanged from prior year as modest growth in the base and specialty label categories was offset by a mid-teens decline for durable label categories. |
| ○ | Sales declined by approximately 30 percent organically in the combined Graphics and Reflective Solutions businesses. |
| ○ | On an organic basis, sales were down low-single digits in North America, mid-single digits in Western Europe where Graphics represents a larger share of the total business, and high-single digits in emerging markets. |
| ● | Reported operating margin decreased 90 basis points to 12.5 percent, reflecting higher restructuring charges. Adjusted operating margin increased 100 basis points to 14.8 percent, as the benefits of productivity, including material reengineering and net restructuring savings, as well as raw material deflation, net of pricing, more than offset unfavorable volume/mix. |
Retail Branding and Information Solutions
| ● | Reported sales declined 29.5 percent. Sales were down 28.2 percent ex. currency, and 35.5 percent on an organic basis, in each case reflecting an approximately 40 percent decline in the base business, driven by site closures and lower apparel demand. |
| ○ | Enterprise-wide sales of RFID products were up over 10 percent ex. currency with the benefit of the Smartrac acquisition, and down 20 percent organically, as increased penetration of the market was more than offset by a decline in existing programs tied to apparel. |
| ● | Reported operating margin declined to negative 3.6 percent, including the impact of significantly higher restructuring charges. Adjusted operating margin declined to 0.7 percent, reflecting reduced fixed cost leverage in this high variable margin business, which was partially offset by aggressive cost control measures. |
Industrial and Healthcare Materials
| ● | Reported sales declined 22.8 percent. On an organic basis, sales fell 20.9 percent, reflecting an approximately 30 percent decline in industrial categories driven by automotive. Healthcare categories were relatively unchanged from prior year. |
| ● | Reported operating margin decreased 390 basis points to 5.7 percent, including slightly higher restructuring charges. Adjusted operating margin decreased 370 basis points to 6.8 percent due to reduced fixed cost leverage, partially offset by productivity. |
Outlook
The company is prepared for a range of possible macro scenarios and how they might impact each of its businesses. The company currently expects sales and earnings to decline in 2020 on lower demand, with the second quarter representing the trough.
In the third quarter, the company anticipates a decline in sales before the impact of currency translation in the range of 5 percent to 7 percent, or 7 percent to 9 percent on an organic basis.
The company has initiated cost control and cash management actions to partially offset the decline in demand for certain of its businesses, and is targeting to deliver free cash flow of approximately $500 million in 2020.
Other factors expected to impact the company’s full year financial performance are summarized in the company’s supplemental presentation materials, “Second Quarter 2020 Financial Review and Analysis.”
For more details on the company’s results, see the summary tables accompanying this news release, as well as the supplemental presentation materials, “Second Quarter 2020 Financial Review and Analysis,” posted on the company’s website at www.investors.averydennison.com, and furnished to the SEC on Form 8-K.
Throughout this release and the supplemental presentation materials, amounts on a per share basis reflect fully diluted shares outstanding.
About Avery Dennison
Avery Dennison (NYSE: AVY) is a global materials science company specializing in the design and manufacture of a wide variety of labeling and functional materials. The company’s products, which are used in nearly every major industry, include pressure-sensitive materials for labels and graphic applications; tapes and other bonding solutions for industrial, medical, and retail applications; tags, labels and embellishments for apparel; and radio frequency identification (RFID) solutions serving retail apparel and other markets. Headquartered in Glendale, California, the company employs more than 30,000 employees in more than 50 countries. Reported sales in 2019 were $7.1 billion. Learn more at www.averydennison.com.
# # #
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995
Certain statements contained in this document are "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements, and financial or other business targets, are subject to certain risks and uncertainties. We believe that the most significant risk factors that could affect our financial performance in the near-term include: (1) the impacts to our business from global economic conditions, political uncertainty, and changes in governmental regulations, including as a result of the coronavirus/COVID-19 pandemic; (2) competitors' actions, including pricing, expansion in key markets, and product offerings; (3) 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 (4) the execution and integration of acquisitions.
Actual results and trends may differ materially from historical or anticipated results depending on a variety of factors, including but are not limited to, risks and uncertainties relating to the following: the coronavirus/COVID-19 pandemic; fluctuations in demand affecting sales to customers; worldwide and local economic and market conditions; changes in political conditions; fluctuations in foreign currency exchange rates and other risks associated with foreign operations, including in emerging markets; changes in our markets due to competitive conditions, technological developments, laws and regulations, and customer preferences; fluctuations in the cost and availability of raw materials and energy; changes in governmental laws and regulations; the impact of competitive products and pricing; the financial condition and inventory strategies of customers; our ability to generate sustained productivity improvement; our ability to achieve and sustain targeted cost reductions; loss of significant contracts or customers; collection of receivables from customers; selling prices; business mix shift; execution and integration of acquisitions; 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; amounts of future dividends and share repurchases; customer and supplier concentrations or consolidations; fluctuations in interest and 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; 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; the realization of deferred tax assets; fluctuations in interest rates; compliance with our debt covenants; fluctuations in pension, insurance, and employee benefit costs; goodwill impairment; the impact of legal and regulatory proceedings, including with respect to environmental, health and safety, anti-corruption and trade compliance; 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.
For a more detailed discussion of the more significant of these factors, see “Risk Factors” and “Management’s Discussion and Analysis of Results of Operations and Financial Condition” in our 2019 Form 10-K, filed with the Securities and Exchange Commission on February 26, 2020, and subsequent quarterly reports on Form 10-Q.
The forward-looking statements included in this document are made only as of the date of this document, and we undertake no obligation to update these statements to reflect subsequent events or circumstances, other than as may be required by law.
For more information and to listen to a live broadcast or an audio replay of the quarterly conference call with analysts, visit the Avery Dennison website at www.investors.averydennison.com
Contacts:
Media Relations:
Rob Six (626) 304-2361
rob.six@averydennison.com
Investor Relations:
Cindy Guenther (626) 304-2204
cynthia.guenther@averydennison.com
| Second Quarter Financial Summary - Preliminary, unaudited | |||||||||||||
| (In millions, except % and per share amounts) | |||||||||||||
| 2Q | 2Q | % Sales Change vs. P/Y | |||||||||||
| 2020 | 2019 | Reported | Ex. Currency | Organic | |||||||||
| (a) | (b) | ||||||||||||
| Net sales, by segment: | |||||||||||||
| Label and Graphic Materials | $1,101.5 | $1,206.3 | (8.7%) | (4.9%) | (4.9%) | ||||||||
| Retail Branding and Information Solutions | 294.9 | 418.3 | (29.5%) | (28.2%) | (35.5%) | ||||||||
| Industrial and Healthcare Materials | 132.1 | 171.1 | (22.8%) | (20.9%) | (20.9%) | ||||||||
| Total net sales | $1,528.5 | $1,795.7 | (14.9%) | (12.0%) | (13.7%) | ||||||||
| As Reported (GAAP) | Adjusted Non-GAAP (c) | ||||||||||||
| 2Q | 2Q | % | % of Sales | 2Q | 2Q | % | % of Sales | ||||||
| 2020 | 2019 | Change | 2020 | 2019 | 2020 | 2019 | Change | 2020 | 2019 | ||||
| Operating income (loss) / operating margins | |||||||||||||
| before interest, other non-operating expense, and taxes, | |||||||||||||
| by segment: | |||||||||||||
| Label and Graphic Materials | $137.5 | $162.1 | 12.5% | 13.4% | $163.3 | $166.5 | 14.8% | 13.8% | |||||
| Retail Branding and Information Solutions | (10.7) | 50.4 | (3.6%) | 12.0% | 2.2 | 52.1 | 0.7% | 12.5% | |||||
| Industrial and Healthcare Materials | 7.5 | 16.5 | 5.7% | 9.6% | 9.0 | 17.9 | 6.8% | 10.5% | |||||
| Corporate expense | (10.8) | (19.9) | (11.0) | (19.9) | |||||||||
| Total operating income / operating margins | |||||||||||||
| before interest, other non-operating expense, and taxes | $123.5 | $209.1 | (41%) | 8.1% | 11.6% | $163.5 | $216.6 | (25%) | 10.7% | 12.1% | |||
