Avery Dennison
Corporation
2016 Annual Report
Table of
Contents
Financial Highlights
Letter to Shareholders
Businesses at a Glance
Directors and Officers
Financial Information
i
ii
iii
v
vi
Visit www.averydennison.com and follow
us on social media to learn more about
how we are creating superior long-term,
sustainable value for our customers,
employees and stockholders and
improving the communities in which
we operate.
$6.3
2014
$6.0
2015
$6.1
2016
Financial
Highlights
$1.60
DIVIDENDS PER COMMON SHARE
Dividends per common share paid in
2016 totaled $1.60, an increase of 10%
over 2015. We distributed a total of
$404.9 million to shareholders in 2016
through dividends and the repurchase of
3.8 million shares of our common stock.
Other†
5%
Latin
America
7%
U.S.
25%
Asia
33%
Western
Europe
22%
Eastern
Europe
and MENA
8%
†Canada, South Africa,
Australia and New Zealand
REVENUE BY GEOGRAPHY
Net sales in emerging markets (Latin America, Asia, Eastern Europe and
the Middle East/North Africa) totaled approximately $2.8 billion in 2016,
representing 48% of our annual revenues.
$320.7
2016
$3.54
2016
$274.3
2015
$245.1
2014
$2.95
2015
$2.56
2014
$320.7 $3.54
NET INCOME
IN MILLIONS
NET INCOME PER
COMMON SHARE
Net income was $320.7 million in 2016,
an increase of 17% from 2015.
Net income per common share, assuming dilution, was $3.54 in 2016, an
increase of 20% from 2015.
$6.1
NET SALES
IN BILLIONS
Net sales in 2016 increased approximately 2%
compared to 2015 primarily due to higher volume.
Net sales grew approximately 4% on an organic
basis.*
Chart scales are approximate.
* Organic sales change is a non-GAAP financial measure. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for definition of and
qualifications for this measure, as well as a reconciliation to the most directly comparable GAAP financial measure.
i
Avery Dennison Corporation 2016 Annual Report
Letter to
Shareholders
Fellow shareholders,
Another Year of Excellent Progress Toward Our Long-Term Goals
We are pleased to report that Avery Dennison delivered another strong performance in 2016, with our fi fth consecutive
year of solid organic sales growth and double-digit increases in earnings per share. This consistent performance
speaks to the resilience of our market positions, the depth of talent in the company, and the strategic foundations we
have laid, which we are now beginning to leverage through the disciplined execution of our M&A strategy.
Five Years of Solid Growth and Record Margins at LGM
Our Pressure-sensitive Materials segment, now reorganized as Label and Graphic Materials (LGM), delivered another
year of margin expansion and solid organic sales growth, including increased penetration of high-value product
categories (specialty labels, graphics, and refl ective solutions). We are increasing our pace of investment to leverage
this high-return business.
RBIS Now on Track to Achieve Long-Term Margin Goals
Retail Branding and Information Solutions (RBIS) delivered solid growth, driven by a 40 percent increase in radio-
frequency identifi cation (RFID) sales. Beyond RFID, the business achieved volume growth and continued margin
improvement, demonstrating initial success with our multiyear transformation strategy.
IHM Positioned to Create Signifi cant Future Value
At the end of 2016, we formed our Industrial and Healthcare Materials (IHM) group, aligning our businesses in tapes
and fasteners, along with Vancive Medical Technologies, into a single organization that shares common end markets,
namely automotive and healthcare. While IHM was down in 2016, we are investing to grow this business to capture
higher-value segments by leveraging Avery Dennison’s broader capabilities.
Raising the Bar: Targeting Strong Performance Through 2021
Our strategy is working. We are making excellent progress toward our 2018 goals to deliver profi table growth and
improved returns. Building on this performance, we recently announced a new set of goals for 2021, targeting
continued solid organic growth, further margin expansion, and double-digit growth in earnings per share annually.
Achieving these goals should enable us to continue delivering superior returns for our stockholders.
Driving a Culture of Sustainability
As always, how we operate is just as important as what we accomplish. Avery Dennison remains a leader in the
development of sustainable products and practices within our industry. We are making steady progress against our 2025
goals that include sourcing more sustainable raw materials, reducing waste, and lowering our carbon footprint. We also
continue to focus on advancing our diversity goals, and we remain committed to providing a safe and healthy workplace
for our employees.
And, we further enhanced our Board of Directors with the recent appointment of Andres Lopez, president and chief
executive offi cer of Owens-Illinois, Inc., the world’s largest glass container manufacturer.
