# Avery Dennison Corp (AVY) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from Avery Dennison Corp's 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/8818/000119312522049910/d179463d10k.htm Accession: 0001193125-22-049910 Filing date: 2022-02-23 Report date: 2022-01-01 Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference. Source document followed from filing index: d179463dex13.htm. Confidence: high Company profile: /company/AVY/ All MD&A years: /company/AVY/mda/ Next year: /company/AVY/mda/fy2022/ (FY 2022) Management’s Discussion and Analysis of Financial Condition and Results of Operations ORGANIZATION OF INFORMATION Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, provides management’s views on our financial condition and results of operations, should be read in conjunction with the accompanying Consolidated Financial Statements and notes thereto, and includes the sections identified below. [[GREPCENT_TABLE]] [["Non-GAAP Financial Measures","","","3"],["Overview and Outlook","","","4"],["Analysis of Results of Operations","","","6"],["Results of Operations by Reportable Segment","","","8"],["Financial Condition","","","9"],["Critical Accounting Estimates","","","15"],["Recent Accounting Requirements","","","18"],["Market-Sensitive Instruments and Risk Management","","","18"]] [[/GREPCENT_TABLE]] 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 the presentation of our financial results that are prepared in accordance with GAAP. Based on 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 strategic decisions. The accounting effects of these events, activities or decisions, which are included in the GAAP financial measures, may make it difficult to assess our underlying performance in a single period. By excluding the accounting effects, positive or negative, of certain items (e.g., restructuring charges, outcomes of certain legal proceedings, 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, gains or losses on venture investments 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 quarters and year-to-date periods, as applicable. We use the non-GAAP financial measures described below in this MD&A. [[GREPCENT_TABLE]] [["","\u2022","","Sales change ex. currency refers to the increase or decrease in net sales, excluding the estimated impact of foreign currency translation, and, where applicable, an extra week in our fiscal year and the calendar shift resulting from the extra week in the prior fiscal year and currency adjustment for transitional reporting of highly inflationary economies. 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."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Organic sales change refers to sales change ex. currency, excluding the estimated impact of acquisitions and product line divestitures."]] [[/GREPCENT_TABLE]] 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. [[GREPCENT_TABLE]] [["","\u2022","","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, certain acquisition-related transaction costs and 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."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","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"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Avery Dennison Corporation","","|","","2021 Annual Report","","","","","","3"]] [[/GREPCENT_TABLE]] Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations [[GREPCENT_TABLE]] [["","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 may increase the volatility of working capital as a percentage of sales from period to period. The items excluded from this measure are not significantly influenced by our day-to-day activities managed at the operating level and do not necessarily reflect the underlying trends in our operations."]] [[/GREPCENT_TABLE]] OVERVIEW AND OUTLOOK Operational and Market Update Our operations largely recovered in 2021 from the prior-year impact of the COVID-19 pandemic, with higher volume across our businesses. Uncertainty surrounding the global health crisis remained elevated in 2021 as many parts of the world experienced an increased number of COVID-19 cases at some point during the year. The greatest impact to our company was in Southeast Asia, particularly in our Retail Branding and Information Solutions (“RBIS”) reportable segment. The safety and well-being of employees has been and continues to be our top priority. We have taken steps to ensure employee safety, quickly implementing world-class safety protocols and continuing to adapt our guidelines as the pandemic continues to evolve. Where appropriate, we may take further actions required by international, federal, state or local authorities or that we determine are in the best interests of our employees, customers, shareholders and communities. We worked to actively manage through a dynamic supply and demand environment in which demand across the majority of businesses and regions was strong, while raw material, freight and labor availability was constrained. Inflation was persistent and we implemented pricing and material re-engineering actions to offset higher costs. We also leveraged our global scale, working closely with customers and suppliers to minimize disruptions and demonstrating agility and preparedness through robust scenario planning. Fiscal Year Our fiscal years generally consist of 52 weeks, but every fifth or sixth fiscal year consists of 53 weeks; our 2021 and 2019 fiscal years consisted of 52-week periods ending January 1, 2022 and December 28, 2019, respectively. Our 2020 fiscal year consisted of a 53-week period ending January 2, 2021. Net Sales The factors impacting the reported sales change are shown in the table below. [[GREPCENT_TABLE]] [["","","2021","","","2020"],["Reported sales change","","","21","%","","","(1",")%"],["Foreign currency translation","","","(3",")","","","1"],["Extra week impact","","","1","","","","(1",")"],["Sales change ex. currency(1)","","","19","%","","","(2",")%"],["Acquisitions and product line divestitures","","","(3",")","","","(2",")"],["Organic sales change(1)","","","16","%","","","(3",")%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Totals may not sum due to rounding"]] [[/GREPCENT_TABLE]] In 2021, net sales increased on an organic basis primarily due to higher volume/mix and recovery from the prior-year impact of COVID-19. In 2020, net sales decreased on an organic basis primarily due to the impact of COVID-19 on our markets and customers. Net Income Net income increased from approximately $556 million in 2020 to approximately $740 million in 2021. The major factors affecting this increase in net income were: [[GREPCENT_TABLE]] [["","\u2022","","Higher volume/mix"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Lower restructuring charges"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Favorable currency translation"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Benefits from productivity initiatives, including savings from restructuring actions, net of transition costs"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Benefit from the Brazil indirect tax credit"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Lower allowance for credit losses"]] [[/GREPCENT_TABLE]] Offsetting factors: [[GREPCENT_TABLE]] [["","\u2022","","Higher employee-related costs"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Impact of prior-year temporary cost reduction actions"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Net impact of higher selling prices, higher raw material costs, and higher freight costs"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Higher income tax provision"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Growth investments"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Contingent liability related to patent infringement litigation"]] [[/GREPCENT_TABLE]] Acquisitions Vestcom Acquisition On August 31, 2021, we completed our acquisition of Vestcom, an Arkansas-based provider of shelf-edge pricing, productivity and consumer engagement solutions for retailers [[GREPCENT_TABLE]] [["4","","","","2021 Annual Report","","|","","Avery Dennison Corporation"]] [[/GREPCENT_TABLE]] Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations and consumer packaged goods companies, for purchase consideration of $1.47 billion. We funded this acquisition using a combination of cash and proceeds from commercial paper borrowings and issuances of senior notes. Refer to Note 4, “Debt,” to the Consolidated Financial Statements for more information. We believe Vestcom’s solutions expand our position in high value categories while adding channel access and data management capabilities to our RBIS reportable segment. Other 2021 Acquisitions On March 18, 2021, we completed our acquisition of the net assets of ZippyYum, LLC (“ZippyYum”), a California-based developer of software products used in the food service and food preparation industries. We believe that this acquisition enhances the product portfolio in our RBIS reportable segment. On March 1, 2021, we completed our acquisition of the issued and outstanding stock of JDC Solutions, Inc. (“JDC”), a Tennessee-based manufacturer of pressure-sensitive specialty tapes. We believe that this acquisition expands the product portfolio in our Industrial and Healthcare Materials (“IHM”) reportable segment. The acquisitions of ZippyYum and JDC are referred to collectively as the “Other 2021 Acquisitions.” The aggregate purchase consideration for the Other 2021 Acquisitions was approximately $43 million. We funded the Other 2021 Acquisitions using cash and commercial paper borrowings. In addition to the cash paid at closing, the sellers in one of these acquisitions are eligible for earn-out payments of up to approximately $13 million subject to the acquired company’s achievement of certain performance targets. As of the acquisition date, we estimated the fair value of these earn-out payments to be approximately $12 million, which has been included in the $43 million of aggregate purchase consideration. The Other 2021 Acquisitions were not material, individually or in the aggregate, to the Consolidated Financial Statements. 