| Interest expense | $20.0 | $19.5 | $20.0 | $19.5 | |||||||||
| Other non-operating expense, net | $0.2 | $0.9 | $0.2 | $0.9 | |||||||||
| Income before taxes | $103.3 | $188.7 | (45%) | 6.8% | 10.5% | $143.3 | $196.2 | (27%) | 9.4% | 10.9% | |||
| Provision for income taxes | $22.2 | $44.9 | $35.4 | $49.1 | |||||||||
| Equity method investment losses | ($1.4) | ($0.4) | ($1.4) | ($0.4) | |||||||||
| Net income | $79.7 | $143.4 | (44%) | 5.2% | 8.0% | $106.5 | $146.7 | (27%) | 7.0% | 8.2% | |||
| Net income per common share, assuming dilution | $0.95 | $1.69 | (44%) | $1.27 | $1.72 | (26%) | |||||||
| 2Q Free Cash Flow (d) | $144.1 | $157.8 | |||||||||||
| YTD Free Cash Flow (d) | $108.8 | $165.1 | |||||||||||
| See accompanying schedules A-4 to A-9 for reconciliations from GAAP to non-GAAP financial measures. | |
| (a) | Sales change ex. currency refers to the increase or decrease in net sales, excluding the estimated impact of foreign currency translation, and, where applicable, currency adjustment for transitional reporting of highly inflationary economies (Argentina) and the reclassification of sales between segments. The estimated impact of foreign currency translation is calculated on a constant currency basis, with prior period results translated at current period average exchange rates to exclude the effect of currency fluctuations. |
| (b) | Organic sales change refers to sales change ex. currency, excluding the estimated impact of product line exits, acquisitions and divestitures, and, where applicable, the extra week in our fiscal year. |
| (c) | Excludes impact of restructuring charges and other items. |
| (d) | Free cash flow refers to cash flow provided by operating activities, less payments for property, plant and equipment, software and other deferred charges, plus proceeds from sales of property, plant and equipment, plus (minus) net proceeds from insurance and sales (purchases) of investments. Free cash flow is also adjusted for, where applicable, the cash contributions related to the termination of our U.S. pension plan. |
A-1
AVERY DENNISON CORPORATION
PRELIMINARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
| (UNAUDITED) | ||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| Jun. 27, 2020 | Jun. 29, 2019 | Jun. 27, 2020 | Jun. 29, 2019 | |||||||||||||
| Net sales | $ | 1,528.5 | $ | 1,795.7 | $ | 3,251.5 | $ | 3,535.8 | ||||||||
| Cost of products sold | 1,145.6 | 1,313.4 | 2,383.5 | 2,588.1 | ||||||||||||
| Gross profit | 382.9 | 482.3 | 868.0 | 947.7 | ||||||||||||
| Marketing, general and administrative expense | 219.4 | 265.7 | 500.4 | 542.0 | ||||||||||||
| Other expense, net(1) | 40.0 | 7.5 | 44.9 | 15.0 | ||||||||||||
| Interest expense | 20.0 | 19.5 | 38.8 | 39.0 | ||||||||||||
| Other non-operating expense, net(2) | 0.2 | 0.9 | (0.3) | 447.4 | ||||||||||||
| Income (loss) before taxes | 103.3 | 188.7 | 284.2 | (95.7) | ||||||||||||
| Provision for (benefit from) income taxes(3) | 22.2 | 44.9 | 68.5 | (93.5) | ||||||||||||
| Equity method investment losses | (1.4) | (0.4) | (1.8) | (1.3) | ||||||||||||
| Net income (loss) | $ | 79.7 | $ | 143.4 | $ | 213.9 | $ | (3.5) | ||||||||
| Per share amounts: | ||||||||||||||||
| Net income (loss) per common share, assuming dilution | $ | 0.95 | $ | 1.69 | $ | 2.55 | $ | (0.04) | ||||||||
| Weighted average number of common shares outstanding, | ||||||||||||||||
| assuming dilution | 83.8 | 85.1 | 83.9 | 84.3 | (4) | |||||||||||
| (1) | "Other expense, net" for the second quarter of 2020 includes severance and related costs of $37.5, asset impairment charges of $1.8, and transaction and related costs of $.7. |
| "Other expense, net" for the second quarter of 2019 includes severance and related costs of $6.1 and asset impairment charges of $1.4. | |
| "Other expense, net" for the first half of 2020 includes severance and related costs of $39.9, asset impairment charges of $1.8, and transaction and related costs of $3.2. | |
| "Other expense, net" for the first half of 2019 includes severance and related costs of $16.5 and asset impairment and lease cancellation charges of $1.7, partially offset by gain on sales of assets of $3.2. | |
| (2) | "Other non-operating expense, net" for the first half of 2019 includes pension plan settlement and related charges of $446.9. |
| (3) | "Provision for (benefit from) income taxes" for the first half of 2019 includes then-estimated tax benefit of $179.8 related to the termination of our U.S. pension plan. |
| (4) | The effect of dilutive shares (additional common shares issuable under stock-based awards) was not included because we had a net loss. |
-more-
A-2
AVERY DENNISON CORPORATION
PRELIMINARY CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
| (UNAUDITED) | ||||||
| ASSETS | Jun. 27, 2020 | Jun. 29, 2019 | ||||
| Current assets: | ||||||
| Cash and cash equivalents | $ | 262.6 | $ | 247.3 | ||
| Trade accounts receivable, net | 1,114.6 | 1,232.0 | ||||
| Inventories, net | 726.6 | 671.0 | ||||
| Other current assets | 220.8 | 226.9 | ||||
| Total current assets | 2,324.6 | 2,377.2 | ||||
| Property, plant and equipment, net | 1,228.8 | 1,143.8 | ||||
| Goodwill and other intangibles resulting from business acquisitions, net | 1,235.3 | 1,077.1 | ||||
| Deferred tax assets | 211.1 | 180.2 | ||||
| Other assets | 651.9 | 611.4 | ||||
| $ | 5,651.7 | $ | 5,389.7 | |||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
| Current liabilities: | ||||||
| Short-term borrowings and current portion of long-term debt and finance leases | $ | 268.6 | $ | 558.5 | ||
| Accounts payable | 956.5 | 1,055.4 | ||||
| Other current liabilities | 684.4 | 664.6 | ||||
| Total current liabilities | 1,909.5 | 2,278.5 | ||||
| Long-term debt and finance leases | 1,997.6 | 1,503.3 | ||||
| Other long-term liabilities | 530.7 | 545.4 | ||||
| Shareholders' equity: | ||||||
| Common stock | 124.1 | 124.1 | ||||
| Capital in excess of par value | 840.0 | 857.7 | ||||
| Retained earnings | 3,100.2 | 2,762.3 | ||||
| Treasury stock at cost | (2,447.2) | (2,311.8) | ||||
| Accumulated other comprehensive loss | (403.2) | (369.8) | ||||
| Total shareholders' equity | 1,213.9 | 1,062.5 | ||||
| $ | 5,651.7 | $ | 5,389.7 | |||
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A-3
AVERY DENNISON CORPORATION
PRELIMINARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| (UNAUDITED) | ||||||
| Six Months Ended | ||||||
| Jun. 27, 2020 | Jun. 29, 2019 | |||||
| Operating Activities: | ||||||
| Net income (loss) | $ | 213.9 | $ | (3.5) | ||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||
| Depreciation | 74.6 | 70.4 | ||||
| Amortization | 23.2 | 19.0 | ||||
| Provision for credit losses and sales returns | 38.8 | 26.8 | ||||
| Stock-based compensation | 1.4 | 16.5 | ||||
| Pension plan settlements and related charges | --- | 446.9 | ||||
| Deferred taxes and other non-cash taxes | 16.4 | (166.6) | ||||
| Other non-cash expense and loss (income and gain), net | 16.7 | 10.3 | ||||
| Changes in assets and liabilities and other adjustments | (201.0) | (181.0) | ||||
| Net cash provided by operating activities | 184.0 | 238.8 | ||||
| Investing Activities: | ||||||
| Purchases of property, plant and equipment | (63.9) | (79.8) | ||||
| Purchases of software and other deferred charges | (11.0) | (13.0) | ||||
| Proceeds from sales of property, plant and equipment | 0.1 | 7.4 | ||||
| Proceeds from insurance and sales (purchases) of investments, net | (0.4) | 4.3 | ||||
| Payments for acquisition, net of cash acquired, and investments in businesses | (252.8) | (6.5) | ||||
| Net cash used in investing activities | (328.0) | (87.6) | ||||
| Financing Activities: | ||||||
| Net increase in borrowings (maturities of three months or less) | 92.5 | 112.9 | ||||
| Additional borrowings under revolving credit facility | 500.0 | --- | ||||
| Additional long-term borrowings | 493.7 | --- | ||||
| Repayments of revolving credit facility | (500.0) | --- | ||||
| Repayments of long-term debt and finance leases | (267.6) | (16.5) | ||||
| Dividends paid | (96.8) | (92.7) | ||||
| Share repurchases | (45.2) | (116.6) | ||||
| Net (tax withholding) proceeds related to stock-based compensation | (20.5) | (20.4) | ||||
| Payments of contingent consideration | --- | (1.6) | ||||
| Net cash provided by (used in) financing activities | 156.1 | (134.9) | ||||
| Effect of foreign currency translation on cash balances | (3.2) | (1.0) | ||||
| Increase in cash and cash equivalents | 8.9 | 15.3 | ||||
| Cash and cash equivalents, beginning of year | 253.7 | 232.0 | ||||
| Cash and cash equivalents, end of period | $ | 262.6 | $ | 247.3 | ||
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A-4
Reconciliation of Non-GAAP Financial Measures to GAAP
We report our financial results in conformity with accounting principles generally accepted in the United States of America, or GAAP, and also communicate with investors using certain non-GAAP financial measures. These non-GAAP financial measures are not in accordance with, nor are they a substitute for or superior to, the comparable GAAP financial measures. These non-GAAP financial measures are intended to supplement the presentation of our financial results that are prepared in accordance with GAAP. Based upon feedback from investors and financial analysts, we believe that the supplemental non-GAAP financial measures we provide are useful to their assessment of our performance and operating trends, as well as liquidity.
