Avery Dennison Corporation
207 Goode Avenue
Glendale, California 91203
www.averydennison.com
Avery
Dennison
Corporation
2014
Annual
Report
Sustainable
momentum
Table of
Contents
Financial Highlights
Letter to Shareholders
Businesses at a Glance
Directors and Officers
Financial Information
1
2
7
9
10
Visit www.averydennison.com and follow
us on social media to learn how we create
sustainable value by developing solutions
for all of our stakeholders.
Financial
Highlights
$1.34
DIvIDenDS per COMMOn SHAre
Dividends per common share paid in
2014 totaled $1.34, an increase of 18%
over 2013. We returned a total of $481
million to shareholders in 2014 through
dividends and the repurchase of 7.4
million shares of our common stock.
Other†
5%
Latin
America
8%
U.S.
24%
$5.9
2012
$6.3
2014
$6.1
2013
Asia
30%
Western
Europe
24%
Eastern
Europe
and MENA
9%
revenUe BY GeOGrApHY
†Canada, South Africa, and Australia
Net sales in emerging markets (Latin America, Asia, Eastern Europe and
The Middle East/North Africa) totaled approximately $3.0 billion in 2014,
representing 47% of our annual revenues.
$248.9
2014
$215.4
2012
$215.8
2013
$330.3
2013
$302.9
2012
$204.0
2014
$248.9
$204.0
neT InCOMe
In MILLIOn S
Free CASH FLOw
In MILLIOn S
$6.3
neT SALeS
In BILLIOn S
Net income was $248.9 million in 2014.
Net
share,
assuming dilution, was $2.60.
income per common
Free cash flow* of $204.0 million in 2014 allowed us to reduce debt,
increase our quarterly dividend and repurchase 7.4 million shares
of our common stock. Free cash flow in 2014 decreased compared
to 2013 due primarily to the impact of currency fluctuation and
actions we took to reduce the volatility associated with year-end changes
to our working capital.
Net sales in 2014 increased approximately 3% over
2013 on both a reported and an organic basis.*
Chart scales are approximate.
* Free cash flow and organic sales change are non-GAAP financial measures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for
definitions of and qualifications for these measures, as well as reconciliations to the most directly comparable GAAP financial measures.
1
Avery Dennison Corporation 2014 Annual Report
Letter to
Shareholders
Dear Fellow Shareholders:
I’m pleased to report on a year of substantial progress in building
sustainable momentum. By this term, I mean both delivering solid
long-term results for shareholders and fulfilling our commitment
to a better world … for people and for the planet. we operate in an
environment being made warmer by greenhouse gas emissions;
in which raw materials are becoming scarcer and more expensive;
and in which social media have increased expectations for incred-
ible transparency and immediacy. As industry leaders, our
two core businesses afford us a unique opportunity to drive the
agenda for creating a more sustainable world for all stakeholders.
In 2014, we delivered a double-digit increase in earnings per share, substantially
increased our return on invested capital, and returned more than $480 million to
shareholders through the repurchase of 7.4 million shares and payment of dividends,
which included a 21% increase in our quarterly dividend rate.
In 2012, we set challenging financial targets for the four years through 2015 and
have made substantial progress toward achieving them. In May of last year, we
updated those targets through 2018, raising our long-term growth objectives and
increasing targets for both operating margin and return on capital. Our long-term
targets and our progress against them are outlined in our investor presentation at
www.investors.averydennison.com.
We have built sustainable momentum in value creation by following a clear strategy:
» Grow through innovation and differentiated quality and service,
and by investing in select high-potential market segments.
» Expand margins by increasing productivity and accelerating growth
in high-return market segments.
» Use a disciplined approach to investing in our business and returning
cash to shareholders.
2
Letter to Shareholders
Our significant competitive advantages – high relative market share, economies of
scale, leadership in emerging markets, technical expertise and innovation
capabilities – have enabled us to grow faster and deliver higher returns over the past
three years. To maintain this momentum and ensure we achieve our 2018 objectives,
we are refining our strategy to drive profitable growth in all of the market segments in
which we compete.
pressure-sensitive Materials (pSM)
Pressure-sensitive Materials delivered its third consecutive year of strong volume
growth while maintaining its profitability and high return on capital. PSM is a great
business, and we believe it can be even better.
Until relatively late in 2014, PSM’s sales growth did not deliver as much profit growth
as we expected due to pricing pressures and the mix of products we were selling.
We also saw some slowing in demand in a few regions in the second half of the year.
The PSM team is addressing these challenges by reducing costs and improving
productivity to enable us to be more competitive in less-differentiated market
segments. At the same time, we are making additional investments in market
segments with higher profit potential, including Performance Tapes and Graphics
Solutions, as well as in faster-growing emerging markets.
We continue to invest in innovation and new capability in PSM. We are adding new
coating capacity in Asia for all product lines, and we have nearly completed a major
restructuring program in Europe that will enable Graphics Solutions to compete more
effectively. We continue to build customer loyalty through innovation, which remains
a priority for PSM. We exceeded our target for sales from new products in 2014, led
by Avery Dennison ClearCut™ adhesive technology, which enables the use of thinner
films, contributes to cleaner press operations and delivers a clearer, no-label look.
We also won industry awards for our new tire label material, which adheres to tires
more securely than previous products.
retail Branding and Information Solutions (rBIS)
RBIS, the leading provider of end-to-end branding and information solutions for the
retail apparel industry, faced top-line growth challenges in 2014. This was due
primarily to share loss in the value and contemporary market segments, which was
partially offset by solid growth in the performance segment and radio-frequency
identification (RFID).
RBIS is focused on recapturing share in the value and contemporary segments by
providing a better value proposition to the apparel factories that serve these
3
Avery Dennison Corporation 2014 Annual Report
Letter to Shareholders
segments, particularly in China. At the same time, we are further reducing our cost
structure to achieve our goals for margin improvement.
Like PSM, RBIS is also driving growth through innovation in higher-potential
segments. For the second consecutive year, we achieved double-digit growth in
external embellishments. Of note, we produced the logos and emblems on three-
quarters of the team jerseys in last year’s World Cup. Another RBIS team applied its
expertise in weaving fabric labels to craft an extraordinarily light and strong one-
piece upper for athletic shoes. This technology is a unique extension of our expertise
into a new market segment and an exciting new growth opportunity for us.
RFID remains a key growth catalyst. Our customers remain committed to the
technology and our partnerships, and we are also seeing heightened interest in
new pilots and roll-outs. We continue to expect RFID to grow 10 to 20 percent
through 2018.
I’m confident about the future of RBIS. Underlying demand for apparel hasn’t
changed; our value proposition for the performance and premium market segments
remains strong, and we know how to develop a comparably strong offering for the
less-differentiated value and contemporary segments. We expect an improvement in
the RBIS sales growth trajectory by mid-year and for the business to resume its
strong pace for margin expansion.
vancive Medical Technologies
Vancive, our small but high-potential medical products business, delivered sales
growth at the high end of our long-term target in 2014. A highlight was the positive
reception given to our Metria® IH1 Lifestyle Assessment System, which uses a
disposable wearable sensor to provide wellness data. In 2015, we will continue to
focus on the milestones needed to drive growth in this promising platform.
Sustainability
In addition to the actions we are taking to drive long-term economic returns, we are
building sustainable momentum in terms of the planet and people as well.
We are taking into account the risks and opportunities that are being created by
the impact of climate change and rising consumption on resources, and the rising
demand for transparency, to build a more resilient and prosperous business. By
operating in ways that reduce our impact on the environment, we reduce costs;
by providing safe working conditions and paying fair wages and benefits, we foster
greater employee engagement, productivity, creativity and performance.
4
Letter to Shareholders
And by developing products that enable our customers’ supply chains to be more
sustainable, we can accelerate growth. Avery Dennison will lead in our key markets
by building on a legacy of innovation, integrity, workplace fairness and community
involvement. By doing so, we create long-term value for shareholders, customers,
employees, and the communities in which we operate.
I’m especially proud of the work we are doing to help our customers and suppliers.
For example, we are dramatically increasing the percentage of responsibly sourced
paper in our label materials. In one year, we have used our scale and innovation to
expand our portfolio of products incorporating Forest Stewardship Council-certified
paper – and offer these products at price parity. Our portfolio is now the largest in the
industry; in Europe, more than 60 percent of the paper facestock on materials we
sold last year was FSC-certified. Our actions are helping to move the labeling
industry toward more sustainable products and enabling us to manage business risk
by ensuring that we have long-term access to a critical raw material.
In 2015, we will reach the end of the five-year period we set for our first long-term
sustainability goals, and we are on track to meet or exceed them. Now we are going
to be much more ambitious and visionary, setting goals not for five years, but for 10.
Our 2025 goals, which we plan to publish later this year, will include new targets for
energy efficiency, responsible sourcing, waste reduction, safety levels, community
investment and gender diversity.
Stan Avery said he started our company when he realized that by running a great,
ethical business, he could help more people than by doing charitable work. His
desire to help people with products, employment, and community involvement is
at the heart of everything we do. By caring for the planet and people, we are better
prepared to thrive and benefit all of our stakeholders.
Transitions
This April, Director Rolf Börjesson will retire from our board of directors after
10 years of service. Rolf’s experience and expertise in the packaging industry have
enabled him to provide invaluable guidance, and I wish him the very best.
In September 2014, we lost H. Russell Smith, one of the most important figures in
our company’s history. Russ, who held every senior leadership role over his 40 years
with the company, was Stan Avery’s partner in entrepreneurship; together they
turned Stan’s inventions into a global enterprise. A model of values-based
leadership, Russ played a key role in creating our culture of integrity, inclusiveness
5
Avery Dennison Corporation 2014 Annual Report
Letter to Shareholders
and empowerment. Because of him, Avery Dennison is a place where individuals
can come to work and make a difference every day.
In November 2014, the board of directors elected Mitchell R. Butier as president
and chief operating offi cer. As chief fi nancial offi cer, Mitch has been a great thought
partner in shaping our business model and designing our value creation strategy.
We have worked together for more than a decade, and I look forward to our new
partnership in building this great company.
Finally, I am delighted to welcome Mitch’s successor, Anne L. Bramman, who will
soon join us as our new senior vice president and chief fi nancial offi cer. Anne is a
world-class fi nance executive and strong business leader, and her extensive
experience in overseeing complex global operations at market-leading companies
makes her ideally suited for the role.
80 Years
Avery Dennison will turn 80 in 2015, an achievement I attribute to our extraordinary
employees. From 1935 to the present day, great people have joined the company
and given their best to build Stan Avery’s small business into an industry leader.
I want to thank our current team for their work in 2014, and all Avery Dennison
employees for their contributions over eight decades.
In the past four years, we have worked through challenging economic conditions,
refocused the company and built solid, sustainable momentum. In 2015 we will
continue on the journey toward becoming a more resilient and sustainable
enterprise. We intend to deliver exceptional value for our customers, employees,
and shareholders, not just for the next 80 years, but for generations to come.
Thank you for your investment in Avery Dennison.
Dean A. Scarborough
Chairman and Chief Executive Officer
MARCH 2, 2015
6
Businesses
at a Glance
SeGMenT
Pressure-sensitive Materials
BUSIneSS
2014 SALeS In MILLIOnS
% OF SALeS
Materials Group
$4,658
74%
GLOBAL BrAnD
Avery Dennison®
DeSCrIpTIOn
The technologies and materials of our
Pressure-sensitive Materials businesses
enhance brands’ shelf, store and street appeal;
inform shoppers of ingredients; protect brand
security; improve operational efficiency; and
provide visual information that enhances safety
prODUCTS/SOLUTIOnS
Pressure-sensitive labeling materials;
packaging materials and solutions; roll-fed
sleeve; performance polymer adhesives and
SeGMenT
Retail Branding and Information Solutions
BUSIneSS
retail Branding and
Information Solutions
2014 SALeS In MILLIOnS
$1,592
% OF SALeS
25%
GLOBAL BrAnDS
Avery Dennison®
Monarch®
DeSCrIpTIOn
RBIS provides intelligent, creative and
sustainable solutions that elevate brands and
accelerate performance throughout the global
retail supply chain
prODUCTS/SOLUTIOnS
Creative services; brand embellishments; graphic
tickets; tags and labels; sustainable packaging;
inventory visibility and loss prevention solutions;
SeGMenT
Vancive Medical Technologies
BUSIneSS
2014 SALeS In MILLIOnS
% OF SALeS
vancive Medical Technologies
$81
1%
GLOBAL BrAnD
vancive Medical Technologies™
DeSCrIpTIOn
Vancive Medical Technologies delivers
advanced medical tapes, films and
technologies with its partners to help improve
the patient experience, accelerate operational
efficiencies, and manage the costs of providing
quality patient care and improving outcomes
7
Avery Dennison Corporation 2014 Annual Report
engineered films; graphic imaging media;
reflective materials; pressure-sensitive tapes
for automotive, building and construction;
electronics and industrial applications; diaper
tapes and closures
MArkeT SeGMenTS
Food; beverage; wine and spirits; home and
personal care products; pharmaceuticals;
durables; fleet vehicle/automotive;
architectural/retail; promotional/advertising;
traffic; safety; transportation original
equipment manufacturing; personal care;
electronics; building and construction
CUSTOMerS
Label converters; package designers;
packaging engineers and manufacturers;
industrial manufacturers; printers; distributors;
advertising agencies; government agencies;
sign manufacturers; graphic vendors; tape
converters; original equipment manufacturers;
construction firms; personal care product
manufacturers
weBSITeS
www.label.averydennison.com
www.graphics.averydennison.com
www.tapes.averydennison.com
www.reflectives.averydennison.com
LeADer
Mitchell r. Butier
President, Chief Operating Officer
and Chief Financial Officer
data management services; price tickets;
printers and scanners; radio-frequency
identification (RFID) inlays; fasteners; brand
protection and security solutions
MArkeT SeGMenTS
Apparel manufacturing and retail supply chain;
food service and supply chain; hard goods and
supply chain; pharmaceutical supply chain;
logistics
CUSTOMerS
Apparel brands, manufacturers and retailers;
food service, grocery and pharmaceutical
supply chains; consumer goods brands;
automotive manufacturers; transportation
companies
weBSITeS
www.rbis.averydennison.com
www.rfid.averydennison.com
LeADer
r. Shawn neville
President,
Retail Branding and Information Solutions
prODUCTS/SOLUTIOnS
Skin-contact adhesives; surgical, wound care,
ostomy and securement products; medical
barrier films; wearable sensor technology
MArkeT SeGMenTS
Medical and healthcare
weBSITe
www.vancive.averydennison.com
CUSTOMerS
Medical products and device manufacturers
LeADer
Howard kelly
Vice President and General Manager,
Vancive Medical Technologies
8
cOMPANY LEAdErSHiP
Dean A. Scarborough
Chairman and
Chief Executive Officer
Mitchell r. Butier
President, Chief Operating Officer
and Chief Financial Officer
Lori J. Bondar
Vice President, Controller and
Chief Accounting Officer
Anne Hill
Senior Vice President and
Chief Human Resources and
Communications Officer
Susan C. Miller
Senior Vice President,
General Counsel and Secretary
r. Shawn neville
President, Retail Branding and
Information Solutions
Directors
and Officers
BOArd Of dirEctOrS
Dean A. Scarborough
Chairman and
Chief Executive Officer,
Avery Dennison Corporation
ken C. Hicks 2, 3
Executive Chairman,
Foot Locker, Inc.,
a specialty athletic retailer
Bradley A. Alford 1, 3
Retired Chairman and
Chief Executive Officer,
Nestlé USA,
a food and beverage company
David e. I. pyott LID, 1, 3
Chairman and
Chief Executive Officer,
Allergan, Inc.,
a global health care company
Anthony k. Anderson 2
Retired Vice Chair and
Managing Partner,
Ernst & Young LLP,
a global assurance, tax, transaction
and advisory services firm
peter k. Barker 2
Retired Chairman of California,
JP Morgan Chase & Co.,
a global financial services firm
rolf L. Börjesson 3
Retired Chairman,
Rexam PLC,
a consumer packaging company
patrick T. Siewert 2
Managing Director and Partner,
The Carlyle Group,
a global alternative investment firm
Julia A. Stewart 1, 3
Chairman and
Chief Executive Officer,
DineEquity, Inc.,
a full-service restaurant company
Martha n. Sullivan1
President and
Chief Executive Officer,
Sensata Technologies Holding N.V.,
a sensors and controls company
LID – Lead Independent Director
1 – Member of Compensation and
Executive Personnel Committee
2 – Member of Audit and Finance Committee
3 – Member of Governance and
Social Responsibility Committee
9
Avery Dennison Corporation 2014 Annual Report
Financial
Information
Five-year Summary
Management’s
Discussion and Analysis
of Financial Condition and
results of Operations
Consolidated Financial
Statements
notes to Consolidated
Financial Statements
Corporate Information
12
14
27
32
63
10
Safe Harbor Statement
The matters discussed in this Annual Report contain ‘‘forward-looking statements’’ within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements, which are not statements of historical fact, contain estimates, assumptions, projections and/or expectations regarding
future events, which may or may not occur. Words such as ‘‘aim,’’ ‘‘anticipate,’’ ‘‘assume,’’ ‘‘believe,’’ ‘‘continue,’’ ‘‘could,’’ ‘‘estimate,’’ ‘‘expect,’’
‘‘foresee,’’ ‘‘guidance,’’ ‘‘intend,’’ ‘‘may,’’ ‘‘might,’’ ‘‘objective,’’ ‘‘plan,’’ ‘‘potential,’’ ‘‘project,’’ ‘‘seek,’’ ‘‘shall,’’ ‘‘should,’’ ‘‘target,’’ ‘‘will,’’ ‘‘would,’’ or
variations thereof, and other expressions that refer to future events and trends, identify forward-looking statements. These forward-looking
statements, and financial or other business targets, are subject to certain risks and uncertainties, which could cause our actual results to differ
materially from the expected results, performance or achievements expressed or implied by such forward-looking statements.
Certain risks and uncertainties are discussed in more detail under ‘‘Risk Factors’’ and ‘‘Management’s Discussion and Analysis of Financial
Condition and Results of Operations’’ in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015 and include, but are not limited to,
risks and uncertainties relating to the following: fluctuations in demand affecting sales to customers; worldwide and local economic conditions;
fluctuations in currency exchange rates and other risks associated with foreign operations, including in emerging markets; the financial condition and
inventory strategies of customers; changes in customer preferences; fluctuations in cost and availability of raw materials; our ability to generate
sustained productivity improvement; our ability to achieve and sustain targeted cost reductions; the impact of competitive products and pricing; loss
of significant contracts or customers; collection of receivables from customers; selling prices; business mix shift; timely development and market
acceptance of new products, including sustainable or sustainably-sourced products; investment in development activities and new production
facilities; integration of acquisitions and completion of potential dispositions; amounts of future dividends and share repurchases; customer and
supplier concentrations; successful implementation of new manufacturing technologies and installation of manufacturing equipment; disruptions in
information technology systems including cyber-attacks or other intrusions to network security; successful installation of new or upgraded
information technology systems; data security breaches; volatility of financial markets; impairment of capitalized assets, including goodwill and other
intangibles; credit risks; our ability to obtain adequate financing arrangements and maintain access to capital; fluctuations in interest and tax rates;
changes in tax laws and regulations, and uncertainties associated with interpretations of such laws and regulations; outcome of tax audits;
fluctuations in pension, insurance, and employee benefit costs; impact of legal and regulatory proceedings, including with respect to environmental,
health and safety; changes in governmental laws and regulations; protection and infringement of intellectual property; changes in political conditions;
the impact of epidemiological events on the economy and our customers and suppliers; acts of war, terrorism, and natural disasters; and other
factors.
We believe that the most significant risk factors that could affect our financial performance in the near-term include: (1) the impacts of economic
conditions on underlying demand for our products and foreign currency fluctuations; (2) competitors’ actions, including pricing, expansion in key
markets, and product offerings; and (3) the degree to which higher costs can be offset with productivity measures and/or passed on to customers
through selling price increases, without a significant loss of volume.
Our forward-looking statements are made only as of the date hereof. We assume no duty to update these forward-looking statements to reflect
new, changed or unanticipated events or circumstances, other than as may be required by law.
11
Avery Dennison Corporation
2014 Annual Report
Five-Year Summary
(Dollars in millions, except %
and per share amounts)
For the Year
Net sales
Gross profit
Marketing, general and administrative expense
Interest expense
Other expense, net (2)
Income from continuing operations before taxes
Provision for (benefit from) income taxes
Income from continuing operations
(Loss) income from discontinued operations, net of tax
Net income
Per Share Information
Income per common share from continuing operations
Income per common share from continuing operations,
assuming dilution
(Loss) income per common share from discontinued
operations
(Loss) income per common share from discontinued
operations, assuming dilution
Net income per common share
Net income per common share, assuming dilution
Dividends per common share
Weighted-average common shares outstanding (in
millions)
Weighted-average common shares outstanding,
assuming dilution (in millions)
Book value per share at fiscal year-end
Market price per share at fiscal year-end
Market price per share range
At End of Year
Working capital (3)
Property, plant and equipment, net (3)
Total assets
Long-term debt and capital leases (3)
Total debt (3)
Shareholders’ equity
Other Information
Depreciation and amortization expense (4)
Research and development expense (4)
Effective tax rate (4)
Return on average shareholders’ equity
Return on average total capital
2014 (1)
2013
2012
2011
2010
Dollars
%
Dollars
%
Dollars
%
Dollars
%
Dollars
%
1,651.2
1,155.3
63.3
68.2
364.4
113.3
251.1
$6,330.3 100.0 $6,140.0 100.0 $5,863.5 100.0 $5,844.9 100.0 $5,604.8 100.0
26.2
20.4
1.4
.3
4.0
(.1)
4.2
83.3 N/A
5.7
26.7
1,637.7
19.2
1,179.0
1.0
59.0
.6
36.6
5.9
363.1
1.9
118.8
244.3
4.0
(28.5) N/A
3.5
215.8
26.1
19.6
1.2
1.2
4.1
1.4
2.7
57.8 N/A
3.7
26.1
18.3
1.0
1.1
5.8
1.8
4.0
(2.2) N/A
3.9
1,475.3
1,139.4
71.1
51.6
213.2
71.5
141.7
48.4
190.1
1,466.4
1,145.9
76.6
18.7
225.2
(8.4)
233.6
1,528.2
1,148.9
72.9
68.8
237.6
80.0
157.6
25.2
19.5
1.2
.9
3.6
1.2
2.4
N/A
3.3
248.9
215.4
316.9
2014
2013
2012
2011
2010
$
2.68
$
2.48
$
1.54
$
1.34
$
2.21
2.62
(.03)
(.02)
2.65
2.60
1.34
93.8
95.7
$ 11.78
51.79
41.28 to
52.67
$ 322.7
875.3
4,360.2
945.3
1,149.6
1,066.5
$ 201.6
102.5
2.44
(.29)
(.28)
2.19
2.16
1.14
98.4
100.1
$ 15.51
50.48
34.92 to
50.65
$ 536.4
922.5
4,610.6
950.6
1,027.5
1,492.2
$ 204.3
96.0
1.52
.56
.56
2.10
2.08
1.08
1.33
.46
.45
1.80
1.78
1.00
2.19
.79
.78
3.00
2.97
.80
102.6
105.8
105.8
103.5
$ 15.82
34.40
26.38 to
34.97
$
25.5
1,015.5
5,105.3
702.2
1,222.4
1,580.9
$ 211.0
98.6
106.8
$ 15.60
28.68
23.97 to
43.11
$ 271.3
1,079.4
4,972.7
954.2
1,181.3
1,658.5
$ 220.0
93.8
106.8
$ 15.61
42.34
30.79 to
42.49
$ 120.1
1,262.9
5,099.4
956.2
1,337.2
1,645.7
$ 220.5
84.5
31.1%
18.3
11.8
32.7%
13.9
9.3
33.7%
13.4
9.1
33.5%
11.1
7.6
(3.7)%
21.6
12.8
(1) Results for 2014 reflected a 53-week period.
(2) Included pretax charges for severance and related costs, asset impairment, lease and other contract cancellation charges, and other items.
(3) Amounts for 2012 and 2011 are for continuing operations only.
(4) Amounts for all years are for continuing operations only.
12
Stockholder Return Performance
The following graph compares the cumulative stockholder return on our common stock, including the reinvestment of dividends, with the return
on the S&P 500(cid:2) Stock Index, the average return (weighted by market capitalization) of the S&P 500(cid:2) Materials and Industrials subsets (the ‘‘Market
Basket’’), and the median return of the Market Basket, in each case for the five-year period ending December 31, 2014.
Comparison of Five-Year Cumulative Total Return as of December 31, 2014
Avery Dennison Corp
S&P 500 Index
Industrials and Materials (Weighted Average)
Industrials and Materials (Median)
$265
$240
$215
$190
$165
$140
$115
$90
$65
$244
$227
$205
$164
$40
12/31/2009
Total Return Analysis (1)
12/31/2010
12/31/2011
12/31/2012
12/31/2013
18FEB201523003752
12/31/2014
Avery Dennison Corporation
S&P 500 Index
Market Basket (Weighted Average) (2)
Market Basket (Median)
12/31/2009
12/31/2010
12/31/2011
12/31/2012
12/31/2013
12/31/2014
$100.00
100.00
100.00
100.00
$118.70
115.09
129.68
125.70
$ 82.92
117.49
128.12
122.74
$104.56
136.27
151.55
138.90
$154.16
180.38
213.29
194.43
$163.63
205.03
243.64
226.77
(1) Assumes $100 invested on December 31, 2009 and the reinvestment of dividends.
(2) Average weighted by market capitalization.
Historical stock price performance is not necessarily indicative of future stock price performance.
13
Avery Dennison Corporation
2014 Annual Report
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 following sections:
Non-GAAP Financial Measures . . . . . . . . . . . . . . . . . . . . .