We are confi dent that we will continue our momentum and achieve our long-term goals through our focus on delivering
exceptional value for our customers, our employees, and our stockholders.
Thank you for your investment in Avery Dennison.
Dean A. Scarborough
Executive Chairman
March 10, 2017
Mitch Butier
President and Chief Executive Officer
March 10, 2017
ii
Businesses
at a Glance
REPORTABLE SEGMENT
Label and Graphic Materials
BUSINESSES
2016 SALES IN MILLIONS
% OF SALES
DESCRIPTION
Label and Packaging Materials
Graphics Solutions
Reflective Solutions
$4,187
69%
GLOBAL BRANDS
Avery Dennison®
Fasson®
The technologies and materials of our Label and
Graphic Materials businesses enhance brands’
shelf, store, and street appeal; inform shoppers of
ingredients; protect brand security; improve
operational efficiency and customer product
performance; and provide visual information that
enhances safety.
REPORTABLE SEGMENT
Retail Branding and Information Solutions
BUSINESSES
2016 SALES IN MILLIONS
% OF SALES
DESCRIPTION
Retail Branding and
Information Solutions
Printer Solutions
$1,445
24%
GLOBAL BRANDS
Avery Dennison®
Monarch®
Our Retail Branding and Information Solutions
businesses provide intelligent, creative, and
sustainable solutions that elevate brands and
accelerate performance through the global retail
supply chain.
REPORTABLE SEGMENT
Industrial and Healthcare Materials
BUSINESSES
2016 SALES IN MILLIONS
% OF SALES
DESCRIPTION
Performance Tapes
Fastener Solutions
Vancive Medical Technologies
$454
7%
GLOBAL BRANDS
Avery Dennison®
Vancive Medical Technologies™
Our Industrial and Healthcare Materials
businesses provide tapes products, including
coated and adhesive transfer tapes; fasteners,
primarily precision-extruded and injection-
molded plastic devices; and wound care,
ostomy, surgical, and electromedical device
applications for manufacturers, clinicians,
and patients.
Note: In the fourth quarter of 2016, we changed our operating structure to align with our overall business strategy. The reportable segments above reflect our new operating and
reporting structure.
iii
Avery Dennison Corporation 2016 Annual Report
PRODUCTS/SOLUTIONS
CUSTOMERS
WEBSITES
Pressure-sensitive labeling materials; packaging
materials and solutions; roll-fed sleeve; engineered
films; graphic imaging media; reflective materials
MARKET SEGMENTS
Food; beverage; wine and spirits; home and
personal care products; pharmaceuticals; dura-
bles; fleet vehicle/automotive; architectural/
retail; promotional/advertising; traffic; safety;
transportation
Label converters; package designers; packaging
engineers and manufacturers; industrial
manufacturers; printers; distributors; designers;
advertising agencies; government agencies; sign
manufacturers; graphics vendors
www.label.averydennison.com
www.graphics.averydennison.com
www.reflectives.averydennison.com
LEADER
Georges Gravanis
President
Label and Graphic Materials
PRODUCTS/SOLUTIONS
MARKET SEGMENTS
WEBSITES
Creative services; brand embellishments; graphic
tickets; tags and labels; sustainable packaging;
inventory visibility and loss prevention solutions;
data management services; price tickets; printers
and scanners; radio-frequency identification inlays
and tags; brand protection and security solutions
Apparel manufacturing and retail supply chain;
food service and supply chain; hard goods and
supply chain; pharmaceutical supply chain; logistics
www.rbis.averydennison.com
www.rfid.averydennison.com
CUSTOMERS
Apparel and footwear brands; manufacturers
and retailers; food service, grocery, and
pharmaceutical supply chains; consumer
goods brands; automotive manufacturers;
transportation companies
LEADER
Deon Stander
Vice President and General Manager
Retail Branding and Information Solutions
PRODUCTS/SOLUTIONS
CUSTOMERS
WEBSITES
Pressure-sensitive tapes for automotive, building,
and construction; electronics; general industrial;
diaper tapes and closures; fasteners; skin-
contact adhesives; surgical, wound care, ostomy,
and securement products; medical barrier films
Tape converters; original equipment
manufacturers; original design manufacturers;
construction firms; personal care product