Our non-GAAP financial measures exclude the impact of certain events, activities or decisions. The accounting effects of these events, activities or decisions, which are included in the GAAP financial measures, may make it difficult to assess our underlying performance in a single period. By excluding the accounting effects, positive or negative, of certain items (e.g., restructuring charges, legal settlements, certain effects of strategic transactions and related costs, losses from debt extinguishments, gains or losses from curtailment or settlement of pension obligations, gains or losses on sales of certain assets, and other items), we believe that we are providing meaningful supplemental information that facilitates an understanding of our core operating results and liquidity measures. While some of the items we exclude from GAAP financial measures recur, they tend to be disparate in amount, frequency, or timing.
We use these non-GAAP financial measures internally to evaluate trends in our underlying performance, as well as to facilitate comparison to the results of competitors for a single period.
We use the following non-GAAP financial measures in the accompanying news release and presentation:
Sales change ex. currency refers to the increase or decrease in net sales, excluding the estimated impact of foreign currency translation, and, where applicable, currency adjustment for transitional reporting of highly inflationary economies (Argentina) and the reclassification of sales between segments. The estimated impact of foreign currency translation is calculated on a constant currency basis, with prior period results translated at current period average exchange rates to exclude the effect of currency fluctuations.
Organic sales change refers to sales change ex. currency, excluding the estimated impact of product line exits, acquisitions and divestitures, and, where applicable, the extra week in our fiscal year.
We believe that sales change ex. currency and organic sales change assist investors in evaluating the sales change from the ongoing activities of our businesses and enhance their ability to evaluate our results from period to period.
Adjusted operating income refers to income before taxes, interest expense, other non-operating expense, and other expense, net.
Adjusted EBITDA refers to net income before interest expense, other non-operating expense, taxes, equity method investment losses, other expense, net, and depreciation and amortization.
Adjusted operating margin refers to adjusted operating income as a percentage of net sales.
Adjusted EBITDA margin refers to adjusted EBITDA as a percentage of net sales.
Adjusted tax rate refers to the projected full-year GAAP tax rate, adjusted to exclude certain unusual or infrequent events that are expected to significantly impact that rate, such as our U.S. pension plan termination, effects of certain discrete tax planning actions, impacts related to the enactment of the U.S. Tax Cuts and Jobs Act ("TCJA"), where applicable, and other items.
Adjusted net income refers to income before taxes, tax-effected at the adjusted tax rate, and adjusted for tax-effected restructuring charges and other items.
Adjusted net income per common share, assuming dilution (adjusted EPS) refers to adjusted net income divided by weighted average number of common shares outstanding, assuming dilution.
We believe that adjusted operating margin, adjusted EBITDA margin, adjusted net income, and adjusted EPS assist investors in understanding our core operating trends and comparing our results with those of our competitors.
Net debt to adjusted EBITDA ratio refers to total debt (including finance leases) less cash and cash equivalents, divided by adjusted EBITDA.
We believe that the net debt to adjusted EBITDA ratio assists investors in assessing our leverage position.
Free cash flow refers to cash flow provided by operating activities, less payments for property, plant and equipment, software and other deferred charges, plus proceeds from sales of property, plant and equipment, plus (minus) net proceeds from insurance and sales (purchases) of investments. Free cash flow is also adjusted for, where applicable, the cash contributions related to the termination of our U.S. pension plan. We believe that free cash flow assists investors by showing the amount of cash we have available for debt reductions, dividends, share repurchases, and acquisitions.
The following reconciliations are provided in accordance with Regulations G and S-K and reconcile our non-GAAP financial measures with the most directly comparable GAAP financial measures.
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A-5
AVERY DENNISON CORPORATION
PRELIMINARY RECONCILIATION FROM GAAP TO NON-GAAP FINANCIAL MEASURES
(In millions, except % and per share amounts)
| (UNAUDITED) | ||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| Jun. 27, 2020 | Jun. 29, 2019 | Jun. 27, 2020 | Jun. 29, 2019 | |||||||||||||
| Reconciliation from GAAP to Non-GAAP operating margins: | ||||||||||||||||
| Net sales | $ | 1,528.5 | $ | 1,795.7 | $ | 3,251.5 | $ | 3,535.8 | ||||||||
| Income (loss) before taxes | $ | 103.3 | $ | 188.7 | $ | 284.2 | $ | (95.7 | ) | |||||||
| Income (loss) before taxes as a percentage of net sales | 6.8 | % | 10.5 | % | 8.7 | % | (2.7 | %) | ||||||||
| Adjustments: | ||||||||||||||||
| Interest expense | $ | 20.0 | $ | 19.5 | $ | 38.8 | $ | 39.0 | ||||||||
| Other non-operating expense, net | 0.2 | 0.9 | (0.3 | ) | 447.4 | |||||||||||
| Operating income before interest expense, other non-operating expense, and taxes | $ | 123.5 | $ | 209.1 | $ | 322.7 | $ | 390.7 | ||||||||
| Operating margins | 8.1 | % | 11.6 | % | 9.9 | % | 11.0 | % | ||||||||
| Income (loss) before taxes | $ | 103.3 | $ | 188.7 | $ | 284.2 | $ | (95.7 | ) | |||||||
| Adjustments: | ||||||||||||||||
| Restructuring charges: | ||||||||||||||||
| Severance and related costs | 37.5 | 6.1 | 39.9 | 16.5 | ||||||||||||
| Asset impairment and lease cancellation charges | 1.8 | 1.4 | 1.8 | 1.7 | ||||||||||||
| Transaction and related costs | 0.7 | --- | 3.2 | --- | ||||||||||||
| Gain on sales of assets | --- | --- | --- | (3.2 | ) | |||||||||||
| Interest expense | 20.0 | 19.5 | 38.8 | 39.0 | ||||||||||||
| Other non-operating expense, net | 0.2 | 0.9 | (0.3 | ) | 447.4 | |||||||||||
| Adjusted operating income (non-GAAP) | $ | 163.5 | $ | 216.6 | $ | 367.6 | $ | 405.7 | ||||||||
| Adjusted operating margins (non-GAAP) | 10.7 | % | 12.1 | % | 11.3 | % | 11.5 | % | ||||||||
| Reconciliation from GAAP to Non-GAAP net income: | ||||||||||||||||
| As reported net income (loss) | $ | 79.7 | $ | 143.4 | $ | 213.9 | $ | (3.5 | ) | |||||||
| Adjustments: | ||||||||||||||||
| Restructuring charges and other items(1) | 40.0 | 7.5 | 44.9 | 15.0 | ||||||||||||
| Pension plan settlement and related charges | --- | --- | --- | 446.9 | ||||||||||||
| Tax benefit from pension plan settlement and related charges | --- | --- | --- | (179.8 | ) | |||||||||||
| Tax effect on restructuring charges and other items and impact of adjusted tax rate | (13.2 | ) | (4.2 | ) | (12.8 | ) | (5.3 | ) | ||||||||
| Adjusted net income (non-GAAP) | $ | 106.5 | $ | 146.7 | $ | 246.0 | $ | 273.3 | ||||||||
(1) Includes pretax restructuring and related charges, transaction and related costs, and gain on sales of assets.