Overview and Outlook . . . . . . . . . . . . . . . . . . . . . . . . . .
Analysis of Results of Operations . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .
Results of Operations by Reportable Segment
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Critical Accounting Estimates . . . . . . . . . . . . . . . . . . . . . .
Recent Accounting Requirements . . . . . . . . . . . . . . . . . . .
. . . . . . .
Market-Sensitive Instruments and Risk Management
14
14
16
18
19
23
26
26
NON-GAAP FINANCIAL MEASURES
investors using certain non-GAAP
We report financial results in conformity with accounting principles
generally accepted in the United States of America, or GAAP, and also
communicate with
financial
measures. These non-GAAP financial measures are not in accordance
with, nor are they a substitute for or superior to, the comparable GAAP
financial measures. These non-GAAP financial measures are intended
to supplement presentation of our financial results that are prepared in
accordance with GAAP. Based upon feedback from our investors and
financial analysts, we believe that supplemental non-GAAP financial
measures provide information that is useful to the assessment of our
performance and operating trends, as well as liquidity. The measures
we use may not be comparable to similarly named non-GAAP measures
used by other companies.
Our non-GAAP financial measures exclude the impact of certain
events, activities or strategic decisions. By excluding certain accounting
effects, both positive and negative, of certain items, we believe that we
are providing meaningful supplemental information to facilitate an
understanding of our core operating results and liquidity measures.
These non-GAAP financial measures are used internally to evaluate
trends in our underlying performance, as well as to facilitate comparison
to the results of competitors for a single period. While some of the items
we exclude from GAAP financial measures recur, they tend to be
disparate in amount, frequency, or timing.
We use the following non-GAAP financial measures in this MD&A:
(cid:129) Organic sales change refers to the increase or decrease in
sales excluding the estimated impact of currency translation,
product line exits, acquisitions and divestitures, and, where
applicable, the extra week in the fiscal year. The estimated
impact of 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. We believe organic sales change assists
investors in evaluating the underlying sales growth from the
ongoing activities of our businesses and provides improved
comparability of results period to period.
(cid:129) Free cash flow refers to cash flow from operations, 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 sales
(purchases) of investments, plus discretionary contributions to
pension plans and charitable contribution to Avery Dennison
Foundation utilizing proceeds from divestitures. Free cash flow
excludes uses of cash that do not directly or immediately
support the underlying business, such as discretionary debt
reductions, dividends, share repurchases, and certain effects
of acquisitions and divestitures (e.g., cash
from
flow
discontinued operations, taxes, and transaction costs).
(cid:129) Operational working capital 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
current assets and current
liabilities of held-for-sale
businesses. We use this non-GAAP financial measure to
assess our working capital requirements because it excludes
the impact of fluctuations attributable to our financing and
other activities (which affect cash and cash equivalents,
deferred taxes, other current assets, and other current
liabilities) that tend to be disparate in amount, frequency, or
timing, and that may increase the volatility of the working
capital as a percentage of sales from period to period.
Additionally, the excluded items are not significantly influenced
by our day-to-day activities managed at the operating level and
may not reflect the underlying trends in our operations.
(cid:129) Net debt to EBITDA ratio refers to total debt less cash and cash
equivalents, divided by EBITDA, which refers to earnings from
continuing operations before interest, taxes, depreciation and
amortization. We believe the net debt to EBITDA ratio is
meaningful because investors view it as an indicator of our
leverage position.
OVERVIEW AND OUTLOOK
Fiscal Year
Normally, our fiscal years consist of 52 weeks, but every fifth or sixth
fiscal year consists of 53 weeks. Our 2014 fiscal year consisted of a
53-week period ending January 3, 2015 and our 2013 and 2012 fiscal
years consisted of 52-week periods ending December 28, 2013 and
December 29, 2012, respectively.
Sales
In 2014, sales from continuing operations grew approximately 3%
compared to 2013 due to organic growth, with the impact of the extra
week in our 2014 fiscal year largely offset by the unfavorable impact of
foreign currency translation. On an organic basis, sales increased 3%
due to higher volume.
14
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
In 2013, sales from continuing operations grew approximately 5%
on both a reported and organic basis compared to 2012 due to higher
volume.
Free Cash Flow
(In millions)
Net cash provided by operating
2014
2013
2012
2014
2013
activities
Purchases of property, plant and
$ 374.2
$ 320.1
$513.4
Estimated change in sales due to
Organic sales change
Foreign currency translation
Extra week in fiscal year
Reported sales change (1)
(1) Totals may not sum due to rounding.
3%
(1)
1
3%
5%
–
–
5%
Income from Continuing Operations
Income from continuing operations increased from approximately
$244 million in 2013 to approximately $251 million in 2014. Major factors
affecting the change in income from continuing operations in 2014
compared to 2013 included:
Positive factors:
(cid:129) Benefits from productivity initiatives, including savings from
restructuring actions
(cid:129) Higher volume
Offsetting factors:
(cid:129) Higher restructuring and transition costs, including the
consolidation of certain European operations in our Pressure-
sensitive Materials segment
(cid:129) Impact of pricing and raw material input costs
(cid:129) Higher employee-related costs
(cid:129) Gain on sale of assets in 2013
Cost Reduction Actions
2014 Actions
including
In 2014, we recorded $66.5 million in restructuring charges, net of
reversals, related to restructuring actions we initiated in 2014 (‘‘2014
Actions’’),
the consolidation of European operations
described above. These charges consisted of severance and related
costs for the reduction of approximately 1,420 positions, lease
cancellation costs, and asset impairment charges. Approximately 100
employees impacted by our 2014 Actions remained employed with us
as of January 3, 2015. We anticipate approximately $49 million in
these restructuring actions, of which
annualized savings
approximately $14 million were realized in 2014, with the remainder to
be realized through 2016. In 2014, transition costs related to the 2014
actions were approximately $12 million.
from
2012 Program
In 2013, we recorded $40.3 million in restructuring charges, net of
reversals, related to the restructuring program we initiated in 2012 (the
‘‘2012 Program’’), which consisted of severance and related costs for
the reduction of approximately 1,400 positions, lease and other contract
cancellation costs, and asset impairment charges.
In 2012, we recorded $56.4 million in restructuring charges, net of
reversals, related to our 2012 Program, which consisted of severance
and related costs for the reduction of approximately 1,060 positions,
lease cancellation costs, and asset impairment charges.
Refer to Note 13, ‘‘Cost Reduction Actions,’’ to the Consolidated
Financial Statements for more information.
15
Avery Dennison Corporation
2014 Annual Report
equipment
(147.9)
(129.2)
(99.2)
Purchases of software and other
deferred charges
(27.1)
(52.2)
(59.1)
Proceeds from sales of property,
plant and equipment
Sales (purchases) of investments, net
Plus: charitable contribution to Avery
Dennison Foundation utilizing
proceeds from divestitures
Plus: discretionary contributions to
pension plans utilizing proceeds
from divestitures
Plus (minus): net divestiture-related
payments and free cash outflow
(inflow) from discontinued
operations
4.3
.3
–
–
38.7
.1
10.0
50.1
4.2
(6.7)
–
–
.2
92.7
(49.7)
Free cash flow
$ 204.0
$ 330.3
$302.9
Free cash flow in 2014 decreased compared to 2013 primarily due
to higher working capital requirements (including larger than usual
differences in year-end timing of vendor payments and customer
receipts), the impact of currency fluctuation, and higher incentive
compensation paid in 2014 for the 2013 performance year, partially
offset by lower income tax payments, and lower pension contributions
(excluding discretionary pension plan contributions utilizing proceeds
from divestitures).
Free cash flow in 2013 increased compared to 2012 primarily due
to higher operating income and lower pension contributions (excluding
discretionary pension plan contributions utilizing proceeds from
divestitures), partially offset by buildup in inventory levels to support
higher sales, higher payments for taxes, as well as higher incentive
compensation paid in 2013 for the 2012 performance year.
See ‘‘Analysis of Results of Operations’’ and ‘‘Liquidity’’ for more
information.
Divestitures
On January 29, 2013, we entered into an agreement to sell our
Office and Consumer Products (‘‘OCP’’) and Designed and Engineered
Solutions (‘‘DES’’) businesses to CCL Industries Inc. (‘‘CCL’’). On
July 1, 2013, we completed the sale for a total purchase price of
$500 million ($481.2 million, net of cash provided) and entered into an
amendment to the purchase agreement, which, among other things,
increased the target net working capital amount and amended
obligations related to employee matters and indemnification. We
continue to be subject to certain indemnification obligations under the
terms of the purchase agreement. In addition, the tax liability associated
with the sale is subject to completion of tax return filings in the
jurisdictions in which we operated our former OCP and DES
businesses.
The sale resulted in a loss, net of tax, of $16 million in 2013.
Outlook
Certain factors that we believe may contribute to results for 2015
are described below:
(cid:129) We expect organic sales growth of 3% to 4% in 2015.
(cid:129) The loss of the extra week in our 2015 fiscal year will decrease
net sales compared to 2014 by approximately 1%.
(cid:129) Based on currency rates in effect during January 2015, we
reduce net sales by
expect currency
translation
approximately 7% and reduce operating income.
to
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Marketing, General and Administrative Expense
Marketing, general and administrative expense decreased in 2014
compared to 2013 due to benefits from productivity initiatives, including
savings from restructuring, partially offset by higher employee-related
costs.
Marketing, general and administrative expense increased in 2013
compared to 2012 due to higher employee-related costs and
investments in growth, partially offset by benefits from restructuring.
(cid:129) We expect our annual effective tax rate in 2015 to be in the low
Interest Expense
to mid-thirty percent range.
(cid:129) We expect earnings to increase in 2015.
(cid:129) We anticipate capital and software expenditures of
approximately $175 million in 2015.
(cid:129) We estimate cash restructuring costs of approximately
$35 million in 2015.
ANALYSIS OF RESULTS OF OPERATIONS
Income from Continuing Operations Before Taxes
(In millions)
2014
2013
2012
Interest expense increased approximately $4 million in 2014
compared to 2013 reflecting the impact of timing between maturation
and issuance of senior notes in the prior year, as well as the extra week
in our 2014 fiscal year.
Interest expense decreased approximately $14 million in 2013
compared to 2012 as a result of the senior notes we issued in April 2013
having a lower interest rate and fees than our senior notes which we
repaid at maturity in January 2013, and our repayment in the second
half of 2013 of borrowings from outstanding commercial paper
issuances utilizing net proceeds from divestitures.
Net sales
Cost of products sold
Gross profit
Marketing, general and
administrative expense
Interest expense
Other expense, net
Income from continuing
$6,330.3
4,679.1
$6,140.0
4,502.3
$5,863.5
4,335.3
Other Expense, net
(In millions)
1,651.2
1,637.7
1,528.2
1,155.3
63.3
68.2
1,179.0
59.0
36.6
1,148.9
72.9
68.8
Other expense, net by type
Restructuring costs:
Severance and related costs
Asset impairment charges and lease
2014
2013
2012
$54.7
$ 27.2
$49.3
operations before taxes
$ 364.4
$ 363.1
$ 237.6
As a Percentage of Sales
Gross profit
Marketing, general and administrative
26.1%
26.7%
26.1%
expense
18.3
19.2
19.6
Income from continuing operations
before taxes
5.8
5.9
4.1
Gross Profit Margin
Gross profit margin in 2014 declined compared to 2013 primarily
reflecting changes in segment and product mix, the impact of pricing
and raw material input costs, and higher employee-related costs,
partially offset by benefits from productivity initiatives, including savings
from restructuring, and higher volume.
Gross profit margin in 2013 improved compared to 2012 primarily
reflecting benefits from productivity initiatives, including savings from
restructuring, and higher volume, partially offset by changes in product
mix and higher employee-related costs. The net impact of pricing and
changes in raw material input costs was modest as commodity costs
were relatively stable during the period.
and other contract cancellation costs
11.4
13.1
6.5
Other items:
Charitable contribution to Avery
Dennison Foundation
Indefinite-lived intangible asset
impairment
Gain on sale of product line
Gains on sales of assets
Loss (gain) from curtailment and
settlement of pension obligation
Legal settlements
Product line exits
Divestiture-related costs (1)
–
10.0
–
3.0
–
(2.5)
–
–
(17.8)
1.6
–
–
–
(1.6)
2.5
–
3.2
7.0
(.6)
–
–
–
3.9
2.7
Other expense, net
$68.2
$ 36.6
$68.8
(1) Represents only the portion allocated to continuing operations.
Refer to Note 6, ‘‘Pension and Other Postretirement Benefits,’’ to
the Consolidated Financial Statements for more information regarding
loss (gain) from curtailment and settlement of pension obligation.
Refer to Note 13, ‘‘Cost Reduction Actions,’’ to the Consolidated
Financial Statements for more information regarding costs associated
with restructuring.
For more information regarding debt extinguishments, refer to
‘‘Financial Condition’’ below, and Note 4, ‘‘Debt and Capital Leases,’’ to
the Consolidated Financial Statements.
16
The 2013 effective tax rate for continuing operations reflected
$11 million of benefit from adjustments to federal income tax, primarily
due to the enactment of the American Taxpayer Relief Act of 2012
(‘‘ATRA’’), and $18.8 million of net expense related to changes in certain
tax reserves and valuation allowances. Additionally, the effective tax rate
for 2013 reflected a benefit of $11.2 million from favorable tax rates on
certain earnings
jurisdictions
throughout the world, offset by $12.1 million of expense related to the
accrual of U.S. taxes on certain foreign earnings.
from our operations
lower-tax
in
The 2012 effective tax rate for continuing operations reflected
$6.2 million of benefit from the release of a valuation allowance on
certain state tax credits and $11.2 million of expense related to the
accrual of U.S. taxes on certain foreign earnings. Additionally, the
effective tax rate for 2012 was negatively impacted by approximately
$5 million from the statutory expiration of federal research and
development tax credits on December 31, 2011.
On December 19, 2014, the Tax Increase Prevention Act of 2014
was enacted, retroactively extending the controlled foreign corporation
(‘‘CFC’’) look-through rule and the federal research and development
credit, which expired on December 31, 2014. The retroactive effects
were recognized in the fourth quarter of 2014. The retroactive effects of
the extension of the CFC look-through rule did not have a material
impact on our effective tax rate or operating results after taking into
consideration tax accruals related to our repatriation assertions.
On January 2, 2013, ATRA was enacted, retrospectively extending
the federal research and development credit for amounts paid or
incurred after December 31, 2011 and before January 1, 2014. The
retroactive effects were recognized in the first quarter of 2013. ATRA
also retroactively extended the CFC look-through rule that had expired
on December 31, 2011. For periods in which the look-though rule was
effective, certain dividends, interest, rents, and royalties received or
accrued by a CFC of a U.S. multinational enterprise from a related CFC
are excluded from U.S. federal income tax. The retroactive effects of the
extension of the CFC look-through rule did not have a material impact
on our effective tax rate or operating results after taking into
consideration tax accruals related to our repatriation assertions. The
extensions of the CFC look-through rule and the research and
development credit expired on December 31, 2013.
Refer to Note 14, ‘‘Taxes Based on Income,’’ to the Consolidated
Financial Statements for more information.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Net Income and Earnings per Share
(In millions, except per share amounts and
percentages)
Income from continuing operations
before taxes
Provision for income taxes
Income from continuing operations
(Loss) income from discontinued
2014
2013
2012
$364.4
113.3
$363.1
118.8
$237.6
80.0
251.1
244.3
157.6
operations, net of tax
(2.2)
(28.5)
57.8
Net income
Net income per common share
Net income per common share,
$248.9
$215.8
$215.4
$ 2.65
$ 2.19
$ 2.10
assuming dilution
2.60
2.16
2.08
Net income as a percentage of sales
Effective tax rate for continuing
3.9%
3.5%
3.7%
operations
31.1
32.7
33.7
Provision for Income Taxes
The effective tax rate for continuing operations was 31.1%, 32.7%,
and 33.7% for fiscal years 2014, 2013, and 2012, respectively. The 2014
effective tax rate for continuing operations included the following: tax
benefits for changes in certain tax reserves, including interest and
penalties, of $10.2 million resulting from settlements of audits and
$18.1 million resulting from lapses and statute expirations; a repatriation
tax benefit of $9.8 million related to certain foreign losses; tax expense
of $9.1 million from the taxable inclusion of a net foreign currency gain
related to the revaluation of certain intercompany loans; tax expense of
$10.6 million related to our change in estimate of the potential outcome
of uncertain tax issues in China and Germany; and state tax expense of
$2.5 million primarily related to gains arising as a result of certain foreign
reorganizations. Additionally, the 2014 effective tax rate for continuing
operations included a net tax benefit of $.9 million from out-of-period
adjustments to properly reflect the valuation allowance related to state
deferred tax assets, uncertain tax positions, the cumulative tax effect of
currency translation associated with a foreign branch investment, and
deferred taxes related to acquisitions completed in 2002 and 2003. The
impact of these out-of-period adjustments, individually and in the
aggregate, was not material to the periods reported or to any previous
financial statements.
17
Avery Dennison Corporation
2014 Annual Report
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS BY REPORTABLE SEGMENT
Retail Branding and Information Solutions
(In millions)
2014
2013
2012
Operating income (loss) refers to income (loss) from continuing
Net sales including intersegment
2014
2013
2012
sales
Less intersegment sales
Net sales
Operating income (1)
$1,594.0
(2.4)
$1,613.5
(2.4)
$1,538.8
(3.8)
$1,591.6
87.9
$1,611.1
81.7
$1,535.0
53.3
$4,721.3
(63.2)
$4,519.6
(64.6)
$4,318.5
(60.9)
$4,658.1
434.4
$4,455.0
442.8
$4,257.6
359.7
(1) Included costs associated with
restructuring in all years, indefinite-lived
intangible asset impairment charges in
2014 and 2012, gains and losses from
curtailment and settlement of pension
obligation in 2014 and 2013, and gains on
sales of assets in 2014 and 2013.
$
22.0
$
20.0
$
24.8
operations before interest and taxes.
Pressure-sensitive Materials
(In millions)
Net sales including intersegment
sales
Less intersegment sales
Net sales
Operating income (1)
(1) Included costs associated with
restructuring in all years, losses from
curtailment and settlement of pension
obligations in 2014, and gain on sale of
product line in 2012.
$
41.6
$
10.8
$
33.5
Net Sales
In 2014, sales in our Pressure-sensitive Materials segment grew
approximately 5% on a reported basis compared to 2013 due to organic
growth, with the impact from the extra week in our 2014 fiscal year more
than offset by the unfavorable impact of foreign currency translation. On
an organic basis, sales increased 5% due to higher volume. On an
organic basis, sales increased at a high-single digit rate in emerging
markets, at a mid-single digit rate in Western Europe, and at a low-single
digit rate in North America.
On an organic basis, sales in 2014 increased at a mid-single digit
rate and at a mid-teens rate for the Materials and Performance Tapes
product groups
in our Pressure-sensitive Materials segment,
respectively.
In 2013, sales in our Pressure-sensitive Materials segment
increased approximately 5% on both a reported and organic basis
compared to 2012 due to higher volume. On an organic basis, sales
increased at a high-single digit rate in emerging markets and at
low-single digit rates in both North America and Europe.
On an organic basis, sales in 2013 increased at a mid-single digit
rate and at a high-single digit rate for the Materials and Performance
Tapes product groups in our Pressure-sensitive Materials segment,
respectively.
Operating Income
Operating income decreased in 2014 due to higher restructuring
and transition costs, the impact of pricing and changes in raw material
input costs, and higher employee-related costs, partially offset by
higher volume and benefits from productivity initiatives, including
savings from restructuring.
Operating income increased in 2013 primarily reflecting benefits
from productivity initiatives, including savings from restructuring, lower
restructuring costs, and higher volume, partially offset by higher
employee-related costs. The net impact of pricing and changes in raw
material input costs was modest as commodity costs were relatively
stable during the period.
Net Sales
In 2014, sales decreased approximately 1% compared to 2013
reflecting lower sales on an organic basis and the unfavorable impact of
foreign currency translation, partially offset by the extra week in our
2014 fiscal year. On an organic basis, sales decreased approximately
2% due to lower volume.
In 2013, sales increased approximately 5% on both a reported and
organic basis compared to 2012 due to increased demand from U.S.
and European retailers and brands, including continued radio-
frequency identification (‘‘RFID’’) adoption.
Operating Income
Operating income increased in 2014 primarily reflecting benefits
from productivity initiatives, including savings from restructuring as well
as lower restructuring costs, partially offset by lower volume and higher
employee-related costs.
Operating income increased in 2013 primarily reflecting benefits
from productivity initiatives, including savings from restructuring, higher
volume, indefinite-lived intangible asset impairment charges in the prior
year, and gain on sale of assets, partially offset by higher employee-
related costs and higher restructuring costs.
Vancive Medical Technologies
(In millions)
Net sales including intersegment sales
Less intersegment sales
Net sales
Operating loss (1)
2014
2013
2012
$ 90.2
(9.6)
$ 80.6
(11.7)
$77.5
(3.6)
$73.9
(8.3)
$ 71.7
(.8)
$ 70.9
(16.2)
(1) Included costs associated with restructuring in all
years and product line exit costs in 2012.
$ 4.2
$
.1
$ 4.8
Net Sales
In 2014, sales increased approximately 9% due to organic growth
and the favorable impact of foreign currency translation. On an organic
basis, sales grew approximately 8% due primarily to higher volume.
In 2013, sales increased approximately 4% due to organic growth
and the favorable impact of foreign currency translation, partially offset
by the impact of a product line exit in the prior year. On an organic basis,
sales grew approximately 8% due primarily to higher volume.
18
2014
2013
2012
Purchases of property, plant and
$248.9
201.6
$ 215.8
204.6
$ 215.4
220.6
16.3
(49.3)
19.5
–
Purchases of software and other
deferred charges
Proceeds from sale of product line
Proceeds from sales of property, plant
and equipment
–
7.0
Sales (purchases) of investments, net
Proceeds from sale of businesses, net
fluctuation, and higher incentive compensation paid in 2014 for the 2013
performance year.
In 2013, cash flow provided by operating activities decreased
compared to 2012 primarily due to lower cash flow from the OCP and
DES businesses, inventory build to support higher sales, higher
payments for taxes, higher incentive compensation paid in 2013 for the
2012 performance year, higher pension contributions
including
discretionary pension plan contributions utilizing the net proceeds from
divestitures, and a charitable contribution to the Avery Dennison
Foundation, partially offset by the impact of extension in payment terms
with suppliers and the timing of inventory purchases.
Cash Flow from Investing Activities
(In millions)
2014
2013
2012
equipment
$(147.9) $(129.2) $ (99.2)
(27.1)
–
(52.2)
–
(59.1)
.8
4.3
.3
–
–
38.7
.1
481.2
.8
4.2
(6.7)
–
–
of cash provided
Other
Net cash (used in) provided by
investing activities
$(170.4) $ 339.4
$(160.0)
Capital and Software Spending
In both 2014 and 2013, we invested in new equipment to support
growth, primarily in Asia, and improve manufacturing productivity.
Information technology investments in 2014 and 2013 were
primarily associated with standardization initiatives.
Proceeds from Sales of Property, Plant and Equipment
In September 2014, we sold properties
in Framingham,
Massachusetts used primarily as the former headquarters of our Retail
Branding and
for $3.3 million,
recognizing a pre-tax gain of $1.9 million.
Information Solutions business
In April 2013, we sold the property and equipment of our former
corporate headquarters in Pasadena, California for approximately
$20 million, recognizing a pre-tax gain of $10.9 million. In 2013,
proceeds from sale of property, plant and equipment also included
approximately $11 million from the sale of property, plant and
equipment in China, as well as $5 million from the sale of a research
facility located in Pasadena, California.
These gains were recorded in ‘‘Other expense, net’’ in the
Consolidated Statements of Income.
Proceeds from Sale of Businesses, Net of Cash Provided
In July 2013, we completed the sale of our former OCP and DES
businesses and received $481.2 million, net of cash provided.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Operating Loss
Operating loss increased in 2014 due to higher restructuring costs
related to an asset impairment and lower payments from a business
partner for development of a new product, partially offset by higher
volume.
Operating loss decreased in 2013 due to costs related to a product
line exit in the prior year, payments from a business partner for
development of a new product, and higher volume, partially offset by
higher employee-related costs and investments in growth.
FINANCIAL CONDITION
Liquidity
Cash Flow from Operating Activities
(In millions)
Net income
Depreciation and amortization
Provision for doubtful accounts and
sales returns
Loss (gain) on sale of businesses
Indefinite-lived intangible asset
impairment charge
Net losses (gains) from long-lived asset
impairments and sales/disposals of
assets
Stock-based compensation
Other non-cash expense and loss
Other non-cash income and gain
Trade accounts receivable
Inventories
Other current assets
Accounts payable
Accrued liabilities
Income taxes (deferred and accrued)
Other assets
Long-term retirement benefits and
20.7
3.4
3.0
10.2
28.3
44.2
–
(40.9)
(33.0)
(16.0)
(62.8)
(18.2)
(2.8)
(3.5)
(5.8)
34.0
49.3
(11.8)
(110.8)
(75.9)
3.5
108.2
(21.2)
41.9
(5.4)
11.7
38.9
41.8
–
(106.7)
(.8)
(7.6)
68.0
73.8
11.1
(4.0)
other liabilities
(8.9)
(73.3)
(75.3)
Net cash provided by operating
activities
$374.2
$ 320.1
$ 513.4
For cash flow purposes, changes in assets and liabilities and other
adjustments exclude the impact of foreign currency translation
(discussed below in ‘‘Analysis of Selected Balance Sheet Accounts’’).
