July 28, 2020, 4:25 p.m. EDT

10-Q: AVERY DENNISON CORP

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

NON-GAAP FINANCIAL MEASURES

We report our financial results in conformity with accounting principles generally accepted in the United States of America, or GAAP, and also communicate with investors using certain non-GAAP financial measures. These non-GAAP financial measures are not in accordance with, nor are they a substitute for or superior to, the comparable GAAP financial measures. These non-GAAP financial measures are intended to supplement 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 assessments 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 this MD&A:

Sales change ex. currency refers to the increase or decrease in net sales, excluding the estimated impact of foreign currency translation, and, where applicable, currency adjustment for transitional reporting of highly ? inflationary economies (Argentina). Segment results are also adjusted for 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, an 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.

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 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.

Operational working capital as a percentage of annualized current quarter net sales refers to trade accounts receivable and inventories, net of accounts payable, and excludes cash and cash equivalents, short-term borrowings, deferred taxes, other current assets and other current liabilities, as well as net current assets or liabilities held-for-sale divided by annualized current quarter net sales. We believe that operational working capital as a percentage of annualized current quarter net sales assists investors in assessing our ? working capital requirements because it excludes the impact of fluctuations attributable to our financing and other activities (which affect cash and cash equivalents, deferred taxes, other current assets, and other current liabilities) that tend to be disparate in amount, frequency, or timing, and that may increase the volatility of working capital as a percentage of sales from period to period. The items excluded from this measure are not significantly influenced by our day-to-day activities managed at the operating level and do not necessarily reflect underlying trends in our operations.

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Avery Dennison Corporation

OVERVIEW AND OUTLOOK

COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of coronavirus/COVID-19 (collectively referred to herein as "COVID-19") a pandemic, which has continued to spread throughout the U.S. and the world, resulting in governmental authorities implementing numerous containment measures, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns.

The safety and well-being of our employees has been and will continue to be our top priority during this global crisis, followed immediately by continuing to deliver high quality products and service to our customers. We created global, regional, and local emergency response teams to manage immediate priorities, recognizing that some of our businesses serve a critical role in supply chains for essential goods such as food, hygiene, and pharmaceutical products, as well as e-commerce. To support the health and well-being of our employees, customers, partners and communities, the majority of our office-based employees are working remotely and some of our operations limited production or ceased operations for short periods of time. We leveraged learnings from our early experience in China to develop safety protocols for our manufacturing facilities to re-open and/or remain operational, and established work-from-home protocols for office workers. To support the well-being of our employees, we ensured that they continued to receive full pay during the initial weeks of facility closures, and, where closures were later extended in jurisdictions with weaker social safety nets, particularly in our Retail Branding and Information Solutions ("RBIS") reportable segment, provided longer periods of salary continuation.

To meet our customer needs during periods of peak demand for label and packaging materials in North America and Europe, we took a number of steps to reduce backlogs, including leveraging our operational excellence to maximize production capacity, providing pay premiums for certain hourly employees, and temporarily allocating a portion of coating assets that normally support our graphics business to manufacture material for labels.

Overall, we have experienced negligible disruptions to our supply chain. As the largest customer for many of our suppliers, we have been able to secure continuity of material supply, while benefitting from our global footprint with dual sourcing for most commodities. We have also strategically built inventory of some key products to enhance our ability to meet customer needs during this period of supply chain uncertainty.

Overall, the pandemic had a negative impact on our consolidated financial results for the second quarter of 2020 with, among other things, total net sales for the quarter down approximately 15% from the same period last year. While our label and packaging materials largely serve essential categories and experienced higher demand as a result of the pandemic in mid-March through May, demand slowed late in the second quarter. Sales of graphics products as well as sales in our RBIS reportable segment declined significantly in April due to lower demand, though we experienced sequential improvement in both May and June. Additionally, sales in our Industrial and Healthcare Materials ("IHM") reportable segment significantly declined mainly due to reduced industrial demand, particularly in automotive end markets.

We expect that the pandemic will have a negative impact for the full year 2020.