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A-5
Continued
AVERY DENNISON CORPORATION
PRELIMINARY RECONCILIATION FROM GAAP TO NON-GAAP FINANCIAL MEASURES
(In millions, except % and per share amounts)
| (UNAUDITED) | ||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| Jun. 27, 2020 | Jun. 29, 2019 | Jun. 27, 2020 | Jun. 29, 2019 | |||||||||||||
| Reconciliation from GAAP to Non-GAAP net income per common share: | ||||||||||||||||
| As reported net income (loss) per common share, assuming dilution | $ | 0.95 | $ | 1.69 | $ | 2.55 | $ | (0.04 | ) | |||||||
| Adjustments per common share, net of tax: | ||||||||||||||||
| Restructuring charges and other items(1) | 0.48 | 0.08 | 0.53 | 0.17 | ||||||||||||
| Pension plan settlement and related charges | --- | --- | --- | 3.13 | ||||||||||||
| Tax effect on restructuring charges and other items and impact of adjusted tax rate | (0.16 | ) | (0.05 | ) | (0.15 | ) | (0.06 | ) | ||||||||
| Adjusted net income per common share, assuming dilution (non-GAAP) | $ | 1.27 | $ | 1.72 | $ | 2.93 | $ | 3.20 | ||||||||
| Weighted average number of common shares outstanding, assuming dilution(2) | 83.8 | 85.1 | 83.9 | 85.3 | ||||||||||||
Our adjusted tax rate was 24.7% and 25% for the three and six months ended June 27, 2020 and June 29, 2019, respectively.
(1) Includes pretax restructuring and related charges, transaction and related costs, and gain on sales of assets.
(2) Six months ended June 29, 2019 includes dilutive shares (additional common shares issuable under stock-based awards) because we generated net income on a non-GAAP basis.
| (UNAUDITED) | ||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| Jun. 27, 2020 | Jun. 29, 2019 | Jun. 27, 2020 | Jun. 29, 2019 | |||||||||||||
| Reconciliation of free cash flow: | ||||||||||||||||
| Net cash provided by operating activities | $ | 179.6 | $ | 203.4 | $ | 184.0 | $ | 238.8 | ||||||||
| Purchases of property, plant and equipment | (30.7 | ) | (38.0 | ) | (63.9 | ) | (79.8 | ) | ||||||||
| Purchases of software and other deferred charges | (4.8 | ) | (7.5 | ) | (11.0 | ) | (13.0 | ) | ||||||||
| Proceeds from sales of property, plant and equipment | 0.1 | 0.1 | 0.1 | 7.4 | ||||||||||||
| Proceeds from insurance and sales (purchases) of investments, net | (0.1 | ) | (0.2 | ) | (0.4 | ) | 4.3 | |||||||||
| Contributions for pension plan termination | --- | --- | --- | 7.4 | ||||||||||||
| Free cash flow (non-GAAP) | $ | 144.1 | $ | 157.8 | $ | 108.8 | $ | 165.1 | ||||||||
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A-6
AVERY DENNISON CORPORATION
PRELIMINARY SUPPLEMENTARY INFORMATION
(In millions, except %)
(UNAUDITED)
| Second Quarter Ended | |||||||||||||
| NET SALES | OPERATING INCOME (LOSS) | OPERATING MARGINS | |||||||||||
| 2020 | 2019 | 2020(1) | 2019(2) | 2020 | 2019 | ||||||||
| Label and Graphic Materials | $ | 1,101.5 | $ | 1,206.3 | $ | 137.5 | $ | 162.1 | 12.5% | 13.4% | |||
| Retail Branding and Information Solutions | 294.9 | 418.3 | (10.7) | 50.4 | (3.6%) | 12.0% | |||||||
| Industrial and Healthcare Materials | 132.1 | 171.1 | 7.5 | 16.5 | 5.7% | 9.6% | |||||||
| Corporate Expense | N/A | N/A | (10.8) | (19.9) | N/A | N/A | |||||||
| TOTAL FROM OPERATIONS | $ | 1,528.5 | $ | 1,795.7 | $ | 123.5 | $ | 209.1 | 8.1% | 11.6% | |||
(1) Operating income for the second quarter of 2020 includes severance and related costs of $37.5, asset impairment charges of $1.8, and transaction and related costs of $.7. Of the total $40, the Label and Graphic Materials segment recorded $25.8, the Retail Branding and Information Solutions segment recorded $12.9, the Industrial and Healthcare Materials segment recorded $1.5, and Corporate recorded ($.2).
(2) Operating income for the second quarter of 2019 includes severance and related costs of $6.1 and asset impairment charges of $1.4. Of the total $7.5, the Label and Graphic Materials segment recorded $4.4, the Retail Branding and Information Solutions segment recorded $1.7, and the Industrial and Healthcare Materials segment recorded $1.4.
RECONCILIATION FROM GAAP TO NON-GAAP SUPPLEMENTARY INFORMATION
| Second Quarter Ended | ||||||||
| OPERATING INCOME (LOSS) | OPERATING MARGINS | |||||||
| 2020 | 2019 | 2020 | 2019 | |||||
| Label and Graphic Materials | ||||||||
| Operating income and margins, as reported | $ | 137.5 | $ | 162.1 | 12.5% | 13.4% | ||
| Adjustments: | ||||||||
| Restructuring charges: | ||||||||
| Severance and related costs | 24.9 | 3.4 | 2.2% | 0.3% | ||||
| Asset impairment charges | 0.9 | 1.0 | 0.1% | 0.1% | ||||
| Adjusted operating income and margins (non-GAAP) | $ | 163.3 | $ | 166.5 | 14.8% | 13.8% | ||
| Retail Branding and Information Solutions | ||||||||
| Operating (loss) income and margins, as reported | $ | (10.7) | $ | 50.4 | (3.6%) | 12.0% | ||
| Adjustments: | ||||||||
| Restructuring charges: | ||||||||
| Severance and related costs | 11.3 | 1.3 | 3.8% | 0.4% | ||||
| Asset impairment charges | 0.9 | 0.4 | 0.3% | 0.1% | ||||
| Transaction and related costs | 0.7 | --- | 0.2% | --- | ||||
| Adjusted operating income and margins (non-GAAP) | $ | 2.2 | $ | 52.1 | 0.7% | 12.5% | ||
| Industrial and Healthcare Materials | ||||||||
| Operating income and margins, as reported | $ | 7.5 | $ | 16.5 | 5.7% | 9.6% | ||
| Adjustments: | ||||||||
| Restructuring charges: | ||||||||
| Severance and related costs | 1.5 | 1.4 | 1.1% | 0.9% | ||||
| Adjusted operating income and margins (non-GAAP) | $ | 9.0 | $ | 17.9 | 6.8% | 10.5% | ||
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A-7
AVERY DENNISON CORPORATION
PRELIMINARY SUPPLEMENTARY INFORMATION
(In millions, except %)
(UNAUDITED)
| Six Months Year-to-Date | |||||||||||||
| NET SALES | OPERATING INCOME (LOSS) | OPERATING MARGINS | |||||||||||
| 2020 | 2019 | 2020(1) | 2019(2) | 2020 | 2019 | ||||||||
| Label and Graphic Materials | $ | 2,275.0 | $ | 2,384.6 | $ | 310.0 | $ | 301.6 | 13.6% | 12.6% | |||
| Retail Branding and Information Solutions | 696.8 | 816.6 | 20.2 | 101.8 | 2.9% | 12.5% | |||||||
| Industrial and Healthcare Materials | 279.7 | 334.6 | 22.4 | 30.1 | 8.0% | 9.0% | |||||||
| Corporate Expense | N/A | N/A | (29.9) | (42.8) | N/A | N/A | |||||||
| TOTAL FROM OPERATIONS | $ | 3,251.5 | $ | 3,535.8 | $ | 322.7 | $ | 390.7 | 9.9% | 11.0% | |||
(1) Operating income for the first half of 2020 includes severance and related costs of $39.9, asset impairment charges of $1.8, and transaction and related costs of $3.2. Of the total $44.9, the Label and Graphic Materials segment recorded $26.9, the Retail Branding and Information Solutions segment recorded $16.2, the Industrial and Healthcare Materials segment recorded $2, and Corporate recorded ($.2).