manufacturers; manufacturers and retailers;
medical device manufacturers
MARKET SEGMENTS
Original equipment manufacturing; personal
care; electronics; building and construction;
retail supply chain; medical
www.tapes.averydennison.com
www.vancive.averydennison.com
LEADER
Michael Johansen
Vice President and General Manager
Industrial and Healthcare Materials
iv
EXECUTIVE OFFICERS
Mitchell R. Butier
President and
Chief Executive Officer
Anne L. Bramman
Senior Vice President and
Chief Financial Officer
Lori J. Bondar
Vice President, Controller and
Chief Accounting Officer
Georges Gravanis
President
Label and Graphic Materials
Anne Hill
Senior Vice President and
Chief Human Resources Officer
Michael Johansen
Vice President and
General Manager
Industrial and
Healthcare Materials
Susan C. Miller
Senior Vice President
General Counsel and Secretary
Dean A. Scarborough
Executive Chairman
Deon M. Stander
Vice President and
General Manager
Retail Branding and
Information Solutions
Andres A. Lopez
President and
Chief Executive Officer
Owens-Illinois, Inc.,
a glass container manufacturer
David E. I. Pyott LID, 1, 3
Retired Chairman
and Chief Executive Officer
Allergan, Inc.,
a global healthcare company
Patrick T. Siewert 2
Managing Director and Partner
The Carlyle Group,
a global alternative investment firm
Julia A. Stewart 1, 3
Former Chairman and
Chief Executive Officer
DineEquity, Inc.,
a full-service restaurant company
Martha N. Sullivan1, 2
President and
Chief Executive Officer
Sensata Technologies Holding N.V.,
a sensors and controls company
Directors
and Officers
BOARD OF DIRECTORS
Dean A. Scarborough
Executive Chairman
Avery Dennison Corporation
Bradley A. Alford 1, 3
Retired Chairman and
Chief Executive Officer
Nestlé USA,
a food and beverage company
Anthony K. Anderson 2, 3
Retired Vice Chair
and Managing Partner
Ernst & Young LLP,
a global assurance, tax, transaction,
and advisory services firm
Peter K. Barker 2, 3
Retired Chairman of California
JP Morgan Chase & Co.,
a global financial services firm
Mitchell R. Butier
President and
Chief Executive Officer
Avery Dennison Corporation
Ken C. Hicks 1, 2
Retired Chairman
Foot Locker, Inc.,
a specialty athletic retailer
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
v
Avery Dennison Corporation 2016 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
2
4
17
22
50
vi
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 December 31, 2016 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;
changes in political conditions; changes in governmental laws and regulations; 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; execution and integration of acquisitions and completion of potential dispositions; timely
development and market acceptance of new products, including sustainable or sustainably-sourced products; investment in development activities
and new production facilities; amounts of future dividends and share repurchases; customer and supplier concentrations; 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;
the impact of legal and regulatory proceedings, including with respect to environmental, health and safety; protection and infringement of intellectual
property; the impact of epidemiological events on the economy and our customers and suppliers; acts of war, terrorism, and natural disasters; and
other factors.
We believe that the most significant risk factors that could affect our financial performance in the near-term include: (1) the impacts of global
economic conditions and political uncertainty on underlying demand for our products and foreign currency fluctuations; (2) competitors’ actions,
including pricing, expansion in key markets, and product offerings; (3) the degree to which higher costs can be offset with productivity measures
and/or passed on to customers through selling price increases, without a significant loss of volume; and (4) the execution and integration of
acquisitions.
Our forward-looking statements are made only as of the date hereof. We assume no duty to update these forward-looking statements to reflect
new, changed or unanticipated events or circumstances, other than as may be required by law.