We continue to execute various long-term productivity and temporary cost saving actions to manage the downturn. These include deferrals of planned compensation increases, hiring freezes, overtime and temporary labor reductions, shift reductions and furloughs, temporary production shutdowns, and travel and other discretionary spending reductions. While our balance sheet is strong and we have ample liquidity, during the first quarter of 2020, we drew down $500 million under our $800 million revolving credit facility ("Revolver") because the commercial paper markets were temporarily unavailable as a result of the pandemic. During the second quarter, we were able to access commercial paper markets and repaid the entire $500 million we had drawn down from our Revolver.

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Avery Dennison Corporation

We continue to actively monitor this situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders.







        Net Sales
        The factors impacting reported net sales change, as compared to the prior-year
        period, are shown in the table below.
                                        Three Months Ended    Six Months Ended
                                             June 27, 2020       June 27, 2020
        Reported sales change                         (15) %               (8) %
        Foreign currency translation                     3                   2
        Sales change ex. currency                     (12)                 (6)
        Acquisitions                                   (2)                 (1)
        Organic sales change                          (14) %               (7) %
        


In the three and six months ended June 27, 2020, net sales decreased on an organic basis compared to the same period in the prior year primarily due to the effects of COVID-19 on our markets and customers.

Net Income (Loss)

Net income was $214 million in the first six months of 2020 compared to a net loss of $3.5 million in the same period last year. Major factors affecting the change in net income (loss) included the following:

? Prior-year settlement loss from pension termination

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

? Net impact of pricing and raw material input costs

? Lower employee-related costs, including lower incentive compensation costs

Offsetting factors:

? Lower sales primarily due to the effects of COVID-19

? Higher restructuring charges

? Increased allowance for credit losses primarily as a result of COVID-19

? Impact of foreign currency translation

Acquisition

On February 28, 2020, we completed the acquisition of Smartrac's Transponder (RFID Inlay) division ("Smartrac"), a manufacturer of radio-frequency identification ("RFID") products, for consideration, subject to customary adjustments, of approximately $255 million (?232 million), $4.9 million of which was payable as of June 27, 2020. We believe this acquisition enhances our research and development capabilities, expands product lines, and provides added manufacturing capacity. Consistent with the time allowed to complete our assessment, the valuation of certain acquired assets and liabilities, including intangible assets, environmental liabilities and income taxes, is preliminary. This acquisition was not material to our unaudited Condensed Consolidated Financial Statements.

Cost Reduction Actions

2019/2020 Actions

During the six months ended June 27, 2020, we recorded $41.9 million in restructuring charges related to our 2019/2020 actions. These charges consisted of severance and related costs for the reduction of approximately 1,750 positions from numerous locations across our company, which primarily included actions in our LGM and RBIS reportable segments. The actions in LGM were primarily associated with the consolidation of our graphics business in Europe, partially in response to COVID-19. The actions in RBIS were primarily related to global headcount and footprint reduction, with some actions accelerated and expanded in response to COVID-19.

2018/2019 Actions

During the six months ended June 27, 2020, we recorded $.2 million in net restructuring reversals related to our 2018/2019 actions.

Restructuring charges were included in "Other expense, net" in the unaudited Condensed Consolidated Statements of Operations. Refer to Note 6, "Cost Reduction Actions," to the unaudited Condensed Consolidated Financial Statements for more information.

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Avery Dennison Corporation

U.S. Pension Plan Termination

In connection with its termination in 2019, we settled approximately $753 million of liabilities of the Avery Dennison Pension Plan (the "ADPP") by entering into an agreement to purchase annuities primarily from American General Life Insurance Company and through a combination of annuities and direct funding to the Pension Benefit Guaranty Corporation for a small portion of former employees and their beneficiaries.

Accounting Guidance Updates

Refer to Note 1, "General," to the unaudited Condensed Consolidated Financial Statements for this information.