(2) Operating income for the first half of 2019 includes severance and related costs of $16.5 and asset impairment and lease cancellation charges of $1.7, partially offset by gain on sales of assets of $3.2. Of the total $15, the Label and Graphic Materials segment recorded $12, the Retail Branding and Information Solutions segment recorded ($.3), and the Industrial and Healthcare Materials segment recorded $3.3.
In the first quarter of 2020, an insignificant portion of the net sales and associated operating loss related to the acquisition of Smartrac was reported in Label and Graphic Materials' results, reflecting sales through that segment's channels. To better align the reporting with our current organization structure, the results associated with the acquisition are now recognized solely in Retail Branding and Information Solutions' results.
RECONCILIATION FROM GAAP TO NON-GAAP SUPPLEMENTARY INFORMATION
| Six Months Year-to-Date | ||||||||
| OPERATING INCOME | OPERATING MARGINS | |||||||
| 2020 | 2019 | 2020 | 2019 | |||||
| Label and Graphic Materials | ||||||||
| Operating income and margins, as reported | $ | 310.0 | $ | 301.6 | 13.6% | 12.6% | ||
| Adjustments: | ||||||||
| Restructuring charges: | ||||||||
| Severance and related costs | 25.3 | 11.4 | 1.1% | 0.5% | ||||
| Asset impairment and lease cancellation charges | 0.9 | 1.3 | 0.1% | 0.1% | ||||
| Transaction and related costs | 0.7 | --- | --- | --- | ||||
| Gain on sale of assets | --- | (0.7) | --- | --- | ||||
| Adjusted operating income and margins (non-GAAP) | $ | 336.9 | $ | 313.6 | 14.8% | 13.2% | ||
| Retail Branding and Information Solutions | ||||||||
| Operating income and margins, as reported | $ | 20.2 | $ | 101.8 | 2.9% | 12.5% | ||
| Adjustments: | ||||||||
| Restructuring charges: | ||||||||
| Severance and related costs | 12.8 | 1.8 | 1.8% | 0.2% | ||||
| Asset impairment charges | 0.9 | 0.4 | 0.1% | --- | ||||
| Transaction and related costs | 2.5 | --- | 0.4% | --- | ||||
| Gain on sale of assets | --- | (2.5) | --- | (0.3%) | ||||
| Adjusted operating income and margins (non-GAAP) | $ | 36.4 | $ | 101.5 | 5.2% | 12.4% | ||
| Industrial and Healthcare Materials | ||||||||
| Operating income and margins, as reported | $ | 22.4 | $ | 30.1 | 8.0% | 9.0% | ||
| Adjustments: | ||||||||
| Restructuring charges: | ||||||||
| Severance and related costs | 2.0 | 3.3 | 0.7% | 1.0% | ||||
| Adjusted operating income and margins (non-GAAP) | $ | 24.4 | $ | 33.4 | 8.7% | 10.0% | ||
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A-8
AVERY DENNISON CORPORATION
PRELIMINARY SUPPLEMENTARY INFORMATION
(UNAUDITED)
| Second Quarter 2020 | ||||
| Total Company |
Label and Graphic Materials |
Retail Branding and Information Solutions |
Industrial and Healthcare Materials | |
| Reconciliation from GAAP to Non-GAAP sales change | ||||
| Reported net sales change | (14.9%) | (8.7%) | (29.5%) | (22.8%) |
| Foreign currency translation | 2.9% | 3.8% | 1.3% | 1.9% |
| Sales change ex. currency (non-GAAP)(1) | (12.0%) | (4.9%) | (28.2%) | (20.9%) |
| Acquisitions | (1.7%) | --- | (7.3%) | --- |
| Organic sales change (non-GAAP)(1) | (13.7%) | (4.9%) | (35.5%) | (20.9%) |
| Six Months Year-to-Date 2020 | ||||
| Total Company |
Label and Graphic Materials |
Retail Branding and Information Solutions |
Industrial and Healthcare Materials | |
| Reconciliation from GAAP to Non-GAAP sales change | ||||
| Reported net sales change | (8.0%) | (4.6%) | (14.7%) | (16.4%) |
| Foreign currency translation | 2.5% | 3.0% | 1.3% | 2.0% |
| Sales change ex. currency (non-GAAP)(1) | (5.5%) | (1.6%) | (13.4%) | (14.4%) |
| Acquisitions | (1.2%) | --- | (5.2%) | --- |
| Organic sales change (non-GAAP)(1) | (6.8%) | (1.6%) | (18.7%) | (14.4%) |
(1) Totals may not sum due to rounding.
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A-8
Continued
AVERY DENNISON CORPORATION
PRELIMINARY SUPPLEMENTARY INFORMATION
Monthly Sales Trends (comparison to prior year)
(UNAUDITED)
| Total Company | ||||
| March | April | May | June | |
| Reconciliation from GAAP to Non-GAAP sales change | ||||
| Reported net sales change | 2% | (18%) | (15%) | (12%) |
| Foreign currency translation | 3% | 3% | 3% | 3% |
| Sales change ex. currency (non-GAAP)(1) | 5% | (16%) | (11%) | (10%) |
| Acquisitions | (2%) | (2%) | (2%) | (2%) |
| Organic sales change (non-GAAP)(1) | 3% | (17%) | (13%) | (11%) |
| Label and Graphic Materials | ||||
| March | April | May | June | |
| Reconciliation from GAAP to Non-GAAP sales change | ||||
| Reported net sales change | 1% | (7%) | (7%) | (11%) |
| Foreign currency translation | 4% | 4% | 5% | 3% |
| Sales change ex. currency (non-GAAP)(1) | 5% | (4%) | (2%) | (8%) |
| Acquisitions | --- | --- | --- | --- |
| Organic sales change (non-GAAP)(1) | 5% | (4%) | (2%) | (8%) |
| Retail Branding and Information Solutions | ||||
| March | April | May | June | |
| Reconciliation from GAAP to Non-GAAP sales change | ||||
| Reported net sales change | 8% | (48%) | (32%) | (10%) |
| Foreign currency translation | 2% | 1% | 1% | 1% |
| Sales change ex. currency (non-GAAP)(1) | 9% | (47%) | (30%) | (9%) |
| Acquisitions | (7%) | (7%) | (7%) | (8%) |
| Organic sales change (non-GAAP)(1) | 2% | (54%) | (38%) | (17%) |
| Industrial and Healthcare Materials | ||||
| March | April | May | June | |
| Reconciliation from GAAP to Non-GAAP sales change | ||||
| Reported net sales change | (8%) | (19%) | (27%) | (22%) |
| Foreign currency translation | 3% | 2% | 2% | 2% |
| Sales change ex. currency (non-GAAP)(1) | (6%) | (17%) | (25%) | (21%) |
| Acquisitions | --- | --- | --- | --- |
| Organic sales change (non-GAAP)(1) | (6%) | (17%) | (25%) | (21%) |
(1) Totals may not sum due to rounding.