2020 Acquisitions On December 31, 2020, we completed our acquisition of ACPO, Ltd. (“ACPO”), an Ohio-based manufacturer of self-wound (linerless) pressure-sensitive overlaminate products, for consideration of approximately $88 million. We believe this acquisition expands our product portfolio in the North American business of our Labels and Graphic Materials (“LGM”) reportable segment. On February 28, 2020, we completed our acquisition of Smartrac’s Transponder (RFID Inlay) division (“Smartrac”), a manufacturer of RFID products, for consideration of approximately $255 million ( € 232 million). We believe this acquisition enhances our research and development capabilities, expands our product lines and provides additional manufacturing capacity. Results for Smartrac’s operations were included in our RBIS reportable segment. These acquisitions (the “2020 Acquisitions”) were not material, individually or in the aggregate, to the Consolidated Financial Statements. Refer to Note 2, “Acquisitions,” to the Consolidated Financial Statements for more information. Cost Reduction Actions 2019/2020 Actions During fiscal year 2021, we recorded $13.3 million in restructuring charges, net of reversals, related to our 2019/2020 actions. These charges consisted of severance and related costs for the reduction of approximately 360 positions and asset impairment charges at numerous locations across our company, primarily reflecting actions in our LGM and RBIS reportable segments. The actions in our LGM reportable segment were primarily associated with consolidations of operations in North America and its graphics business in Europe, in part in response to COVID-19. The actions in our RBIS reportable segment were primarily related to global headcount and footprint reduction, with some actions accelerated and expanded in response to COVID-19. During fiscal year 2020, we recorded $56 million in restructuring charges, net of reversals, related to our 2019/2020 actions. These charges consisted of severance and related costs for the reduction of approximately 2,160 positions, as well as asset impairment charges. Our activities related to our 2019/2020 actions began in the fourth quarter of fiscal year 2019 and continued through fiscal year 2021. Impact of Cost Reduction Actions In both fiscal years 2021 and 2020, we realized approximately $65 million, in savings from restructuring, net of transition costs, primarily from our 2019/2020 actions. Restructuring charges were included in “Other expense (income), net” in the Consolidated Statements of Income. Refer to Note 13, “Cost Reduction Actions,” to the Consolidated Financial Statements for more information. [[GREPCENT_TABLE]] [["Avery Dennison Corporation","","|","","2021 Annual Report","","","","","","5"]] [[/GREPCENT_TABLE]] Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations Accounting Guidance Updates Refer to Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements for this information. Cash Flow [[GREPCENT_TABLE]] [["(In millions)","","2021","","","2020","","","2019"],["Net cash provided by operating activities","","$","1,046.8","","","$","751.3","","","$","746.5"],["Purchases of property, plant and equipment","","","(255.0",")","","","(201.4",")","","","(219.4",")"],["Purchases of software and other deferred charges","","","(17.1",")","","","(17.2",")","","","(37.8",")"],["Proceeds from sales of property, plant and equipment","","","1.1","","","","9.2","","","","7.8"],["Proceeds from insurance and sales (purchases) of investments, net","","","3.1","","","","5.6","","","","4.9"],["Contributions for U.S. pension plan termination","","","\u2013","","","","\u2013","","","","10.3"],["Payments for certain acquisition-related transaction costs","","","18.8","","","","\u2013","","","","\u2013"],["Free cash flow","","$","797.7","","","$","547.5","","","$","512.3"]] [[/GREPCENT_TABLE]] In 2021, cash flow provided by operating activities increased compared to 2020 primarily due to higher net income, changes in operational working capital and lower severance payments related to restructuring actions, partially offset by higher income tax payments, net of refunds. In 2021, free cash flow increased compared to 2020 primarily due to higher cash provided by operating activities adjusted for payments for certain acquisition-related transaction costs, partially offset by higher purchases of property, plant and equipment. Outlook In addition to the continued uncertain impact of COVID-19 on our businesses and including the impact of our Vestcom acquisition, certain factors that we believe may contribute to our 2022 results are described below. [[GREPCENT_TABLE]] [["","\u2022","","We expect net sales to increase by approximately 8% to 11%, reflecting in part a decrease of approximately 3% from the effect of foreign currency translation and an increase of approximately 3% from the effect of acquisitions."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Based on recent exchange rates, we expect foreign currency translation to decrease our operating income by approximately $35 million."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","We expect fixed and IT capital expenditures to be approximately $350 million."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","We expect our full year effective tax rate to be in the mid-twenty percent range."]] [[/GREPCENT_TABLE]] ANALYSIS OF RESULTS OF OPERATIONS Income before Taxes [[GREPCENT_TABLE]] [["(In millions, except percentages)","","","2021","","","","2020","","","","2019"],["Net sales","","$","8,408.3","","","$","6,971.5","","","$","7,070.1"],["Cost of products sold","","","6,095.5","","","","5,048.2","","","","5,166.0"],["Gross profit","","","2,312.8","","","","1,923.3","","","","1,904.1"],["Marketing, general and administrative expense","","","1,248.5","","","","1,060.5","","","","1,080.4"],["Other expense (income), net","","","5.6","","","","53.6","","","","53.2"],["Interest expense","","","70.2","","","","70.0","","","","75.8"],["Other non-operating expense (income), net","","","(4.1",")","","","1.9","","","","445.2"],["Income before taxes","","$","992.6","","","$","737.3","","","$","249.5"],["Gross profit margin","","","27.5","%","","","27.6","%","","","26.9","%"]] [[/GREPCENT_TABLE]] Gross Profit Margin Gross profit margin in 2021 decreased slightly compared to 2020 primarily reflecting the net impact of higher sales prices, higher raw material costs and higher freight costs, the impact of prior-year temporary cost reduction actions and higher employee-related costs, partially offset by favorable volume/mix and the benefits from productivity initiatives, including temporary cost reduction actions, material re-engineering and savings from restructuring actions, net of transition costs. Gross profit margin in 2020 increased compared to 2019 primarily reflecting the net benefit of pricing and raw material input costs and the benefits from productivity initiatives, including temporary cost reduction actions, material re-engineering and savings from restructuring actions, net of transition costs, partially offset by the net impact of lower volume and unfavorable product mix. Marketing, General and Administrative Expense Marketing, general and administrative expense increased in 2021 compared to 2020 primarily due to higher employee-related costs including the impact of acquisitions, growth investments, the impact of prior-year temporary cost reduction actions and unfavorable currency translation, partially offset by lower allowance for credit losses. Marketing, general and administrative expense decreased in 2020 compared to 2019 primarily due to benefits from productivity initiatives, including temporary cost reduction actions, and savings from restructuring actions, net of transition costs, as well as favorable foreign currency translation, partially offset by the impact of our Smartrac acquisition, increased allowance for credit losses and our contribution to the Avery Dennison Foundation. [[GREPCENT_TABLE]] [["6","","","","2021 Annual Report","","|","","Avery Dennison Corporation"]] [[/GREPCENT_TABLE]] Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations Other Expense (Income), Net [[GREPCENT_TABLE]] [["(In millions)","","2021","","","2020","","","2019"],["Other expense (income), net by type"],["Restructuring charges:"],["Severance and related costs","","$","10.5","","","$","49.1","","","$","45.3"],["Asset impairment charges and lease cancellation costs","","","3.1","","","","6.2","","","","5.1"],["Other items:"],["Transaction and related costs","","","20.9","","","","4.2","","","","2.6"],["Loss (gain) on sale of assets, net","","",".2","","","","(.5",")","","","(3.2",")"],["Gain on venture investments, net","","","(23.0",")","","","(5.4",")","","","\u2013"],["Gain on sale of product line","","","(5.7",")","","","\u2013","","","","\u2013"],["Outcomes of legal proceedings, net","","","(.4",")","","","\u2013","","","","3.4"],["Other expense (income), net","","$","5.6","","","$","53.6","","","$","53.2"]] [[/GREPCENT_TABLE]] Refer to Note 13, “Cost Reduction Actions,” to the Consolidated Financial Statements for more information. Refer to Note 9, “Fair Value Measurements,” to the Consolidated Financial Statements for more information regarding gains on venture investments. Refer to Note 15, “Segment and Disaggregated Revenue Information,” to the Consolidated Financial Statements for more information regarding outcomes of legal proceedings. Interest Expense Interest expense in 2021 was comparable to 2020. Interest expense decreased approximately $5.8 million in 2020 compared to 2019, primarily reflecting lower borrowing rates on our outstanding indebtedness. Other Non-Operating Expense (Income), Net Other non-operating income, net, increased in 2021 compared to 2020 as the components of net periodic benefit costs other than service costs resulted in a net credit. Other non-operating expense, net, decreased in 2020 compared to 2019 primarily due to the prior-year impact of the Avery Dennison Pension Plan (the “ADPP”) termination. In 2019, we recorded approximately $444 million of settlement charges related to the termination of the ADPP which increased other non-operating expense compared to 2018. Refer to Note 6, “Pension and Other Postretirement Benefits,” and Note 14, “Taxes Based on Income,” to the Consolidated Financial Statements for more information. Net Income and Earnings per Share [[GREPCENT_TABLE]] [["(In millions, except percentages and per share amounts)","","","2021","","","","2020","","","","2019"],["Income before taxes","","$","992.6","","","$","737.3","","","$","249.5"],["Provision for (benefit from) income taxes","","","248.6","","","","177.7","","","","(56.7",")"],["Equity method investment (losses) gains","","","(3.9",")","","","(3.7",")","","","(2.6",")"],["Net income","","$","740.1","","","$","555.9","","","$","303.6"],["Net income per common share","","$","8.93","","","$","6.67","","","$","3.61"],["Net income per common share, assuming dilution","","","8.83","","","","6.61","","","","3.57"],["Effective tax rate","","","25.0","%","","","24.1","%","","","(22.7",")%"]] [[/GREPCENT_TABLE]] Provision for (Benefit from) Income Taxes Our effective tax rate in 2021 increased compared to 2020 primarily due to lower benefits from decreases in certain tax reserves, including interest and penalties, as a result of closing tax years, and the tax charge related to certain legal proceeding, partially offset by higher benefits from return-to-provision adjustments related to GILTI exclusion elections in 2021. Our effective tax rate in 2020 increased compared to 2019 primarily due to the tax effects of the settlement charges associated with our termination of the ADPP and a discrete foreign structuring transaction in 2019. Our effective tax rate can vary from period to period due to the recognition of discrete events, such as changes in tax reserves, settlements of income tax audits, changes in tax laws and regulations, return-to-provision adjustments, and tax impacts related to stock-based payments, as well as recurring factors, such as changes in the mix of earnings in countries with differing statutory tax rates and the execution of tax planning strategies. Refer to Note 14, “Taxes Based on Income,” to the Consolidated Financial Statements for more information. [[GREPCENT_TABLE]] [["Avery Dennison Corporation","","|","","2021 Annual Report","","","","","","7"]] [[/GREPCENT_TABLE]] Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS BY REPORTABLE SEGMENT Operating income refers to income before taxes, interest and other non-operating expense (income), net. Label and Graphic Materials [[GREPCENT_TABLE]] [["(In millions)","","2021","","","2020","","","2019"],["Net sales including intersegment sales","","$","5,528.9","","","$","4,795.4","","","$","4,826.1"],["Less intersegment sales","","","(98.5",")","","","(80.3",")","","","(80.2",")"],["Net sales","","$","5,430.4","","","$","4,715.1","","","$","4,745.9"],["Operating income(1)","","","801.7","","","","688.8","","","","601.5"],["(1) Included charges associated with restructuring actions, transaction and related costs and gain/losses on sale of assets in all years, outcomes of legal proceedings and gain on sale of product line in 2021 and gain on venture investments in 2020","","$","(28.1",")","","$","22.2","","","$","28.3"]] [[/GREPCENT_TABLE]] Net Sales The factors impacting reported sales change are shown in the table below. [[GREPCENT_TABLE]] [["","","2021","","","2020"],["Reported sales change","","","15","%","","","(1",")%"],["Foreign currency translation","","","(4",")","","","1"],["Extra week impact","","","1","","","","(1",")"],["Sales change ex. currency(1)","","","13","","","","(1",")"],["Acquisitions and product line divestitures","","","(1",")","","","\u2013"],["Organic sales change(1)","","","12","%","","","(1",")%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Totals may not sum due to rounding"]] [[/GREPCENT_TABLE]] In 2021, net sales increased on an organic basis compared to the same period in the prior year due to favorable volume/mix and pricing actions. On an organic basis, net sales increased by a mid-teens rate in emerging markets, a high-single digit rate in North America and a low double-digit rate in Western Europe. In 2020, net sales decreased on an organic basis primarily due to raw material deflation-related price reductions, which more than offset higher volume/mix. On an organic basis, net sales increased by a low-single digit rate in emerging markets and North America and decreased by a low-to-mid single digit rate in Western Europe. Operating Income Operating income increased in 2021 compared to the same period last year primarily due to favorable volume/mix, the Brazil indirect tax credit, lower restructuring charges, favorable foreign currency translation, and lower allowance for credit losses. These benefits were partially offset by the net impact of higher sales prices, higher raw material costs, and higher freight costs, as well as higher employee-related costs. Operating income increased in 2020 compared to 2019 primarily due to benefits from productivity initiatives, including temporary cost reduction actions, material re-engineering, savings from restructuring actions, net of transition costs, and benefits from raw material deflation, net of pricing and the impact of the extra week in our 2020 fiscal year. These benefits were partially offset by higher employee-related costs, unfavorable volume/mix and increased allowance for credit losses. Retail Branding and Information Solutions [[GREPCENT_TABLE]] [["(In millions)","","2021","","","2020","","","2019"],["Net sales including intersegment sales","","$","2,239.1","","","$","1,658.4","","","$","1,670.9"],["Less intersegment sales","","","(37.3",")","","","(27.5",")","","","(20.6",")"],["Net sales","","$","2,201.8","","","$","1,630.9","","","$","1,650.3"],["Operating income(1)","","","257.2","","","","144.7","","","","196.6"],["(1) Included charges associated with restructuring actions and net gains on sales of assets and transaction and related costs in all years, outcomes of legal proceeding, loss on sale of asset and gain on venture investments in 2021 and loss on venture investments in 2020","","$","36.6","","","$","22.7","","","$","9.9"]] [[/GREPCENT_TABLE]] Net Sales The factors impacting reported sales change are shown in the table below. [[GREPCENT_TABLE]] [["","","2021","","","2020"],["Reported sales change","","","35","%","","","(1",")%"],["Foreign currency translation","","","(2",")","","","1"],["Extra week impact","","","2","","","","(2",")"],["Sales change ex. currency(1)","","","35","","","","(2",")"],["Acquisitions","","","(10",")","","","(7",")"],["Organic sales change(1)","","","25","%","","","(10",")%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Totals may not sum due to rounding"]] [[/GREPCENT_TABLE]] In 2021, on an organic basis, net sales in the segment related to Intelligent Labels increased over 20%. Net sales in the base business increased by a low double-digit rate, partially due to the recovery from the prior-period impact of COVID-19. In 2020, sales ex. currency decreased from the prior year due to a mid-teens rate decline in the base business driven by temporary closures of apparel manufacturing sites and lower demand for apparel due to the impact of COVID-19, partially offset by an approximate 40% increase in Intelligent Labels in the segment, including the [[GREPCENT_TABLE]] [["8","","","","2021 Annual Report","","|","","Avery Dennison Corporation"]] [[/GREPCENT_TABLE]] Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations benefit of our Smartrac acquisition. The substantial majority of our sales of Intelligent Labels is reported within our RBIS reportable segment. On an organic basis, sales in the segment related to Intelligent Labels increased by a mid-single digit rate. Company-wide, sales of Intelligent Labels increased on an organic basis at a high-single digit rate. Operating Income Operating income increased in 2021 compared to 2020 primarily due to higher volume, including the impact of acquisitions, benefits from productivity initiatives, including savings from restructuring actions, net of transition costs, and lower restructuring charges, partially offset by higher employee-related costs, the impact of prior-year temporary cost reduction actions, growth investments, outcomes of legal proceedings, and higher transaction and related costs. Operating income decreased in 2020 compared to 2019 primarily due to lower volume, higher long-term growth-related investments, including costs associated with our Smartrac acquisition, higher restructuring charges and increased allowance for credit losses, partially offset by benefits from productivity initiatives, including temporary cost reduction actions and savings from restructuring actions, net of transition costs. Industrial and Healthcare Materials [[GREPCENT_TABLE]] [["(In millions)","","2021","","","2020","","","2019"],["Net sales including intersegment sales","","$","789.4","","","$","631.9","","","$","682.7"],["Less intersegment sales","","","(13.3",")","","","(6.4",")","","","(8.8",")"],["Net sales","","$","776.1","","","$","625.5","","","$","673.9"],["Operating income(1)","","","81.6","","","","58.2","","","","60.0"],["(1) Included charges associated with restructuring actions in all years and transaction and related costs and gain on sale of assets in 2021.","","$","2.4","","","$","8.4","","","$","9.4"]] [[/GREPCENT_TABLE]] Net Sales The factors impacting reported sales change are shown in the table below. [[GREPCENT_TABLE]] [["","","2021","","","2020"],["Reported sales change","","","24","%","","","(7",")%"],["Foreign currency translation","","","(4",")","","","\u2013"],["Extra week impact","","","2","","","","(2",")"],["Sales change ex. currency(1)","","","22","","","","(9",")"],["Acquisitions","","","(4",")","","","\u2013"],["Organic sales change(1)","","","18","%","","","(9",")%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Totals may not sum due to rounding"]] [[/GREPCENT_TABLE]] In 2021, net sales increased on an organic basis compared to the same period in the prior year primarily due to an increase over 20% in industrial categories and a low-single digit rate increase in healthcare categories, partially due to the recovery from the prior-period impact of COVID-19. In 2020, net sales decreased on an organic basis due to a high single-digit rate decline in industrial categories and a mid-single digit decline in healthcare categories due to lower demand as a result of the impact of COVID-19. Operating Income Operating income increased in 2021 compared to 2020 primarily due to higher volume/mix and lower restructuring charges, partially offset by the impact of prior-year temporary cost reduction actions, the net impact of higher sales prices, higher raw material costs, and higher freight costs and higher employee-related costs. Operating income decreased in 2020 compared to 2019 primarily due to lower volume, partially offset by benefits from productivity initiatives, including temporary cost reduction actions and savings from restructuring actions, net of transition costs. FINANCIAL CONDITION Liquidity Operating Activities [[GREPCENT_TABLE]] [["(In millions)","","2021","","","2020","","","2019"],["Net income","","$","740.1","","","$","555.9","","","$","303.6"],["Depreciation","","","167.3","","","","154.2","","","","140.3"],["Amortization","","","76.8","","","","51.1","","","","38.7"],["Provision for credit losses and sales returns","","","35.7","","","","64.0","","","","58.7"],["Stock-based compensation","","","37.2","","","","24.0","","","","34.5"],["Pension plan settlements and related charges","","","1.6","","","",".5","","","","444.1"],["Deferred taxes and other non-cash taxes","","","2.6","","","","9.3","","","","(216.9",")"],["Other non-cash expense and loss (income and gain), net","","","10.1","","","","44.9","","","","28.3"],["Trade accounts receivable","","","(113.2",")","","","14.7","","","","(42.2",")"],["Inventories","","","(182.7",")","","","(6.0",")","","","(18.1",")"],["Accounts payable","","","255.2","","","","(68.2",")","","","46.4"],["Taxes on income","","","(7.3",")","","","(35.2",")","","","5.4"],["Other assets","","","4.1","","","","18.2","","","","38.4"],["Other liabilities","","","19.3","","","","(76.1",")","","","(114.7",")"],["Net cash provided by operating activities","","$","1,046.8","","","$","751.3","","","$","746.5"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Avery Dennison Corporation","","|","","2021 Annual Report","","","","","","9"]] [[/GREPCENT_TABLE]] Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations In 2021, cash flow provided by operating activities increased compared to 2020 primarily due to higher net income, changes in operational working capital and lower severance payments related to restructuring actions, partially offset by higher income tax payments, net of refunds. In 2020, cash flow provided by operating activities increased compared to 2019 primarily due to higher net income, lower pension plan contributions, lower incentive compensation payments and lower severance payments related to restructuring actions, partially offset by higher income tax payments, net of refunds, and changes in operational working capital primarily related to the timing of vendor payments. Investing Activities [[GREPCENT_TABLE]] [["(In millions)","","2021","","","2020","","","2019"],["Purchases of property, plant and equipment","","$","(255.0",")","","$","(201.4",")","","$","(219.4",")"],["Purchases of software and other deferred charges","","","(17.1",")","","","(17.2",")","","","(37.8",")"],["Proceeds from sales of property, plant and