        Cash Flow
                                                                               Six Months Ended
        (In millions)                                                   June 27, 2020      June 29, 2019
        Net cash provided by operating activities                     $         184.0    $         238.8
        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                       .1                7.4
        Proceeds from insurance and sales (purchases) of
        investments, net                                                         (.4)                4.3
        Contributions for pension plan termination                                  -                7.4
        Free cash flow                                                $         108.8    $         165.1
        


During the first six months of 2020, net cash provided by operating activities decreased compared to the same period last year primarily due to the impact of COVID-19 on net income and operational working capital, partially offset by lower pension plan contributions and lower severance payments related to restructuring actions. Also, during the first six months of 2020, free cash flow decreased compared to the same period last year due to a decrease in net cash provided by operating activities, lower proceeds from sales of property, plant and equipment and lower proceeds from sales of investments, partially offset by a decrease in purchases of property, plant and equipment as a result of COVID-19 and reduced purchases of software and other deferred charges.

Outlook

Certain factors that we believe may contribute to our 2020 results are described below:

? We expect sales and earnings to decline in 2020 as a result of COVID-19, although the amounts of these declines are uncertain at this time.

? We anticipate partially offsetting the negative impact of COVID-19 on volume with approximately $150 million of net temporary cost savings.

? We estimate cash restructuring charges of approximately $60 million.

? We anticipate incremental savings from restructuring actions, net of transition costs, of $60 million to $70 million.

? We expect our full year effective tax rate to be in the mid-twenty percent range.

Based on recent foreign currency exchange rates, we expect foreign currency ? translation to reduce net sales by approximately 2% and our operating income by approximately $15 million.

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                                                              Avery Dennison Corporation
        ANALYSIS OF RESULTS OF OPERATIONS FOR THE SECOND QUARTER
        Income Before Taxes
                                                                 Three Months Ended
        (In millions, except percentages)                  June 27, 2020      June 29, 2019
        Net sales                                        $       1,528.5    $       1,795.7
        Cost of products sold                                    1,145.6            1,313.4
        Gross profit                                               382.9              482.3
        Marketing, general and administrative expense              219.4              265.7
        Other expense, net                                          40.0                7.5
        Interest expense                                            20.0               19.5
        Other non-operating expense, net                              .2                 .9
        Income (loss) before taxes                       $         103.3    $         188.7
        Gross profit margin                                         25.1 %             26.9 %
        


Gross Profit Margin

Gross profit margin for the second quarter of 2020 decreased compared to the same period last year primarily reflecting reduced fixed cost leverage and unfavorable product mix, partially offset by the net benefit of pricing and raw material input costs and benefits from productivity initiatives, including material re-engineering and savings from restructuring actions, net of transition costs.

Marketing, General and Administrative Expense

Marketing, general and administrative expense decreased in the second quarter of 2020 compared to the same period last year primarily due to benefits from productivity initiatives, including savings from restructuring actions, net of transition costs, and lower employee-related costs, including lower incentive compensation costs.







        Other Expense, Net
                                                         Three Months Ended
        (In millions)                             June 27, 2020        June 29, 2019
        Other expense (income), net, by type
        Restructuring charges:
        Severance and related costs             $          37.5      $           6.1
        Asset impairment charges                            1.8                  1.4
        Other items:
        Transaction and related costs                        .7                    -
        Other expense, net                      $          40.0      $           7.5
        


Refer to Note 6, "Cost Reduction Actions," to the unaudited Condensed Consolidated Financial Statements for more information regarding restructuring charges.

Interest Expense

Interest expense increased slightly in the second quarter of 2020 compared to the same period last year primarily reflecting the impact of additional interest and fees associated with drawdowns from our Revolver.

Other Non-Operating Expense, Net

Other non-operating expense decreased in the second quarter of 2020 compared to the same period last year primarily due to lower pension costs.