1
Avery Dennison Corporation
2016 Annual Report
Five-Year Summary
(Dollars in millions, except percentages
and per share amounts)
2016
2015
2014 (1)
2013
2012
Dollars
%
Dollars
%
Dollars
%
Dollars
%
Dollars
%
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 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
(Loss) income per common share from discontinued
operations
Net income per common share
Income per common share from continuing operations,
assuming dilution
(Loss) income per common share from discontinued
operations, assuming dilution
Net income per common share, assuming dilution
Dividends per common share
Weighted average number of common shares
outstanding (in millions)
Weighted average number of common shares
outstanding, assuming dilution (in millions)
Market price per share at fiscal year-end
Market price per share range
At End of Year
Property, plant and equipment, net (3)
Total assets (4)
Long-term debt and capital leases
Total debt
Shareholders’ equity (4)
Other Information
Depreciation and amortization expense (3)
Research and development expense (3)
1,699.7
1,097.5
59.9
65.2
477.1
156.4
320.7
$6,086.5 100.0 $5,966.9 100.0 $6,330.3 100.0 $6,140.0 100.0 $5,863.5 100.0
26.1
19.7
1.2
1.2
4.0
1.3
2.7
57.8 N/A
3.7
26.1
18.3
1.0
1.1
5.7
1.8
3.9
(2.2) N/A
3.9
27.6
18.6
1.0
1.1
6.9
2.3
4.6
(.1) N/A
4.6
1,637.7
1,174.2
60.9
36.6
366.0
124.3
241.7
(28.5)
213.2
27.9
18.0
1.0
1.1
7.8
2.6
5.3
– N/A
5.3
1,529.5
1,152.6
72.5
68.8
235.6
76.1
159.5
1,651.2
1,158.9
63.3
68.2
360.8
113.5
247.3
1,645.8
1,108.1
60.5
68.3
408.9
134.5
274.4
26.7
19.1
1.0
.6
6.0
2.0
3.9
N/A
3.5
217.3
245.1
274.3
320.7
2016
2015
2014
2013
2012
$
3.60
$
3.01
$
2.64
$
2.46
$
1.56
–
3.60
3.54
–
3.54
1.60
89.1
90.7
$ 70.22
58.16 to
78.84
$ 915.2
4,396.4
713.4
1,292.5
925.5
$ 180.1
89.7
–
3.01
2.95
–
2.95
1.46
91.0
92.9
$ 62.66
51.07 to
66.18
$ 847.9
4,133.7
963.6
1,058.9
965.7
$ 188.3
91.9
(.03)
2.61
2.58
(.02)
2.56
1.34
93.8
95.7
$ 51.79
41.28 to
52.67
$ 875.3
4,356.9
940.1
1,144.4
1,047.7
$ 201.6
102.5
(.29)
2.17
2.41
(.28)
2.13
1.14
98.4
100.1
$ 50.48
34.92 to
50.65
$ 922.5
4,608.3
944.6
1,021.5
1,468.1
$ 204.3
96.0
.56
2.12
1.54
.56
2.10
1.08
102.6
103.5
$ 34.40
26.38 to
34.97
$1,015.5
5,113.2
697.6
1,217.8
1,536.6
$ 211.0
98.6
Effective tax rate (3)
32.8%
32.9%
31.5%
34.0%
32.3%
(1) Results for 2014 reflected a 53-week period.
(2) Included pre-tax charges for severance and related costs, asset impairment charges, lease and other contract cancellation costs, and other items.
(3) Amounts are for continuing operations only.
(4) Amounts are for continuing and discontinued operations.
2
Stockholder Return Performance
The graph below 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, 2016.
Comparison of Five-Year Cumulative Total Return as of December 31, 2016
Avery Dennison Corporation
S&P 500 Index
Industrials and Materials (Weighted Average)
Industrials and Materials (Median)
$265
$240
$215
$190
$165
$140
$115
$90
$65
$40
12/31/2011
Total Return Analysis (1)
12/31/2012
12/31/2013
12/31/2014
12/31/2015
18FEB201704112975
12/31/2016
Avery Dennison Corporation
S&P 500 Index
Market Basket (Weighted Average) (2)
Market Basket (Median)
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
$100.00
100.00
100.00
100.00
$123.24
112.58
116.19
117.86
$171.14
141.77
156.46
158.37
$181.46
157.06
173.07
175.68
$220.14
155.92
172.00
161.04
$250.10
170.12
202.46
186.86
(1) Assumes $100.00 invested on December 31, 2011 and the reinvestment of dividends.
(2) Average weighted by market capitalization.
Historical stock price performance is not necessarily indicative of future stock price performance.
3
Avery Dennison Corporation
2016 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
4
4
6
8
9
13
16
16
NON-GAAP FINANCIAL MEASURES
We report our financial results in conformity with accounting
principles generally accepted in the United States of America, or GAAP,
and also communicate with investors using certain non-GAAP financial
measures. These non-GAAP financial measures are not in accordance
with, nor are they a substitute for or superior to, the comparable GAAP
financial measures. These non-GAAP financial measures are intended
to supplement the presentation of our financial results that are prepared
in accordance with GAAP. Based upon feedback from investors and
financial analysts, we believe that the supplemental non-GAAP financial
measures we provide are useful to their assessments of our
performance and operating trends, as well as liquidity.
Our non-GAAP financial measures exclude the impact of certain
events, activities or strategic decisions. The accounting effects of these
events, activities or decisions, which are included in the GAAP financial
measures, may make it difficult to assess our underlying performance in
a single period. By excluding the accounting effects, both positive and
negative, of certain items (e.g. restructuring charges, legal settlements,
certain effects of strategic transactions and related costs, losses from
debt extinguishments, gains and losses from curtailment and settlement
of pension obligations, gains or losses on sales of certain assets, and
other 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:
• 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 our 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.