In 2014, cash flow provided by operating activities improved
compared to 2013 due to the impact of cash outflows related to our
former OCP and DES businesses, higher pension contributions
including discretionary pension plan contributions utilizing the net
proceeds from divestitures and a charitable contribution to the Avery
Dennison Foundation, all in 2013, as well as lower income tax payments
in 2014. These factors were partially offset by higher working capital
requirements (including larger than usual differences in year-end timing
of vendor payments and customer receipts), the effect of currency
19
Avery Dennison Corporation
2014 Annual Report
Cash Flow from Financing Activities
(In millions)
2014
2013
2012
Net change in borrowings and
payments of debt
Dividends paid
Share repurchases
Proceeds from exercises of stock
options, net
Other
$ 124.9
(125.1)
(355.5)
$(187.2)
(112.0)
(283.5)
$ 40.5
(110.4)
(235.2)
34.2
(2.0)
44.8
(8.3)
10.2
(2.7)
Net cash used in financing activities
$(323.5)
$(546.2)
$(297.6)
Borrowings and Repayment of Debt
We had $87 million of borrowings from commercial paper
issuances outstanding (weighted-average interest rate of .4%) at
January 3, 2015. We had no outstanding short-term variable rate
borrowings from commercial paper issuances at December 28, 2013.
Short-term borrowings outstanding under uncommitted lines of
credit were $111.6 million (weighted-average interest rate of 9.4%) at
year-end 2014, compared to $73.9 million (weighted-average interest
rate of 11.2%) at year-end 2013.
requirements and capital expenditures given
In 2014 and 2013, our commercial paper and foreign short-term
borrowings were used to fund share repurchase activity and support
operational
the
seasonality of our cash flow during the year. During 2013, a portion of
our outstanding borrowings was repaid using net proceeds from the
$250 million issuance of senior notes and divestitures of our former OCP
and DES businesses. Refer to ‘‘Share Repurchases’’ below for more
information.
We had medium-term notes of $50 million outstanding at both
year-end 2014 and 2013.
No balances were outstanding under our revolving credit facility
(the ‘‘Revolver’’) as of year-end 2014 or 2013. Commitment fees
associated with this facility in 2014, 2013, and 2012, were $1.3 million,
$1.4 million, and $1.4 million, respectively.
In April 2013, we issued $250 million of senior notes due April 2023.
The notes bear an interest rate of 3.35% per year, payable semiannually
in arrears. Net proceeds from the offering, after deducting underwriting
discounts and offering expenses, of approximately $247.5 million were
used to repay a portion of the indebtedness outstanding under our
commercial paper program during the second quarter of 2013.
In January 2013, we repaid $250 million of senior notes at maturity
using commercial paper borrowings.
Refer to Note 4, ‘‘Debt and Capital Leases,’’ to the Consolidated
Financial Statements for more information.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
for other corporate purposes.
used
In 2014, we repurchased
approximately 7.4 million shares of our common stock at an aggregate
cost of $355.5 million.
On December 4, 2014, our Board of Directors authorized the
repurchase of shares of our common stock in the aggregate amount of
up to $500 million (exclusive of any fees, commissions or other
expenses related to such purchases), in addition to any outstanding
shares authorized under any previous Board authorization. This
authorization will remain in effect until the shares authorized thereby
have been repurchased.
On July 25, 2013, our Board of Directors authorized the repurchase
of shares of our common stock in the aggregate amount of up to
$400 million (exclusive of any fees, commissions or other expenses
related to such purchases), in addition to any outstanding shares
authorized under any previous Board authorization. This authorization
will remain in effect until the shares authorized thereby have been
repurchased.
As of January 3, 2015, shares of our common stock in the
aggregate amount of approximately $600 million remained authorized
for repurchase under both Board authorizations.
Analysis of Selected Balance Sheet Accounts
Long-lived Assets
Goodwill decreased by approximately $30 million to $722 million at
year-end 2014, which reflected the impact of foreign currency
translation partially offset by acquisition adjustments.
Other
intangibles resulting
from business acquisitions, net,
decreased by approximately $29 million to $67 million at year-end 2014,
which reflected current year amortization expense, a non-cash
impairment charge associated with our indefinite-lived intangible
assets, 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.
Other assets decreased by approximately $22 million
to
$464 million at year-end 2014, which primarily reflected a decrease in
long-term pension assets, amortization expense related to software and
other deferred charges, net of purchases, the impact of foreign currency
translation, and a non-cash impairment charge of a certain asset,
partially offset by a reclassification of certain assets from ‘‘Property,
plant and equipment, net’’ to ‘‘Other assets,’’ an increase in the cash
surrender value of our corporate-owned life insurance, and the
capitalization of financing costs related to the amendment of the
Revolver discussed under ‘‘Capital Resources’’ below.
Refer to ‘‘Capital Resources’’ below for further information on 2014
Shareholders’ Equity Accounts
and 2013 borrowings and repayment of debt.
Dividend Payments
We paid dividends of $1.34 per share in 2014 compared to $1.14
per share in 2013. In April 2014, we increased our quarterly dividend to
$.35 per share, representing a 21% increase from our previous dividend
rate of $.29 per share.
Share Repurchases
From time to time, our Board of Directors authorizes us to
repurchase shares of our outstanding common stock. Repurchased
shares may be reissued under our stock option and incentive plan or
The balance of our shareholders’ equity decreased by
approximately $426 million to $1.07 billion at year-end 2014, which
reflected the effect of share repurchases, an increase in ‘‘Accumulated
other comprehensive loss’’ due to the unfavorable impacts of foreign
currency translation and net pension actuarial losses resulting from
lower discount rates at year-end 2014, as well as dividend payments.
These decreases were partially offset by net income.
The balance of our treasury stock increased by approximately
$299 million to $1.47 billion at year-end 2014, which primarily reflected
share repurchase activity ($356 million), partially offset by the use of
treasury shares to settle exercises of stock options and vesting of stock-
20
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
based awards ($43 million) and the funding of contributions to our U.S.
defined contribution plan ($13 million).
loss
comprehensive
Accumulated other
increased by
approximately $266 million to $547 million at year-end 2014 primarily
due to net actuarial losses in our pension and other postretirement
plans as a result of lower discount rates ($185 million) and the
unfavorable impact of foreign currency translation ($155 million),
partially offset by current year amortization of net actuarial losses, net
pension transition obligations and prior service cost ($23 million), the
tax effect of pension activity ($48 million), and a net gain on derivative
instruments designated as cash flow and firm commitment hedges
($1 million). Refer to Note 6, ‘‘Pension and Other Postretirement
Benefits,’’
for more
information.
the Consolidated Financial Statements
to
compared to 2013 primarily due to an increase in short-term and current
portion of long-term debt, as well as a decrease in cash and cash
equivalents and trade accounts receivable, net, partially offset by a
decrease in accounts payable.
Operational working capital, as a percentage of net sales, is
reconciled with working capital below. Our objective is to minimize our
investment in operational working capital, as a percentage of sales, to
maximize cash flow and return on investment.
(Dollars in millions)
(A) Working capital
Reconciling items:
Cash and cash equivalents
Current deferred and refundable income
2014
2013
$ 322.7
$ 536.4
(227.0)
(351.6)
Impact of Foreign Currency Translation
(In millions)
Change in net sales
Change in net income from continuing
operations
2014
2013
2012
taxes and other current assets
(243.6)
(228.3)
Short-term borrowings and current portion
of long-term debt and capital leases
204.3
76.9
$(67)
$8
$(201)
Current deferred and payable income taxes
and other current accrued liabilities
595.7
587.7
(5)
4
(11)
(B) Operational working capital
(C) Net sales
Working capital, as a percentage of net sales
(A) (cid:3) (C)
Operational working capital, as a percentage
of net sales (B) (cid:3) (C)
$ 652.1
$ 621.1
$6,330.3
$6,140.0
5.1%
8.7%
10.3%
10.1%
As a percentage of net sales, operational working capital in 2014
deteriorated modestly compared
factors
contributing to this change, which includes the impact of foreign
currency translation, are discussed below.
to 2013. The primary
Accounts Receivable Ratio
The average number of days sales outstanding was 62 days in
2014 compared to 60 days in 2013, calculated using the four-quarter
average accounts receivable balance divided by the average daily sales
for the year. The increase in the current year average number of days
sales outstanding reflected the timing of collection and longer payment
terms with certain customers.
Inventory Ratio
Average inventory turnover decreased modestly to 8.6 in 2014 from
8.8 in 2013, calculated using the annual cost of sales divided by the
four-quarter average inventory balance.
Accounts Payable Ratio
The average number of days payable outstanding was 68 days in
2014 and 2013, calculated using the four-quarter average accounts
payable balance divided by the average daily cost of products sold for
the year.
In 2014, international operations generated approximately 76% 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 effect of foreign currency translation on net sales in 2014
compared to 2013 primarily reflected the unfavorable impact from sales
in Argentina, Brazil and Australia, partially offset by the favorable impact
from sales in the European Union and the U.K.
Translation gains and losses for operations in hyperinflationary
economies, if any, are included in net income in the period incurred.
Operations are treated as being in a hyperinflationary economy based
on the cumulative inflation rate over the past three years. We had no
operations in hyperinflationary economies in fiscal years 2014, 2013, or
2012.
Effect of Foreign Currency Transactions
The impact on net income from transactions denominated in
foreign currencies may be 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.
Analysis of Selected Financial Ratios
We utilize the financial ratios discussed below to assess our
financial condition and operating performance.
Working Capital and Operational Working Capital Ratios
Working capital (current assets minus current liabilities and net
assets held for sale), as a percentage of net sales, improved in 2014
21
Avery Dennison Corporation
2014 Annual Report
Net Debt to EBITDA Ratio
(Dollars in millions)
Income from continuing operations
Reconciling items:
Interest expense
Provision for income taxes
Depreciation
Amortization
2014
2013
2012
$ 251.1
$ 244.3
$ 157.6
63.3
113.3
135.5
65.9
59.0
118.8
135.2
69.1
72.9
80.0
145.4
65.6
EBITDA
$ 629.1
$ 626.4
$ 521.5
Total debt
Less cash and cash equivalents
$1,149.6
(227.0)
$1,027.5
(351.6)
$1,222.4
(235.4)
Net debt
$ 922.6
$ 675.9
$ 987.0
Net debt to EBITDA ratio
1.5
1.1
1.9
The net debt to EBITDA ratio was higher in 2014 compared to 2013
primarily due to higher total debt and a decrease in cash and cash
equivalents as a result of funding share repurchase activity and
supporting operational requirements and capital expenditures.
The net debt to EBITDA ratio was lower in 2013 compared to 2012
primarily due to lower total debt and an increase in cash and cash
equivalents as a result of the net proceeds received from the sale of the
OCP and DES businesses, as well as higher earnings from continuing
operations.
Financial Covenants
Our various loan agreements require that we maintain specified
financial covenant ratios of total debt and interest expense in relation to
certain measures of income. As of January 3, 2015, we were in
compliance with our financial covenants.
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 on notes with similar
rates, credit rating, and remaining maturities. The fair value of short-term
borrowings, which include commercial paper issuances and short-term
lines of credit, approximates carrying value given the short duration of
these obligations. The fair value of our total debt was $1.22 billion at
January 3, 2015 and $1.06 billion at December 28, 2013. Fair value
amounts were determined primarily based on Level 2 inputs. Refer to
Note 1,
the
‘‘Summary of Significant Accounting Policies,’’
Consolidated Financial Statements for more information.
to
Capital Resources
Capital resources include cash flows from operations, cash and
cash equivalents and debt financing. At year-end 2014, we had cash
and cash equivalents of $227 million held in accounts at third-party
financial institutions.
Our cash balances are held in numerous locations throughout the
world. At January 3, 2015, the majority of our cash and cash equivalents
was held by our foreign subsidiaries. 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
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
foreign subsidiaries, and repatriating foreign earnings. However, if we
were to repatriate incremental foreign earnings, we may be subject to
additional taxes in the U.S.
In October 2014, we amended and restated the Revolver with
certain domestic and foreign banks, increasing the amount available
thereunder from $675 million to $700 million. The amendment also
extended the Revolver’s maturity date from December 22, 2016 to
October 3, 2019 and adjusted pricing to reflect favorable market
conditions. The maturity date may be extended for additional one-year
periods under certain circumstances. The commitments under the
Revolver may be increased by up to $325 million, subject to lender
approval and customary requirements. The Revolver is used as a
back-up facility for our commercial paper program and can be used to
finance other corporate requirements. As of January 3, 2015, there was
no balance outstanding under the Revolver.
Refer to Note 4, ‘‘Debt and Capital Leases,’’ 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
Our total debt increased by approximately $122 million in 2014 to
$1.15 billion at year-end 2014 compared to $1.03 billion at year-end
2013, primarily reflecting an increase in commercial paper and foreign
short-term borrowings to fund share repurchase activity and support
the
operational
seasonality of our cash flow during the year. Refer to ‘‘Borrowings and
Repayment of Debt’’ above for more information.
requirements, and capital expenditures given
In April 2013, we issued $250 million of senior notes due April 2023.
The notes bear an interest rate of 3.35% per year, payable semiannually
in arrears. Net proceeds from the offering, after deducting underwriting
discounts and offering expenses, of approximately $247.5 million were
used to repay a portion of the indebtedness outstanding under our
commercial paper program during the second quarter of 2013.
In January 2013, we repaid $250 million of senior notes at maturity
using commercial paper borrowings.
Uncommitted lines of credit were approximately $316 million at
year-end 2014. These lines may be cancelled at any time by us or the
issuing banks.
Credit ratings are a significant factor in our ability to raise short-term
and long-term financing. The credit ratings assigned to us also impact
the interest rates paid and our access to commercial paper, credit
facilities, and other borrowings. A downgrade of our short-term credit
ratings below current levels could impact our ability to access the
commercial paper markets. If our access to commercial paper markets
were to become limited, the Revolver and our other credit facilities
would be available to meet our short-term funding requirements, if
necessary. When determining a 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
to
maintaining an investment grade rating.
team. We remain committed
22
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Contractual Obligations at End of Year 2014
(In millions)
Total
2015
2016
2017
2018
2019 Thereafter
Payments Due by Period
Short-term borrowings
Long-term debt
Long-term capital leases
Interest on long-term debt
Operating leases
Pension and postretirement benefit payments (unfunded plans)
$ 198.5 $198.5 $
– $
949.4
1.6
378.4
173.8
82.2
5.0
.7
51.0
50.9
7.6
– $
–
.3
50.8
37.4
6.6
249.7
.2
46.6
22.3
7.0
– $
–
.2
34.2
13.6
21.1
–
–
.2
34.2
10.3
9.4
$
–
694.7
–
161.6
39.3
30.5
Total contractual obligations
$1,783.9 $313.7 $95.1 $325.8 $69.1 $54.1
$926.1
We enter into operating leases primarily for office and warehouse
space and equipment for electronic data processing and transportation.
The table above includes minimum annual rental commitments on
operating leases having initial or remaining non-cancelable lease terms
of one year or more. The terms of our leases do not impose significant
restrictions or unusual obligations, except for the commercial facility
located in Mentor, Ohio described below.
The table above does not include:
(cid:129) Purchase obligations or open purchase orders at year-end – It
is impracticable for us to either obtain this information or
provide a reasonable estimate thereof due to the decentralized
nature of our purchasing systems. In addition, purchase orders
are generally at fair value and cancelable without penalty.
(cid:129) Cash funding requirements for pension benefits payable to
certain eligible current and future retirees under our funded
plans – Benefits paid by our funded pension plans are paid
through a trust or trust equivalent. 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 trust
or trust equivalent. Refer to Note 6, ‘‘Pension and Other
the Consolidated Financial
Postretirement Benefits,’’
Statements for expected contributions to our plans.
(cid:129) Deferred compensation plan benefit payments –
is
impracticable for us to obtain a reasonable estimate for 2015
and beyond due to the volatility of the payment amounts and
certain events that could trigger immediate payment of
benefits to participants. In addition, the account balances per
participant are marked-to-market monthly and benefit
payments are adjusted annually. Refer to Note 6, ‘‘Pension and
Other Postretirement Benefits,’’ to the Consolidated Financial
Statements for more information.
to
It
(cid:129) Cash awards to employees under incentive compensation
plans – The amounts to be paid to employees under these
awards are based on our stock price and, if applicable,
achievement of certain performance objectives on the vesting
dates, and, therefore, we cannot reasonably estimate the
amounts to be paid on these vesting dates. Refer to Note 12,
‘‘Long-term Incentive Compensation,’’ to the Consolidated
Financial Statements for further information on cash awards.
(cid:129) Unfunded termination indemnity benefits to certain employees
outside of the U.S. – These benefits are subject to applicable
agreements, local laws and regulations. We have not incurred
23
Avery Dennison Corporation
2014 Annual Report
significant costs
arrangements.
related
to performance under
these
(cid:129) Unrecognized tax benefit reserves of $122.6 million – 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, ‘‘Taxes Based on
Income,’’ to the Consolidated Financial Statements for further
information on unrecognized tax benefits.
for
(cid:129) Obligations associated with a commercial facility located in
Mentor, Ohio used primarily
the North American
headquarters and research center of our Materials group. The
facility consists generally of land, buildings, and equipment.
We lease the facility under an operating lease arrangement,
which contains a residual value guarantee of $31.5 million, as
well as certain obligations with respect to the refinancing of the
lessor’s debt of $11.5 million (collectively, the ‘‘Guarantee’’). At
the end of the lease term, we have the option to purchase or
remarket the facility at an amount equivalent to the value of the
Guarantee. If our estimated fair value (or estimated selling
price) of the facility falls below the Guarantee, we would be
required to pay the lessor a shortfall, which is an amount
equivalent to the Guarantee less our estimated fair value. Refer
to Note 7, ‘‘Commitments,’’ to the Consolidated Financial
Statements for more information.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions for the
reporting period and as of the financial statement date. These estimates
and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent liabilities and the reported amounts of
revenue and expense. Actual results could differ from those 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 that critical accounting
estimates include accounting for goodwill and indefinite-lived intangible
assets, pension and postretirement benefits, taxes based on income,
long-term incentive compensation, litigation matters, and environmental
expenditures.
Goodwill and Indefinite-lived Intangible Assets
Our reporting units are composed of either a discrete business or
an aggregation of businesses with similar economic characteristics. We
have the following reporting units: materials; retail branding and
information solutions; reflective solutions; performance tapes; and
medical solutions. Goodwill relates to our materials, retail branding and
information solutions, and reflective solutions reporting units. In
performing the required impairment tests, we primarily apply a present
value (discounted cash flow) method to determine the fair value of the
reporting units with goodwill. We perform our annual impairment test of
goodwill during the fourth quarter.
Certain factors may result in the need 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.
We determine goodwill impairment using a two-step process. The
first step is to identify if a potential impairment exists by comparing the
fair value of a reporting unit with its carrying amount, including goodwill.
If the fair value of a reporting unit exceeds its carrying amount, goodwill
of the reporting unit is not considered to have a potential impairment
and the second step of the impairment test is not necessary. However, if
the carrying amount of a reporting unit exceeds its fair value, the second
step is performed to determine if goodwill is impaired and to measure
the amount of impairment loss to recognize, if any.
The second step, if necessary, compares the implied fair value of
goodwill with the carrying amount of goodwill. If the implied fair value of
goodwill exceeds the carrying amount, then goodwill is not considered
impaired. However, if the carrying amount of goodwill exceeds the
implied fair value, an impairment loss is recognized in an amount equal
to that excess.
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 the
reporting units, including sales, operating margins, growth rates, and
discount rates. Assumptions about discount rates are based on a
weighted-average cost of capital
for comparable companies.
Assumptions about sales, operating margins, and growth rates are
based on our forecasts, business plans, economic projections,
anticipated future cash flows and marketplace data. Assumptions are
also made 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 differ from those
estimates and projections, and those differences may be material. The
valuation methodology used 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. Our annual first step impairment analysis in the fourth
quarter of 2014 indicated that the fair values of our reporting units
exceeded their respective carrying values, including goodwill. The fair
value of the reporting units tested exceeded their carrying values by
83% to 291%.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
in
the
We test indefinite-lived intangible assets, consisting of trademarks,
for
fourth quarter or whenever events or
impairment
circumstances indicate that it is more likely than not that their carrying
values exceed their fair values. Fair value is estimated as the discounted
value of future revenues using a royalty rate that a third party would pay
for use of the asset. Variation in the royalty rates could impact the
estimate of fair value. If the carrying amount of an asset exceeds its
implied fair value, an impairment loss is recognized in an amount equal
to that excess. In the third quarter of 2014, we recorded an indefinite-
lived intangible asset impairment of $3 million. The fair value of this
asset exceeded its carrying value by 2%.
Pension and Postretirement Benefits
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 used, 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 that we use may differ from actual
results, which could have a significant impact on our pension and
postretirement liability and related cost.
Discount Rate
In consultation with our actuaries, we annually review and
determine the discount rates to be used in connection with valuing our
postretirement obligations. The assumed discount rate for each
pension plan reflects market rates for high quality corporate bonds
currently available. In the U.S., our discount rate is 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 plans. A .25% increase in the discount
rate in the U.S. as of January 3, 2015 would decrease our 2015 periodic
benefit cost and projected benefit obligation by approximately
$.2 million and $36 million, respectively, and a .25% decrease in the
discount rate in the U.S. would increase our 2015 periodic benefit cost
and projected benefit obligation by approximately $.1 million and
$38 million, respectively.
Long-term Return on 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 our asset classes, and the 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 in the U.S. would have decreased or
increased, respectively, our 2015 periodic benefit cost by approximately
$2 million.
Healthcare Cost Trend Rate
Our practice is to fund the cost of postretirement benefits from
operating cash flows. For measurement purposes, a 6.5% annual rate of
increase in the per capita cost of covered health care benefits was
24
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
assumed for 2015. This rate is expected to decrease to approximately
5% by 2018.
Changes in estimated forfeiture rates are recorded as cumulative
adjustments in the period estimates are revised.
Taxes Based on Income
Valuation of Stock-Based Awards
Deferred income tax assets represent amounts available to reduce
income taxes payable on taxable income 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 loss
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 recoverability of
these future tax deductions and credits by assessing 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. We use historical experience along
with operating forecasts in evaluating expected taxable income for the
future. 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 such a determination. A tax planning
strategy is defined as ‘‘an action that: is prudent and feasible; an
enterprise ordinarily might not take, but would take to prevent an
operating loss or tax credit carryforward from expiring unused; and
would result in realization of deferred tax assets.’’ We also acquired
certain net deferred tax assets with existing valuation allowances in prior
years. If, based on our estimates of future taxable income, it is later
determined that it is more likely than not that a deferred tax asset will be
realized, we would release the valuation allowance to current earnings
or adjust purchase price allocation.
Our income tax rate is significantly affected by the different tax rates
applicable to our operations in the jurisdictions in which we do
business. In addition to local country tax law and regulations, this rate
depends on the extent earnings are indefinitely reinvested outside the
United States. Indefinite reinvestment is determined in accordance with
ASC 740-30-25-17 using management’s judgment about and intentions
concerning estimates of our future financial results, cash flows, capital
investment plans and our discretionary actions to return cash to
shareholders.
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 are complex and subject to different interpretations by
taxpayers and respective governmental taxing authorities. Significant
judgment is required in determining our tax expense and in evaluating
our tax positions, including evaluating uncertainties. Our estimate of the
potential outcome of any uncertain
to
management’s assessment of relevant facts and circumstances existing
at the balance sheet date, taking into consideration existing laws,
regulations and practices of any governmental authorities exercising
jurisdiction over our operations. We review our tax positions quarterly
and adjust the balances as new information becomes available.
is subject
issue
tax
Further information is available in Note 14, ‘‘Taxes Based on
Income,’’ to the Consolidated Financial Statements.
Long-Term Incentive Compensation
We have not capitalized expense associated with our long-term
incentive compensation.
25
Avery Dennison Corporation
2014 Annual Report
Our stock-based compensation expense is based on the fair value
of awards, adjusted for estimated forfeitures, and amortized on a
straight-line basis over the requisite service period for stock options,
restricted stock units (‘‘RSUs’’), and performance units (‘‘PUs’’). The
to market-leveraged stock units
compensation expense related
(‘‘MSUs’’) is based on the fair value of awards, adjusted for estimated
forfeitures, and amortized on a graded-vesting basis over their
respective performance periods.
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.
The fair value of stock options is estimated as of the date of grant
using the Black-Scholes option-pricing model. This model requires
input assumptions for our expected dividend yield, expected stock price
volatility, risk-free interest rate and the expected option term.
The following assumptions are used in estimating the fair value of
granted stock options:
Risk-free interest rate is based on the 52-week average of the
Treasury-Bond rate that has a term corresponding to the expected
option term.
Expected stock price volatility represents an average of implied and
historical volatility.
Expected dividend yield is based on the current annual dividend
divided by the 12-month average of our monthly stock price prior to the
date of grant.
Expected option term is determined based on historical experience
under our stock option and incentive plans.
The fair value of RSUs and certain PUs that are subject to
achievement of performance objectives based on a performance
condition is determined based on the fair market value of our common
stock as of the date of grant, adjusted for foregone dividends.
The fair value of stock-based awards that are subject to
achievement of performance objectives based on a market condition,
which includes MSUs and certain PUs, is determined using the Monte-
Carlo simulation model, which utilizes multiple input variables, including
expected volatility and other assumptions appropriate for determining
fair value, to estimate the probability of satisfying the target performance
objectives established for the award.
Certain of these 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 stock-based compensation expense and our results of
operations.
Valuation of Cash-Based Awards
Cash-based awards consist of long-term incentive units (‘‘LTI
Units’’) granted to eligible employees. Cash-based awards 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.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Accounting for Income Taxes for Stock-Based Compensation
We elected to use the short-cut method to calculate the historical
pool of windfall tax benefits related to employee and non-employee
director stock-based compensation awards. In addition, we elected to
follow the tax law ordering approach to determine the sequence in
which deductions and net operating loss carryforwards are utilized, as
well as the direct-only approach to calculate the amount of windfall or
shortfall tax benefits.