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A-9
AVERY DENNISON CORPORATION
PRELIMINARY SUPPLEMENTARY INFORMATION
($ in millions)
(UNAUDITED)
| Net Debt to Adjusted EBITDA | ||||||||||||||||||||||||||||||||
| QTD | YTD | |||||||||||||||||||||||||||||||
| 1Q19 | 2Q19 | 3Q19 | 4Q19 | 1Q20 | 2Q20 | 2Q19 | 2Q20 | |||||||||||||||||||||||||
| Net sales | $ | 1,740.1 | $ | 1,795.7 | $ | 1,761.4 | $ | 1,772.9 | $ | 1,723.0 | $ | 1,528.5 | $ | 3,535.8 | $ | 3,251.5 | ||||||||||||||||
| As reported net income (loss) | $ | (146.9 | ) | $ | 143.4 | $ | 144.6 | $ | 162.5 | $ | 134.2 | $ | 79.7 | |||||||||||||||||||
| Interest expense | 19.5 | 19.5 | 19.0 | 17.8 | 18.8 | 20.0 | ||||||||||||||||||||||||||
| Other non-operating expense, net | 446.5 | 0.9 | 0.8 | (3.0 | ) | (0.5 | ) | 0.2 | ||||||||||||||||||||||||
| Income taxes | (138.4 | ) | 44.9 | 34.6 | 2.2 | 46.3 | 22.2 | |||||||||||||||||||||||||
| Equity method investment losses | 0.9 | 0.4 | 0.7 | 0.6 | 0.4 | 1.4 | ||||||||||||||||||||||||||
| Operating income before interest expense, other non-operating expense, taxes, and equity method investment losses | $ | 181.6 | $ | 209.1 | $ | 199.7 | $ | 180.1 | $ | 199.2 | $ | 123.5 | ||||||||||||||||||||
| Non-GAAP Adjustments: | ||||||||||||||||||||||||||||||||
| Restructuring charges: | ||||||||||||||||||||||||||||||||
| Severance and related costs | $ | 10.4 | $ | 6.1 | $ | 3.3 | $ | 25.5 | $ | 2.4 | $ | 37.5 | ||||||||||||||||||||
| Asset impairment and lease cancellation charges | 0.3 | 1.4 | --- | 3.4 | --- | 1.8 | ||||||||||||||||||||||||||
| Other items | (3.2 | ) | --- | 3.4 | 2.6 | 2.5 | 0.7 | |||||||||||||||||||||||||
| Adjusted operating incomes (non-GAAP) | $ | 189.1 | $ | 216.6 | $ | 206.4 | $ | 211.6 | $ | 204.1 | $ | 163.5 | ||||||||||||||||||||
| Depreciation | 34.9 | 35.5 | 34.9 | 35.0 | 36.8 | 37.8 | ||||||||||||||||||||||||||
| Amortization | 9.6 | 9.4 | 9.1 | 10.6 | 10.7 | 12.5 | ||||||||||||||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 233.6 | $ | 261.5 | $ | 250.4 | $ | 257.2 | $ | 251.6 | $ | 213.8 | $ | 495.1 | $ | 465.4 | ||||||||||||||||
| Adjusted EBITDA margins (non-GAAP) | 13.4 | % | 14.6 | % | 14.2 | % | 14.5 | % | 14.6 | % | 14.0 | % | 14.0 | % | 14.3 | % | ||||||||||||||||
| Total Debt | $ | 2,110.2 | $ | 2,061.8 | $ | 1,997.9 | $ | 1,939.5 | $ | 2,820.3 | $ | 2,266.2 | ||||||||||||||||||||
| Less: Cash and cash equivalents | 225.7 | 247.3 | 224.2 | 253.7 | 742.0 | 262.6 | ||||||||||||||||||||||||||
| Net Debt | $ | 1,884.5 | $ | 1,814.5 | $ | 1,773.7 | $ | 1,685.8 | $ | 2,078.3 | $ | 2,003.6 | ||||||||||||||||||||
| Net Debt to Adjusted EBITDA LTM* (non-GAAP) | 2.1 | |||||||||||||||||||||||||||||||
*LTM = Last twelve months (3Q19 to 2Q20)
####
Exhibit 99.2
1 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Second Quarter 2020 Financial Review and Analysis (preliminary, unaudited) July 27, 2020 Supplemental Presentation Materials Unless otherwise indicated, comparisons are to the same period in the prior year.
2 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Safe Harbor Statement Certain statements contained in this document are "forward - looking statements" intended to qualify for the safe harbor from liab ility established by the Private Securities Litigation Reform Act of 1995. These forward - looking statements, and financial or other business targets, are subject to certain risks and uncertainties. We believe that the most significant risk factors that could affect our financial performance in the near - term include: (1) the impacts to our busin ess from global economic conditions, political uncertainty, and changes in governmental regulations, including as a result of the coronavirus/COVID - 19 pandemic; (2) competitor s' actions, including pricing, expansion in key markets, and product offerings; (3) the degree to which higher costs can be offset with productivity measures and/or pass ed on to customers through price increases, without a significant loss of volume; and (4) the execution and integration of acquisitions. Actual results and trends may differ materially from historical or anticipated results depending on a variety of factors, inc lud ing but are not limited to, risks and uncertainties relating to the following: the coronavirus/COVID - 19 pandemic; fluctuations in demand affecting sales to customers; worldwide and local economic and market conditions; changes in political conditions; fluctuations in foreign currency exchange rates and other risks associate d w ith foreign operations, including in emerging markets; changes in our markets due to competitive conditions, technological developments, laws and regulations, and customer pr eferences; fluctuations in the cost and availability of raw materials and energy; changes in governmental laws and regulations; the impact of competitive products an d p ricing; the financial condition and inventory strategies of customers; our ability to generate sustained productivity improvement; our ability to achieve and sus tai n targeted cost reductions; loss of significant contracts or customers; collection of receivables from customers; selling prices; business mix shift; execution and integrati on of acquisitions; product and service quality; timely development and market acceptance of new products, including sustainable or sustainably - sourced products; investment in d evelopment activities and new production facilities; amounts of future dividends and share repurchases; customer and supplier concentrations or consolidat ion s; fluctuations in interest and tax rates; changes in tax laws and regulations, and uncertainties associated with interpretations of such laws and regulations; retentio n o f tax incentives; outcome of tax audits; successful implementation of new manufacturing technologies and installation of manufacturing equipment; disruptions in infor mat ion 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 o bta in adequate financing arrangements and maintain access to capital; the realization of deferred tax assets; fluctuations in interest rates; compliance with our debt cov enants; fluctuations in pension, insurance, and employee benefit costs; goodwill impairment; the impact of legal and regulatory proceedings, including with respect to enviro nme ntal, health and safety, anti - corruption and trade compliance; protection and infringement of intellectual property; the impact of epidemiological events on the econo my and our customers and suppliers; acts of war, terrorism, and natural disasters; and other factors. For a more detailed discussion of the more significant of these factors, see “Risk Factors” and “Management’s Discussion and Ana lysis of Results of Operations and Financial Condition” in our 2019 Form 10 - K, filed with the Securities and Exchange Commission on February 26, 2020, and subseque nt quarterly reports on Form 10 - Q. The forward - looking statements included in this document are made only as of the date of this document, and we undertake no obli gation to update these statements to reflect subsequent events or circumstances, other than as may be required by law.
3 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Use of Non - GAAP Financial Measures This presentation contains certain non - GAAP financial measures as defined by SEC rules. We report our financial results in conf ormity with accounting principles generally accepted in the United States of America, or GAAP, and also communicate with investors using certain non - GAAP financial measures. These non - GAAP financial measures are not in accorda nce with, nor are they a substitute for or superior to, the comparable GAAP financial measures. These non - GAAP financial measures are intended to supplement presentation of our financial results that are prepared in accordan ce with GAAP. Based upon feedback from investors and financial analysts, we believe that the supplemental non - GAAP financial measures we provide are useful to their assessment of our performance and operating trends, as w ell as liquidity. In accordance with Regulations G and S - K, reconciliations of non - GAAP financial measures to the most directly comparable GAAP financial measures, including limitations associated with these non - GAAP financial measures, are provided in the financial schedules accompanying the earnings news release for the quarter (see Attachments A - 4 through A - 9 to news release dated July 27, 2020). Our non - GAAP financial measures exclude the impact of certain events, activities or decisions. The accounting effects of these events, activities or decisions, which are included in the GAAP financial measures, may make it difficult to assess our underlying performance in a single period. By excluding the accounting effects, positive or negative, of certa in items (e.g., restructuring charges, legal settlements, certain effects of strategic transactions and related costs, losses from debt extinguishments, gains or losses from curtailment or settlement of pension obligations, gains or loss es on sales of certain assets, and other items), we believe that we are providing meaningful supplemental information that facilitates an understanding of our core operating results and liquidity measures. While some of the items w e e xclude from GAAP financial measures recur, they tend to be disparate in amount, frequency, or timing. We use these non - GAAP financial measures internally to evaluate trends in our underlying performance, as well as to facilitate c omparison to the results of competitors for a single period. We use the following non - GAAP financial measures in this presentation: • Sales change ex. currency refers to the increase or decrease in net sales excluding the estimated impact of foreign currency translation, and, where ap pl icable, currency adjustment for transitional reporting of highly inflationary economies (Argentina) and reclassification of sales between segments. The estimated impact of foreign currency translation is ca lculated on a constant currency basis, with prior period results translated at current period average exchange rates to exclude the effect of currency fluctuations. • Organic sales change refers to sales change ex. currency, excluding the estimated impact of product line exits, acquisitions and divestitures, and , where applicable, the extra week in our fiscal year. We believe that sales change ex. currency and organic sales change assist investors in evaluating the sales change from the o ngo ing activities of our businesses and enhance their ability to evaluate our results from period to period. • Adjusted operating income refers to income before taxes, interest expense, other non - operating expense, and other expense, net. • Adjusted EBITDA refers to net income before interest expense, other non - operating expense, taxes, equity method investment losses, other expens e, net, and depreciation and amortization. • Adjusted operating margin refers to adjusted operating income as a percentage of net sales. • Adjusted EBITDA margin refers to adjusted EBITDA as a percentage of net sales. • Adjusted tax rate refers to the projected full - year GAAP tax rate, adjusted to exclude certain unusual or infrequent events that are expected to s ignificantly impact that rate, such as our U.S. pension plan termination, effects of certain discrete tax planning actions, impacts related to the enactment of the U.S. Tax Cuts and Jobs Act ("TCJA"), where app lic able, and other items. • Adjusted net income refers to income before taxes, tax - effected at the adjusted tax rate, and adjusted for tax - effected restructuring charges and o ther items. • Adjusted net income per common share, assuming dilution (adjusted EPS) refers to adjusted net income divided by weighted average number of common shares outstanding, assuming dilution. We believe that adjusted operating margin, adjusted EBITDA margin, adjusted net income, and adjusted EPS assist investors in und erstanding our core operating trends and comparing our results with those of our competitors. • Net debt to adjusted EBITDA ratio refers to total debt (including finance leases) less cash and cash equivalents, divided by adjusted EBITDA. We believe that t he net debt to adjusted EBITDA ratio assists investors in assessing our leverage position. • Free cash flow refers to cash flow provided by operating activities, less payments for property, plant and equipment, software and other def er red charges, plus proceeds from sales of property, plant and equipment, plus (minus) net proceeds from insurance and sales (purchases) of investments. Free cash flow is also adjusted for, where applicable, the cas h contributions related to the termination of our U.S. pension plan. We believe that free cash flow assists investors by showing the amount of cash we have available for debt reductions, dividends, share repurchases, and acqu isi tions. This document has been furnished (not filed) on Form 8 - K with the SEC and may be found on our website at www.investors.averydenn ison.com.