• Sales change (ex. currency) refers to the increase or decrease
in sales excluding the estimated impact of currency translation.
We believe that organic sales change and sales change (ex.
currency) assist investors in evaluating the sales growth from
the ongoing activities of our businesses and better enable
them to evaluate our results from period to period.
• 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 (minus) free cash outflow
(inflow) from discontinued operations. We believe that free
cash flow assists investors by indicating the amount of cash we
have available
reductions, dividends, share
repurchases, and acquisitions.
for debt
• 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 net
current assets or liabilities held-for-sale. We believe that
operational working capital assists investors in assessing our
working capital requirements because it excludes the impact
of fluctuations attributable to our financing and other activities
(which affect cash and cash equivalents, deferred taxes, other
current assets, and other current liabilities) that tend to be
disparate in amount, frequency, or timing, and that may
increase the volatility of working capital as a percentage of
sales from period to period. The items excluded from this
measure are not significantly influenced by our day-to-day
level and do not
activities managed at the operating
necessarily reflect the underlying trends in our operations.
• Net debt to EBITDA ratio refers to total debt (including capital
leases) less cash and cash equivalents, divided by EBITDA,
which refers to net income before interest, taxes, depreciation
and amortization. We believe the net debt to EBITDA ratio is
meaningful because investors view it as a useful measurement
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 2016 and 2015 fiscal years
consisted of 52-week periods ending December 31, 2016 and
January 2, 2016, respectively. Our 2014 fiscal year consisted of a
53-week period ending January 3, 2015.
Segment Information
In the fourth quarter of 2016, we changed our operating structure to
align with our overall business strategy, and our Chief Executive Officer,
who is also our chief operating decision maker, requested changes in
the information that he regularly reviews for purposes of allocating
resources and assessing performance. As a result of these events, our
fiscal year 2016 results are reported based on our new reportable
segments, as described in Note 15, ‘‘Segment Information,’’ to the
4
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Consolidated Financial Statements. We have reclassified certain prior
period amounts to reflect our new operating structure.
Net Sales
The factors impacting the reported sales change are shown in the
table below:
2016
2015
Reported sales change
Foreign currency translation
Sales change (ex. currency)
Extra week in 2014 fiscal year
Acquisitions/divestitures
2%
3
5%
–
(1)
(6)%
9
2014/2015 Actions
During fiscal year 2015, we recorded $33.4 million in restructuring
charges, net of reversals, related to restructuring actions we initiated in
2014 that continued through the second quarter of 2015 (‘‘2014/2015
Actions’’). These charges consisted of severance and related costs for
the reduction of approximately 605 positions, lease cancellation costs,
and asset impairment charges.
No employees impacted by our 2014/2015 Actions remained
employed by us as of December 31, 2016.
3% Impact of Cost Reduction Actions
1
1
During fiscal year 2016, we realized more than $80 million in
savings, net of transition costs, from our 2015/2016 Actions and
2014/2015 Actions.
Organic sales change
4%
5%
In both years, net sales increased on an organic basis primarily due
to higher volume.
We anticipate incremental savings, net of transition costs, from our
2015/2016 actions of approximately $40 million to $50 million in 2017.
We estimate cash restructuring costs of approximately $25 million in
2017.
Restructuring charges were included in ‘‘Other expense, net’’ in the
Consolidated Statements of Income. Refer to Note 13, ‘‘Cost Reduction
Actions,’’
for more
information.
the Consolidated Financial Statements
to
Acquisitions
On August 1, 2016, we completed the acquisition of the European
business of Mactac (‘‘Mactac’’) from Platinum Equity through the
purchase of Evergreen Holding V, LLC. Mactac manufactures pressure-
sensitive materials that primarily complement our existing graphics
portfolio. The total consideration for this acquisition, net of cash
received, was approximately $220 million, which we funded primarily
through existing credit facilities. Due to the allowable time required to
complete our assessment, the valuation of certain acquired assets and
liabilities, including environmental liabilities and taxes, is currently
pending. This acquisition was not material to our Consolidated Financial
Statements.
In December 2016, we announced our agreement to acquire Hanita
Coatings, a pressure-sensitive manufacturer of specialty films and
laminates, from Kibbutz Hanita Coatings and Tene Investment Funds for
a purchase price of $75 million, subject to customary adjustments. We
expect to complete this acquisition in the first quarter of 2017.