Litigation Matters
We are involved in various lawsuits, claims, inquiries and other
regulatory and compliance matters, most of which are routine to the
nature of our business. When it is probable that a loss will be incurred
and where a range of the loss can be reasonably estimated, the best
estimate within the range is accrued. When the best estimate within the
range cannot be determined, the low end of the range is accrued. The
ultimate resolution of these claims could affect future results of
operations should our exposure be materially different from our
estimates or should liabilities be incurred that were not previously
accrued. Potential insurance reimbursements are not offset against
potential liabilities, and such liabilities are not discounted.
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 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 our objectives, 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 domestic natural gas anticipated to be
used in manufacturing and 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 risk, which are
not reflected in the analyses that follow.
Environmental Expenditures
Foreign Exchange Value-At-Risk
Environmental expenditures are generally expensed. However,
environmental expenditures for newly acquired assets and those which
extend or improve the economic useful life of existing assets are
capitalized and amortized over the shorter of the estimated useful life of
the acquired asset or the remaining life of the existing asset. We review
our estimates of costs of compliance with environmental laws related to
remediation and cleanup of various sites, including sites in which
governmental agencies have designated us as a potentially responsible
party. When it is probable that a loss will be incurred and where a range
of the loss can be reasonably estimated, the best estimate within the
range is accrued. When the best estimate within the range cannot be
determined, the low end of the range is accrued. Potential insurance
reimbursements are not offset against potential liabilities, and such
liabilities are not discounted.
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 interest rates and
foreign currency exchange rates.
Our policy is not to 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
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 were made assuming
normal market conditions. Firm commitments, accounts receivable and
accounts payable denominated in foreign currencies, which certain of
these instruments are intended to hedge, were included in the model.
Forecasted transactions, which certain of these instruments are
intended to hedge, were excluded from the model.
In both 2014 and 2013, 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 $1 million at year-end
2014 and $1.2 million at year-end 2013.
The VAR model is a risk analysis tool and does not purport to
represent actual losses in fair value that we could incur, nor does it
consider the potential effect of favorable changes in market factors.
Interest Rate Sensitivity
An assumed 50 basis point move in interest rates affecting our
variable-rate borrowings (10% of our weighted-average interest rate on
floating rate debt) would have had an estimated $1 million effect on our
2014 earnings.
An assumed 30 basis point move in interest rates affecting our
variable-rate borrowings (10% of our weighted-average interest rate on
floating rate debt) would have had an estimated $1.1 million effect on
our 2013 earnings.
26
Consolidated Balance Sheets
(Dollars in millions)
Assets
Current assets:
Cash and cash equivalents
Trade accounts receivable, less allowances of $30.5 and $31.6 at year-end 2014 and 2013, respectively
Inventories, net
Current deferred and refundable income taxes
Assets held for sale
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Other intangibles resulting from business acquisitions, net
Non-current deferred income taxes
Other assets
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term borrowings and current portion of long-term debt and capital leases
Accounts payable
Accrued payroll and employee benefits
Accrued trade rebates
Current deferred and payable income taxes
Other accrued liabilities
Total current liabilities
Long-term debt and capital leases
Long-term retirement benefits and other liabilities
Non-current deferred and payable income taxes
Commitments and contingencies (see Notes 7 and 8)
Shareholders’ equity:
Common stock, $1 par value per share, authorized – 400,000,000 shares at year-end 2014 and 2013;
issued – 124,126,624 shares at year-end 2014 and 2013; outstanding – 90,458,956 shares and 96,178,411
shares at year-end 2014 and 2013, respectively
Capital in excess of par value
Retained earnings
Treasury stock at cost, 33,667,668 shares and 27,948,213 shares at year-end 2014 and 2013, respectively
Accumulated other comprehensive loss
Total shareholders’ equity
See Notes to Consolidated Financial Statements
January 3,
2015
December 28,
2013
$
227.0
958.1
491.8
107.5
.8
136.1
1,921.3
875.3
721.6
67.4
311.0
463.6
$
351.6
1,016.5
494.1
103.4
1.3
124.9
2,091.8
922.5
751.1
96.0
263.4
485.8
$ 4,360.2
$ 4,610.6
$
204.3
797.8
173.7
90.5
64.9
266.6
1,597.8
945.3
622.8
127.8
$
76.9
889.5
224.1
79.6
49.3
234.7
1,554.1
950.6
476.4
137.3
124.1
823.9
2,137.1
(1,471.3)
(547.3)
124.1
812.3
2,009.1
(1,172.2)
(281.1)
1,066.5
1,492.2
$ 4,360.2
$ 4,610.6
27
Avery Dennison Corporation
2014 Annual Report
Consolidated Statements of Income
(In millions, except per share amounts)
Net sales
Cost of products sold
Gross profit
Marketing, general and administrative expense
Interest expense
Other expense, net
Income from continuing operations before taxes
Provision for income taxes
Income from continuing operations
(Loss) income from discontinued operations, net of tax
Net income
Per share amounts:
Net income (loss) per common share:
Continuing operations
Discontinued operations
Net income per common share
Net income (loss) per common share, assuming dilution:
Continuing operations
Discontinued operations
Net income per common share, assuming dilution
Dividends per common share
Weighted average shares outstanding:
Common shares
Common shares, assuming dilution
See Notes to Consolidated Financial Statements
2014
2013
2012
$6,330.3
4,679.1
1,651.2
1,155.3
63.3
68.2
364.4
113.3
251.1
(2.2)
$6,140.0
4,502.3
1,637.7
1,179.0
59.0
36.6
363.1
118.8
244.3
(28.5)
$5,863.5
4,335.3
1,528.2
1,148.9
72.9
68.8
237.6
80.0
157.6
57.8
$ 248.9
$ 215.8
$ 215.4
$
$
$
$
$
2.68
(.03)
2.65
2.62
(.02)
2.60
1.34
93.8
95.7
$
$
$
$
$
2.48
(.29)
2.19
2.44
(.28)
2.16
1.14
$
$
$
$
$
1.54
.56
2.10
1.52
.56
2.08
1.08
98.4
100.1
102.6
103.5
28
Consolidated Statements of Comprehensive Income
(In millions)
Net income
Other comprehensive (loss) income, before tax:
Foreign currency translation:
Translation (loss) gain
Reclassifications to net income
Pension and other postretirement benefits:
Net actuarial (loss) gain
Prior service credit (cost)
Reclassifications to net income:
Amortization of net actuarial loss
Amortization of prior service credit
Amortization of transition asset
Net curtailment of pension and post-retirement benefit obligations
Settlement of pension obligations
Cash flow hedges:
Losses (gains) recognized on cash flow hedges
Reclassifications to net income
Other comprehensive (loss) income, before tax
Income tax (benefit) expense related to items of other comprehensive income (loss)
Other comprehensive loss, net of tax
Total comprehensive (loss) income, net of tax
See Notes to Consolidated Financial Statements
2014
2013
2012
$ 248.9
$215.8
$ 215.4
(154.7)
–
(53.3)
10.8
43.6
–
(192.2)
7.3
68.2
(19.9)
(111.6)
–
24.2
(1.7)
–
.6
1.0
.2
1.2
(314.1)
(47.9)
28.4
(3.3)
(.1)
(13.3)
1.2
1.0
.3
20.0
23.1
20.3
(4.0)
(.5)
–
.6
(1.8)
9.7
(43.7)
(28.9)
(266.2)
(3.1)
(14.8)
$ (17.3)
$212.7
$ 200.6
29
Avery Dennison Corporation
2014 Annual Report
Consolidated Statements of Shareholders’ Equity
(Dollars in millions, except per share amounts)
Balance as of December 31, 2011
Net income
Other comprehensive loss
Repurchase of 7,927,344 shares for treasury
Issuance of 713,571 shares under stock-based compensation plans,
including tax of $(3.8)
Contribution of 844,311 shares to the 401(k) Plan
Dividends: $1.08 per share
Balance as of December 29, 2012
Net income
Other comprehensive loss
Repurchase of 6,555,672 shares for treasury
Issuance of 2,240,185 shares under stock-based compensation plans,
including tax of $1.7
Contribution of 578,441 shares to the 401(k) Plan
Dividends: $1.14 per share
Balance as of December 28, 2013
Net income
Other comprehensive loss
Repurchase of 7,416,167 shares for treasury
Issuance of 1,299,931 shares under stock-based compensation plans,
including tax of $(4.1)
Contribution of 396,781 shares to the 401(k) Plan
Dividends: $1.34 per share
Common Capital in
excess of
stock, $1
par value
par value
Retained
earnings
Treasury
stock
Accumulated
other
comprehensive
loss
Total
$124.1
–
–
–
$778.6 $1,810.5 $ (791.5)
–
215.4
–
–
(235.2)
–
–
–
–
$(263.2) $1,658.5
215.4
(14.8)
(235.2)
–
(14.8)
–
–
–
–
23.2
–
–
(3.8)
(.9)
(110.4)
22.4
26.5
–
–
–
–
41.8
25.6
(110.4)
$124.1
–
–
–
$801.8 $1,910.8 $ (977.8)
–
215.8
–
–
(283.5)
–
–
–
–
$(278.0) $1,580.9
215.8
(3.1)
(283.5)
(3.1)
–
–
–
–
10.5
–
–
(11.6)
6.1
(112.0)
70.7
18.4
–
–
–
–
69.6
24.5
(112.0)
$124.1
–
–
–
$812.3 $2,009.1 $(1,172.2)
–
248.9
–
–
(355.5)
–
–
–
–
$(281.1) $1,492.2
248.9
(266.2)
(355.5)
(266.2)
–
–
–
–
11.6
–
–
(2.0)
6.2
(125.1)
43.2
13.2
–
–
–
–
52.8
19.4
(125.1)
Balance as of January 3, 2015
$124.1
$823.9 $2,137.1 $(1,471.3)
$(547.3) $1,066.5
See Notes to Consolidated Financial Statements
30
Consolidated Statements of Cash Flows
(In millions)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Amortization
Provision for doubtful accounts and sales returns
Loss (gain) on sale of businesses
Indefinite-lived intangible asset impairment charge
Net losses (gains) from long-lived asset impairments and sales/disposals of assets
Stock-based compensation
Other non-cash expense and loss
Other non-cash income and gain
Changes in assets and liabilities and other adjustments:
Trade accounts receivable
Inventories
Other current assets
Accounts payable
Accrued liabilities
Taxes on income
Deferred taxes
Other assets
Long-term retirement benefits and other liabilities
Net cash provided by operating activities
Investing Activities
Purchases of property, plant and equipment
Purchases of software and other deferred charges
Proceeds from sale of product line
Proceeds from sales of property, plant and equipment
Sales (purchases) of investments, net
Proceeds from sale of businesses, net of cash provided
Other
Net cash (used in) provided by investing activities
Financing Activities
Net increase (decrease) in borrowings (maturities of 90 days or less)
Additional borrowings (maturities longer than 90 days)
Payments of debt (maturities longer than 90 days)
Dividends paid
Share repurchases
Proceeds from exercises of stock options, net
Other
Net cash used in financing activities
Effect of foreign currency translation on cash balances
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See Notes to Consolidated Financial Statements
31
Avery Dennison Corporation
2014 Annual Report
2014
2013
2012
$ 248.9
$ 215.8
$ 215.4
135.5
66.1
20.7
3.4
3.0
10.2
28.3
44.2
–
(40.9)
(33.0)
(16.0)
(62.8)
(18.2)
15.4
(18.2)
(3.5)
(8.9)
374.2
(147.9)
(27.1)
–
4.3
.3
–
–
(170.4)
126.5
–
(1.6)
(125.1)
(355.5)
34.2
(2.0)
(323.5)
(4.9)
(124.6)
351.6
135.6
69.0
16.3
(49.3)
–
(5.8)
34.0
49.3
(11.8)
(110.8)
(75.9)
3.5
108.2
(21.2)
(12.2)
54.1
(5.4)
(73.3)
320.1
(129.2)
(52.2)
–
38.7
.1
481.2
.8
339.4
(435.3)
250.0
(1.9)
(112.0)
(283.5)
44.8
(8.3)
(546.2)
2.9
116.2
235.4
150.1
70.5
19.5
–
7.0
11.7
38.9
41.8
–
(106.7)
(.8)
(7.6)
68.0
73.8
12.4
(1.3)
(4.0)
(75.3)
513.4
(99.2)
(59.1)
.8
4.2
(6.7)
–
–
(160.0)
42.3
–
(1.8)
(110.4)
(235.2)
10.2
(2.7)
(297.6)
1.6
57.4
178.0
$ 227.0
$ 351.6
$ 235.4
Notes to Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
We develop identification and decorative solutions primarily for
include pressure-sensitive
businesses worldwide. Our products
labeling technology and materials; graphics imaging media; retail
branding and information solutions; radio-frequency identification
(‘‘RFID’’) inlays and tags; performance tapes; and medical solutions.
Principles of Consolidation
The consolidated financial statements include the accounts of
majority-owned subsidiaries. Intercompany accounts, transactions and
profits are eliminated in consolidation.
Financial Presentation
In the first quarter of 2014, we began reporting Vancive Medical
Technologies as a reportable segment. This business was previously
‘‘other specialty converting
reported within a category entitled
businesses’’ and was the only business that comprised that category in
the prior periods presented.
As further discussed in Note 2, ‘‘Discontinued Operations and Sale
of Assets,’’ we have classified the operating results of our Office and
Consumer Products (‘‘OCP’’) and Designed and Engineered Solutions
(‘‘DES’’) businesses, together with certain costs associated with their
divestiture, as discontinued operations in the Consolidated Statements
of Income for all periods presented. Unless otherwise noted, the results
and financial condition of discontinued operations have been excluded
from the notes to our Consolidated Financial Statements.
Fiscal Year
Normally, our fiscal years consist of 52 weeks, but every fifth or sixth
fiscal year consists of 53 weeks. Our 2014 fiscal year consisted of a
53-week period ending January 3, 2015 and our 2013 and 2012 fiscal
years consisted of 52-week periods ending December 28, 2013 and
December 29, 2012, respectively.
Use of Estimates
The preparation of
financial statements
in conformity with
accounting principles generally accepted in the United States of
America, or GAAP, requires management to make estimates and
assumptions for the reporting period and as of the date of the financial
statements. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent liabilities
and the reported amounts of revenue and expense. Actual results could
differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, deposits in
banks, and short-term investments with maturities of three months or
less when purchased. The carrying value of these assets approximates
fair value due to the short maturity of the instruments.
reduce gross trade receivables to their net realizable values. We record
these allowances based on estimates related to:
(cid:129) Customer-specific allowances;
(cid:129) Amounts based upon an aging schedule; and
(cid:129) An amount, based on our historical experience, for allowances
not yet identified.
No single customer represented 10% or more of our net sales in, or
trade accounts receivable at, year-end 2014 or 2013. However, during
2014, our ten largest customers by net sales represented 13% of our net
sales. As of January 3, 2015, our ten largest customers by trade
accounts receivable represented 15% of our trade accounts receivable.
These customers were concentrated in the Pressure-sensitive Materials
segment. We do not generally require our customers to provide
collateral.
Inventories
Inventories are stated at the lower-of-cost-or-market value and are
categorized as raw materials, work-in-progress or finished goods. Cost
is determined using the first-in, first-out (‘‘FIFO’’) method. Inventory
reserves are recorded to cost of products sold for damaged, obsolete,
excess and slow-moving inventory and we establish a lower cost basis
for the inventory. We use estimates to record these reserves.
Slow-moving inventory is reviewed by category and may be partially or
fully reserved for depending on the type of product, level of usage, and
the length of time the product has been included in inventory.
Property, Plant and Equipment
Depreciation is generally computed using the straight-line method
over the estimated useful lives of the assets, ranging from ten to
forty-five years for buildings and improvements and three to fifteen
years for machinery and equipment. Leasehold improvements are
depreciated over the shorter of the useful life of the asset or the term of
the associated leases. Maintenance and repair costs are expensed as
incurred; renewals and betterments are capitalized. Upon the sale or
retirement of assets, the accounts are relieved of the cost and the
related accumulated depreciation, with any resulting gain or loss
included in net income.
Software
We capitalize internal and external software costs that are incurred
during the application development stage of software development,
including costs incurred for the design, coding, installation to hardware,
testing, and upgrades and enhancements that provide the software or
hardware with additional functionalities and capabilities. Internal and
external software costs during the preliminary project stage are
expensed, as are those costs during the post-implementation and/or
operation stage, including internal and external training costs and
maintenance costs. Capitalized software, which is included in ‘‘Other
assets’’ in the Consolidated Balance Sheets, is amortized on a
straight-line basis over the estimated useful life of the software,
generally between five and ten years.
Accounts Receivable
Impairment of Long-lived Assets
We record trade accounts receivable at the invoiced amount. The
allowance for doubtful account reserve represents allowances for
customer trade accounts receivable that are estimated to be partially or
entirely uncollectible. The customer complaint reserve represents
estimated sales returns and allowances. These allowances are used to
Impairment charges are recorded when the carrying amounts of
long-lived assets are determined not to be recoverable. Recoverability is
measured by comparing the undiscounted cash flows expected from
their use and eventual disposition to the carrying value of the related
asset or asset group. The amount of impairment loss is calculated as the
32
Notes to Consolidated Financial Statements
excess of the carrying value over the fair value. Historically, changes in
market conditions and management strategy have caused us to
reassess the carrying amount of our long-lived assets.
Goodwill and Other Intangibles Resulting from Business
Acquisitions
Business combinations are accounted for by 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. Other identifiable intangibles include customer
relationships, patents and other acquired technology, trade names and
trademarks, and other intangibles.
We have the following reporting units: materials; retail branding and
information solutions; reflective solutions; performance tapes; and
medical solutions. In performing the required impairment tests, we
primarily apply a present value (discounted cash flow) method to
determine the fair value of the reporting units with goodwill. We perform
our annual impairment test of goodwill during the fourth quarter.
Certain factors may result in the need 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.
We determine goodwill impairment using a two-step process. The
first step is to identify if a potential impairment exists by comparing the
fair value of a reporting unit with its carrying amount, including goodwill.
If the fair value of a reporting unit exceeds its carrying amount, goodwill
of the reporting unit is not considered to have a potential impairment
and the second step of the impairment test is not necessary. However, if
the carrying amount of a reporting unit exceeds its fair value, the second
step is performed to determine if goodwill is impaired and to measure
the amount of impairment loss to recognize, if any.
The second step, if necessary, compares the implied fair value of
goodwill with the carrying amount of goodwill. If the implied fair value of
goodwill exceeds the carrying amount, then goodwill is not considered
impaired. However, if the carrying amount of goodwill exceeds the
implied fair value, an impairment loss is recognized in an amount equal
to that excess.
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 the
reporting units, including sales, operating margins, growth rates, and
discount rates. Assumptions about discount rates are based on a
weighted-average cost of capital
for comparable companies.
Assumptions about sales, operating margins, and growth rates are
based on our forecasts, business plans, economic projections,
anticipated future cash flows and marketplace data. Assumptions are
also made 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 differ from those
estimates and projections, and those differences may be material. The
valuation methodology used 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
33
Avery Dennison Corporation
2014 Annual Report
increase or decrease depending on changes in the inputs and
assumptions.
in
the
We test indefinite-lived intangible assets, consisting of trademarks,
for
fourth quarter or whenever events or
impairment
circumstances indicate that it is more likely than not that their carrying
values exceed their fair values. Fair value is estimated as the discounted
value of future revenues using a royalty rate that a third party would pay
for use of the asset. Variation in the royalty rates could impact the
estimate of fair value. If the carrying amount of an asset exceeds its fair
value, an impairment loss is recognized in an amount equal to that
excess.
See also Note 3, ‘‘Goodwill and Other Intangibles Resulting from
Business Acquisitions.’’
Foreign Currency
Asset and liability accounts of international operations are
translated into U.S. dollars at current rates. Revenues and expenses are
translated at the weighted-average currency rate for the fiscal year.
in
Translation gains and
hyperinflationary economies, if any, are included in net income in the
period incurred. Gains and losses resulting from hedging the value of
investments in certain international operations and from translation of
balance sheet accounts are recorded directly as a component of other
comprehensive income.
losses of subsidiaries operating
Financial Instruments
We enter into foreign exchange hedge contracts to reduce our risk
from exchange rate fluctuations associated with receivables, payables,
loans and firm commitments denominated in certain foreign currencies
that arise primarily as a result of our operations outside the U.S. We
enter into interest rate contracts to help manage our exposure to certain
interest rate fluctuations. We also enter into futures contracts to hedge
certain price fluctuations for a portion of our anticipated domestic
purchases of natural gas. The maximum length of time for which we
hedge our exposure to the variability in future cash flows for forecasted
transactions is 36 months.
On the date we enter into a derivative contract, we determine
whether the derivative will be designated as a hedge. Those derivatives
not designated as hedges are recorded on the balance sheets at fair
value, with changes in the fair value recognized in earnings. Those
derivatives designated as hedges are classified as either (1) hedges of
the fair value of a recognized asset or liability or an unrecognized firm
commitment (‘‘fair value’’ hedges); or (2) hedges of a forecasted
transaction or the variability of cash flows that are to be received or paid
in connection with a recognized asset or liability (‘‘cash flow’’ hedges).
Our policy is not to purchase or hold any foreign currency, interest rate
or commodity contracts for trading purposes.
We assess, both at the inception of the hedge and on an ongoing
basis, whether hedges are highly effective. If it is determined that a
hedge is not highly effective, we prospectively discontinue hedge
accounting. For cash flow hedges, the effective portion of the related
gains and losses is recorded as a component of other comprehensive
income, and the ineffective portion is reported in earnings. Amounts in
accumulated other comprehensive income (loss) are reclassified into
earnings in the same period during which the hedged transaction
affects earnings. In the event the anticipated transaction is no longer
likely to occur, we recognize the change in fair value of the instrument in
current period earnings. Changes in fair value hedges are recognized in
current period earnings. Changes in the fair value of underlying hedged
items (such as recognized assets or liabilities) are also recognized in
current period earnings and offset the changes in the fair value of the
derivative.
In the Consolidated Statements of Cash Flows, hedge transactions
are classified in the same category as the item hedged, primarily in
operating activities.
See also Note 5, ‘‘Financial Instruments.’’
Fair Value Measurements
We define fair value as the price that would be received from selling
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining the fair
value measurements for assets and liabilities which are required to be
recorded at fair value, we consider the principal or most advantageous
market in which we would transact and the market-based risk
measurements or assumptions that market participants would use in
pricing the asset or liability.
We determine fair value based on a three-tier fair value hierarchy,
which we use to prioritize the inputs used in measuring fair value. These
tiers consist of Level 1, defined as observable inputs such as quoted
prices in active markets; Level 2, defined as inputs other than quoted
prices in active markets that are either directly or indirectly observable;
and Level 3, defined as unobservable inputs in which little or no market
data exists, therefore requiring us to develop our own assumptions to
determine the best estimate of fair value.
Revenue Recognition
Sales are recognized when persuasive evidence of an arrangement
exists, pricing is determinable, delivery has occurred based on
applicable sales terms, and collection is reasonably assured. Sale terms
are generally free on board (f.o.b.) shipping point or f.o.b. destination,
depending upon local business customs. For most regions in which we
operate, f.o.b. shipping point terms are utilized and sales are recorded
at the time of shipment, because this is when title and risk of loss are
transferred. In certain regions, notably in Europe, f.o.b. destination
terms are generally utilized and sales are recorded when the products
are delivered to the customer’s delivery site, because this is when title
and risk of loss are transferred. Furthermore, sales, provisions for
estimated returns, and the cost of products sold are recorded at the time
title transfers to customers and when the customers assume the risks
and rewards of ownership. Actual product returns are charged against
estimated sales return allowances.
Sales rebates and discounts are common practice in the industries
in which we operate. Volume, promotional, price, cash and other
discounts and customer incentives are accounted for as a reduction to
gross sales. Rebates and discounts are recorded based upon estimates
at the time products are sold. These estimates are based on our
historical experience for similar programs and products. We review
these rebates and discounts on an ongoing basis and accruals for
rebates and discounts are adjusted, if necessary, as additional
information becomes available.
Research and Development
Research and development costs are related to research, design
and testing of new products and applications and are expensed as
incurred.
Long-Term Incentive Compensation
No long-term incentive compensation expense was capitalized for
the years ended 2014, 2013, or 2012.
Notes to Consolidated Financial Statements
Changes in estimated forfeiture rates are recorded as cumulative
adjustments in the period estimates are revised.
Valuation of Stock-Based Awards
(‘‘RSUs’’). Compensation expense
Our stock-based compensation expense is based on the fair value
of awards, adjusted for estimated forfeitures, and amortized on a
straight-line basis over the requisite service period for stock options and
restricted stock units
for
performance units (‘‘PUs’’) is based 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. The
compensation expense related
to market-leveraged stock units
(‘‘MSUs’’) is based on the fair value of awards, adjusted for estimated
forfeitures, and amortized on a graded-vesting basis over their
respective performance periods.
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.
The fair value of stock options is estimated as of the date of grant
using the Black-Scholes option-pricing model. This model requires
input assumptions for our expected dividend yield, expected stock price
volatility, risk-free interest rate and the expected option term.
The fair value of RSUs and certain PUs that are subject to
achievement of performance objectives based on a performance
condition is determined based on the fair market value of our common
stock as of the date of grant, adjusted for foregone dividends.
The fair value of stock-based awards that are subject to
achievement of performance objectives based on a market condition,
which includes MSUs and certain PUs, is determined using the Monte-
Carlo simulation model, which utilizes multiple input variables, including
expected volatility and other assumptions appropriate for determining
fair value, to estimate the probability of satisfying the target performance
objectives established for the award.