equipment","","","1.1","","","","9.2","","","","7.8"],["Proceeds from insurance and sales (purchases) of investments, net","","","3.1","","","","5.6","","","","4.9"],["Proceeds from sale of product line","","","7.6","","","","\u2013","","","","\u2013"],["Payments for acquisitions, net of cash acquired, and investments in businesses","","","(1,477.6",")","","","(350.4",")","","","(6.5",")"],["Net cash used in investing activities","","$","(1,737.9",")","","$","(554.2",")","","$","(251.0",")"]] [[/GREPCENT_TABLE]] Purchases of Property, Plant and Equipment In 2021, we invested in equipment to support growth in the U.S. and certain countries in Europe and Asia Pacific for our LGM reportable segment, in the U.S. for our IHM reportable segment, and in the U.S. and certain countries in Asia Pacific for our RBIS reportable segment. In 2020 and 2019, we invested in equipment and expanded manufacturing facilities to support growth, and productivity improvement primarily in the U.S. and certain countries in Asia Pacific, including Thailand, India, and China, for our LGM reportable segment and in China, the U.S., and Malaysia for our RBIS reportable segment. Purchases of Software and Other Deferred Charges In 2021, 2020 and 2019, we invested in information technology upgrades worldwide. In 2019, we also invested in enterprise resource planning system implementations in North America. Proceeds from Sales of Property, Plant and Equipment In 2021, the majority of the proceeds from sales of property, plant and equipment was related to the sale of equipment in Asia Pacific. In 2020, the majority of the proceeds from sales of property, plant and equipment was related to the sale of a property in Europe. In 2019, the majority of the proceeds from sales of property, plant and equipment was related to the sale of three properties in North America, Asia Pacific and Europe. Proceeds from Insurance and Sales (Purchases) of Investments, Net In 2021, we had lower proceeds from insurance associated with our company-owned life insurance policies. Proceeds from Sale of Product Line In 2021, proceeds from the sale of a product line were in our LGM reportable segment. Payments for Acquisitions, Net of Cash Acquired, and Investments in Businesses In 2021, we paid consideration, net of cash acquired, of approximately $1.44 billion and $32 million for the Vestcom acquisition and Other 2021 Acquisitions, respectively. We funded the Vestcom acquisition using the net proceeds from the $500 million and $300 million senior notes we issued in August 2021, commercial paper borrowings and cash. We funded the Other 2021 Acquisitions using cash and commercial paper borrowings. In 2020, we paid consideration, net of cash acquired, of approximately $255 million to acquire Smartrac, which we initially funded through commercial paper borrowings, and approximately $88 million to acquire ACPO. We also made certain venture investments in 2021, 2020 and 2019. [[GREPCENT_TABLE]] [["10","","","","2021 Annual Report","","|","","Avery Dennison Corporation"]] [[/GREPCENT_TABLE]] Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations Refer to Note 2, “Acquisitions,” to the Consolidated Financial Statements for more information. Financing Activities [[GREPCENT_TABLE]] [["(In millions)","","2021","","","2020","","","2019"],["Net increase (decrease) in borrowings with maturities of three months or less","","$","259.2","","","$","(110.4",")","","$","(5.3",")"],["Additional borrowings under revolving credit facility","","","\u2013","","","","500.0","","","","\u2013"],["Repayments of borrowings under revolving credit facility","","","\u2013","","","","(500.0",")","","","\u2013"],["Additional long-term borrowings","","","791.7","","","","493.7","","","","\u2013"],["Repayments of long-term debt and finance leases","","","(13.4",")","","","(270.2",")","","","(18.6",")"],["Dividends paid","","","(220.6",")","","","(196.8",")","","","(189.7",")"],["Share repurchases","","","(180.9",")","","","(104.3",")","","","(237.7",")"],["Net (tax withholding) proceeds related to stock-based compensation","","","(25.4",")","","","(19.7",")","","","(17.4",")"],["Other","","","(6.3",")","","","\u2013","","","","(1.6",")"],["Net cash provided by (used in) financing activities","","$","604.3","","","$","(207.7",")","","$","(470.3",")"]] [[/GREPCENT_TABLE]] Borrowings and Repayment of Debt During 2021, 2020, and 2019, our commercial paper borrowings were used to fund acquisitions, dividend payments, share repurchases, capital expenditures and other general corporate purposes. In August 2021, we issued $500 million of senior notes, due February 15, 2032, which bear an interest rate of 2.250%, payable semiannually in arrears. Our net proceeds from the issuance, after deducting underwriting discounts and offering expenses, were $493.7 million. Additionally, in August 2021, we issued $300 million of senior notes, due August 15, 2024, which we can repay without penalty on or after August 15, 2022 and bear an interest rate of 0.850%, payable semiannually in arrears. Our net proceeds from this issuance, after deducting underwriting discounts and offering expenses, were $298 million. We used the net proceeds from these two debt issuances to finance a portion of the Vestcom acquisition. During 2020, commercial paper borrowings were also used for the Smartrac acquisition, with those borrowings subsequently repaid using a portion of the net proceeds of $493.7 million from the $500 million of senior notes we issued in March 2020. We used the remaining proceeds from these notes to repay the $250 million aggregate principal amount of senior notes that matured in April 2020. We also repaid $15 million of medium-term notes that matured in June 2020. In the first quarter of 2020, in light of uncertainty as a result of COVID-19 regarding the availability of commercial paper, which we typically rely upon to fund our day-to-day operational needs, and the relatively favorable terms under our recently-extended $800 million revolving credit facility (the “Revolver”), we borrowed $500 million from the Revolver with a six-month duration. We repaid this amount in June 2020. Refer to Note 2, “Acquisitions,” and Note 4, “Debt,” to the Consolidated Financial Statements for more information. Dividends Paid We paid dividends per share of $2.66, $2.36 and $2.26 in 2021, 2020 and 2019, respectively. In April 2021, we increased our quarterly dividend rate to $.68 per share, representing an increase of approximately 10% from our previous quarterly dividend rate of $.62 per share. In October 2020, we increased our quarterly dividend to $.62 per share, representing an increase of approximately 7% from our previous dividend rate of $.58 per share. Share Repurchases From time to time, our Board authorizes the repurchase of shares of our outstanding common stock. Repurchased shares may be reissued under our long-term incentive plan or used for other corporate purposes. In 2021, 2020 and 2019, we repurchased approximately .9 million, .8 million and 2 million shares of our common stock, respectively. We temporarily paused share repurchase activity in March 2020 as a result of COVID-19 and resumed repurchases late in the third quarter of 2020. In April 2019, our Board authorized the repurchase of shares of our common stock with a fair market value of up to $650 million, excluding any fees, commissions or other expenses related to such purchases, in addition to the amount outstanding under our previous Board authorization. Board authorizations remain in effect until shares in the amount authorized thereunder have been repurchased. As of January 1, 2022, shares of our common stock in the aggregate amount of $359.6 million remained authorized for repurchase under this Board authorization. [[GREPCENT_TABLE]] [["Avery Dennison Corporation","","|","","2021 Annual Report","","","","","","11"]] [[/GREPCENT_TABLE]] Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations Net (Tax Withholding) Proceeds Related to Stock-Based Compensation In 2021, tax withholding for stock-based compensation increased compared to 2020 primarily as a result of equity awards vesting at higher share prices. In 2020, proceeds from stock option exercises decreased compared to 2019, with tax withholding for stock-based compensation also decreasing, primarily as a result of lower vesting of equity awards. Approximately .02 million, .05 million and .3 million stock options were exercised in 2021, 2020 and 2019, respectively. Refer to Note 12, “Long-Term Incentive Compensation,” to the Consolidated Financial Statements for more information. Analysis of Selected Balance Sheet Accounts Long-lived Assets Property, plant and equipment, net, increased by approximately $134 million to $1.48 billion at year-end 2021, which primarily reflected purchases of property, plant and equipment and the acquisitions of Vestcom and the Other 2021 Acquisitions, partially offset by depreciation expense and the impact of foreign currency translation. Goodwill increased by approximately $745 million to $1.88 billion at year-end 2021, which reflected acquired goodwill associated with the acquisition of Vestcom and the Other 2021 Acquisitions, partially offset by the impact of foreign currency translation. Other intangibles resulting from business acquisitions, net, increased by approximately $687 million to $911 million at year-end 2021, which reflected the valuations of other intangibles from the acquisitions of Vestcom and the Other 2021 Acquisitions, partially offset by amortization expense and the impact of foreign currency translation. Refer to Note 3, “Goodwill and Other Intangibles Resulting from Business Acquisitions,” to the Consolidated Financial Statements for more information. Shareholders’ Equity Accounts The balance of our shareholders’ equity increased by approximately $440 million to $1.92 billion at year-end 2021. Refer to Note 11, “Supplemental Equity and Comprehensive Income Information,” to the Consolidated Financial Statements for more information. Impact of Foreign Currency Translation [[GREPCENT_TABLE]] [["(In millions)","","2021","","","2020"],["Change in net sales","","$","201","","","$","(67",")"]] [[/GREPCENT_TABLE]] In 2021, international operations generated approximately 75% of our net sales. Our future results are subject to changes in political and economic conditions in the regions in which we operate and the impact of fluctuations in foreign currency exchange and interest rates. The favorable impact of foreign currency translation on net sales in 2021 compared to 2020 was primarily related to euro-denominated sales and sales in China. Effect of Foreign Currency Transactions The impact on net income from transactions denominated in foreign currencies is largely mitigated because the costs of our products are generally denominated in the same currencies in which they are sold. In addition, to reduce our income and cash flow exposure to transactions in foreign currencies, we enter into foreign exchange forward, option and swap contracts where available and appropriate. Refer to Note 5, “Financial Instruments,” to the Consolidated Financial Statements for more information. Analysis of Selected Financial Ratios We utilize the financial ratios discussed below to assess our financial condition and operating