In February 2017, we announced our agreement to acquire Yongle
Tape Company Ltd. (‘‘Yongle Tape’’), a manufacturer of specialty tapes
and related products used in a variety of industrial markets, from Yongle
Tape’s management and ShawKwei & Partners. The purchase price is
$190 million, which is subject to customary adjustments, with an
additional earn-out opportunity of up to $55 million to be paid based on
the acquired business’ achievement of certain performance targets over
the next two years. We expect to complete this acquisition in mid-2017.
We expect to fund the acquisitions of Hanita Coatings and Yongle
Tape with cash and credit facilities available at the time of closing.
Income from Continuing Operations
Income from continuing operations increased from approximately
$274 million in 2015 to approximately $321 million in 2016. Major factors
affecting the change in income from continuing operations in 2016
compared to 2015 included:
Positive factors:
• Higher volume
• Benefits from productivity initiatives, including savings from
restructuring actions, net of transition costs
• Lower restructuring charges
Offsetting factors:
• Loss from settlement of pension obligations
• Higher employee-related costs
• Net impact of pricing and raw material input costs
• Higher income taxes
• Geographic mix
• Foreign currency translation
Cost Reduction Actions
2015/2016 Actions
During fiscal year 2016, we recorded $20.9 million in restructuring
charges, net of reversals, related to restructuring actions initiated during
the third quarter of 2015 (‘‘2015/2016 Actions’’) that we expect to
continue through 2017. These charges consisted of severance and
related costs for the reduction of approximately 440 positions, lease
cancellation costs, and asset impairment charges.
During fiscal year 2015, we recorded $26.1 million in restructuring
charges, net of reversals, related to our 2015/2016 Actions. These
charges consisted of severance and related costs for the reduction of
approximately 430 positions, lease cancellation costs, and asset
impairment charges.
No employees impacted by our 2015/2016 Actions taken through
December 31, 2016 remained employed by us as of such date.
5
Avery Dennison Corporation
2016 Annual Report
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
2016
2015
2014
ANALYSIS OF RESULTS OF OPERATIONS
Free Cash Flow
(In millions)
Net cash provided by operating
activities
$ 585.3
$ 473.7
$ 354.9
Purchases of property, plant and
equipment
(176.9)
(135.8)
(147.9)
Purchases of software and other
deferred charges
(29.7)
(15.7)
(27.1)
Proceeds from sales of property,
plant and equipment
8.5
7.6
4.3
(Purchases) sales of investments,
net
Plus: free cash outflow from
discontinued operations
(.1)
–
(.5)
.1
.3
.2
Income from Continuing Operations before Taxes
(In millions, except percentages)
2016
2015
2014
Net sales
Cost of products sold
Gross profit
Marketing, general and
administrative expense
Interest expense
Other expense, net
Income from continuing
$6,086.5
4,386.8
$5,966.9
4,321.1
$6,330.3
4,679.1
1,699.7
1,645.8
1,651.2
1,097.5
59.9
65.2
1,108.1
60.5
68.3
1,158.9
63.3
68.2
operations before taxes
$ 477.1
$ 408.9
$ 360.8
Free cash flow
$ 387.1
$ 329.4
$ 184.7
Gross profit margin
27.9%
27.6%
26.1%
In 2016, free cash flow increased compared to 2015 primarily due
to higher net income, lower severance payments, benefits from
changes in operational working capital, and lower income tax
payments, net of refunds, partially offset by higher capital and software
expenditures, higher incentive compensation paid in 2016 for the 2015
performance year, and higher pension plan contributions.
In 2015, free cash flow increased compared to 2014 primarily due
to the timing of vendor payments, higher operating income, lower
incentive compensation paid in 2015 for the 2014 performance year,
and lower capital and software expenditures, partially offset by the
timing of collections from customers and higher payments for taxes.
See ‘‘Analysis of Results of Operations’’ and ‘‘Liquidity’’ for more
information.
Outlook
Certain factors that we believe may contribute to our 2017 results,
including acquisitions announced in 2016, are described below:
• We expect net sales to increase by 1.5% to 3.5%.
• Assuming the continuation of currency rates in effect during
January 2017, we expect currency translation to reduce pre-tax
operating income by approximately $22 million.
• We expect our full year effective tax rate to be in the low-thirty
percent range.
• We anticipate capital and software expenditures of
approximately $215 million.