Certain of these 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 stock-based compensation expense and our results of
operations.
Valuation of Cash-Based Awards
Cash-based awards consist of long-term incentive units (‘‘LTI
Units’’) granted to eligible employees. Cash-based awards 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.
Accounting for Income Taxes for Stock-Based Compensation
We elected to use the short-cut method to calculate the historical
pool of windfall tax benefits related to employee and non-employee
director stock-based compensation awards. In addition, we elected to
follow the tax law ordering approach to determine the sequence in
which deductions and net operating loss carryforwards are utilized, as
well as the direct-only approach to calculate the amount of windfall or
shortfall tax benefits.
See also Note 12, ‘‘Long-term Incentive Compensation.’’
34
Notes to Consolidated Financial Statements
Taxes Based on Income
Our provision for income taxes is determined using the asset and
liability approach following the provisions of ASC 740, Accounting for
Income Taxes. Under this approach, deferred income taxes represent
the expected future tax consequences of temporary differences
between the carrying amounts and tax basis of assets and liabilities. We
record a valuation allowance to reduce our deferred tax assets when
uncertainty regarding their realizability exists. We recognize and
measure our uncertain tax positions following the more-likely-than-not
threshold for financial statement recognition and measurement for tax
positions taken or expected to be taken in a tax return.
See also Note 14, ‘‘Taxes Based on Income.’’
Recent Accounting Requirements
In January 2015, the Financial Accounting Standards Board
(‘‘FASB’’) issued guidance on simplification of income statement
classification by removing the concept of extraordinary items from
GAAP. Items that are both unusual and infrequent will no longer be
separately reported net of tax after continuing operations. The existing
requirement to separately present items that are of an unusual nature or
occur infrequently on a pre-tax basis within income from continuing
operations has been retained and was expanded to include items that
are both unusual and infrequent. These items may be presented in the
income statement or disclosed in the footnotes to the financial
statements. The guidance is effective for periods beginning after
December 15, 2015. Early adoption is permitted, but only as of the
beginning of the fiscal year of adoption. We expect our adoption of this
standard to have no impact on our financial position, results of
operations, cash flows, or disclosures.
In August 2014, the FASB issued a new standard that requires an
entity to evaluate whether there are conditions or events, considered in
the aggregate, that raise substantial doubt about the entity’s ability to
continue as a going concern. Management’s evaluation should be
based on relevant conditions and events that are known and reasonably
knowable at the date that the financial statements are issued. Under this
new standard, substantial doubt exists when it is probable that the entity
will be unable to meet its obligations as they become due within one
year of the date the financial statements are issued. If applicable, certain
disclosures are required, including management’s plans to mitigate
those relevant conditions or events to alleviate the substantial doubt.
This standard is effective for annual periods and interim periods within
those annual periods ending after December 15, 2016. Early adoption is
permitted. We expect our adoption of this standard to have no impact on
our financial position, results of operations, cash flows, or disclosures.
In June 2014, the FASB revised guidance on share-based
compensation awards that require a specific performance target to be
achieved in order for the awards to vest. This revised guidance requires
that a performance target that impacts vesting and can be achieved
after the requisite service period be treated as a performance condition.
As such, a performance target should not be reflected in estimating the
grant-date fair value of the award. Compensation cost should be
recognized in the period in which it becomes probable that a
performance target will be achieved and should represent the
compensation cost attributable to the period(s) for which the requisite
35
Avery Dennison Corporation
2014 Annual Report
service has already been rendered. The revised guidance is effective for
annual periods and interim periods within those annual periods
beginning after December 15, 2015, and can be applied either
(i) prospectively to all awards granted or modified after the effective date
or (ii) retrospectively to all awards with performance targets that are
outstanding as of the beginning of the earliest annual period presented
in the financial statements and to all new or modified awards thereafter.
Early adoption is permitted. We do not anticipate our adoption of this
revised guidance to have a significant impact on our financial position,
results of operations, cash flows, or disclosures.
In May 2014, the FASB issued revised guidance on revenue
recognition. This revised guidance provides a single comprehensive
model for accounting for revenue arising from contracts with customers
and supersedes most current revenue recognition guidance, including
industry-specific guidance. This revised guidance will require an entity
to recognize revenue when it transfers promised goods or services to
customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services.
This update creates a five-step model that requires entities to exercise
judgment when considering the terms of contract(s), which includes
(i) identifying the contract(s) with the customer, (ii) identifying the
separate performance obligations in the contract, (iii) determining the
transaction price, (iv) allocating the transaction price to the separate
performance obligations, and (v) recognizing revenue when each
performance obligation is satisfied. This revised guidance also requires
additional disclosure about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts, including
qualitative and quantitative information about contracts with customers,
significant judgments and changes in judgments and assets recognized
from costs incurred to obtain or fulfill a contract. This revised guidance is
effective for fiscal years beginning after December 15, 2016 and interim
periods within those years, and can be applied retrospectively either to
each prior reporting period presented or with the cumulative effect of
adoption recognized at the date of initial application. Early adoption is
not permitted. We are evaluating the impact adoption of this revised
guidance will have on our financial position, results of operations, cash
flows, or disclosures. Based on the information that we have evaluated
to date, we do not anticipate the adoption of this revised guidance to
have a significant impact on our financial position, results of operations,
cash flows, or disclosures.
In April 2014, the FASB issued revised guidance on reporting
discontinued operations. This revised guidance defines a discontinued
operation as a disposal of a component or a group of components of an
entity that represents a strategic shift that has (or will have) a major
effect on the entity’s operations and financial results. This revised
for discontinued
guidance also requires additional disclosures
operations and new disclosures for individually material disposal
transactions that do not meet the definition of a discontinued operation.
This revised guidance is effective for fiscal years beginning on or after
December 15, 2014 and interim periods within those years, with earlier
adoption permitted. We do not anticipate the adoption of this revised
guidance to have a significant impact on our financial position, results of
operations, cash flows, or disclosures.
NOTE 2. DISCONTINUED OPERATIONS AND SALE OF ASSETS
including completion of the final purchase price allocation in the third
quarter of 2014.
Notes to Consolidated Financial Statements
Discontinued Operations
On January 29, 2013, we entered into an agreement to sell our
former OCP and DES businesses to CCL Industries Inc. (‘‘CCL’’).
On July 1, 2013, we completed the sale for a total purchase price of
$500 million ($481.2 million net of cash provided) and entered into an
amendment to the purchase agreement, which, among other things,
increased the target net working capital amount and amended
provisions related to employee matters and indemnification. We
continue to be subject to certain indemnification obligations under the
terms of the purchase agreement. In addition, the tax liability associated
with the sale is subject to completion of tax return filings in certain
foreign jurisdictions where we operated the OCP and DES businesses.
At closing, we entered into a supply agreement, pursuant to which
CCL agreed to purchase certain pressure-sensitive label stock,
adhesives and other base material products for up to six years after
closing. While the supply agreement is expected to continue generating
revenues and cash flows from the OCP and DES businesses, our
continuing involvement in the OCP and DES operations is not expected
to be significant to us as a whole.
The operating results of the discontinued operations and loss on
sale were as follows:
(In millions)
Net sales
2014
2013
2012
$
– $380.4 $912.3
(Loss) income before taxes, including
divestiture-related and restructuring costs
$
Provision for income taxes
– $ (12.4) $ 86.4
(28.6)
(.1)
–
(Loss) income from discontinued operations,
net of tax before loss on sale
(Loss) gain on sale before taxes
Tax benefit (provision) on sale
–
(3.3)
1.1
(12.5)
49.4
(65.4)
57.8
–
–
(Loss) income from discontinued operations,
net of tax
$(2.2) $ (28.5) $ 57.8
The loss from discontinued operations, net of tax, for 2014 reflected
costs related to the resolution of certain post-closing adjustments,
The
taxes,
loss before
including divestiture-related and
restructuring costs, for 2013 included a curtailment gain associated with
our postretirement health and welfare benefit plans, partially offset by
divestiture-related costs. Refer to Note 6, ‘‘Pension and Other
Postretirement Benefits,’’ for information regarding the curtailment gain.
The (loss) income from discontinued operations, net of tax, reflected the
elimination of certain corporate cost allocations. The income tax
provision included in the net loss on sale reflects tax versus book basis
differences, primarily associated with goodwill.
Net sales from continuing operations to discontinued operations
were $45.8 million and $100 million during 2013 and 2012, respectively.
These sales have been included in ‘‘Net sales’’ in the Consolidated
Statements of Income.
Sale of Assets
Information Solutions business
In September 2014, we sold properties
in Framingham,
Massachusetts used primarily as the former headquarters of our Retail
Branding and
for $3.3 million,
recognizing a pre-tax gain of $1.9 million. In April 2013, we sold the
property and equipment of our former corporate headquarters in
Pasadena, California for approximately $20 million, recognizing a
pre-tax gain of $10.9 million. During 2013, we also completed the sale of
certain property, plant and equipment in China for approximately
$11 million, as well as the sale of a research facility also located in
Pasadena, California for approximately $5 million. These gains were
recorded in ‘‘Other expense, net’’ in the Consolidated Statements of
Income.
NOTE 3. GOODWILL AND OTHER INTANGIBLES RESULTING
FROM BUSINESS ACQUISITIONS
Goodwill
Results from our annual impairment test in the fourth quarter of
2014 indicated that no impairment had occurred in 2014 related to
goodwill. The fair value of these assets was primarily based on Level 3
inputs.
Changes in the net carrying amount of goodwill for 2014 and 2013 by reportable segment were as follows:
(In millions)
Goodwill as of December 29, 2012
Divestiture (1)
Acquisition adjustments
Translation adjustments
Goodwill as of December 28, 2013
Acquisition adjustments (2)
Translation adjustments
Goodwill as of January 3, 2015
Pressure-
sensitive
Materials
Retail
Branding and
Information
Solutions
Other
specialty
converting
businesses
$338.3
–
–
(3.9)
334.4
.4
(28.2)
$422.6
–
(.2)
(5.7)
416.7
7.0
(8.7)
$306.6
$415.0
$
$ 3.5
(3.5)
–
–
–
–
–
–
(1) See Note 2, ‘‘Discontinued Operations and Sale of Assets,’’ for more information.
(2) Acquisition adjustments related to deferred taxes from previous acquisitions. See Note 14, ‘‘Taxes Based on Income,’’ for more information.
Total
$764.4
(3.5)
(.2)
(9.6)
751.1
7.4
(36.9)
$721.6
36
Notes to Consolidated Financial Statements
The carrying amounts of goodwill at January 3, 2015 and December 28, 2013 were net of accumulated impairment losses of $820 million, which
were included in our Retail Branding and Information Solutions reportable segment.
There was no goodwill associated with our Vancive Medical Technologies reportable segment.
Indefinite-Lived Intangible Assets
In the third quarter of 2014, we determined that there was a need to conduct an interim impairment test of our indefinite-lived intangible assets,
consisting of certain trade names and trademarks. The factors considered included a shortfall in 2014 full-year projected revenue and a reduction in
2015 projected revenue associated with these assets. The interim impairment test indicated that the fair value of our indefinite-lived intangible assets
was less than their carrying value, which resulted in a non-cash asset impairment charge of $3 million. This charge was recorded in ‘‘Other expense,
net’’ in the Consolidated Statements of Income and included in our Retail Branding and Information Solutions reportable segment. Results from our
annual impairment test in the fourth quarter of 2014 indicated that no further impairment had occurred related to indefinite-lived intangible assets. The
fair value of these assets was primarily based on Level 3 inputs.
In conjunction with the preparation for our annual impairment test in the fourth quarter of 2012, we determined that the carrying value of our
indefinite-lived intangible assets consisting of certain trade names and trademarks exceeded their fair value, which resulted in a non-cash impairment
charge of $7 million. This charge was recorded in ‘‘Other expense, net’’ in the Consolidated Statements of Income and included in our Retail Branding
and Information Solutions reportable segment. The fair value of these assets was primarily based on Level 3 inputs.
The carrying value of indefinite-lived intangible assets resulting from business acquisitions, consisting of trade names and trademarks, was
$7.9 million and $10.9 million at January 3, 2015 and December 28, 2013, respectively.
Finite-Lived Intangible Assets
The following table sets forth our finite-lived intangible assets resulting from business acquisitions at January 3, 2015 and December 28, 2013,
which continue to be amortized:
(In millions)
Customer relationships
Patents and other acquired technology
Trade names and trademarks
Other intangibles
Total
2014
Accumulated
Amortization
$180.2
42.7
20.5
11.3
Net
Carrying
Amount
$48.7
6.3
3.5
1.0
Gross
Carrying
Amount
$234.1
48.9
26.2
12.4
$254.7
$59.5
$321.6
2013
Accumulated
Amortization
$164.6
38.3
22.5
11.1
$236.5
Net
Carrying
Amount
$69.5
10.6
3.7
1.3
$85.1
Gross
Carrying
Amount
$228.9
49.0
24.0
12.3
$314.2
Amortization expense from continuing operations for finite-lived intangible assets resulting from business acquisitions was $24.4 million for 2014,
$28.5 million for 2013, and $29.9 million for 2012.
The estimated amortization expense for finite-lived intangible
assets resulting from business acquisitions for each of the next five
fiscal years is expected to be as follows:
(In millions)
2015
2016
2017
2018
2019
Estimated
Amortization
Expense
$20.8
19.0
9.9
2.4
1.8
NOTE 4. DEBT AND CAPITAL LEASES
Short-Term Borrowings
We had $87 million of borrowings from commercial paper
issuances outstanding (weighted-average interest rate of .4%) at
January 3, 2015. We had no outstanding short-term variable rate
borrowings from commercial paper issuances at December 28, 2013.
Short-Term Credit Facilities
In October 2014, we amended and restated our revolving credit
facility (the ‘‘Revolver’’) with certain domestic and foreign banks,
increasing the amount available thereunder from $675 million to
$700 million. The amendment also extended the Revolver’s maturity
date from December 22, 2016 to October 3, 2019 and adjusted pricing
to reflect favorable market conditions. The maturity date may be
extended for additional one-year periods under certain circumstances.
The commitments under the Revolver may be increased by up to
$325 million, subject to lender approval and customary requirements.
The Revolver is used as a back-up facility for our commercial paper
program and can be used to finance other corporate requirements.
No balances were outstanding under the Revolver as of January 3,
2015 or December 28, 2013. Commitment fees associated with this
facility in 2014, 2013, and 2012 were $1.3 million, $1.4 million, and
$1.4 million, respectively.
Uncommitted lines of credit were approximately $316 million at
January 3, 2015. These lines may be cancelled at any time by us or the
issuing banks. Short-term borrowings outstanding under uncommitted
lines of credit were $111.6 million (weighted-average interest rate of
9.4%) and $73.9 million (weighted-average interest rate of 11.2%) at
January 3, 2015 and December 28, 2013, respectively.
37
Avery Dennison Corporation
2014 Annual Report
Notes to Consolidated Financial Statements
Long-Term Borrowings and Capital Leases
In January 2013, we repaid $250 million of senior notes at maturity
Long-term debt, including its respective interest rates, and capital
using commercial paper borrowings.
lease obligations at year-end consisted of the following:
(In millions)
2014
2013
Long-term debt and capital leases
Medium-term notes:
Series 1995 due 2015 through 2025
$ 50.0
$ 50.0
Long-term notes:
Senior notes due 2017 at 6.6%
Senior notes due 2020 at 5.4%
Senior notes due 2023 at 3.4%
Senior notes due 2033 at 6.0%
Capital lease obligations
Less amount classified as current
249.6
249.9
249.7
150.0
1.8
(5.7)
249.6
249.9
249.7
150.0
3.0
(1.6)
Total long-term debt and capital leases
$945.3
$950.6
Our medium-term notes have maturities from 2015 through 2025
and accrue interest at an average fixed rate of 7.5%.
Maturities of long-term debt and capital lease payments for each of
the next five fiscal years and thereafter are expected to be as follows:
Year
2015 (classified as current)
2016
2017
2018
2019
2020 and thereafter
(In millions)
$
5.7
.3
249.9
.2
.2
694.7
In April 2013, we issued $250 million of senior notes due April 2023.
The notes bear an interest rate of 3.35% per year, payable semiannually
in arrears. Net proceeds from the offering, after deducting underwriting
discounts and offering expenses, of approximately $247.5 million were
used to repay a portion of the indebtedness outstanding under our
commercial paper program during the second quarter of 2013.
Other
Our various loan agreements require that we maintain specified
financial covenant ratios of total debt and interest expense in relation to
certain measures of income. As of January 3, 2015, we were in
compliance with our financial covenants.
Our total interest costs from continuing operations in 2014, 2013,
and 2012, were $67.2 million, $62.3 million, and $76.2 million,
respectively, of which $3.9 million, $3.3 million, and $3.3 million,
respectively, were capitalized as part of the cost of assets.
The estimated fair value of our long-term debt is primarily based on
the credit spread above U.S. Treasury securities on notes with similar
rates, credit ratings, and remaining maturities. The fair value of
short-term borrowings, which include commercial paper issuances and
short-term lines of credit, approximates carrying value given the short
duration of these obligations. The fair value of our total debt was
$1.22 billion at January 3, 2015 and $1.06 billion at December 28, 2013.
Fair value amounts were determined primarily based on Level 2 inputs.
Refer to Note 1, ‘‘Summary of Significant Accounting Policies,’’ for more
information.
NOTE 5. FINANCIAL INSTRUMENTS
As of January 3, 2015, the aggregate U.S. dollar equivalent notional
value of our outstanding commodity contracts and foreign exchange
contracts was $5.5 million and $1.4 billion, respectively.
We recognize all derivative instruments as either assets or liabilities
at fair value in the Consolidated Balance Sheets. We designate
commodity forward contracts on forecasted purchases of commodities
and foreign exchange contracts on forecasted transactions as cash flow
hedges and foreign exchange contracts on existing balance sheet items
as fair value hedges.
The following table provides the fair value and balance sheet locations of derivatives as of January 3, 2015:
(In millions)
Balance Sheet Location
Fair Value
Balance Sheet Location
Asset
Liability
Foreign exchange contracts
Commodity contracts
Other current assets
Other current assets
$10.3
–
$10.3
Other accrued liabilities
Other accrued liabilities
Long-term retirement benefits and other liabilities
The following table provides the fair value and balance sheet locations of derivatives as of December 28, 2013:
(In millions)
Balance Sheet Location
Fair Value
Balance Sheet Location
Asset
Liability
Foreign exchange contracts
Commodity contracts
Other current assets
Other current assets
$3.1
.1
$3.2
Other accrued liabilities
Other accrued liabilities
Fair Value
$10.5
1.0
.2
$11.7
Fair Value
$4.7
–
$4.7
Fair Value Hedges
For derivative instruments that are designated and qualify as fair
value hedges, the gain or loss on the derivative and the offsetting loss or
gain on the hedged item attributable to the hedged risk are recognized
in current earnings, resulting in no material net impact to income.
38
Notes to Consolidated Financial Statements
The following table provides the components of the net gain (loss)
recognized in income related to fair value hedge contracts. The
corresponding gains or losses on the underlying hedged items
approximated the net gain (loss) on these fair value hedge contracts.
(In millions)
Location of Gain (Loss)
in Income
2014
2013
2012
Foreign exchange
Cost of products
contracts
sold
$ (1.6) $ 2.3 $
–
Foreign exchange
Marketing, general
contracts
and administrative
expense
(43.3)
(35.9) 17.8
$(44.9) $(33.6) $17.8
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash
flow hedges, the effective portion of the gain or loss on the derivative is
reported as a component of ‘‘Accumulated other comprehensive loss’’
and reclassified into earnings in the same period(s) during which the
hedged transaction affects earnings. Gains and losses on the
derivatives representing either hedge
ineffectiveness or hedge
components excluded from the assessment of effectiveness are
recognized in current earnings.
Gains (losses) recognized in ‘‘Accumulated other comprehensive
loss’’ (effective portion) on derivatives related to cash flow hedge
contracts were as follows:
(In millions)
2014
2013
2012
Foreign exchange contracts
Commodity contracts
$ 1.3 $ 1.1 $ (.9)
(.9)
(1.2)
(.1)
$
.1 $ 1.0 $ (1.8)
Amounts reclassified from ‘‘Accumulated other comprehensive
loss’’ (effective portion) on derivatives related to cash flow hedge
contracts were as follows:
(In millions)
Location of Gain (Loss)
in Income
2014
2013
2012
Foreign exchange
Cost of products
contracts
sold
$ (1.2) $
.6 $ (2.5)
Commodity contracts
Cost of products
Interest rate contracts
Interest expense
sold
.1
(.1)
(1.2)
(.1)
(2.8)
(4.4)
$ (1.2) $ (.7) $ (9.7)
The amount of gain or loss recognized in income related to the
ineffective portion of, and the amount excluded from, effectiveness
testing for cash flow hedges and derivatives not designated as hedging
instruments was not material in 2014, 2013, or 2012.
As of January 3, 2015, we expect a net gain of approximately
$2 million to be reclassified from ‘‘Accumulated other comprehensive
loss’’ to earnings within the next 12 months.
39
Avery Dennison Corporation
2014 Annual Report
NOTE 6. PENSION AND OTHER POSTRETIREMENT BENEFITS
Defined Benefit Plans
We sponsor a number of defined benefit plans, the accrual of
benefits under some of which has been frozen, covering eligible
employees in the U.S. and certain other countries. Benefits payable to
an employee are based primarily on years of service and the
employee’s compensation during the course of his or her employment
with us. While we have not expressed any intent to terminate these
plans, we may do so at any time, subject to applicable laws and
regulations.
We are also obligated to pay unfunded termination indemnity
benefits to certain employees outside of the U.S., which are subject to
applicable agreements, local laws and regulations. We have not
incurred significant costs
indemnity
related
arrangements, and therefore, no related costs are included in the
disclosures below.
termination
to
Employees who participated in our U.S. defined benefit plan, the
Avery Dennison Pension Plan (‘‘ADPP’’), between December 1, 1986
and November 30, 1997, may also have had a Stock Holding and
Retirement Enhancement Account (‘‘SHARE Account’’) associated with
our defined contribution plan. The ADPP is a floor offset plan that
coordinated the amount of projected benefit obligation to an eligible
participant with the SHARE Account such that the total benefit payable
to an eligible participant would equal the greater of the value of the
participant’s benefit from the ADPP or the value of the participant’s
SHARE Account. Lower than expected asset returns on the participant
balances in the SHARE Account could have increased the projected
benefit obligation under the ADPP. In the fourth quarter of 2013, we
amended our plan documents to require participants to make an early
election rather than waiting to make such election upon termination of
employment either to (a) receive their assets in the SHARE Account as a
distribution, in which case their retirement benefit under the ADPP
would be offset by the annuity equivalent of these assets, or (b) transfer
their SHARE Account assets to the ADPP and receive the full ADPP
retirement benefit in annuity form. The amendment resulted in an
actuarial loss of approximately $20 million to the ADPP in 2013. In the
fourth quarter of 2014, all participants with a SHARE Account completed
their elections and the existing SHARE Accounts were terminated,
resulting in our recording an additional actuarial loss of $12 million.
These actuarial losses are subject to future amortization.
Plan Assets
Our investment management of the ADPP assets utilizes a liability
driven investment (LDI) strategy. Under an LDI strategy, the assets are
invested in a diversified portfolio that is split into two sub-portfolios: a
growth portfolio and a liability hedging portfolio. The growth portfolio
consists primarily of equity and high-yield fixed income securities. The
liability hedging portfolio consists primarily of investment grade fixed
income securities and cash, and is intended, over time, to more closely
match the liabilities of the plan. The investment objective of the portfolio
is to improve the funded status of the plan; as funded status reaches
certain trigger points, the portfolio moves to a more conservative asset
allocation by increasing the allocation to the liability hedging portfolio.
The current allocation is 65% in the growth portfolio and 35% in the
liability hedging portfolio, subject to periodic fluctuations due to market
movements. The plan assets are diversified across asset classes,
striving to balance risk and return within the limits of prudent risk-taking
and Section 404 of the Employee Retirement Income Security Act of
1974, as amended. Because many of the pension liabilities are
long-term, the investment horizon is also long-term, but the investment
plan must also ensure adequate near-term liquidity to fund benefit
payments.
Notes to Consolidated Financial Statements
Assets of our international plans are invested in accordance with
locally accepted practices and primarily include equity securities, fixed
income securities, insurance contracts and cash. Asset allocations and
investments vary by country and plan. Our target plan asset investment
allocation for our international plans combined is 39% in equity
securities, 49% in fixed income securities and cash, and 12% in
insurance contracts and other investments, and is subject to periodic
fluctuations in these respective asset classes.
Fair Value Measurements
The following is a description of the valuation methodologies used
for assets measured at fair value:
Cash is valued at nominal value. Money market funds are valued at
net asset value (‘‘NAV’’). Mutual funds are valued at fair value as
determined by quoted market prices, based upon the NAV of shares
held by the plans at year-end. Pooled funds, which include real estate
pooled funds and multi-asset common trust funds, are comprised of
shares or units in funds that are not publicly traded and are valued at net
unit value, as determined by the fund’s trustees based on the underlying
securities in the trust. Equities are valued at the closing price reported
on the active market on which the individual securities are traded. Real
estate investment trusts are valued based on quoted prices in active
markets. Debt securities consist primarily of treasury securities and
corporate bonds, which are valued using bid prices; observable market
inputs to determine these prices include reportable trades, benchmark
yields, credit spreads, broker/dealer quotes, bids and offers. Insurance
contracts are valued at book value, which approximates fair value and is
calculated using the prior year balance plus or minus investment returns
and changes in cash flows. Pooled funds – alternative investments are
investments in a fund of hedge funds, which are valued monthly on a
one-month lag using a market approach valuation technique. We
assess information available to us to determine whether there are any
material changes to values at the reporting date. This investment was
classified as a Level 3 asset as shares may be redeemed quarterly upon
65 days’ notice and are subject to certain restrictions.