performance. We believe this information assists our investors in understanding the drivers impacting our cash flow other than net income and capital expenditures. Operational Working Capital Ratio Operational working capital, as a percentage of annualized current-quarter net sales, is reconciled to working capital below. Our objective is to minimize our investment in operational working capital, as a percentage of annualized current-quarter net sales, to maximize our cash flow and return on investment. Operational working capital, as a percentage of annualized current-quarter net [[GREPCENT_TABLE]] [["12","","","","2021 Annual Report","","|","","Avery Dennison Corporation"]] [[/GREPCENT_TABLE]] Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations sales, in 2021 was lower compared to 2020. Further discussion of the components of operational working capital is provided below. [[GREPCENT_TABLE]] [["(In millions, except percentages)","","2021","","","2020"],["(A) Working capital","","$","186.7","","","$","490.2"],["Reconciling items:"],["Cash and cash equivalents","","","(162.7",")","","","(252.3",")"],["Other current assets","","","(240.2",")","","","(211.5",")"],["Short-term borrowings and current portion of long-term debt and finance leases","","","318.8","","","","64.7"],["Current income taxes payable and other current accrued liabilities","","","930.3","","","","810.4"],["(B) Operational working capital","","$","1,032.9","","","$","901.5"],["(C) Fourth-quarter net sales, annualized","","$","8,732.8","","","$","7,394.8"],["Operational working capital, as a percentage of annualized current-quarter net sales (B) \u00f7 (C)","","","11.8","%","","","12.2","%"]] [[/GREPCENT_TABLE]] Accounts Receivable Ratio The average number of days sales outstanding was 59 days in 2021 compared to 61 days in 2020, calculated using the accounts receivable balance at year-end divided by the average daily sales in the fourth quarter of 2021 and 2020, respectively. The decrease in average number of days sales outstanding was primarily due to higher volume and the impact of foreign currency translation, partially offset by the timing of collections and the impact of acquisitions. Inventory Ratio Average inventory turnover was 7.0 in 2021 compared to 7.5 in 2020, calculated using the annualized fourth-quarter cost of products sold in 2021 and 2020, respectively, and divided by the inventory balance at the respective year-end. The decrease in average inventory turnover primarily reflected inventory build to manage supply chain disruptions and anticipated increased demand. Accounts Payable Ratio The average number of days payable outstanding was 74 days in 2021 compared to 73 days in 2020, calculated using the accounts payable balance at year-end divided by the annualized fourth-quarter cost of products sold in 2021 and 2020, respectively. The increase in the average number of days payable outstanding from the prior year primarily reflected the impact of higher accounts payable balances due to our inventory build to manage supply chain disruptions and anticipated increased demand, partially offset by the impact of acquisitions and foreign currency translation. Capital Resources Capital resources include cash flows from operations, cash and cash equivalents and debt financing, including access to commercial paper supported by our Revolver. We use these resources to fund operational needs. At year-end 2021, we had cash and cash equivalents of $162.7 million held in accounts at third-party financial institutions. Our cash balances are held in numerous locations throughout the world. At year-end 2021, the majority of our cash and cash equivalents was held by our foreign subsidiaries, primarily in Asia Pacific and Europe. To meet U.S. cash requirements, we have several cost-effective liquidity options available. These options include borrowing funds at reasonable rates, including borrowings from foreign subsidiaries, and repatriating foreign earnings and profits. However, if we were to repatriate foreign earnings and profits, a portion would be subject to cash payments of withholding taxes imposed by foreign tax authorities. Additional U.S. taxes may also result from the impact of foreign currency movements related to these earnings and profits. Refer to Note 14, “Taxes Based on Income,” to the Consolidated Financial Statements for more information. In February 2020, we amended and restated the Revolver, eliminating one of the financial covenants and extending its maturity date to February 13, 2025. The maturity date may be further extended for a one-year period under certain circumstances. The commitments under the Revolver may be increased by up to $400 million, subject to lender approvals and customary requirements. The Revolver is used as a back-up facility for our commercial paper program and can be used for other corporate purposes. The Revolver contains a financial covenant that requires us to maintain a maximum leverage ratio (calculated as a ratio of consolidated debt to consolidated EBITDA as defined in the agreement) of not more than 3.50 to 1.00; provided that, in the event of an acquisition by us that exceeds $250 million, which occurred when we acquired Vestcom, the maximum leverage ratio increases to 4.00 to 1.00 for the fiscal quarter in which the acquisition occurs and three consecutive fiscal quarters immediately following that fiscal quarter. As of January 1, 2022 and January 2, 2021, our ratio was substantially below the maximum ratio allowed by the Revolver. In addition to the Revolver, we have significant short-term lines of credit available in various countries of approximately $358 million in the aggregate at January 2, 2021. These lines may be cancelled at any time by us or [[GREPCENT_TABLE]] [["Avery Dennison Corporation","","|","","2021 Annual Report","","","","","","13"]] [[/GREPCENT_TABLE]] Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations the issuing banks. Short-term borrowings outstanding under our lines of credit were $11.2 million and $22.2 million at January 2, 2021 and January 2, 2021, respectively, with a weighted average interest rate of 4.97% and 3.6%, respectively. Refer to Note 4, “Debt,” to the Consolidated Financial Statements for more information. We are exposed to financial market risk resulting from changes in interest and foreign currency rates, and to possible liquidity and credit risks of our counterparties. Capital from Debt The carrying value of our total debt increased by approximately $988 million to $3.10 billion at year-end 2021 compared to $2.12 billion at year-end 2020, primarily reflecting our issuance of the $500 million and $300 million senior notes in August 2021 and a net increase in commercial paper borrowings. Credit ratings are a significant factor in our ability to raise short- and long-term financing. The credit ratings assigned to us also impact the interest rates we pay and our access to commercial paper, credit facilities, and other borrowings. A downgrade of our short-term credit ratings could impact our ability to access commercial paper markets. If our access to commercial paper markets were to become limited, as it did in the first quarter of 2020 as a result of COVID-19 when we drew down on the Revolver, we believe that the Revolver and our other credit facilities would be available to meet our short-term funding requirements. When determining our credit rating, we believe that rating agencies primarily consider our competitive position, business outlook, consistency of cash flows, debt level and liquidity, geographic dispersion and management team. There has been no change to the credit ratings assigned to us as a result of COVID-19. We remain committed to maintaining an investment grade rating. Fair Value of Debt The estimated fair value of our long-term debt is primarily based on the credit spread above U.S. Treasury securities or euro government bond securities, as applicable, on notes with similar rates, credit ratings and remaining maturities. The fair value of short-term borrowings, which includes commercial paper issuances and short-term lines of credit, approximates their carrying value given their short duration. The fair value of our total debt was $3.25 billion at January 1, 2022 and $2.34 billion at January 2, 2021. Fair value amounts were determined based primarily on Level 2 inputs, which are inputs other than quoted prices in active markets that are either directly or indirectly observable. Refer to Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements for more information. Contractual Obligations, Commitments and Off-Balance Sheet Arrangements Material Cash Requirements at End of Year 2021 [[GREPCENT_TABLE]] [["","","Payments Due by Period"],["(In millions)","","Total","","","2022","","","2023","","","2024","","","2025","","","2026","","","Thereafter"],["Short-term borrowings","","$","313.2","","","$","313.2","","","$","\u2013","","","$","\u2013","","","$","\u2013","","","$","\u2013","","","$","\u2013"],["Long-term debt","","","2,795.3","","","","\u2013","","","","250.0","","","","300.0","","","","595.3","","","","\u2013","","","","1,650.0"],["Interest on long-term debt","","","537.0","","","","75.1","","","","71.0","","","","66.8","","","","64.0","","","","54.9","","","","205.2"],["Finance leases","","","18.3","","","","6.1","","","","5.3","","","","5.0","","","","1.7","","","",".2","","","","\u2013"],["Operating leases","","","204.4","","","","51.5","","","","40.1","","","","29.8","","","","22.9","","","","14.4","","","","45.7"],["Total contractual obligations","","$","3,868.2","","","$","445.9","","","$","366.4","","","$","401.6","","","$","683.9","","","$","69.5","","","$","1,900.9"]] [[/GREPCENT_TABLE]] The table above does not include: [[GREPCENT_TABLE]] [["","\u2022","","Purchase obligations or open purchase orders at year-end \u2013 It is impracticable for us to obtain or provide a reasonable estimate of this information due to the decentralized nature of our purchasing systems. In addition, purchase orders are generally entered into at fair value and cancelable without penalty."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Cash funding requirements for pension benefits payable to certain eligible current and future retirees under our funded plans \u2013 Benefits under our funded pension plans are paid through trusts or trust equivalents. Cash funding requirements for our funded plans, which can be significantly impacted by earnings on investments, the discount rate, changes in the plans, and funding laws and regulations, are not included as we are not able to estimate required contributions to the trusts or trust equivalents. Refer to Note 6, \u201cPension and Other Postretirement Benefits,\u201d to the"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["14","","","","2021 Annual Report","","|","","Avery Dennison Corporation"]] [[/GREPCENT_TABLE]] Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations Consolidated Financial Statements for information regarding our expected contributions to these plans and plan terminations and settlements. [[GREPCENT_TABLE]] [["","\u2022","","Pension and postretirement benefit payments \u2013 We have unfunded benefit obligations related to defined benefit plans. Refer to Note 6, \u201cPension and Other Postretirement Benefits,\u201d to the Consolidated Financial Statements for more information, including our expected benefit payments over the next 10 years."