4 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Actively managing dynamic environment through robust scenario planning and strong execution ● Safety and well - being of employees remains our top priority during continuing global health crisis ● Q2 revenue better than expected, though overall demand trends playing out largely as anticipated ○ Label & Packaging Materials (LPM) flat to prior year, as NA/EU volume surge during early stage of pandemic was partially offset by subsequent slowdown, and emerging markets declined, especially in South Asia ○ Sharp declines in April in RBIS and Graphics were followed by better - than - expected sequential improvement ● Executing well against cost saving plans, both structural and temporary ○ Now targeting $60 mil. to $70 mil. of net restructuring savings + ~$150 mil. of temporary savings in 2020 ● Strong balance sheet (net debt to adj. EBITDA ratio of 2.1) and ample liquidity ● Anticipate Q3 sales decline ex. currency of 5% to 9% (organic sales decline of 7% to 11%) ● Free cash flow strong across wide range of scenarios… targeting ~$500 mil. for 2020 ● Strategic priorities are unchanged; ringfencing key investments in high value categories, including RFID, while driving long - term profitable growth in the base
5 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Second Quarter Review Reported EPS of $0.95; adj. EPS (non - GAAP) of $1.27, above our expectations in April ● Reported sales declined 14.9% ○ Sales change ex. currency (non - GAAP) of (12.0%) ○ Organic sales change (non - GAAP) of (13.7%) ○ Solid sequential improvement through the quarter overall, driven by RBIS and Graphics ● Reported operating margin down 350 bps to 8.1% ○ Adj. EBITDA margin (non - GAAP) down 60 bps to 14.0% ○ Adj. operating margin (non - GAAP) down 140 bps to 10.7% ● YTD free cash flow of $109 mil. LGM expanded adj. operating margin by 100 bps despite top line challenge; sales down 5% organically, reflecting combined Graphics and Reflective Solutions decline of ~30% RBIS sales down 36% organically due to closure of retail stores and apparel manufacturing hubs; modestly positive adj. operating income, as expected, as relatively high variable margin was partially offset by aggressive cost management IHM sales down 21% organically on reduced industrial demand, most notably in automotive
6 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Operations / Market Update in Light of COVID - 19 Label and Graphic Materials (LGM) 67% of 2019 sales Retail Branding and Info. Solutions (RBIS) 23% of 2019 sales Industrial and Healthcare Materials (IHM) 10% of 2019 sales ● Most plants operational throughout crisis, with exception of sites in India, which are now up and running ● LPM volume surge in NA/EU mid - March through April, driven by food, hygiene, and pharmaceutical product labeling, as well as variable information (e.g., e - commerce labels), followed by slowdown in June. Portion of volume surge and subsequent slowdown due to inventory build/destocking throughout supply chain ● Though China demand for label materials improved following decline in Jan/Feb, balance of emerging markets deteriorated as lockdowns spread across the globe and continued through much of Q2, with India particularly hard hit early in the quarter ● Sharp decline in demand for Graphics & Reflective Solutions and material for durable label applications (e.g., consumer appliances, tires, etc.) beginning in March; sequential improvement monthly since April ● Government - mandated closures continued to impact operations in many countries during April and first few weeks of May; [all] sites now operational ○ Our global footprint providing significant competitive advantage during pandemic; key to meeting retailer/brand owner needs as they ramp back up (Smartrac acquisition further strengthening our advantage) ● Sharp decline in demand from apparel retailers and brands, reflecting widespread closure of malls and other retail outlets ● Enterprise - wide sales of RFID products up over 10% ex. currency in Q2 with benefit of Smartrac acquisition; down 20% organically, as increased penetration of market was more than offset by decline in existing programs tied to apparel ○ Project pipeline continues to expand (engagements up >35% since start of year) ○ Current environment underscoring value of RFID as key technology to improve supply chains and support customer automation over the long - term ● All plants now operational, some with limited production ● Demand for industrial categories (~60% of IHM sales in 2019) weakened further during Q2 reflecting global decline in industrial production (though timing for our business impacted by customers building some inventory in early stages of pandemic due to supply chain uncertainty) ● Medical division (~15% of IHM sales in 2019), historically focused on advanced wound care, has commercialized new personal protective equipment (PPE) solutions to address urgent need 1
7 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Q2 LGM (5%) RBIS (36%) IHM (21%) Total Company (14%) Monthly Organic Sales Trends (comparison to prior year)
8 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Agile teams effectively managing through crisis Ensuring Safety and Well - being of Our Team ● Continue to adapt safety protocols based on new information; focus has shifted to ensuring safe “back to work” environment ● During initial weeks of facility closures, company ensured that employees continued to receive full pay ● Extended salary continuation in jurisdictions with weaker social safety nets Meeting Customer Needs ● Adapted quickly to manage peak demand in label materials, as well as to address migration of lockdowns impacting RBIS customers ● Leveraged operational excellence to maximize production capacity in label materials ● Successfully executing large new RFID rollouts ● Developed N95 masks which are being rapidly commercialized Supporting Our Communities ● Shifted resources to produce PPE and hand sanitizer to donate to local communities ● Avery Dennison Foundation increasing grants to provide employee assistance and rapid community response Mitigating Supply Chain Risk ● Partnered with suppliers (and customers) to keep supply chains open (essential business) ● Negligible disruptions to supply chain throughout pandemic ● Global footprint with dual sourcing or available alternatives for most commodities ● Selective strategic inventory build Enabling Financial Flexibility ● Curtailed capital spending plans by ~$55 mil.; heightened focus on working capital management ● Initial $500 mil. drawdown of revolver in Q1 to mitigate dependence on CP markets (repaid in Q2 as CP markets stabilized) ● Maintaining dividend rate ● Temporary pause on share repurchases
9 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Broad exposure to diverse end markets, with ~60% tied to non - durable consumer goods, logistics & shipping, and medical products 2019 Sales by Product Category Non - durable consumer goods Retail Apparel Industrial / Durable Logistics, Shipping, & Other Variable Information Medical / Healthcare Non - durable Consumer Goods Vast majority of these sales tied to labeling of food, beverage, and home and personal care (HPC) products. Growth catalysts: Emerging markets (increased use of packaged goods with rising middle class) and labeling technology shifts to pressure - sensitive Logistics, Shipping & Other Variable Information Growth catalysts: Increase in e - commerce benefits our businesses serving variable information needs, including non - apparel RFID Retail Apparel Industrial / Durable “Discretionary staple”. Cyclical. Growth catalyst: expansion Growth catalyst: shift from of omni - channel retailing mechanical to adhesive - based fastening
10 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Diversified geographic exposure 2019 Sales by Manufacturing Location 2019 Sales by End Market, estimated (1) Other includes Canada, South Africa, Australia, and New Zealand U.S. Western Europe China Other Asia (ex - China) E. Europe & MENA Latin America Other (1)