The methods described above may produce a fair value calculation
that may not be indicative of net realizable value or reflective of future fair
values. Furthermore, while we believe the valuation methods are
appropriate and consistent with other market participants, the use of
different methodologies or assumptions to determine the fair value of
certain financial instruments could result in a different fair value
measurement at the reporting date.
The following table sets forth, by level within the fair value hierarchy, U.S. plan assets (all in the ADPP) at fair value as of year-end 2014:
(In millions)
Asset class
Cash
Liability hedging portfolio
Pooled funds – Corporate debt/agencies
Pooled funds – Fixed income
Pooled funds – U.S. bonds, other fixed income
Total liability hedging portfolio
Growth portfolio (1)
Pooled funds – Global equities
Pooled funds – Global real estate investment trusts
Pooled funds – High yield bonds
Pooled funds – International
Pooled funds – U.S. equities
Pooled funds – Alternative investments
Total growth portfolio
Total U.S. plan assets at fair value
Other assets (2)
Total U.S. plan assets
(1) ‘‘Pooled funds – International’’ excludes U.S. equity securities; ‘‘Pooled funds – Global equities’’ includes U.S. equity securities.
(2) Includes accrued recoverable taxes.
Fair Value Measurements Using
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservable
Inputs
(Level 3)
Total
$
1.3
$1.3
$
–
$
152.4
218.7
.4
371.5
60.2
40.4
58.2
87.5
99.4
60.3
406.0
–
–
–
–
–
–
–
–
–
–
–
152.4
218.7
.4
371.5
60.2
40.4
58.2
87.5
99.4
–
345.7
–
–
–
–
–
–
–
–
–
–
60.3
60.3
$778.8
$1.3
$717.2
$60.3
.1
$778.9
40
Notes to Consolidated Financial Statements
The following table presents a reconciliation of Level 3 U.S. plan assets held during the year ended January 3, 2015:
(In millions)
Balance at December 28, 2013
Net realized and unrealized gain
Purchases
Settlements
Impact of changes in foreign currency exchange rates
Balance at January 3, 2015
Level 3 Assets
Pooled Funds –
Alternative
Investments
$51.2
2.7
6.4
–
–
$60.3
The following table sets forth, by level within the fair value hierarchy, international plan assets at fair value as of year-end 2014:
(In millions)
Asset class
Cash
Fixed income securities
Mutual funds
Pooled funds – Emerging markets bonds
Pooled funds – European bonds
Pooled funds – U.K. bonds
Pooled funds – Global bonds
Pooled funds – High yield bonds
Pooled funds – Enhanced yield bonds
Total fixed income securities
Equity securities
Pooled funds – Emerging markets
Pooled funds – U.K.
Pooled funds – Global
Pooled funds – Real estate investment trusts
Total equity securities
Other investments
Pooled funds – Commodities
Pooled funds – Real estate
Pooled funds – Other
Insurance contracts
Total other investments
Fair Value Measurements Using
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservable
Inputs
(Level 3)
Total
$
.6
$.6
$
–
$
.3
6.7
243.5
66.4
3.4
6.5
1.9
328.7
22.3
16.2
160.2
32.0
230.7
8.4
8.5
16.6
24.6
58.1
.3
–
–
–
–
–
–
.3
–
–
–
–
–
–
–
–
–
–
–
6.7
243.5
66.4
3.4
6.5
1.9
328.4
22.3
16.2
160.2
32.0
230.7
8.4
8.5
16.6
–
33.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
24.6
24.6
Total international plan assets at fair value
$618.1
$.9
$592.6
$24.6
41
Avery Dennison Corporation
2014 Annual Report
The following table presents a reconciliation of Level 3 international plan assets held during the year ended January 3, 2015:
Notes to Consolidated Financial Statements
(In millions)
Balance at December 28, 2013
Net realized and unrealized gain
Purchases
Settlements
Impact of changes in foreign currency exchange rates
Balance at January 3, 2015
Level 3 Assets
Insurance Contracts
$27.4
.6
2.3
(2.9)
(2.8)
$24.6
The following table sets forth, by level within the fair value hierarchy, U.S. plan assets (all in the ADPP) at fair value as of year-end 2013:
(In millions)
Asset class
Cash
Liability hedging portfolio
Pooled funds – Corporate debt/agencies
Pooled funds – U.S. bonds, other fixed income
Total liability hedging portfolio
Growth portfolio (1)
Pooled funds – Global equities
Pooled funds – Global real estate investment trusts
Pooled funds – High yield bonds
Pooled funds – International
Pooled funds – U.S. equities
Pooled funds – Alternative investments
Total growth portfolio
Total U.S. plan assets at fair value
Other assets (2)
Total U.S. plan assets
(1) ‘‘Pooled funds – International’’ excludes U.S. equity securities; ‘‘Pooled funds – Global equities’’ includes U.S. equity securities.
(2) Includes accrued recoverable taxes.
Fair Value Measurements Using
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservable
Inputs
(Level 3)
Total
$ 15.8
$15.8
$
–
$
332.7
.4
333.1
60.0
45.8
65.2
86.6
89.5
51.2
398.3
–
–
–
–
–
–
–
–
–
–
332.7
.4
333.1
60.0
45.8
65.2
86.6
89.5
–
347.1
–
–
–
–
–
–
–
–
–
51.2
51.2
$747.2
$15.8
$680.2
$51.2
.2
$747.4
42
Notes to Consolidated Financial Statements
The following table sets forth, by level within the fair value hierarchy, international plan assets at fair value as of year-end 2013:
(In millions)
Asset class
Cash
Fixed income securities
Mutual funds
Pooled funds – Emerging markets bonds
Pooled funds – European bonds
Pooled funds – U.K. bonds
Pooled funds – Global bonds
Pooled funds – High yield bonds
Total fixed income securities
Equity securities
Pooled funds – Emerging markets
Pooled funds – U.K.
Pooled funds – Global
Pooled funds – Real estate investment trusts
Total equity securities
Other investments
Pooled funds – Commodities
Pooled funds – Real estate
Pooled funds – Other
Insurance contracts
Total other investments
Fair Value Measurements Using
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservable
Inputs
(Level 3)
Total
$
4.7
$4.7
$
–
$
.3
6.2
193.8
56.6
3.3
6.7
266.9
20.9
17.2
151.3
28.8
218.2
9.5
7.7
31.7
27.4
76.3
.3
–
–
–
–
–
.3
–
–
–
–
–
–
–
–
–
–
–
6.2
193.8
56.6
3.3
6.7
266.6
20.9
17.2
151.3
28.8
218.2
9.5
7.7
31.7
–
48.9
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
27.4
27.4
Total international plan assets at fair value
$566.1
$5.0
$533.7
$27.4
Other assets (1)
Total international plan assets
(1) Includes accrued recoverable taxes.
Postretirement Health Benefits
We provide postretirement health benefits to certain U.S. retired
employees up to the age of 65 under a cost-sharing arrangement and
provide supplemental Medicare benefits to certain U.S. retirees over the
age of 65. Our policy is to fund the cost of the postretirement benefits
from operating cash flows. While we have not expressed any intent to
terminate postretirement health benefits, we may do so at any time,
subject to applicable laws and regulations.
Plan Assumptions
Discount Rate
In consultation with our actuaries, we annually review and
determine the discount rates to be used in connection with valuing our
postretirement obligations. The assumed discount rate for each
pension plan reflects market rates for high quality corporate bonds
.5
$566.6
currently available. In the U.S., our discount rate is 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 plans.
Long-term Return on 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 our asset classes, and the mix of
active and passive investments. Additionally, current market conditions,
including interest rates, are evaluated and market data is reviewed for
reasonableness and appropriateness.
43
Avery Dennison Corporation
2014 Annual Report
Notes to Consolidated Financial Statements
Healthcare Cost Trend Rate
A one-percentage-point change in assumed health care cost trend
Our practice is to fund the cost of postretirement benefits from
operating cash flows. For measurement purposes, a 6.5% annual rate of
increase in the per capita cost of covered health care benefits was
assumed for 2015. This rate is expected to decrease to approximately
5% by 2018.
rates would have the following effects:
(In millions)
Effect on total of service
and interest cost
components
Effect on postretirement
benefit obligations
One-percentage-point
Increase
One-percentage-point
Decrease
$.01
.4
$(.01)
(.4)
Plan Balance Sheet Reconciliations
The following table provides a reconciliation of benefit obligations, plan assets, funded status of the plans and accumulated other
comprehensive loss for our defined benefit plans:
Plan Benefit Obligations
(In millions)
Change in projected benefit obligations
Projected benefit obligations at beginning of year
Service cost
Interest cost
Participant contribution
Amendments (1)
Actuarial loss (gain) (2)
Plan transfers (3)
Benefits paid
Curtailments
Settlements
Foreign currency translation
Pension Benefits
U.S. Postretirement
Health Benefits
2014
2013
2014
2013
U.S.
Int’l
U.S.
Int’l
$ 933.7
.4
44.7
–
–
141.5
21.4
(47.9)
–
–
–
$642.8
12.9
23.8
4.0
(7.2)
166.1
–
(22.3)
(7.6)
(2.2)
(73.2)
$963.7
.4
39.7
–
19.9
(59.8)
5.7
(45.4)
9.5
–
–
$597.6
13.0
23.3
4.1
–
8.5
7.1
(21.2)
(1.7)
(6.0)
18.1
$ 9.1
–
.3
1.1
–
.3
–
(2.8)
–
–
–
$12.0
–
.3
1.2
–
(.5)
–
(3.5)
(.4)
–
–
$ 9.1
Projected benefit obligations at end of year
$1,093.8
$737.1
$933.7
$642.8
$ 8.0
Accumulated benefit obligations at end of year
$1,093.8
$693.9
$933.7
$601.7
(1) Amendments to the international plans in 2014 related to our plans in The Netherlands, U.K. and France. Amendments to the U.S. pension plan in 2013 primarily related to changing the timing for the
required benefit elections for participant SHARE Accounts.
(2) Actuarial loss (gain) in 2013 included an out-of-period adjustment of $15 million recorded in the fourth quarter of 2013 to properly state the balance sheet pension liability by increasing the projected
benefit obligation as a result of a change in the method for projecting SHARE Account asset values. The corresponding adjustment affected other comprehensive income, with no impact to net
income in 2013, and is subject to future amortization. The impact of this out-of-period adjustment was not considered material to the 2013 or any previous financial statements.
(3) Plan transfers in 2014 and 2013 for the U.S. represented transfers from participant SHARE Accounts. Plan transfers in 2013 for the international plans include transfers in Switzerland and Germany
related to the OCP and DES divestitures.
Plan Assets
(In millions)
Change in plan assets
Plan assets at beginning of year
Actual return on plan assets
Plan transfers (1)
Employer contributions
Participant contributions
Benefits paid
Settlements
Foreign currency translation
Plan assets at end of year
Pension Benefits
U.S. Postretirement
Health Benefits
2014
2013
2014
2013
U.S.
Int’l
U.S.
Int’l
$747.4
52.9
21.4
5.1
–
(47.9)
–
–
$566.6
117.9
–
16.0
4.0
(22.3)
(2.2)
(61.9)
$648.5
61.8
5.7
76.8
–
(45.4)
–
–
$515.0
26.6
2.3
28.9
4.1
(21.2)
(6.0)
16.9
$
–
–
–
1.7
1.1
(2.8)
–
–
$
–
–
–
2.3
1.2
(3.5)
–
–
$778.9
$618.1
$747.4
$566.6
$
–
$
–
(1) Plan transfers in 2014 and 2013 for the U.S. represented transfers from participant SHARE Accounts. Plan transfers in 2013 for the international plans include transfers in Switzerland related to the
OCP and DES divestitures.
44
Notes to Consolidated Financial Statements
Funded Status
(In millions)
Funded status of the plans
Other assets
Other accrued liabilities
Long-term retirement benefits and other liabilities
Plan assets less than benefit obligations
Weighted-average assumptions used to determine year-end benefit
obligations
Discount rate
Compensation rate increase
Pension Benefits
U.S. Postretirement
Health Benefits
2014
2013
2014
2013
U.S.
Int’l
U.S.
Int’l
$
–
(4.1)
(310.8)
$ 20.0
(2.5)
(136.5)
$
–
(3.6)
(182.7)
$ 35.4
(2.7)
(108.9)
$
–
(1.6)
(6.4)
$(314.9)
$(119.0)
$(186.3)
$ (76.2)
$(8.0)
$
–
(2.2)
(6.9)
$(9.1)
Pension Benefits
U.S. Postretirement
Health Benefits
2014
2013
2012
2014
2013
2012
U.S.
Int’l
U.S.
Int’l
U.S.
Int’l
4.00% 2.54% 4.85% 3.88% 4.00% 3.94% 3.50% 3.45% 2.85%
–
2.22
2.24
2.24
–
–
–
–
–
The amount in non-current pension assets represents the net assets of our overfunded plans, which consist of a few international plans. The
amounts in current and non-current pension liabilities represent the net obligations of our underfunded plans, which consist of all U.S. and several
international plans.
For U.S. and international plans combined, the projected benefit obligations and fair value of plan assets for pension plans with projected benefit
obligations in excess of plan assets were $1.45 billion and $997.3 million, respectively, at year-end 2014 and $1.25 billion and $953.7 million,
respectively, at year-end 2013.
For U.S. and international plans combined, the accumulated benefit obligations and fair value of plan assets for pension plans with accumulated
benefit obligations in excess of plan assets were $1.43 billion and $997.3 million, respectively, at year-end 2014 and $1.22 billion and $938.6 million,
respectively, at year-end 2013.
Accumulated Other Comprehensive Loss
The following table sets forth the pretax amounts recognized in ‘‘Accumulated other comprehensive loss’’ in the Consolidated Balance Sheets:
Pension Benefits
U.S. Postretirement
Health Benefits
2014
2013
2014
2013
U.S.
Int’l
U.S.
Int’l
$590.5
19.9
–
$174.8
(5.3)
.4
$466.9
21.0
–
$129.5
2.5
.5
$ 24.1
(22.9)
–
$ 26.6
(26.2)
–
$
.4
(In millions)
Net actuarial loss
Prior service cost (credit)
Net transition obligation
Net amount recognized in accumulated other comprehensive loss
$610.4
$169.9
$487.9
$132.5
$ 1.2
The following table sets forth the pretax amounts, including those of discontinued operations, recognized in ‘‘Other comprehensive loss
(income)’’:
(In millions)
Net actuarial loss (gain)
Prior service (credit) cost
Amortization of unrecognized:
Net actuarial loss
Prior service (cost) credit
Net transition asset
Pension Benefits
U.S. Postretirement
Health Benefits
2014
2013
2012
2014
2013
2012
U.S.
Int’l
U.S.
Int’l
U.S.
Int’l
$140.6
–
$51.3
(7.3)
$(73.4)
19.9
$ 6.1
–
$ 93.5
–
$16.4
–
$ .3
–
$ (.9)
–
$ 1.7
–
(16.8)
(1.2)
–
(5.6)
(1.0)
–
(18.6)
(.3)
–
(8.0)
(.4)
.1
(14.9)
(.4)
–
(3.3)
(.5)
.5
(2.8)
3.3
–
(2.5)
17.2
–
(2.7)
4.8
–
Net amount recognized in other comprehensive loss (income)
$122.6
$37.4
$(72.4)
$(2.2)
$ 78.2
$13.1
$ .8
$13.8
$ 3.8
45
Avery Dennison Corporation
2014 Annual Report
Plan Income Statement Reconciliations
The following table sets forth the components of net periodic benefit cost, which are recorded in income from continuing operations, for our
defined benefit plans:
Notes to Consolidated Financial Statements
(In millions)
Service cost
Interest cost
Expected return on plan assets
Recognized actuarial loss
Amortization of prior service cost (credit)
Amortization of transition asset
Recognized loss (gain) on curtailment (1)
Recognized loss on settlement (2)
Pension Benefits
U.S. Postretirement
Health Benefits
2014
2013
2012
2014
2013
2012
U.S.
Int’l
U.S.
Int’l
U.S.
Int’l
$
.4
44.7
(52.0)
16.2
1.2
–
–
.6
$ 12.9
23.8
(26.0)
5.2
.4
–
.6
.4
$
.4
39.7
(48.1)
17.7
.3
–
–
–
$ 13.0
23.3
(22.6)
6.3
.5
(.1)
(1.5)
.5
$
.3
40.3
(45.9)
14.3
.4
–
–
.6
$ 9.1
24.5
(22.1)
3.1
.4
(.5)
–
–
$
–
.3
–
2.8
(3.3)
–
–
–
$
–
.3
–
2.5
(4.1)
–
–
–
$
–
.5
–
2.7
(4.8)
–
–
–
Net periodic benefit cost (credit)
$ 11.1
$ 17.3
$ 10.0
$ 19.4
$ 10.0
$ 14.5
$ (.2) $(1.3) $(1.6)
(1) Recognized loss on curtailment in 2014 related to a pension plan in The Netherlands and gain on curtailment in 2013 related to a pension plan in Taiwan. These amounts were recorded in ‘‘Other
expense, net’’ in the Consolidated Statements of Income.
(2) Represented settlement event in Switzerland in 2014.
In 2013, in connection with the sale of our former OCP and DES businesses, we recognized a curtailment gain of $13.1 million associated with our
U.S. postretirement health benefit plan, partially offset by curtailment and settlement losses of $10.4 million associated with certain U.S. pension
plans. The net gain of $2.7 million was recorded in ‘‘Income (loss) from discontinued operations, net of tax’’ in the Consolidated Statements of
Income. Refer to Note 2, ‘‘Discontinued Operations and Sale of Assets,’’ for more information on the sale.
The following table sets forth the weighted-average assumptions used to determine net periodic cost:
Pension Benefits
U.S. Postretirement
Health Benefits
2014
2013
2012
2014
2013
2012
U.S.
Int’l
U.S.
Int’l
U.S.
Int’l
Discount rate
Expected return on assets
Compensation rate increase
Plan Contributions
We make contributions to our defined benefit plans sufficient to
meet the minimum funding requirements of applicable laws and
regulations, plus additional amounts, if any, we determine to be
appropriate. In 2015, we expect to contribute approximately $15 million,
$4 million, and $2 million to our international pension plans, U.S.
pension plans, and postretirement benefit plan, respectively.
Future Benefit Payments
Anticipated future benefit payments, which reflect expected service
periods for eligible participants, are as follows:
(In millions)
2015
2016
2017
2018
2019
2020 (cid:4)2023
Pension Benefits
U.S.
Int’l
$ 49.4
50.1
52.2
68.4
58.2
294.5
$ 18.4
19.3
19.8
20.1
21.1
119.2
U.S. Postretirement
Health Benefits
$ 1.6
1.2
.9
.6
.5
1.6
4.85% 3.88% 4.00% 3.94% 4.75% 4.80% 3.45% 2.85% 3.75%
8.00
7.75
–
–
4.78
2.24
8.00
–
4.95
2.79
4.82
2.24
–
–
–
–
–
–
Estimated Amortization Amounts in Accumulated Other
Comprehensive Loss
Our estimates of fiscal year 2015 amortization of amounts included
in ‘‘Accumulated other comprehensive loss’’ are as follows:
(In millions)
Net actuarial loss
Prior service cost (credit)
Net transition obligation
Net loss (gain) to be
recognized
Pension Benefits
U.S.
Int’l
$ 20.3
1.1
–
$ 10.4
(.3)
.1
$ 21.4
$ 10.2
U.S. Postretirement
Health Benefits
$ 2.6
(3.3)
–
$ (.7)
Defined Contribution Plans
We sponsor various defined contribution plans worldwide, the
largest of which is the Avery Dennison Corporation Employee Savings
Plan (‘‘Savings Plan’’), a 401(k) plan for our U.S. employees.
We
recognized expense
from continuing operations of
$19.4 million, $21 million, and $19.8 million in 2014, 2013, and 2012,
respectively, related to our employer contributions and employer match
of participant contributions to the Savings Plan.
46
Notes to Consolidated Financial Statements
Other Retirement Plans
We have deferred compensation plans which permit eligible
employees and directors to defer a portion of their compensation. The
compensation voluntarily deferred by the participant, together with
certain employer contributions, earn specified and variable rates of
return. As of year-end 2014 and 2013, we had accrued $125.2 million
and $128.6 million, respectively, for our obligations under these plans.
These obligations are funded by corporate-owned life insurance
contracts and standby letters of credit. As of year-end 2014 and 2013,
these obligations were secured by standby letters of credit of
$2.5 million and $3 million, respectively. Proceeds from the insurance
policies are payable to us upon the death of covered participants. The
cash surrender values of these policies, net of outstanding loans, which
are included in ‘‘Other assets’’ in the Consolidated Balance Sheets,
were $210.9 million and $204.6 million at year-end 2014 and 2013,
respectively.
Our deferred compensation expense from continuing operations
was $6.8 million, $5.9 million, and $7.1 million for 2014, 2013, and 2012,
respectively. A portion of the interest on certain of our contributions may
be forfeited by participants if their employment terminates before age 55
other than by reason of death or disability.
Our Directors Deferred Equity Compensation Plan allows our
non-employee directors to elect to receive their cash compensation in
deferred stock units (‘‘DSUs’’) issued under our stock option and
incentive plan. Dividend equivalents, representing
the value of
dividends per share paid on shares of our common stock and calculated
with reference to the number of DSUs held as of a quarterly dividend
record date, are credited in the form of additional DSUs on the
applicable payable date. A director’s DSUs are converted into shares of
our common stock upon his or her resignation or retirement.
Approximately .1 million DSUs were outstanding as of year-end 2014
and 2013, with an aggregate value of $6.1 million and $5.5 million,
respectively.
NOTE 7. COMMITMENTS
Minimum annual rental commitments on operating leases having initial
or remaining non-cancelable lease terms of one year or more are as
follows:
Year
2015
2016
2017
2018
2019
2020 and thereafter
Total minimum lease payments
(In millions)
$ 50.9
37.4
22.3
13.6
10.3
39.3
$173.8
Rent expense for operating leases from continuing operations,
which includes maintenance and insurance costs and property taxes,
was approximately $67 million in 2014, $70 million in 2013, and
$75 million in 2012. Operating leases relate primarily to office and
warehouse space, and equipment for electronic data processing and
transportation. The terms of these leases do not impose significant
restrictions or unusual obligations, except as noted below.
On September 9, 2005, we completed a ten-year lease financing for
a commercial facility located in Mentor, Ohio used primarily for the North
47
Avery Dennison Corporation
2014 Annual Report
American headquarters and research center of our Materials group. The
facility consists generally of land, buildings, and equipment. We lease
the facility under an operating lease arrangement, which contains a
residual value guarantee of $31.5 million, as well as certain obligations
with respect to the refinancing of the lessor’s debt of $11.5 million
(collectively, the ‘‘Guarantee’’). At the end of the lease term, we have the
option to purchase or remarket the facility at an amount equivalent to the
value of the Guarantee. If our estimated fair value (or estimated selling
price) of the facility falls below the Guarantee, we would be required to
pay the lessor a shortfall, which is an amount equivalent to the
Guarantee less our estimated fair value. During the second quarter of
2011, we estimated a shortfall with respect to the Guarantee and began
to recognize the shortfall on a straight-line basis over the remaining
lease term. The carrying amount of the shortfall was approximately
$16 million at January 3, 2015, which was included in ‘‘Other accrued
liabilities’’ in the Consolidated Balance Sheets.
Refer to Note 4, ‘‘Debt and Capital Leases,’’ for information on
capital lease obligations.
NOTE 8. CONTINGENCIES
Legal Proceedings
We are involved in various lawsuits, claims, inquiries, and other
regulatory and compliance matters, most of which are routine to the
nature of our business. We have accrued liabilities for matters where it is
probable that a loss will be incurred and the amount of loss can be
reasonably estimated. Because of the uncertainties associated with
claims resolution and litigation, future expenses to resolve these matters
could be higher than the liabilities we have accrued; however, we are
unable to reasonably estimate a range of potential expenses. If
information were to become available that allowed us to reasonably
estimate the range of potential expenses in an amount higher or lower
than what we have accrued, we would adjust our accrued liabilities
accordingly. Additional lawsuits, claims, inquiries, and other regulatory
and compliance matters could arise in the future. The range of expenses
for resolving any future matters would be assessed as they arise; until
then, a range of potential expenses for such resolution cannot be
determined. Potential insurance reimbursements are not offset against
potential liabilities, and such liabilities are not discounted. Based upon
current information, we believe that the impact of the resolution of these
matters would not be, individually or in the aggregate, material to our
financial position, results of operations or cash flows.
Environmental
Environmental expenditures are generally expensed. However,
environmental expenditures for newly acquired assets and those which
extend or improve the economic useful life of existing assets are
capitalized and amortized over the shorter of the estimated useful life of
the acquired asset or the remaining life of the existing asset. We review
our estimates of costs of compliance with environmental laws related to
remediation and cleanup of various sites, including sites in which
governmental agencies have designated us as a potentially responsible
party. When it is probable that a loss will be incurred and where a range
of the loss can be reasonably estimated, the best estimate within the
range is accrued. When the best estimate within the range cannot be
determined, the low end of the range is accrued. Potential insurance
reimbursements are not offset against potential liabilities, and such
liabilities are not discounted.
As of January 3, 2015, we have been designated by the U.S.
Environmental Protection Agency (‘‘EPA’’) and/or other responsible
state agencies as a potentially responsible party (‘‘PRP’’) at fourteen
waste disposal or waste recycling sites, which are the subject of
separate investigations or proceedings concerning alleged soil and/or
groundwater contamination and for which no settlement of our liability
has been agreed. We are participating with other PRPs at these sites,
and anticipate that our share of remediation costs will be determined
pursuant to agreements entered into in the normal course of
negotiations with the EPA or other governmental authorities.