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Deferred compensation plan benefit payments \u2013 It is impracticable for us to obtain a reasonable estimate for 2022 and beyond due to the volatility of payment amounts and certain events that could trigger immediate payment of benefits to participants. In addition, participant account balances are marked-to-market monthly and benefit payments are adjusted annually. Refer to Note 6, \u201cPension and Other Postretirement Benefits,\u201d to the Consolidated Financial Statements for more information."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Cash-based awards to employees under incentive compensation plans \u2013 The amounts to be paid to employees under these awards are based on our stock price and, as applicable, achievement of certain performance objectives as of the end of their respective performance periods. Therefore, we cannot reasonably estimate the amounts to be paid on the respective vesting dates. Refer to Note 12, \u201cLong-term Incentive Compensation,\u201d to the Consolidated Financial Statements for more information."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Unfunded termination indemnity benefits to certain employees outside of the U.S. \u2013 These benefits are subject to applicable agreements, local laws and regulations; however, the timing of these payments cannot be reasonably estimated. Refer to Note 6, \u201cPension and Other Postretirement Benefits,\u201d to the Consolidated Financial Statements for more information."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","Unrecognized tax benefits of $74 million \u2013 The resolution of the balance, including the timing of payments, is contingent upon various unknown factors and cannot be reasonably estimated. Refer to Note 14, \u201cTaxes Based on Income,\u201d to the Consolidated Financial Statements for more information."]] [[/GREPCENT_TABLE]] CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions for the reporting period and as of the financial statement date. These estimates and assumptions affect our reported amounts of assets and liabilities, disclosure of contingent liabilities and reported amounts of revenue and expense. Actual results could differ from these estimates. Critical accounting estimates are those that are important to our financial condition and results, and which require us to make difficult, subjective and/or complex judgments. Critical accounting estimates cover accounting matters that are inherently uncertain because their future resolution is unknown. We believe our critical accounting estimates include accounting for goodwill, business combinations, pension and postretirement benefits, taxes based on income and long-term incentive compensation. Goodwill Business combinations are accounted for using the acquisition method, with the excess of the acquisition cost over the fair value of net tangible assets and identified intangible assets acquired considered goodwill. As a result, we disclose goodwill separately from other intangible assets. Our reporting units are composed of either a discrete business or an aggregation of businesses with similar economic characteristics. We perform an annual impairment test of goodwill during the fourth quarter. Certain factors may cause us to perform an impairment test prior to the fourth quarter, including significant underperformance of a business relative to expected operating results, significant adverse economic and industry trends, significant decline in our market capitalization for an extended period of time relative to net book value, or a decision to divest a portion of a reporting unit. In performing impairment tests, we have the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative assessment for goodwill impairment. If the qualitative assessment indicates that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative assessment. A quantitative assessment primarily consists of a present value (discounted cash flow) method to determine the fair value of reporting units with goodwill. We compare the fair value of each reporting unit to its carrying amount, and, to the extent the carrying amount exceeds the unit’s fair value, we recognize an impairment of goodwill for the excess up to the amount of goodwill of [[GREPCENT_TABLE]] [["Avery Dennison Corporation","","|","","2021 Annual Report","","","","","","15"]] [[/GREPCENT_TABLE]] Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations that reporting unit. In consultation with outside specialists, we estimate the fair value of our reporting units using various valuation techniques, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various assumptions about our reporting units, including their respective forecasted sales, operating margins and growth rates, as well as discount rates. Our assumptions about discount rates are based on the weighted average cost of capital for comparable companies. Our assumptions about sales, operating margins and growth rates are based on our forecasts, business plans, economic projections, anticipated future cash flows, and marketplace data. We also make assumptions for varying perpetual growth rates for periods beyond the long-term business plan period. We base our fair value estimates on projected financial information and assumptions that we believe are reasonable. However, actual future results may materially differ from these estimates and projections. The valuation methodology we use to estimate the fair value of reporting units requires inputs and assumptions that reflect current market conditions, as well as the impact of planned business and operational strategies that require management judgment. The estimated fair value could increase or decrease depending on changes in the inputs and assumptions. In our annual impairment analysis in the fourth quarter of 2021, the goodwill of all reporting units in our LGM, RBIS, and IHM reportable segments, were tested utilizing a qualitative assessment. Based on this assessment, we determined that the fair values of these reporting units were more-likely-than-not greater than their respective carrying values. Therefore, the goodwill of our reporting units was not impaired. Business Combinations The results of acquired businesses are included in our Consolidated Financial Statements from their acquisition date. Assets and liabilities of an acquired business are recorded at their estimated fair values on the acquisition date. We engage third-party valuation specialists to assist us in determining these fair values as necessary. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill. The allocation of purchase price requires management to make significant estimates and assumptions. While we believe our assumptions and estimates are reasonable, they are inherently uncertain and based in part on experience, market conditions, projections of future performance and information obtained from management of the acquired companies. Critical estimates include, but are not limited to, the following: [[GREPCENT_TABLE]] [["","\u2022","","future revenue and profit margins;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","royalty rates;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","discount rates;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","customer retention rates;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","technology migration curves; and"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","","useful lives assigned to acquired intangible assets."]] [[/GREPCENT_TABLE]] Acquired identifiable finite-lived intangible assets are amortized on a straight-line basis over their respective estimated useful lives to marketing, general and administrative expense. Pension and Postretirement Benefits Our assumptions used in determining projected benefit obligations and the fair value of plan assets for our defined benefit pension plans and other postretirement benefit plans are evaluated by management in consultation with outside actuaries. In the event that we determine that changes are warranted in the assumptions we use, such as the discount rate, expected long-term rate of return or health care costs, future pension and postretirement benefit expenses could increase or decrease. Due to changes in market conditions or participant population, the actuarial assumptions we use may differ from actual results, which could have a significant impact on our pension and postretirement liability and related costs. Discount Rate In consultation with our actuaries, we annually review and determine the discount rates we use in valuing our postretirement obligations. Our assumed discount rates for our international pension plans reflect market rates for high quality corporate bonds currently available. Our discount rates are determined by evaluating yield curves consisting of large populations of high quality corporate bonds. The projected pension benefit payment streams are then matched with the bond portfolios to determine a rate that reflects the liability duration unique to our pension and postretirement benefit plans. As of January 1, 2022, a .25% increase in the discount rates associated with our international plans would have decreased our year-end projected benefit obligation by $44 million and decreased expected periodic benefit cost for the coming year by approximately $1 million. Conversely, a .25% decrease in the discount rates associated with our international plans would have increased our year-end projected benefit obligation by approximately $44 million and increased expected periodic benefit cost for the coming year by approximately $2 million. [[GREPCENT_TABLE]] [["16","","","","2021 Annual Report","","|","","Avery Dennison Corporation"]] [[/GREPCENT_TABLE]] Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations We use the full yield curve approach to estimate the service and interest cost components of net periodic benefit cost for our pension and other postretirement benefit plans. Using this approach, we apply multiple discount rates from a yield curve composed of the rates of return on several hundred high-quality, fixed income corporate bonds available at the measurement date. We believe this approach provides a more precise measurement of service and interest cost by aligning the timing of these plans’ liability cash flows to the corresponding rates on the yield curve. Long-term Return on Plan Assets We determine the long-term rate of return assumption for plan assets by reviewing the historical and expected returns of both the equity and fixed income markets, taking into account our asset allocation, the correlation between returns in our asset classes, and our mix of active and passive investments. Additionally, current market conditions, including interest rates, are evaluated and market data is reviewed for reasonableness and appropriateness. An increase or decrease of .25% on the long-term return on assets associated with our international plans would have decreased or increased our periodic benefit cost for the coming year by approximately $2 million. Taxes Based on Income We are subject to income tax in the U.S. and