Gross Profit Margin
Gross profit margin in 2016 improved compared to 2015 primarily
reflecting benefits from productivity initiatives, including savings from
restructuring, net of transition costs, and higher volume, and partially
offset by higher employee-related costs, the net impact of pricing and
raw material input costs, and unfavorable geographic mix.
Gross profit margin in 2015 improved compared to 2014 primarily
reflecting benefits from productivity initiatives, including savings from
restructuring, net of transition costs, higher volume, the impact of
changes in foreign currency rates, and the net impact of pricing and raw
material input costs, partially offset by higher employee-related costs
and changes in product mix in our Retail Branding and Information
Solutions (‘‘RBIS’’) reportable segment.
Marketing, General and Administrative Expense
Marketing, general and administrative expense decreased in 2016
compared to 2015 reflecting benefits from productivity initiatives,
including savings from restructuring, net of transition costs, and the
favorable impact of foreign currency translation, partially offset by
higher employee-related costs.
Marketing, general and administrative expense decreased in 2015
compared to 2014 reflecting the impact of currency and benefits from
productivity initiatives, including savings from restructuring, net of
transition costs, partially offset by higher employee-related costs.
• We estimate cash restructuring costs of approximately
Interest Expense
$25 million in 2017.
Interest expense in 2016 was comparable to 2015.
Interest expense decreased approximately $3 million in 2015
compared to 2014 reflecting a decrease in foreign short-term debt, the
extra week in our 2014 fiscal year, and the maturity of a series of our
medium-term notes, partially offset by an increase in commercial paper
borrowings.
6
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Other Expense, net
(In millions)
Other expense, net by type
Restructuring charges:
2016
2015
2014
Severance and related costs
Asset impairment charges and lease
$14.7
$52.5
$54.7
and other contract cancellation costs
5.2
7.0
11.4
Other items:
Net loss from curtailment and settlement
of pension obligations
Net gains on sales of assets
Transaction costs
Legal settlements
Loss on sale of a product line and
related exit costs
Indefinite-lived intangible asset
impairment charge
41.4
(1.1)
5.0
–
.3
(1.7)
–
(.3)
1.6
(2.5)
–
–
–
–
10.5
–
–
3.0
Other expense, net
$65.2
$68.3
$68.2
Refer to Note 13, ‘‘Cost Reduction Actions,’’ to the Consolidated
regarding charges
information
for more
Financial Statements
associated with restructuring.
Refer to Note 6, ‘‘Pension and Other Postretirement Benefits,’’ to
the Consolidated Financial Statements for more information regarding
the net loss from curtailment and settlement of pension obligations.
Net Income and Earnings per Share
(In millions, except percentages and per
share amounts)
Income from continuing operations
before taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations, net
of tax
Net income
Net income per common share
Net income per common share,
2016
2015
2014
$477.1
156.4
$408.9
134.5
$360.8
113.5
320.7
274.4
247.3
–
(.1)
(2.2)
$320.7
$274.3
$ 3.60
$ 3.01
$245.1
$ 2.61
assuming dilution
3.54
2.95
Effective tax rate for continuing
operations
32.8%
32.9%
Provision for Income Taxes
The 2016 effective tax rate for continuing operations included a tax
expense of $7.6 million associated with the cost to repatriate
non-permanently reinvested current earnings of certain
foreign
subsidiaries and a tax expense of $46.3 million related to the U.S.
income and foreign withholding taxes resulting from changes in
indefinite reinvestment assertions on certain foreign earnings; benefits
from changes in certain tax reserves, including interest and penalties, of
$16.8 million resulting from settlements of certain foreign audits and
$5.4 million resulting from expirations of statutes of limitations; benefits
of $6.7 million from the release of valuation allowances against certain
deferred tax assets in a foreign jurisdiction associated with a structural
7
Avery Dennison Corporation
2016 Annual Report
simplification approved by the tax authority and $3.6 million from the
release of valuation allowances on certain state deferred tax assets; and
a tax expense of $8.4 million from deferred tax adjustments resulting
from enacted tax rate changes in certain foreign jurisdictions.