We have accrued liabilities for sites where it is probable that a loss
will be incurred and the cost or amount of loss can be reasonably
estimated. These estimates could change as a result of changes in
planned remedial actions, remediation technologies, site conditions,
the estimated time to complete remediation, environmental laws and
regulations, and other factors. Because of the uncertainties associated
with environmental assessment and remediation activities, future
expenses to remediate these sites could be higher than the liabilities we
have accrued; however, we are unable to reasonably estimate a range of
potential expenses. If information were to become available that allowed
us to reasonably estimate the range of potential expenses in an amount
higher or lower than what we have accrued, we would adjust our
environmental liabilities accordingly. In addition, we may be identified as
a PRP at additional sites in the future. The range of expenses for
remediation of any future-identified sites would be addressed as they
NOTE 9. FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
Notes to Consolidated Financial Statements
arise; until then, a range of expenses for such remediation cannot be
determined.
The activity in 2014 and 2013 related to environmental liabilities was
as follows:
(In millions)
Balance at beginning of year
Charges (reversals), net
Payments
Balance at end of year
2014
2013
$29.6
1.7
(5.1)
$32.5
4.6
(7.5)
$26.2
$29.6
As of January 3, 2015, approximately $10 million of the balance was
classified as short-term and included in ‘‘Other accrued liabilities’’ in the
Consolidated Balance Sheets.
Guarantees
We participate in receivable financing programs with several
financial institutions whereby advances may be requested from these
financial institutions. We guarantee the collection of the related
receivables. At January 3, 2015, the outstanding amount guaranteed
was approximately $17 million. We believe our exposure to these
guarantees is not material.
Unused letters of credit (primarily standby) outstanding with various
financial institutions were approximately $53 million at January 3, 2015.
The following table provides the assets and liabilities carried at fair value, measured on a recurring basis, as of January 3, 2015:
(In millions)
Assets
Trading securities
Derivative assets
Liabilities
Derivative liabilities
Fair Value Measurements Using
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservable
Inputs
(Level 3)
Total
$17.9
10.3
$7.6
–
$10.3
10.3
$11.7
$1.2
$10.5
$ –
–
$ –
48
Notes to Consolidated Financial Statements
The following table provides the assets and liabilities carried at fair value, measured on a recurring basis, as of December 28, 2013:
Fair Value Measurements Using
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservable
Inputs
(Level 3)
Total
$ 17.7
114.5
3.2
$7.6
–
.1
$ 10.1
114.5
3.1
$ –
–
–
$ –
$
4.7
$ –
$
4.7
NOTE 10. NET INCOME PER SHARE
Net income per common share was computed as follows:
(In millions, except per share amounts)
2014
2013
2012
(A) Income from continuing operations
(B) (Loss) income from discontinued
$251.1
$244.3
$157.6
operations, net of tax
(2.2)
(28.5)
57.8
(C) Net income available to common
shareholders
$248.9
$215.8
$215.4
(D) Weighted-average number of
common shares outstanding
93.8
98.4
102.6
Dilutive shares (additional common
shares issuable under stock-
based awards)
(E) Weighted-average number of
common shares outstanding,
assuming dilution
Net income (loss) per common share:
Continuing operations (A) (cid:3) (D)
Discontinued operations (B) (cid:3) (D)
Net income per common share
(C) (cid:3) (D)
Net income (loss) per common share,
assuming dilution:
Continuing operations (A) (cid:3) (E)
Discontinued operations (B) (cid:3) (E)
Net income per common share,
assuming dilution (C) (cid:3) (E)
1.9
1.7
.9
95.7
100.1
103.5
$ 2.68
(.03)
$ 2.48
(.29)
$ 1.54
.56
$ 2.65
$ 2.19
$ 2.10
$ 2.62
(.02)
$ 2.44
(.28)
$ 1.52
.56
$ 2.60
$ 2.16
$ 2.08
Certain stock-based compensation awards were not included in the
computation of net income per common share, assuming dilution,
because they would not have had a dilutive effect. Stock-based
compensation awards excluded
totaled
approximately 3 million shares in 2014, 7 million shares in 2013, and
12 million shares in 2012.
the computation
from
(In millions)
Assets
Trading securities
Short-term investments
Derivative assets
Liabilities
Derivative liabilities
respectively,
‘‘Other current assets,’’
Trading securities include fixed income securities (primarily U.S.
government and corporate debt securities) measured at fair value using
quoted prices/bids and a money market fund measured at fair value
using net asset value. As of January 3, 2015, trading securities of
$.8 million and $17.1 million were included in ‘‘Cash and cash
equivalents’’ and
the
Consolidated Balance Sheets. As of December 28, 2013, trading
securities of $.3 million and $17.4 million were included in ‘‘Cash and
cash equivalents’’ and ‘‘Other current assets,’’ respectively, in the
Consolidated Balance Sheets. Short-term investments are comprised of
commercial paper and measured at fair value using broker quoted
prices. As of December 28, 2013, short-term investments were included
in ‘‘Cash and cash equivalents.’’ Derivatives that are exchange-traded
are measured at fair value using quoted market prices and classified
within Level 1 of the valuation hierarchy. Derivatives measured based on
inputs that are readily available in public markets are classified within
Level 2 of the valuation hierarchy.
in
Non-recurring Fair Value Measurements
During 2013, long-lived assets with carrying amounts totaling
$8.3 million were written down to their fair value of $4.8 million, resulting
in an impairment charge of $3.5 million, which was included in ‘‘Other
expense, net’’ in the Consolidated Statements of Income. The fair value
was based on the sale price of the assets, less estimated broker fees,
which are primarily Level 3 inputs.
49
Avery Dennison Corporation
2014 Annual Report
NOTE 11. SUPPLEMENTAL EQUITY AND COMPREHENSIVE
INCOME INFORMATION
The changes in ‘‘Accumulated other comprehensive loss’’ (net of
tax) for 2014 and 2013 were as follows:
Notes to Consolidated Financial Statements
Common Stock and Share Repurchase Program
Our Certificate of Incorporation authorizes five million shares of $1
par value preferred stock (none outstanding), with respect to which our
Board of Directors may fix the series and terms of issuance, and
400 million shares of $1 par value voting common stock.
From time to time, our Board of Directors authorizes us to
repurchase of shares of our outstanding common stock. Repurchased
shares may be reissued under our stock option and incentive plan or
used
In 2014, we repurchased
approximately 7.4 million shares of our common stock at an aggregate
cost of $355.5 million.
for other corporate purposes.
On December 4, 2014, our Board of Directors authorized the
repurchase of shares of our common stock in the aggregate amount of
up to $500 million (exclusive of any fees, commissions or other
expenses related to such purchases), in addition to any outstanding
shares authorized under any previous Board authorization. This
authorization will remain in effect until the shares authorized thereby
have been repurchased.
On July 25, 2013, our Board of Directors authorized the repurchase
of shares of our common stock in the aggregate amount of up to
$400 million (exclusive of any fees, commissions or other expenses
related to such purchases), in addition to any outstanding shares
authorized under any previous Board authorization. This authorization
will remain in effect until the shares authorized thereby have been
repurchased.
As of January 3, 2015, shares of our common stock in the
aggregate amount of approximately $600 million remained authorized
for repurchase under both Board authorizations.
Treasury Shares Reissuance
We fund a portion of our employee-related expenses using shares
of our common stock held in treasury. We elected to record net gains or
losses associated with our use of treasury shares to retained earnings.
Foreign
Pension and
Other
Currency Postretirement Cash Flow
Hedges
Benefits
Translation
Total
$ 180.5
$(456.5)
$(2.0) $(278.0)
(53.3)
10.8
29.4
9.0
.8
.2
(23.1)
20.0
(42.5)
38.4
1.0
(3.1)
138.0
(418.1)
(1.0)
(281.1)
(154.7)
(129.4)
–
16.9
.1
.9
(284.0)
17.8
(154.7)
(112.5)
1.0
(266.2)
(In millions)
Balance as of
December 29, 2012
Other comprehensive
income (loss) before
reclassifications, net of
tax
Reclassifications to net
income, net of tax
Net current-period other
comprehensive income
(loss), net of tax
Balance as of
December 28, 2013
Other comprehensive
income (loss) before
reclassifications, net of
tax
Reclassifications to net
income, net of tax
Net current-period other
comprehensive income
(loss), net of tax
Balance as of
January 3, 2015
$ (16.7)
$(530.6)
$
–
$(547.3)
The amounts reclassified from ‘‘Accumulated other comprehensive
loss’’ to increase (decrease) income from continuing operations were
as follows:
Affected Line Item in the
Statement Where Net
2013 Income is Presented
Comprehensive Income
(In millions)
2014
Comprehensive income, net of tax, includes net income, foreign
currency translation adjustment, net actuarial loss, prior service cost
and net transition assets, and the gains or losses on the effective portion
of cash flow and firm commitment hedges that are currently presented
as a component of shareholders’ equity.
Cash flow hedges:
Foreign exchange
contracts
Commodity contracts
Interest rate contracts
Pension and other
postretirement
benefits (1)
$ (1.2)
.1
(.1)
(1.2)
.3
$
.6 Cost of products sold
(1.2) Cost of products sold
(.1) Interest expense
(.7) Total before tax
.2 Provision for income
taxes
(.9)
(.5) Net of tax
(24.1)
7.2
(23.5)
7.8 Provision for income
taxes
(16.9)
(15.7) Net of tax
Total reclassifications for
the period
$(17.8)
$(16.2) Total, net of tax
(1) See Note 6, ‘‘Pension and Other Postretirement Benefits,’’ for more information.
50
Notes to Consolidated Financial Statements
During 2013, we reclassified $6.4 million (net of tax) from
‘‘Accumulated other comprehensive loss’’ to ‘‘(Loss) income from
discontinued operations, net of tax,’’ related to a net gain from
curtailment in our domestic defined benefit plans and settlements from
certain international pension plans as a result of the sale of the OCP and
DES businesses. Refer to Note 6, ‘‘Pension and Other Postretirement
Benefits,’’ for more information.
Additionally, during 2013, we recognized $10.8 million (net of tax) of
currency translation loss from ‘‘Accumulated other comprehensive
loss’’ to ‘‘(Loss) income from discontinued operations, net of tax’’ as a
result of the sale of the OCP and DES businesses.
The following table sets forth the income tax (benefit) expense
allocated to each component of other comprehensive (loss) income:
(In millions)
Foreign currency translation
Pension and other postretirement
benefits:
Net actuarial (loss) gain
Prior service credit (cost)
Reclassifications to net income:
Amortization of net actuarial loss
Amortization of prior service credit
Amortization of transition asset
Net curtailment of pension and
post-retirement benefit obligations
Settlement of pension obligations
Cash flow hedges:
Losses (gains) recognized on cash
flow hedges
Reclassifications to net income
Income tax (benefit) expense related to
items of other comprehensive (loss)
income
2014
2013
2012
$
–
$
–
$
.9
(56.6)
1.1
26.4
(7.5)
(38.3)
–
7.5
(.7)
–
.1
.3
.1
.3
9.4
(1.3)
–
(4.8)
.6
6.9
(1.5)
(.1)
–
.2
.2
.1
(.7)
3.7
$(47.9)
$23.1
$(28.9)
NOTE 12. LONG-TERM INCENTIVE COMPENSATION
Equity Awards
Stock-Based Compensation
We maintain various stock option and incentive plans and grant our
annual stock-based compensation awards to eligible employees in
February and non-employee directors in May. Prior to 2013, these
awards were granted to non-employee directors in April. Certain awards
granted to retirement-eligible employees vest in full upon retirement;
awards to these employees are accounted for as fully vested on the date
of grant.
Stock-based compensation expense from continuing operations
and the total recognized tax benefit related to this expense for the years
2014, 2013, and 2012 were as follows:
(In millions)
Stock-based compensation expense
Tax benefit
2014
2013
2012
$28.3
10.5
$32.3
10.8
$35.8
12.5
This expense was
included
in
‘‘Marketing, general and
administrative expense’’ in the Consolidated Statements of Income.
As of January 3, 2015, we had approximately $29 million of
unrecognized compensation expense from continuing operations
related to unvested stock-based awards, which is expected to be
recognized over the remaining weighted-average requisite service
period of approximately two years.
Stock Options
Stock options granted to non-employee directors and employees
may be granted at no less than 100% of the fair market value of our
common stock on the date of the grant. Options generally vest ratably
over a three-year period for non-employee directors and over a
four-year period for employees. Options expire ten years from the date
of grant.
The fair value of stock option awards is estimated as of the date of
grant using the Black-Scholes option-pricing model. This model
requires input assumptions for our expected dividend yield, expected
stock price volatility, risk-free interest rate and the expected option term.
The following assumptions are used in estimating the fair value of
granted stock options:
Risk-free interest rate is based on the 52-week average of the
Treasury-Bond rate that has a term corresponding to the expected
option term.
Expected stock price volatility represents an average of the implied
and historical volatility.
Expected dividend yield is based on the current annual dividend
divided by the 12-month average of our monthly stock price prior to
grant.
Expected option term is determined based on historical experience
under our stock option and incentive plans.
No stock options were granted during 2014. The weighted-average
grant date fair value per share for stock options was $6.97 and $7.08 in
2013 and 2012, respectively.
The underlying weighted-average assumptions used were as
follows:
Risk-free interest rate
Expected stock price volatility
Expected dividend yield
Expected option term
2013
2012
1.04%
27.17%
3.40%
1.82%
32.81%
3.30%
6.2 years
6.0 years
The following table sets forth stock option information related to our stock option and incentive plan during 2014:
Outstanding at December 28, 2013
Exercised
Forfeited or expired
Outstanding at January 3, 2015
Options vested and expected to vest at January 3, 2015
Options exercisable at January 3, 2015
51
Avery Dennison Corporation
2014 Annual Report
Number
of options Weighted-average
exercise price
(in thousands)
7,891.2
(1,009.2)
(1,703.4)
5,178.6
5,134.5
4,444.2
$45.85
34.14
58.17
$44.08
44.19
$45.89
Weighted-average
remaining
contractual life
(in years)
Aggregate
intrinsic value
(in millions)
4.27
$69.0
3.95
3.95
3.51
$54.6
53.7
$40.9
Notes to Consolidated Financial Statements
The total intrinsic value of stock options exercised was $15.4 million
in 2014, $26.1 million in 2013, and $3.8 million in 2012. We received
approximately $34.2 million in 2014, $44.8 million in 2013, and
$10.2 million in 2012 from the exercise of stock options. The tax benefit
associated with these exercised options was $5.3 million in 2014,
$8.5 million in 2013, and $1.3 million in 2012. The intrinsic value of the
stock options is based on the amount by which the market value of the
underlying stock exceeds the exercise price of the option.
of the four vesting periods represents one tranche of MSUs and the fair
value of each of these four tranches was determined using the Monte-
Carlo simulation model, which utilizes multiple input variables, including
expected volatility and other assumptions, to estimate the probability of
achieving the performance objective established for the award. The
weighted-average grant date fair value for MSUs was $52.76 and $51.40
in 2014 and 2013, respectively.
The following table summarizes information related to awarded
Performance Units (‘‘PUs’’)
PUs are performance-based awards granted under our stock
option and incentive plan to eligible employees. PUs are payable in
shares of our common stock at the end of a three-year cliff vesting
period provided that certain performance objectives are achieved at the
end of the period. Over the performance period, the estimated number
of shares of our common stock issuable upon vesting is adjusted
upward or downward based upon the probability of the achievement of
the performance objectives established for the award. The actual
number of shares issued can range from 0% to 200% of the target
shares at the time of grant. The weighted-average grant date fair value
for PUs was $47.85, $52.93 and $34.43 in 2014, 2013 and 2012,
respectively.
The following table summarizes information related to awarded
PUs:
Unvested at December 28, 2013
Granted at target
Forfeited/cancelled
Number of
PUs
(in thousands)
795.2
183.6
(288.9)
Weighted-
average
grant-date
fair value
$41.32
47.85
41.59
Unvested at January 3, 2015
689.9
$40.16
In 2014, PUs granted during 2011 were cancelled as the
performance objective was not met as of the end of the three-year
performance period. The fair value of vested PUs was $9.8 million and
$.3 million in 2013 and 2012, respectively.
Market-Leveraged Stock Units (‘‘MSUs’’)
In 2013, we began granting performance-based MSUs under our
stock option and incentive plan to certain eligible employees. These
units vest ratably over a four-year period provided that the performance
objective is achieved as of the end of each vesting period. MSUs accrue
dividend equivalents during the vesting period, which are earned and
paid only at vesting. The number of MSU shares earned is based upon
our absolute total shareholder return at each vesting date and can range
from 0% to 200% of the target amount of MSUs subject to vesting. Each
MSUs:
Number of
MSUs
(in thousands)
Unvested at December 28, 2013
Granted at target
Adjustment for above-target performance (1)
Vested
Forfeited/cancelled
330.1
338.1
33.3
(109.6)
(40.1)
Weighted-
average
grant-date
fair value
$51.40
52.76
51.40
51.40
53.11
Unvested at January 3, 2015
551.8
$52.18
(1) Reflects adjustment as a result of achieving above-target performance for vesting of the
tranche paid out in 2014.
Restricted Stock Units (‘‘RSUs’’)
RSUs are service-based awards granted under our stock option
and incentive plan to certain eligible employees that usually vest ratably
over a period of three years for non-employee directors and four years
for employees provided that directorship or employment continues
through the applicable vesting date. If the condition is not met, unvested
RSUs are generally forfeited. The weighted-average grant date fair value
for RSUs was $45.91, $38.72 and $27.88 in 2014, 2013 and 2012,
respectively.
The following table summarizes information related to awarded
RSUs:
Unvested at December 28, 2013
Granted
Vested
Forfeited/cancelled
Number of
RSUs (in
thousands)
681.0
48.9
(301.1)
(40.8)
Weighted-
average
grant-date
fair value
$31.06
45.91
31.41
31.53
Unvested at January 3, 2015
388.0
$32.70
The fair value of vested RSUs was $9.5 million, $15.9 million and
$12.5 million in 2014, 2013 and 2012, respectively.
52
Notes to Consolidated Financial Statements
Cash Awards
Long-Term Incentive Units
Long-term incentive units (‘‘LTI Units’’) are granted under our
long-term incentive unit plan to certain eligible employees. LTI Units are
service-based awards that generally vest ratably over a four-year period.
The settlement value equals the number of vested LTI Units multiplied
by the average of the high and low market prices of our common stock
on the vesting date. The compensation expense related to these awards
is amortized on a straight-line basis and the fair value is remeasured
using the estimated percentage of units expected to be earned
multiplied by the average of the high and low market prices of our
common stock at each quarter-end.
We also grant cash-based awards in the form of performance and
market-leveraged LTI Units to eligible employees. Performance LTI Units
are payable in cash at the end of a three-year cliff vesting period
provided that certain performance objectives are achieved at the end of
the performance period. Market-leveraged LTI Units are payable in cash
and vest ratably over a period of four years. The number of performance
and market-leveraged LTI Units earned at vesting is adjusted upward or
downward based upon the probability of achieving the performance
objectives established for the respective award and the actual number
of units issued can range from 0% to 200% of the target units subject to
vesting. The performance and market-leveraged LTI Units are
remeasured using the estimated percentage of units expected to be
earned multiplied by the average of the high and low market prices of
their respective
our common stock at each quarter-end over
performance periods. The compensation expense
to
related
performance LTI Units is amortized on a straight-line basis over their
respective performance period. The compensation expense related to
market-leveraged LTI Units is amortized on a graded-vesting basis over
their respective performance periods.
The compensation expense from continuing operations related to
LTI Units was $17.8 million in 2014, $10.3 million in 2013, and
$1.9 million in 2012. This expense was included in ‘‘Marketing, general
and administrative expense’’ in the Consolidated Statements of Income.
The total recognized tax benefit related to these units was $5.7 million in
2014, $3.2 million in 2013, and $.5 million in 2012.
NOTE 13. COST REDUCTION ACTIONS
Restructuring Costs
We have compensation plans that provide eligible employees with
severance in the event of an involuntary termination due to qualifying
cost reduction actions. We calculate severance using the benefit
formula under the plans. Accordingly, we record provisions for
severance and other exit costs (including asset impairment charges and
lease and other contract cancellation costs) when they are probable
and estimable. In the absence of a plan or established local practice for
overseas jurisdictions, liabilities for restructuring costs are recognized
when incurred.
2014 Actions
In 2014, we recorded $66.5 million in restructuring charges, net of
reversals, related to restructuring actions we initiated in 2014 (‘‘2014
Actions’’), including the consolidation of certain European operations.
These charges consisted of severance and related costs for the
reduction of approximately 1,420 positions, lease cancellation costs,
and asset impairment charges. Approximately 100 employees impacted
by our 2014 Actions remained employed with us as of January 3, 2015.
We expect payments relating to our 2014 Actions to be completed in
2015.
2012 Program
In 2013, we recorded $40.3 million in restructuring charges, net of
reversals, related to the restructuring program we initiated in 2012
(‘‘2012 Program’’), which consisted of severance and related costs for
the reduction of approximately 1,400 positions, lease and other contract
cancellation costs, and asset impairment charges.
In 2012, we recorded $56.4 million in restructuring charges, net of
reversals, related to our 2012 Program, which consisted of severance
and related costs for the reduction of approximately 1,060 positions,
lease cancellation costs, and asset impairment charges.
No employees impacted by the 2012 Program remained employed
with us as of December 28, 2013.
2011 Actions
In 2011, we recorded approximately $45 million in restructuring
charges, net of reversals,
for discontinued
operations, consisting of severance and related costs for the reduction
of approximately 910 positions, asset impairment charges, and lease
cancellation costs. No employees impacted by these actions remained
employed with us as of December 29, 2012.
including charges
Accruals for severance and related costs and lease and other
contract cancellation costs were included in ‘‘Other accrued liabilities’’
in the Consolidated Balance Sheets. For assets that were not disposed,
impairments were based on the estimated market value of the assets.
53
Avery Dennison Corporation
2014 Annual Report
Notes to Consolidated Financial Statements
During 2014, restructuring charges and payments were as follows:
(In millions)
2014 Actions
Severance and related costs
Asset impairment charges
Lease cancellation costs
2012 Program
Severance and related costs
Lease and other contract cancellation costs
Total
Accrual at
December 28,
2013
Charges
(Reversals),
net
Cash
Payments
Non-cash
Impairment
Foreign
Currency
Translation
Accrual at
January 3,
2015
$ –
–
–
6.6
.2
$6.8
$55.1
10.8
.6
$(35.6)
–
(.5)
$
–
(10.8)
–
(.4)
–
(5.2)
(.2)
–
–
$(2.7)
–
–
(.2)
–
$16.8
–
.1
.8
–
$66.1
$(41.5)
$(10.8)
$(2.9)
$17.7
During 2013, restructuring charges and payments were as follows:
(In millions)
2012 Program
Severance and related costs
Lease and other contract cancellation costs
Asset impairment charges
2011 Actions
Severance and related costs
Total
Accrual at
December 29,
2012
Charges,
net
Cash
Payments
Non-cash
Impairment
Foreign
Currency
Translation
Accrual at
December 28,
2013
$20.7
.1
–
$27.2
3.4
9.7
$(41.0)
(3.3)
–
$
–
–
(9.7)
.1
–
(.1)
–
$20.9
$40.3
$(44.4)
$(9.7)
$(.3)
–
–
–
$(.3)
$6.6
.2
–
–
$6.8
The table below shows the total amount of restructuring costs
incurred by reportable segment and Corporate. Restructuring costs in
continuing operations were included in ‘‘Other expense, net’’ in the
Consolidated Statements of Income.
(In millions)
2014
2013
2012
Restructuring costs by reportable
segment and Corporate
Pressure-sensitive Materials
Retail Branding and Information Solutions
Vancive Medical Technologies
Corporate
Continuing operations
Discontinued operations
Total
$40.2
21.3
4.2
.4
$10.8
28.5
.1
.9
$34.1
17.8
.9
3.0
66.1
40.3
55.8
–
–
.6
$66.1
$40.3
$56.4
NOTE 14. TAXES BASED ON INCOME
Taxes based on income (loss) were as follows:
(In millions)
Current:
U.S. federal tax
State taxes
International taxes
Deferred:
U.S. federal tax
State taxes
International taxes
2014
2013
2012
$ 14.5
(.2)
115.0
$
1.9
.3
107.3
$ (18.7)
(2.4)
101.2
129.3
109.5
80.1
(21.4)
8.0
(2.6)
(16.0)
(11.2)
1.3
19.2
9.3
9.5
(9.3)
(.3)
(.1)
Provision for income taxes
$113.3
$118.8
$ 80.0
54
Notes to Consolidated Financial Statements
The principal items accounting for the difference between taxes
computed at the U.S. statutory rate and taxes recorded were as follows:
aggregate, was not material to the periods reported or to any previous
financial statements.
The 2013 effective tax rate for continuing operations reflected
$11 million of benefit from adjustments to federal income tax, primarily
due to the enactment of the American Taxpayer Relief Act of 2012
(‘‘ATRA’’), and $18.8 million of net expense related to changes in certain
tax reserves and valuation allowances. Additionally, the effective tax rate
for 2013 reflected a benefit of $11.2 million from favorable tax rates on
certain earnings
jurisdictions
throughout the world, offset by $12.1 million of expense related to the
accrual of U.S. taxes on certain foreign earnings.
from our operations
lower-tax
in
The 2012 effective tax rate for continuing operations reflected
$6.2 million of benefit from the release of a valuation allowance on
certain state tax credits and $11.2 million of expense related to the
accrual of U.S. taxes on certain foreign earnings. Additionally, the
effective tax rate for 2012 was negatively impacted by approximately
$5 million from the statutory expiration of federal research and
development tax credits on December 31, 2011.