multiple foreign jurisdictions, whereby judgment is required in evaluating and estimating our worldwide provision, accruals for taxes, deferred taxes and for evaluating our tax positions. Our provision for (benefit from) income taxes is determined using the asset and liability approach in accordance with GAAP. Deferred tax assets represent amounts available to reduce income taxes payable in future years. These assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating losses and tax credit carryforwards. These amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We evaluate the realizability of these future tax deductions and credits by assessing the period over which recoverability is allowed by law and the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. Our assessment of these sources of income relies heavily on estimates. Our forecasted earnings by jurisdiction are determined by how we operate our business and any changes to our operations may affect our effective tax rate. For example, our future income tax rate could be adversely affected by earnings being lower than anticipated in jurisdictions in which we have significant deferred tax assets that are dependent on such earnings to be realized. We use historical experience along with operating forecasts to evaluate expected future taxable income. To the extent we do not consider it more-likely-than-not that a deferred tax asset will be recovered, a valuation allowance is established in the period we make that determination. We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified. Tax laws and regulations are complex and subject to different interpretations by taxpayers and governmental taxing authorities. We review our tax positions quarterly and adjust the balances if and as new information becomes available. Significant judgment is required in determining our tax expense and evaluating our tax positions, including evaluating uncertainties. Our estimate of the potential outcome of any uncertain tax issue is subject to our assessment of relevant facts and circumstances existing at the balance sheet date, taking into consideration existing laws, regulations and practices of the governmental authorities exercising jurisdiction over our operations. We recognize and measure our uncertain tax positions following the more-likely-than-not threshold for recognition and measurement for tax positions we take or expect to take on a tax return. For example, we continue to monitor developments regarding the European Commission state aid investigations for jurisdictions in which we have significant operations, such as the Netherlands and Luxembourg. Refer to Note 14, “Taxes Based on Income,” to the Consolidated Financial Statements for more information. Long-Term Incentive Compensation Valuation of Stock-Based Awards We base our stock-based compensation expense on the fair value of awards, adjusted for estimated forfeitures, amortized on a straight-line basis over the requisite service period for stock options and restricted stock units (“RSUs”). We base compensation expense for performance units (“PUs”) on the fair value of awards, adjusted for estimated forfeitures, and amortized on a straight-line basis as these awards cliff-vest at the end of the requisite service period. We base compensation expense related to market-leveraged stock units (“MSUs”) on the fair value of awards, adjusted for estimated forfeitures, and amortized on a graded-vesting basis over their respective performance periods. [[GREPCENT_TABLE]] [["Avery Dennison Corporation","","|","","2021 Annual Report","","","","","","17"]] [[/GREPCENT_TABLE]] Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations Compensation expense for awards with a market condition as a performance objective, which includes PUs and MSUs, is not adjusted if the condition is not met, as long as the requisite service period is met. We determine the fair value of RSUs and the component of PUs that is subject to the achievement of a performance objective based on a financial performance condition based on the fair market value of our common stock as of the date of the grant, adjusted for foregone dividends. Over the performance period of the PUs, the estimated number of shares of our common stock issuable upon vesting is adjusted upward or downward based on the probability of achieving the performance objectives established for the award. We determine the fair value of stock-based awards that are subject to achievement of performance objectives based on a market condition, which includes MSUs and the other component of PUs, using the Monte-Carlo simulation model, which utilizes multiple input variables, including expected stock price volatility and other assumptions appropriate for determining fair value, to estimate the probability of satisfying the respective target performance objectives established for the award. Forfeiture Rate Changes in estimated forfeiture rates are recorded as cumulative adjustments in the period estimates are revised. Certain of our assumptions are based on management’s estimates, in consultation with outside specialists. Significant changes in assumptions for future awards and actual forfeiture rates could materially impact our stock-based compensation expense and results of operations. Valuation of Cash-Based Awards Cash-based awards consist of long-term incentive units (“LTI Units”) granted to eligible employees. LTI Units are classified as liability awards and remeasured at each quarter-end over the applicable vesting or performance period. In addition to LTI Units with terms and conditions that mirror those of RSUs, we also grant certain employees LTI Units with terms and conditions that mirror those of PUs and MSUs. RECENT ACCOUNTING REQUIREMENTS Refer to Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements for this information. MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT Risk Management We are exposed to the impact of changes in foreign currency exchange rates and interest rates. We generally do not purchase or hold foreign currency or interest rate or commodity contracts for trading purposes. Our objective in managing our exposure to foreign currency changes is to reduce the risk to our earnings and cash flow associated with foreign exchange rate changes. As a result, we enter into foreign exchange forward, option and swap contracts to reduce risks associated with the value of our existing foreign currency assets, liabilities, firm commitments and anticipated foreign revenues and costs, when available and appropriate. The gains and losses on these contracts are intended to offset changes in the related exposures. We do not hedge our foreign currency translation exposure in a manner that would entirely eliminate the effects of changes in foreign exchange rates on our net income. Our objective in managing our exposure to interest rate changes is to reduce the impact of interest rate changes on earnings and cash flows. To achieve this objective, we may periodically use interest rate contracts to manage our exposure to interest rate changes. Additionally, we enter into certain natural gas futures contracts to reduce the risks associated with natural gas we anticipate using in our manufacturing operations. These amounts are not material to our financial statements. In the normal course of operations, we also face other risks that are either non-financial or non-quantifiable. These risks principally include changes in economic or political conditions, other risks associated with foreign operations, commodity price risk, and litigation and compliance risk, which are not reflected in the analyses described below. [[GREPCENT_TABLE]] [["18","","","","2021 Annual Report","","|","","Avery Dennison Corporation"]] [[/GREPCENT_TABLE]] Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations Foreign Exchange Value-At-Risk We use a Value-At-Risk (“VAR”) model to determine the estimated maximum potential one-day loss in earnings associated with our foreign exchange positions and contracts. This approach assumes that market rates or prices for foreign exchange positions and contracts are normally distributed. VAR model estimates are made assuming normal market conditions. The model includes foreign exchange derivative contracts. Forecasted transactions, firm commitments, accounts receivable and accounts payable denominated in foreign currencies, which certain of these instruments are intended to hedge, are excluded from the model. The VAR model is a risk analysis tool and does not represent actual losses in fair value that we could incur, nor does it consider the potential effect of favorable changes in market factors. In both 2021 and 2020, the VAR was estimated using a variance-covariance methodology. The currency correlation was based on one-year historical data obtained from one of our domestic banks. A 95% confidence level was used for a one-day time horizon. The estimated maximum potential one-day loss in earnings for our foreign exchange positions and contracts was not significant at year-end 2021 or 2020. Interest Rate Sensitivity In 2021 and 2020, an assumed 9 and 18 basis point, respectively, increase in interest rates affecting our variable-rate borrowings (10% of our weighted average interest rate on floating rate debt) would not have had a significant impact on interest expense. [[GREPCENT_TABLE]] [["Avery Dennison Corporation","","|","","2021 Annual Report","","","","","","19"]] [[/GREPCENT_TABLE]] Table of Contents Consolidated Balance Sheets [[GREPCENT_TABLE]] [["(Dollars in millions, except per share amount)","","January 1, 2022","","","January 2, 2021"],["Assets"],["Current assets:"],["Cash and cash equivalents","","","$ 162.7","","","","$ 252.3"],["Trade accounts receivable, less allowances of $33 and $44.6 at year-end 2021 and 2020, respectively","","","1,424.5","","","","1,235.2"],["Inventories","","","907.2","","","","717.2"],["Other current assets","","","240.2","","","","211.5"],["Total current assets","","","2,734.6","","","","2,416.2"],["Property, plant and equipment, net","","","1,477.7","","","","1,343.7"],["Goodwill","","","1,881.5","","","","1,136.4"],["Other intangibles resulting from business acquisitions, net","","","911.4","","","","224.9"],["Deferred tax assets","","","130.2","","","","197.7"],["Other assets","","","836.2","","","","765.0"],["","","","$ 7,971.6","","","","$ 6,083.9"],["Liabilities and Shareholders\u2019 Equity"],["Current liabilities:"],["Short-term borrowings and current portion of long-term debt and finance leases","","","$ 318.8","","","","$ 64.7"],["Accounts payable","","","1,298.8","","","","1,050.9"],["Accrued payroll and employee benefits","","","299.0","","","","239.0"],["Accrued trade rebates","","","176.3","","","","140.2"],["Income taxes payable","","","74.9","","","","86.3"],["Other current liabilities","","","380.1","","","","344.9"],["Total current liabilities","","","2,547.9","","","","1,926.0"],["Long-term debt and finance leases","","","2,785.9","","","","2,052.1"],["Long-term retirement benefits and other liabilities","","","474.9","","","","503.6"],["Deferred tax liabilities and income taxes payable","","","238.5","","","","117.3"],["Commitments and contingencies (see Notes 7 and 8)"],["Shareholders\u2019 equity:"],["Common stock, $1 par value