11 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Our businesses are resilient through economic cycles * Externally reported organic growth by segment has been adjusted to reflect divestitures and transfers between segments. Organic growth trends* during 2009/2010
12 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Key Cost Saving Initiatives ● Continuing to execute long - term, strategic restructuring plans, reflecting our relentless focus on productivity ● Temporary sources of cost savings to weather the downturn: ○ Short - term belt - tightening actions (travel reduction, no trade shows, etc.) ○ Actions focused on businesses experiencing significant decline in demand: ■ Temporary production shutdowns ■ Overtime / temp reductions ■ Shift reductions / furloughs, including payroll costs covered by government incentives outside the US ■ Salary increase delay / headcount freeze ○ Incentive compensation Anticipate savings from restructuring actions, net of transition costs, of $60 mil. to $70 mil.... carryover savings of ~$70 mil. anticipated for 2021 (up ~$10 mil. since April outlook for both 2020 and 2021) Targeting net temporary savings vs. 2019 of ~$150 mil. in 2020, the vast majority of which would be expected to be a headwind as markets recover; over half of FY targeted temporary savings have been realized in the first half of the year (largely in Q2)
13 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Strong Balance Sheet and Ample Liquidity Leverage @ 6/27/20 Total Debt Outstanding $2.27 B Cash and cash equivalents $0.26 B Net Debt $2.00 B Adjusted EBITDA, trailing 4 qtrs $0.97B Net Debt to Adj. EBITDA (non - GAAP) 2.1 X Debt / Liquidity Considerations Long - Term Debt Maturity Schedule @ 6/27/20 ● Ample liquidity: $800 mil. available under revolving credit facility (through 2025), plus ~$260 mil. in cash and cash equivalents at quarter - end ● Laddered long - term debt: Completed $500 mil. debt offering in March, as planned. Next maturity in 2023 ● No foreseeable covenant constraints Near - term capital allocation priorities conserve cash while supporting long - term value creation goals: ● Ringfencing investments in high value categories ● Curtailed original (pre - COVID - 19) 2020 capital spending plans by ~$55 mil., while heightening focus on working capital management ● Maintaining dividend rate; continued temporary pause on share repurchases in Q2 * 500M Euro bond converted to USD at 1.10x + $30M medium term note Wtd avg interest cost of 2.9%
14 July 27, 2020 Second Quarter 2020 Financial Review and Analysis ● Lower sales due principally due to declining volumes and currency translation, with trough in Q2: ○ Anticipate Q3 sales decline ex. currency of 5% to 9% (organic sales decline of 7% to 11%) ○ Currency translation headwinds at recent rates of ~2% for both Q3 and FY ● Currency translation headwind to FY operating income of ~$18 mil. at recent rates (down ~$10 mil. since April outlook) ● Incremental savings of $60 mil. to $70 mil. from restructuring actions, net of transition costs (up $10 mil. since April outlook). Additional net temporary savings vs. 2019 of ~$150 mil. ● Full year adjusted tax rate in the mid - twenty percent range ● Targeting free cash flow of ~$500 mil. ○ Fixed and IT capital spend of $165 mil. to $175 mil. ○ Cash impact of restructuring charges now ~$60 mil. 2020 Outlook
15 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Q2 Results Detail
16 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Quarterly Sales Trend Analysis 2Q19 3Q19 4Q19 1Q20 2Q20 Reported Sales Change (3.2%) 0.1% 0.2% (1.0%) (14.9%) Organic Sales Change 1.6% 2.1% 2.1% 0.3% (13.7%) Acquisitions 0.7% 1.7% Sales Change Ex. Currency* 1.6% 2.1% 2.1% 1.0% (12.0%) Currency Translation (4.7%) (2.0%) (1.9%) (1.9%) (2.9%) Reported Sales Change* (3.2%) 0.1% 0.2% (1.0%) (14.9%) *Totals may not sum due to rounding.
17 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Second Quarter Sales Change and Operating Margin Comparison Reported Adjusted (Non - GAAP) Operating Margin 2Q20 2Q19 2Q20 2Q19 Label and Graphic Materials 12.5% 13.4% 14.8% 13.8% Retail Branding and Information Solutions (3.6%) 12.0% 0.7% 12.5% Industrial and Healthcare Materials 5.7% 9.6% 6.8% 10.5% Total Company 8.1% 11.6% 10.7% 12.1% 2Q20 Sales Change Reported Ex. Currency Organic Label and Graphic Materials (8.7%) (4.9%) (4.9%) Retail Branding and Information Solutions (29.5%) (28.2%) (35.5%) Industrial and Healthcare Materials (22.8%) (20.9%) (20.9%) Total Company (14.9%) (12.0%) (13.7%)
18 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Label and Graphic Materials ● Reported sales declined 9% to $1.10 bil. ● Sales were down 5% on an organic basis, driven largely by volume/mix ○ Label and Packaging Materials unchanged from prior year as modest growth in the base and specialty label categories was offset by a mid - teens decline for durable label categories ○ Combined Graphics and Reflective Solutions down ~30% ○ North America down low - single digits, Western Europe down mid - single digits where Graphics represents larger share of total business, and emerging markets down high - single digits ● Reported operating margin decreased 90 basis points to 12.5% reflecting higher restructuring charges ○ Adjusted operating margin increased 100 basis points to 14.8%, as the benefits of productivity, including material reengineering and net restructuring savings, as well as raw material deflation, net of pricing, more than offset unfavorable volume/mix 2019 Sales by Product Base Label Specialty / Durables Graphics Reflectives 2019 Sales by Geography U.S. Western Europe Asia Pacific Latin America E. Europe & MENA 18 High Value Categories ~37% Emerging Markets ~39%
19 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Retail Branding and Information Solutions ● Reported sales declined 30% to $295 mil. ● Sales were down 28% ex. currency, and down 36% on an organic basis ○ Base business down ~40% organically, driven by site closures and lower apparel demand ○ Enterprise - wide sales of RFID products were up over 10% ex. currency with benefit of Smartrac acquisition; down 20% organically, as increased penetration of market was more than offset by decline in existing programs tied to apparel ● Strong sequential improvement in demand every month since April ● Reported operating margin declined to (3.6%), including the impact of significantly higher restructuring charges ○ Adjusted operating margin declined roughly 12 points to 0.7%, reflecting reduced fixed cost leverage in this high variable margin business, which was partially offset by aggressive cost control measures 2019 Sales by Geography (end markets, estimated) U.S. Europe Asia Pacific Others 2019 Sales by Product Apparel Tags & Labels RFID Ext. Embellishment PSD (ex. RFID) High Value Categories ~27% 19
20 July 27, 2020 Second Quarter 2020 Financial Review and Analysis Industrial and Healthcare Materials ● Reported sales declined 23% to $132 mil. ● Sales declined 21% on an organic basis ○ ~30% decline in industrial categories driven by automotive ○ Healthcare categories relatively unchanged from prior year ● Demand trend somewhat choppy during quarter, as customers worked off inventory that they had built during early weeks of pandemic due to supply chain uncertainty ● Reported operating margin decreased 390 basis points to 5.7%, including slightly higher restructuring charges ○ Adjusted operating margin decreased 370 basis points to 6.8% due to reduced fixed cost leverage, partially offset by productivity 2019 Sales by Product Automotive Other Industrial Healthcare Retail 2019 Sales by Geography U.S. Europe Asia Pacific Latin America High Value Categories ~74% 20
21 July 27, 2020 Second Quarter 2020 Financial Review and Analysis © 2020 Avery Dennison Corporation. All rights reserved. Avery Dennison and all other Avery Dennison brands, product names and co des are trademarks of Avery Dennison Corporation. All other brands or product names are trademarks of their respective owners. Fortune 500® is a trademark of Time, Inc. Branding and other information on any samples depicted is fictitious. Any resemblance to actual names is purely coincidental. Thank you