On December 19, 2014, the Tax Increase Prevention Act of 2014
was enacted, retroactively extending the controlled foreign corporation
(‘‘CFC’’) look-through rule and the federal research and development
credit, which expired on December 31, 2014. The retroactive effects
were recognized in the fourth quarter of 2014. The retroactive effects of
the extension of the CFC look-through rule did not have a material
impact on our effective tax rate or operating results after taking into
consideration tax accruals related to our repatriation assertions.
On January 2, 2013, ATRA was enacted, retrospectively extending
the federal research and development credit for amounts paid or
incurred after December 31, 2011 and before January 1, 2014. The
retroactive effects were recognized in the first quarter of 2013. ATRA
also retroactively extended the CFC look-through rule that had expired
on December 31, 2011. For periods in which the look-though rule was
effective, certain dividends, interest, rents, and royalties received or
accrued by a CFC of a U.S. multinational enterprise from a related CFC
are excluded from U.S. federal income tax. The retroactive effects of the
extension of the CFC look-through rule did not have a material impact
on our effective tax rate or operating results after taking into
consideration tax accruals related to our repatriation assertions. The
extensions of the CFC look-through rule and the research and
development credit expired on December 31, 2013.
Deferred income taxes have not been provided on approximately
$2.2 billion of undistributed earnings of foreign subsidiaries as of
January 3, 2015 since these amounts are intended to be indefinitely
reinvested in foreign operations. It is not practicable to calculate the
deferred taxes associated with these earnings because of the variability
of multiple factors that would need to be assessed at the time of any
assumed repatriation; however, foreign tax credits would likely be
available to reduce federal income taxes in the event of distribution. In
making this assertion, we evaluate, among other factors, the profitability
of our U.S. and foreign operations and the need for cash within and
outside the U.S., including cash requirements for capital improvements,
acquisitions, market expansion, and stock repurchase programs.
(In millions)
2014
2013
2012
Computed tax at 35% of income before
taxes
$127.5
$127.1
$ 83.1
Increase (decrease) in taxes resulting
from:
State taxes, net of federal tax benefit
Foreign earnings taxed at different
rates (1)(2)
Valuation allowance
Corporate owned life insurance
U.S. federal research and
development tax credits
Tax contingencies and audit
settlements
Expiration of carryforward items
Other items, net
1.4
2.4
1.1
(15.9)
16.0
(4.2)
(14.7)
(4.3)
(6.9)
11.8
(23.6)
(5.5)
(1.6)
(7.0)
–
(2.7)
1.4
(8.6)
23.1
2.5
(3.4)
9.4
4.8
(1.1)
Provision for income taxes
$113.3
$118.8
$ 80.0
(1) Included foreign earnings taxed in the U.S., net of credits, for all years.
(2) Included $12.1 million and $11.2 million of expense related to the accrual of U.S. taxes on
certain foreign earnings for 2013 and 2012, respectively. For 2014, there was no such accrual.
Income (loss) from continuing operations before taxes from our
U.S. and international operations was as follows:
(In millions)
U.S.
International
2014
2013
2012
$
3.5
360.9
$ (36.2)
399.3
$(125.7)
363.3
Income from continuing operations
before taxes
$364.4
$363.1
$ 237.6
The effective tax rate for continuing operations was 31.1%, 32.7%,
and 33.7% for fiscal years 2014, 2013, and 2012, respectively. The 2014
effective tax rate for continuing operations included the following: tax
benefits for changes in certain tax reserves, including interest and
penalties, of $10.2 million resulting from settlements of audits and
$18.1 million resulting from lapses and statute expirations; a repatriation
tax benefit of $9.8 million related to certain foreign losses; tax expense
of $9.1 million from the taxable inclusion of a net foreign currency gain
related to the revaluation of certain intercompany loans; tax expense of
$10.6 million related to our change in estimate of the potential outcome
of uncertain tax issues in China and Germany; and state tax expense of
$2.5 million primarily related to gains arising as a result of certain foreign
reorganizations. Additionally, the 2014 effective tax rate for continuing
operations included a net tax benefit of $.9 million from out-of-period
adjustments to properly reflect the valuation allowance related to state
deferred tax assets, uncertain tax positions, the cumulative tax effect of
currency translation associated with a foreign branch investment, and
deferred taxes related to acquisitions completed in 2002 and 2003. The
impact of these out-of-period adjustments, individually and in the
55
Avery Dennison Corporation
2014 Annual Report
Deferred income taxes reflect the temporary differences between
the amounts at which assets and liabilities are recorded for financial
reporting purposes and the amounts utilized for tax purposes. The
primary components of the temporary differences that gave rise to our
deferred tax assets and liabilities were as follows:
(In millions)
Accrued expenses not currently deductible
Net operating losses
Tax credit carryforwards
Postretirement and postemployment benefits
Pension costs
Inventory reserves
Other assets
Valuation allowance
Total deferred tax assets (2)
Depreciation and amortization
Repatriation accrual (1)
Foreign operating loss recapture
Other liabilities
Total deferred tax liabilities (2)
Total net deferred tax assets
2014
2013
$ 40.7
277.7
104.2
97.6
154.0
9.1
9.2
(75.0)
$ 44.7
306.2
129.2
100.8
95.7
8.6
6.2
(59.0)
617.5
632.4
(121.8)
1.9
(118.0)
(3.0)
(127.8)
(52.9)
(136.5)
(1.8)
(240.9)
(319.0)
$ 376.6
$ 313.4
(1) Included in the repatriation accrual as of January 3, 2015 was a net deferred tax liability of
$4.4 million associated with the future tax cost to repatriate non-permanently reinvested
earnings of our foreign subsidiaries which is more than offset by a contra deferred tax liability
of $6.3 million related to unrealized foreign exchange losses associated with earnings of our
foreign subsidiaries that can be repatriated to the U.S. in future periods without incurring any
additional U.S. federal income taxes.
(2) Reflect gross amounts before jurisdictional netting of deferred tax assets and liabilities.
A valuation allowance is recorded to reduce deferred tax assets to
the amount that is more likely than not to be realized. The valuation
allowance at January 3, 2015 and December 28, 2013 was $75 million
and $59 million, respectively.
Net operating loss carryforwards of foreign subsidiaries at
January 3, 2015 and December 28, 2013 were $928.7 million and
$1.06 billion, respectively. Tax credit carryforwards of both domestic and
foreign subsidiaries at January 3, 2015 and December 28, 2013 totaled
Notes to Consolidated Financial Statements
$104.2 million and $129.2 million, respectively. If unused, foreign net
operating losses and tax credit carryforwards will expire as follows:
(In millions)
Expires in 2015
Expires in 2016
Expires in 2017
Expires in 2018
Expires in 2019
Expires in 2020
Expires in 2021
Expires in 2022
Expires in 2023
Expires in 2024
Expires in 2025
Expires in 2026
Expires in 2027
Expires in 2028
Expires in 2029
Expires in 2030
Expires in 2031
Expires in 2032
Expires in 2033
Expires in 2034
Indefinite life/no expiration
Total
Net Operating
Losses (1)
Tax Credits
$ 15.3
8.1
15.5
16.5
4.6
17.7
8.2
2.8
13.7
3.3
–
–
–
–
1.8
.4
.6
1.1
–
–
819.1
$928.7
$
.6
.7
.4
23.9
33.2
15.9
.3
9.6
5.2
.3
.1
1.2
.1
.1
.1
–
–
–
1.8
1.6
9.1
$104.2
(1) Net operating losses are presented before tax effect
Based on current projections, certain indefinite-lived foreign net
operating losses may take up to 50 years to be fully utilized.
We do not anticipate the expected expiration of our remaining tax
holidays in Thailand and Vietnam between 2015 and 2016 to have a
material effect on our effective tax rate, operating results, or financial
condition.
Unrecognized Tax Benefits
As of January 3, 2015, our unrecognized tax benefits totaled
$122.6 million, $98.7 million of which, if recognized, would reduce our
annual effective income tax rate. As of December 28, 2013, our
unrecognized tax benefits totaled $137.2 million, $96.7 million of which,
if recognized, would reduce our annual effective income tax rate.
Where applicable, we recognize potential accrued interest and
penalties related to unrecognized tax benefits from our global
operations in income tax expense. We recognized a tax benefit of
$1.3 million, and tax expense of $2.7 million and $5.5 million in the
Consolidated Statements of Income in 2014, 2013, and 2012,
respectively. We have accrued $26.7 million and $29.2 million for
interest and penalties, net of tax benefit, in the Consolidated Balance
Sheets at January 3, 2015 and December 28, 2013, respectively.
56
Notes to Consolidated Financial Statements
A reconciliation of the beginning and ending amounts of
unrecognized tax benefits is set forth below:
(In millions)
Balance at beginning of year
Additions based on tax positions related to the
current year
Additions for tax positions of prior years
Reductions for tax positions of prior years:
Changes in judgment
Settlements
Lapses and statute expirations
Changes due to translation of foreign currencies
2014
2013
$137.2
$121.6
18.2
7.8
(1.8)
(15.8)
(13.8)
(9.2)
20.1
8.3
(4.0)
(2.6)
(6.2)
–
Balance at end of year
$122.6
$137.2
The amount of income taxes we pay is subject to ongoing audits by
taxing jurisdictions around the world. Our estimate of the potential
outcome of any uncertain tax issue is subject to our assessment of
relevant risks, facts, and circumstances existing at that time. We believe
that we have adequately provided for reasonably foreseeable outcomes
related to these matters. However, our future results may include
favorable or unfavorable adjustments to our estimated tax liabilities in
the period the assessments are made or resolved, which may impact
our effective tax rate. As of the date the 2014 financial statements are
being issued, we and our U.S. subsidiaries have completed the Internal
Revenue Service’s Compliance Assurance Process Program through
2013. We are subject to routine tax examinations in other jurisdictions.
With a few exceptions, we are no longer subject to examinations by tax
authorities for years prior to 2006.
It is reasonably possible that, during the next 12 months, we may
realize a decrease in our uncertain tax positions, including interest and
penalties, of approximately $12 million, as a result of settlements and
closing tax years.
NOTE 15. SEGMENT INFORMATION
We do not disclose total assets by reportable segment since we do
not produce and review such information internally. As our reporting
structure is not organized or reviewed internally by country, results by
individual country are not provided.
(In millions)
2014
2013
2012
Net sales to unaffiliated customers
Pressure-sensitive Materials
Retail Branding and Information
$4,658.1 $4,455.0 $4,257.6
Solutions
Vancive Medical Technologies
1,591.6
80.6
1,611.1
73.9
1,535.0
70.9
Net sales to unaffiliated customers
$6,330.3 $6,140.0 $5,863.5
Intersegment sales
Pressure-sensitive Materials
Retail Branding and Information
Solutions
Vancive Medical Technologies
$
63.2 $
64.6 $
60.9
2.4
9.6
2.4
3.6
3.8
.8
Intersegment sales
$
75.2 $
70.6 $
65.5
Income from continuing operations
before taxes
Pressure-sensitive Materials
Retail Branding and Information
Solutions
Vancive Medical Technologies
Corporate expense
Interest expense
Income from continuing operations
$ 434.4 $ 442.8 $ 359.7
87.9
(11.7)
(82.9)
(63.3)
81.7
(8.3)
(94.1)
(59.0)
53.3
(16.2)
(86.3)
(72.9)
before taxes
$ 364.4 $ 363.1 $ 237.6
Capital expenditures
Pressure-sensitive Materials
Retail Branding and Information
Solutions
Vancive Medical Technologies
$ 110.5 $
81.1 $
64.8
39.6
2.1
42.4
1.2
24.7
3.4
Capital expenditures
$ 152.2 $ 124.7 $
92.9
Segment Reporting
Depreciation and amortization
We have the following operating and reportable segments:
expense
(cid:129) Pressure-sensitive Materials – manufactures and sells
pressure-sensitive labeling technology and materials, films for
graphic and reflective applications, performance polymers
(largely adhesives used to manufacture pressure-sensitive
materials), and performance tapes;
(cid:129) Retail Branding and
Information Solutions – designs,
manufactures and sells a wide variety of branding and
information products and services, including brand and price
tickets, tags and labels (including RFID inlays), and related
services, supplies and equipment; and
(cid:129) Vancive Medical Technologies – manufactures an array of
pressure-sensitive adhesive products for surgical, wound care,
ostomy, and electromedical applications.
Intersegment sales are recorded at or near market prices and are
eliminated in determining consolidated sales. We evaluate performance
based on income from operations before interest expense and taxes.
General corporate expenses are also excluded from the computation of
income from operations for the segments.
Pressure-sensitive Materials
Retail Branding and Information
Solutions
Vancive Medical Technologies
Depreciation and amortization
$ 116.0 $ 113.5 $ 112.8
81.4
4.2
86.7
4.1
93.9
4.3
expense
$ 201.6 $ 204.3 $ 211.0
Other expense, net by reportable
segment
Pressure-sensitive Materials
Retail Branding and Information
Solutions
Vancive Medical Technologies
Corporate
$
41.6 $
10.8 $
33.5
22.0
4.2
.4
20.0
.1
5.7
24.8
4.8
5.7
Other expense, net
$
68.2 $
36.6 $
68.8
57
Avery Dennison Corporation
2014 Annual Report
(In millions)
2014
2013
2012
NOTE 16. SUPPLEMENTAL FINANCIAL INFORMATION
Notes to Consolidated Financial Statements
$54.7
$27.2
$49.3
Net inventories at year-end were as follows:
Inventories
Other expense, net by type
Restructuring costs:
Severance and related costs
Asset impairment charges and
lease and other contract
cancellation costs
Other items:
Charitable contribution to Avery
Dennison Foundation
Indefinite-lived intangible asset
impairment charge
Gain on sale of product line
Gains on sales of assets
Loss (gain) from curtailment and
settlement of pension obligation
Legal settlements
Product line exits
Divestiture-related costs (1)
11.4
13.1
6.5
–
10.0
3.0
–
(2.5)
1.6
–
–
–
–
–
(17.8)
(1.6)
2.5
–
3.2
–
7.0
(.6)
–
–
–
3.9
2.7
Other expense, net
$68.2
$36.6
$68.8
(1) Represents only the portion allocated to continuing operations.
Within Pressure-sensitive Materials, net sales to unaffiliated
customers of
the Materials product group were $4.33 billion,
$4.16 billion, and $3.98 billion in 2014, 2013, and 2012, respectively,
and net sales to unaffiliated customers of the Performance Tapes
product group were $332.5 million, $293 million, and $274.2 million in
2014, 2013, and 2012, respectively.
Revenues in our continuing operations by geographic area are set
forth below. Revenues are attributed to geographic areas based on the
location to which the product is shipped. Export sales from the United
States to unaffiliated customers are not a material factor in our business.
(In millions)
2014
2013
2012
Net sales to unaffiliated customers
U.S.
Europe
Asia
Latin America
Other international
$1,529.4 $1,537.6 $1,528.3
1,851.1
1,958.4
1,627.6
1,823.5
501.2
515.6
355.3
304.9
2,074.4
1,914.2
522.9
289.4
(In millions)
Raw materials
Work-in-progress
Finished goods
Inventories, net
2014
2013
$183.6
150.4
157.8
$196.3
149.0
148.8
$491.8
$494.1
Property, Plant and Equipment
Major classes of property, plant and equipment, stated at cost, at
year-end were as follows:
(In millions)
Land
Buildings and improvements
Machinery and equipment
Construction-in-progress
Property, plant and equipment
Accumulated depreciation
2014
2013
$
32.1
578.2
1,958.2
86.0
$
47.0
580.2
2,001.3
74.3
2,654.5
(1,779.2)
2,702.8
(1,780.3)
Property, plant and equipment, net
$
875.3
$
922.5
Software
Capitalized software costs at year-end were as follows:
(In millions)
Cost
Accumulated amortization
Software, net
2014
2013
$ 445.7
(293.1)
$ 427.9
(264.6)
$ 152.6
$ 163.3
Software amortization expense from continuing operations was
$36.4 million in 2014, $35.3 million in 2013, and $30.7 million in 2012.
Research and Development
Research and development expense from continuing operations,
which is included in ‘‘Marketing, general and administrative expense’’ in
the Consolidated Statements of Income, was as follows:
Net sales to unaffiliated customers
$6,330.3 $6,140.0 $5,863.5
(In millions)
2014
2013
2012
Research and development expense
$102.5
$96.0
$98.6
Property, plant and equipment, net, in our U.S. and international
operations are set forth below.
Supplemental Cash Flow Information
(In millions)
2014
2013
2012
Cash paid for interest and income taxes, including amounts paid for
Property, plant and equipment, net
U.S.
International
$261.5
613.8
$279.6 $ 340.2
675.3
642.9
Property, plant and equipment, net
$875.3
$922.5 $1,015.5
discontinued operations, was as follows:
(In millions)
2014
2013
2012
Interest, net of capitalized amounts
Income taxes, net of refunds
$ 61.6
108.8
$ 64.1
129.4
$68.0
97.7
Capital expenditures accrued but not paid, including amounts for
discontinued operations, were $3.8 million in 2014, $11.5 million in
2013, and $12 million in 2012.
58
Notes to Consolidated Financial Statements
Currency Effects
Gains and losses resulting from foreign currency transactions are
included in income in the period incurred. Transactions in foreign
currencies (including receivables, payables and loans denominated in
currencies other than the functional currency), including hedging
impacts, decreased net income by $8.7 million, $7.9 million, and
$8.8 million in 2014, 2013, and 2012, respectively.
We had no operations in hyperinflationary economies in fiscal years
2014, 2013, or 2012.
NOTE 17. QUARTERLY FINANCIAL INFORMATION (Unaudited)
(In millions, except per share data)
2014
Net sales
Gross profit
Income from continuing operations
(Loss) income from discontinued operations, net of tax
Net income
Net income (loss) per common share:
Continuing operations
Discontinued operations
Net income per common share
Net income (loss) per common share, assuming dilution:
Continuing operations
Discontinued operations
Net income per common share, assuming dilution
2013
Net sales
Gross profit
Income from continuing operations
Loss from discontinued operations, net of tax
Net income
Net income (loss) per common share:
Continuing operations
Discontinued operations
Net income per common share
Net income (loss) per common share, assuming dilution:
Continuing operations
Discontinued operations
Net income per common share, assuming dilution
(1) Results for the fourth quarter of 2014 reflected the extra week in our 2014 fiscal year.
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter (1)
$1,550.1
407.2
71.6
(.4)
71.2
$1,615.8
428.2
44.4
(1.9)
42.5
$1,559.6
400.7
65.0
(.7)
64.3
$1,604.8
415.1
70.1
.8
70.9
.74
–
.74
.73
–
.73
.47
(.02)
.45
.46
(.02)
.44
.70
(.01)
.69
.68
–
.68
.77
.01
.78
.75
.01
.76
$1,498.9
401.7
66.8
(9.0)
57.8
$1,552.3
417.5
70.8
(2.0)
68.8
$1,504.9
402.2
62.0
(15.5)
46.5
$1,583.9
416.3
44.7
(2.0)
42.7
.67
(.09)
.58
.66
(.09)
.57
.71
(.02)
.69
.70
(.02)
.68
.63
(.16)
.47
.62
(.15)
.47
.46
(.02)
.44
.45
(.02)
.43
59
Avery Dennison Corporation
2014 Annual Report
‘‘Other expense, net’’ is presented by type for each quarter below:
(In millions)
2014
Restructuring costs:
Severance and related costs
Asset impairment charges and lease cancellation costs
Other items:
Indefinite-lived intangible asset impairment charge
Gains on sales of assets
Losses from curtailment and settlement of pension obligations
Other expense, net
2013
Restructuring costs:
Severance and related costs
Asset impairment charges and lease and other contract cancellation costs
Other items:
Charitable contribution to Avery Dennison Foundation
Gains on sale of assets
Gain from curtailment of pension obligation
Legal settlement
Divestiture-related costs (1)
Other expense, net
(1) Represents only the portion allocated to continuing operations.
Notes to Consolidated Financial Statements
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 7.0
.3
$ 35.9
2.6
$ 5.1
1.6
$ 6.7
6.9
–
–
–
–
(.6)
.6
3.0
(1.9)
–
–
–
1.0
$ 7.3
$ 38.5
$ 7.8
$14.6
$ 6.8
1.3
$ 5.4
2.4
$ 8.7
8.0
$ 6.3
1.4
–
(1.3)
–
–
.7
–
(10.9)
–
2.5
.3
10.0
(.5)
(1.6)
–
1.1
–
(5.1)
–
–
1.1
$ 7.5
$
(.3)
$25.7
$ 3.7
60
STATEMENT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
The consolidated financial statements and accompanying information were prepared by and are the responsibility of management. The
statements were prepared in conformity with accounting principles generally accepted in the United States of America and, as such, include amounts
that are based on management’s best estimates and judgments.
Oversight of management’s financial reporting and internal accounting control responsibilities is exercised by the Board of Directors, through the
Audit and Finance Committee, which is comprised solely of independent directors. The Committee meets periodically with financial management,
internal auditors and the independent registered public accounting firm to obtain reasonable assurance that each is meeting its responsibilities and to
discuss matters concerning auditing, internal accounting control and financial reporting. The independent registered public accounting firm and our
internal audit department have free access to meet with the Audit and Finance Committee without management present.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Exchange Act Rule 13a-15(f) or 15(d)-15(f). Under the supervision and with the participation of management, including the chief executive officer and
chief financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal Control – Integrated Framework (2013), management has concluded that internal control over financial
reporting was effective as of January 3, 2015. Management’s assessment of the effectiveness of internal control over financial reporting as of
January 3, 2015 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which
is included herein.
27FEB201323543803
Dean A. Scarborough
Chairman and
Chief Executive Officer
27FEB201323550060
Mitchell R. Butier
President, Chief Operating Officer, and
Chief Financial Officer
61
Avery Dennison Corporation
2014 Annual Report
Report of Independent Registered Public Accounting Firm
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF AVERY DENNISON CORPORATION:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income,
shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Avery Dennison Corporation and its subsidiaries at
January 3, 2015 and December 28, 2013, and the results of their operations and their cash flows for each of the three years in the period ended
January 3, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of January 3, 2015, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting
based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of
the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit
of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
27FEB201501102312
PricewaterhouseCoopers LLP
Los Angeles, California
February 25, 2015
62
Corporate
Information
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
Los Angeles, California
Registrar and Transfer Agent
Broadridge Corporate Issuer Solutions, Inc.
P.O. Box 1342
Brentwood, NY 11717
(888) 682-5999
(720) 864-4993 (international)
(855) 627-5080 (hearing impaired)
https://investor.broadridge.com
Other Information
We are including, as Exhibits 31.1 and 31.2 to our Annual Report on
Form 10-K for fiscal year 2014 filed with the Securities and Exchange
Commission (‘‘SEC’’), certificates of our Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. We submitted to the New York Stock Exchange (‘‘NYSE’’)
an unqualified annual written affirmation, along with the Chief Executive
Officer’s certificate that he is not aware of any violation by the Company
of NYSE’s corporate governance listing standards, on April 24, 2014.
A copy of our Annual Report on Form 10-K, as filed with the SEC,
will be furnished to shareholders and interested investors free of charge
upon written request to our Corporate Secretary. Copies may also be
downloaded from our investor website at www.investors.averydennison.com.
Corporate Headquarters and Mailing Address
Avery Dennison Corporation
207 Goode Avenue
Glendale, California 91203
Phone: (626) 304-2000
Annual Meeting
Our Annual Meeting of Stockholders will be held at 1:30 p.m. on
April 23, 2015 at the Hilton Hotel, 100 West Glenoaks Boulevard,
Glendale, California 91202.
Stock and Dividend Data
Our common stock is listed on the NYSE.
Ticker symbol: AVY
The Direct Share Purchase and Sale Program
Shareholders of record may reinvest their cash dividends in
additional shares of our common stock at market price. Investors may
also invest optional cash payments of up to $12,500 per month in our
common stock at market price. Investors not yet participating in the
program, as well as brokers and custodians who hold our common
stock on behalf of clients, may obtain a copy of the program by
contacting Broadridge Corporate Issuer Solutions, Inc.
Market Price
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Direct Deposit of Dividends
Shareholders may receive their quarterly dividend payments by
direct deposit into their checking or savings accounts. For more
information, contact Broadridge Corporate Issuer Solutions, Inc.
Dividends per Common Share
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2014
2013
High
Low
High
Low
$52.14
51.76
51.49
52.67
$46.99
46.66
46.18
41.28
$43.58
44.46
46.15
50.65
$34.92
40.13
42.76
42.28
2014
2013
$
.29
.35
.35
.35
$
.27
.29
.29
.29
$ 1.34
$ 1.14
Number of shareholders of record as of year-end
5,728
6,339
63
Avery Dennison Corporation
2014 Annual Report
Visit www.averydennison.com
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value by developing solutions for
all of our stakeholders.
Investor Information
Available at
www.investors.averydennison.com
Send inquiries via e-mail to
investorcom@averydennison.com
Career Opportunities
Learn how you can make your
mark at Avery Dennison. Visit
www.averydennison.com/careers
Company Websites
www.averydennison.com
www.label.averydennison.com
www.graphics.averydennison.com
www.tapes.averydennison.com
www.reflectives.averydennison.com
www.rbis.averydennison.com
www.rfid.averydennison.com
www.vancive.averydennison.com
Follow Us On Social Media
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www.averydennison.com/socialmedia
In support of our commitment to
sustainability, the paper for this
annual report is certified by the
Forest Stewardship Council (FSC),
which promotes environmentally
responsible, socially beneficial and
economically viable management
of the world’s forests.
Avery Dennison Corporation
207 Goode Avenue
Glendale, California 91203
www.averydennison.com
Avery
Dennison
Corporation
2014
Annual
Report
Sustainable
momentum