per share, authorized \u2013 400,000,000 shares at year-end 2021 and 2020; issued \u2013 124,126,624 shares at year-end 2021 and 2020; outstanding \u2013 82,605,953 and 83,151,174 shares at year-end 2021 and 2020, respectively","","","124.1","","","","124.1"],["Capital in excess of par value","","","862.3","","","","862.1"],["Retained earnings","","","3,880.7","","","","3,349.3"],["Treasury stock at cost, 41,520,671 and 40,975,450 shares at year-end 2021 and 2020, respectively","","","(2,659.8",")","","","(2,501.0",")"],["Accumulated other comprehensive loss","","","(282.9",")","","","(349.6",")"],["Total shareholders\u2019 equity","","","1,924.4","","","","1,484.9"],["","","","$ 7,971.6","","","","$ 6,083.9"]] [[/GREPCENT_TABLE]] See Notes to Consolidated Financial Statements [[GREPCENT_TABLE]] [["20","","","","2021 Annual Report","","|","","Avery Dennison Corporation"]] [[/GREPCENT_TABLE]] Table of Contents Consolidated Statements of Income [[GREPCENT_TABLE]] [["(In millions, except per share amounts)","","2021","","","2020","","","2019"],["Net sales","","$","8,408.3","","","$","6,971.5","","","$","7,070.1"],["Cost of products sold","","","6,095.5","","","","5,048.2","","","","5,166.0"],["Gross profit","","","2,312.8","","","","1,923.3","","","","1,904.1"],["Marketing, general and administrative expense","","","1,248.5","","","","1,060.5","","","","1,080.4"],["Other expense (income), net","","","5.6","","","","53.6","","","","53.2"],["Interest expense","","","70.2","","","","70.0","","","","75.8"],["Other non-operating expense (income), net","","","(4.1",")","","","1.9","","","","445.2"],["Income before taxes","","","992.6","","","","737.3","","","","249.5"],["Provision for (benefit from) income taxes","","","248.6","","","","177.7","","","","(56.7",")"],["Equity method investment (losses) gains","","","(3.9",")","","","(3.7",")","","","(2.6",")"],["Net income","","$","740.1","","","$","555.9","","","$","303.6"],["Per share amounts:"],["Net income per common share","","$","8.93","","","$","6.67","","","$","3.61"],["Net income per common share, assuming dilution","","$","8.83","","","$","6.61","","","$","3.57"],["Weighted average number of shares outstanding:"],["Common shares","","","82.9","","","","83.4","","","","84.0"],["Common shares, assuming dilution","","","83.8","","","","84.1","","","","85.0"]] [[/GREPCENT_TABLE]] See Notes to Consolidated Financial Statements [[GREPCENT_TABLE]] [["Avery Dennison Corporation","","|","","2021 Annual Report","","","","","","21"]] [[/GREPCENT_TABLE]] Table of Contents Consolidated Statements of Comprehensive Income [[GREPCENT_TABLE]] [["(In millions)","","2021","","","2020","","","2019"],["Net income","","$","740.1","","","$","555.9","","","$","303.6"],["Other comprehensive income (loss), net of tax:"],["Foreign currency translation:"],["Translation gain (loss)","","","30.7","","","","(3.0",")","","","2.3"],["Pension and other postretirement benefits:"],["Net gain recognized from actuarial gain/loss and prior service cost/credit","","","27.9","","","","6.2","","","","66.4"],["Reclassifications to net income","","","4.4","","","","2.9","","","","266.1"],["Cash flow hedges:"],["Gains (losses) recognized on cash flow hedges","","","5.4","","","","(7.5",")","","",".5"],["Reclassifications to net income","","","(1.7",")","","","(.1",")","","","(1.4",")"],["Other comprehensive income (loss), net of tax","","","66.7","","","","(1.5",")","","","333.9"],["Total comprehensive income, net of tax","","$","806.8","","","$","554.4","","","$","637.5"]] [[/GREPCENT_TABLE]] See Notes to Consolidated Financial Statements [[GREPCENT_TABLE]] [["22","","","","2021 Annual Report","","|","","Avery Dennison Corporation"]] [[/GREPCENT_TABLE]] Table of Contents Consolidated Statements of Shareholders’ Equity [[GREPCENT_TABLE]] [["(Dollars in millions, except per share amounts)","","Common stock, $1 par value","","","Capital in excess of par value","","","Retained earnings","","","Treasury stock","","","Accumulated other comprehensive loss","","","Total"],["Balance as of December 29, 2018","","","$124.1","","","","$872.0","","","$","2,864.9","","","$","(2,223.9",")","","","$(682.0",")","","$","955.1"],["Net income","","","\u2013","","","","\u2013","","","","303.6","","","","\u2013","","","","\u2013","","","","303.6"],["Other comprehensive income (loss), net of tax","","","\u2013","","","","\u2013","","","","\u2013","","","","\u2013","","","","333.9","","","","333.9"],["Repurchase of 2,222,937 shares for treasury","","","\u2013","","","","\u2013","","","","\u2013","","","","(237.7",")","","","\u2013","","","","(237.7",")"],["Issuance of 665,380 shares under stock-based compensation plans","","","\u2013","","","","2.0","","","","(13.6",")","","","28.0","","","","\u2013","","","","16.4"],["Contribution of 200,742 shares to 401(k) Plan","","","\u2013","","","","\u2013","","","","13.9","","","","8.5","","","","\u2013","","","","22.4"],["Dividends of $2.26 per share","","","\u2013","","","","\u2013","","","","(189.7",")","","","\u2013","","","","\u2013","","","","(189.7",")"],["Balance as of December 28, 2019","","","$124.1","","","","$874.0","","","$","2,979.1","","","$","(2,425.1",")","","","$(348.1",")","","$","1,204.0"],["Net income","","","\u2013","","","","\u2013","","","","555.9","","","","\u2013","","","","\u2013","","","","555.9"],["Other comprehensive income (loss), net of tax","","","\u2013","","","","\u2013","","","","\u2013","","","","\u2013","","","","(1.5",")","","","(1.5",")"],["Repurchase of 792,997 shares for treasury","","","\u2013","","","","\u2013","","","","\u2013","","","","(104.3",")","","","\u2013","","","","(104.3",")"],["Issuance of 389,102 shares under stock-based compensation plans","","","\u2013","","","","(11.9",")","","","(3.4",")","","","20.2","","","","\u2013","","","","4.9"],["Contribution of 188,229 shares to 401(k) Plan","","","\u2013","","","","\u2013","","","","14.5","","","","8.2","","","","\u2013","","","","22.7"],["Dividends of $2.36 per share","","","\u2013","","","","\u2013","","","","(196.8",")","","","\u2013","","","","\u2013","","","","(196.8",")"],["Balance as of January 2, 2021","","","$124.1","","","","$862.1","","","$","3,349.3","","","$","(2,501.0",")","","","$(349.6",")","","$","1,484.9"],["Net income","","","\u2013","","","","\u2013","","","","740.1","","","","\u2013","","","","\u2013","","","","740.1"],["Other comprehensive income (loss), net of tax","","","\u2013","","","","\u2013","","","","\u2013","","","","\u2013","","","","66.7","","","","66.7"],["Repurchase of 925,425 shares for treasury","","","\u2013","","","","\u2013","","","","\u2013","","","","(180.9",")","","","\u2013","","","","(180.9",")"],["Issuance of 257,189 shares under stock-based compensation plans","","","\u2013","","","",".2","","","","(7.2",")","","","16.6","","","","\u2013","","","","9.6"],["Contribution of 123,015 shares to 401(k) Plan","","","\u2013","","","","\u2013","","","","19.1","","","","5.5","","","","\u2013","","","","24.6"],["Dividends of $2.66 per share","","","\u2013","","","","\u2013","","","","(220.6",")","","","\u2013","","","","\u2013","","","","(220.6",")"],["Balance as of January 1, 2022","","","$124.1","","","","$862.3","","","$","3,880.7","","","$","(2,659.8",")","","","$(282.9",")","","$","1,924.4"]] [[/GREPCENT_TABLE]] See Notes to Consolidated Financial Statements [[GREPCENT_TABLE]] [["Avery Dennison Corporation","","|","","2021 Annual Report","","","","","","23"]] [[/GREPCENT_TABLE]] Table of Contents Consolidated Statements of Cash Flows [[GREPCENT_TABLE]] [["(In millions)","","2021","","","2020","","","2019"],["Operating Activities"],["Net income","","$","740.1","","","$","555.9","","","$","303.6"],["Adjustments to reconcile net income to net cash provided by operating activities:"],["Depreciation","","","167.3","","","","154.2","","","","140.3"],["Amortization","","","76.8","","","","51.1","","","","38.7"],["Provision for credit losses and sales returns","","","35.7","","","","64.0","","","","58.7"],["Stock-based compensation","","","37.2","","","","24.0","","","","34.5"],["Pension plan settlements and related charges","","","1.6","","","",".5","","","","444.1"],["Deferred taxes and other non-cash taxes","","","2.6","","","","9.3","","","","(216.9",")"],["Other non-cash expense and loss (income and gain), net","","","10.1","","","","44.9","","","","28.3"],["Changes in assets and liabilities and other adjustments:"],["Trade accounts receivable","","","(113.2",")","","","14.7","","","","(42.2",")"],["Inventories","","","(182.7",")","","","(6.0",")","","","(18.1",")"],["Accounts payable","","","255.2","","","","(68.2",")","","","46.4"],["Taxes on income","","","(7.3",")","","","(35.2",")","","","5.4"],["Other assets","","","4.1","","","","18.2","","","","38.4"],["Other liabilities","","","19.3","","","","(76.1",")","","","(114.7",")"],["Net cash provided by operating activities","","","1,046.8","","","","751.3","","","","746.5"],["Investing Activities"],["Purchases of property, plant and equipment","","","(255.0",")","","","(201.4",")","","","(219.4",")"],["Purchases of software and other deferred charges","","","(17.1",")","","","(17.2",")","","","(37.8",")"],["Proceeds from sales of property, plant and equipment","","","1.1","","","","9.2","","","","7.8"],["Proceeds from insurance and sales (purchases) of investments, net","","","3.1","","","","5.6","","","","4.9"],["Proceeds from sale of product line","","","7.6","","","","\u2014","","","","\u2014"],["Payments for acquisitions, net of cash acquired, and investments in businesses","","","(1,477.6",")","","","(350.4",")","","","(6.5",")"],["Net cash used in investing activities","","","(1,737.9",")","","","(554.2",")","","","(251.0",")"],["Financing Activities"],["Net increase (decrease) in borrowings with maturities of three months or less","","","259.2","","","","(110.4",")","","","(5.3",")"],["Additional borrowings under revolving credit facility","","","\u2013","","","","500.0","","","","\u2013"],["Repayments of borrowings under revolving credit facility","","","\u2013","","","","(500.0",")","","","\u2013"],["Additional long-term borrowings","","","791.7","","","","493.7","","","","\u2013"],["Repayments of long-term debt and finance leases","","","(13.4",")","","","(270.2",")","","","(18.6",")"],["Dividends paid","","","(220.6",")","","","(196.8",")","","","(189.7",")"],["Share repurchases","","","(180.9",")","","","(104.3",")","","","(237.7",")"],["Net (tax withholding) proceeds related to stock-based compensation","","","(25.4",")","","","(19.7",")","","","(17.4",")"],["Other","","","(6.3",")","","","\u2013","","","","(1.6",")"],["Net cash provided by (used in) financing activities","","","604.3","","","","(207.7",")","","","(470.3",")"],["Effect of foreign currency translation on cash balances","","","(2.8",")","","","9.2","","","","(3.5",")"],["Increase (decrease) in cash and cash equivalents","","","(89.6",")","","","(1.4",")","","","21.7"],["Cash and cash equivalents, beginning of year","","","252.3","","","","253.7","","","","232.0"],["Cash and cash equivalents, end of year","","$","162.7","","","$","252.3","","","$","253.7"]] [[/GREPCENT_TABLE]] See Notes to Consolidated Financial Statements [[GREPCENT_TABLE]] [["24","","","","2021 Annual Report","","|","","Avery Dennison Corporation"]] [[/GREPCENT_TABLE]] Table of Contents