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                                                              Avery Dennison Corporation
        Net Income and Earnings per Share
                                                                             Three Months Ended
        (In millions, except per share amounts and percentages)        June 27, 2020       June 29, 2019
        Income (loss) before taxes                                   $         103.3     $         188.7
        Provision for (benefit from) income taxes                               22.2                44.9
        Equity method investment losses                                        (1.4)                (.4)
        Net income (loss)                                            $          79.7     $         143.4
        Per share amounts:
        Net income (loss) per common share                           $           .96     $          1.70
        Net income (loss) per common share, assuming dilution                    .95                1.69
        Effective tax rate                                                      21.5 %              23.8 %
        


Provision for Income Taxes

Our effective tax rate for the three months ended June 27, 2020 was 21.5% compared to 23.8% in the same period last year. The decrease in tax rate was primarily due to higher discrete benefits related to effective settlements of certain foreign tax audits in 2020. Refer to Note 8, "Taxes Based on Income," to the unaudited Condensed Consolidated Financial Statements for more information.

RESULTS OF OPERATIONS BY REPORTABLE SEGMENT FOR THE SECOND QUARTER

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







        Label and Graphic Materials
                                                                              Three Months Ended
        (In millions)                                                   June 27, 2020      June 29, 2019
        Net sales including intersegment sales                        $       1,114.4    $       1,226.4
        Less intersegment sales                                                (12.9)             (20.1)
        Net sales                                                     $       1,101.5    $       1,206.3
        Operating income(1)                                                     137.5              162.1
        (1)Included charges associated with restructuring actions
        in both years                                                 $          25.8    $           4.4
        








        Net Sales
        The factors impacting reported net sales change are shown in the table below.
                                        Three Months Ended
                                             June 27, 2020
        Reported sales change                          (9) %
        Foreign currency translation                     4
        Sales change ex. currency                      (5)
        Acquisitions                                     -
        Organic sales change                           (5) %
        


In the second quarter of 2020, net sales decreased on an organic basis compared to the same period in the prior year primarily due to unfavorable volume/mix.

Operating Income

Operating income decreased in the second quarter of 2020 compared to the same period last year primarily due to unfavorable volume/mix and higher restructuring charges, partially offset by benefits from productivity initiatives, including material re-engineering and savings from restructuring actions, net of transition costs, and benefits from raw material deflation, net of pricing.

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                                                              Avery Dennison Corporation
        Retail Branding and Information Solutions
                                                                              Three Months Ended
        (In millions)                                                   June 27, 2020      June 29, 2019
        Net sales including intersegment sales                        $         300.5    $         423.3
        Less intersegment sales                                                 (5.6)              (5.0)
        Net sales                                                     $         294.9    $         418.3
        Operating (loss) income(1)                                             (10.7)               50.4
        (1)Included charges associated with restructuring actions
        in both years and transaction and related costs in 2020       $          12.9    $           1.7
        








        Net Sales
        The factors impacting reported net sales change are shown in the table below.
                                        Three Months Ended
                                             June 27, 2020
        Reported sales change                         (30) %
        Foreign currency translation                     1
        Sales change ex. currency(1)                  (28)
        Acquisitions                                   (7)
        Organic sales change(1)                       (36) %
        


(1)Total does not sum due to rounding

In the second quarter of 2020, net sales decreased ex. currency compared to the same period in the prior year due to a decline of approximately 40% in the base business due to temporary closures of apparel manufacturing sites and lower demand for apparel, partially offset by a 10% increase in RFID solutions in the segment including the benefit of the Smartrac acquisition. On an organic basis, sales in the segment related to RFID solutions decreased by more than 20%.

Operating Income

Operating income decreased in the second quarter of 2020 compared to the same period last year primarily due to lower volume, partially offset by benefits from productivity initiatives, including savings from restructuring actions, net of transition costs, and lower employee-related costs, including lower incentive compensation costs.







        Industrial and Healthcare Materials
                                                                                   Three Months Ended
        (In millions)                                                        June 27, 2020       June 29, 2019
        Net sales including intersegment sales                             $         133.3     $         174.0
        Less intersegment sales                                                      (1.2)               (2.9)
        Net sales                                                          $         132.1     $         171.1
        Operating income(1)                                                            7.5                16.5
        (1)Included charges associated with restructuring in both years    $           1.5     $           1.4
        


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. . .

Jul 28, 2020

COMTEX_368556924/2041/2020-07-28T16:25:27

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