We assess the available positive and negative evidence to estimate
if sufficient future taxable income will be generated to use existing
deferred tax assets. On the basis of this evaluation, we record valuation
allowances only with respect to the portion of the deferred tax asset that
is more likely than not to be realized. However, the amount of the
deferred tax asset considered realizable could be adjusted if estimates
of future taxable income during the carryforward period changes or if
objective negative evidence in the form of cumulative losses is no longer
present. For example,
improves at a
higher-than-expected rate, it is possible that the remaining valuation
allowances on state deferred tax assets could be subject to further
releases.
if our U.S. profitability
In connection with our initiatives to simplify our corporate legal
entity and intercompany financing structures, we evaluated the facts
and circumstances surrounding the indefinite reinvestment assertions
on certain foreign earnings that would be affected as a result of our
actions to improve structural and operational efficiency. Our evaluation
considered working capital,
liquidity, capitalization
improvement, acquisition plans, and alignment of the existing structure
with long-term strategic plans. As a result of this evaluation, we
determined that the excess of the amount for financial reporting over the
tax basis of investments in certain foreign subsidiaries is subject to
reversal in the foreseeable future. As a result, we recorded a tax
provision for the effects of changes in indefinite reinvestment assertions
in 2016.
long-term
reinvested 2015 earnings of certain
The 2015 effective tax rate for continuing operations included a tax
expense of $20 million associated with the tax cost to repatriate
foreign
non-permanently
subsidiaries; benefits from changes in certain tax reserves, including
interest and penalties, of $5.8 million resulting from settlements of audits
and $8.2 million resulting from expirations of statutes of limitations; and
a tax benefit of $2.6 million from the extension of the federal research
and development credit.
2.56
The 2014 effective tax rate for continuing operations included 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 expirations of statutes of limitations; a
repatriation tax benefit of $9.8 million related to certain foreign losses; a
tax expense of $9.1 million from the taxable inclusion of a net foreign
31.5% currency gain related to the revaluation of certain intercompany loans; a
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 a
state tax expense of $2.5 million primarily related to gains arising as a
result of certain foreign reorganizations.
On December 18, 2015, the Protecting Americans from Tax Hikes
Act of 2015 (‘‘PATH Act’’) was enacted, which included a provision
making permanent the federal research and development tax credit for
the tax years 2015 and beyond. The PATH Act also retroactively
extended the controlled foreign corporation (‘‘CFC’’) look-through rule
that had expired on December 31, 2014. For periods during which the
look-through rule was effective, U.S. federal income tax on certain
dividends, interest, rents, and royalties received or accrued by a CFC of
a U.S. multinational enterprise from a related CFC are deferred. 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. The
extension of the CFC look-through rule is currently scheduled to expire
on December 31, 2019.
Due to recent changes in the U.S. government, U.S. tax reform may
be enacted in the near future. Significant changes that could occur
include a reduction of the corporate income tax rate, a one-time deemed
repatriation of untaxed
foreign earnings, border adjustability,
territoriality, and various increases to the tax base. Due to the lack of
clarity regarding if, how, and when any such tax reform will be enacted,
the potential impact of U.S. tax reform is unclear. We continue to closely
monitor these developments.
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
savings from restructuring, net of transition costs, partially offset by the
net impact of pricing and raw material input costs, unfavorable
geographic mix, the unfavorable impact of foreign currency translation,
and higher employee-related costs.
from productivity
Operating income increased in 2015 compared to 2014 due to
benefits
from
initiatives,
restructuring, net of transition costs, higher volume, lower restructuring
charges, and the net impact of pricing and raw material input costs,
partially offset by higher employee-related costs and the unfavorable
impact of foreign currency translation.
including savings
Retail Branding and Information Solutions
(In millions)
2016
2015
2014
Net sales including intersegment
RESULTS OF OPERATIONS BY REPORTABLE SEGMENT
sales
Operating income refers to income from continuing operations
before interest and taxes.
Label and Graphic Materials
(In millions)
Net sales including intersegment
sales
Less intersegment sales
Net sales
Operating income (1)
(1) Included charges associated with
restructuring in all years, transaction costs
in 2016, gain on sale of asset in 2015, and
losses from curtailment and settlement of
pension obligations in 2015 and 2014.
2016
2015
2014
$4,250.7
(63.4)
$4,093.4
(61.3)
$4,362.9
(64.2)
$4,187.3
516.2
$4,032.1
453.4
$4,298.7
396.9
$
13.0
$
12.1
$
41.5
table below:
Less intersegment sales
Net sales
Operating income (1)
(1) Included charges associated with
restructuring in all years, loss on sale of a
product line and related transaction and
exit costs in 2016 and 2015, gains on
sales of assets in 2016 and 2014, legal
settlement in 2015, indefinite-lived
intangible asset impairment charge in
2014, and loss from settlement of pension
obligation in 2014.
$1,448.3
(2.9)
$1,446.3
(2.9)
$1,518.5
(2.5)
$1,445.4
102.6
$1,443.4
51.6
$1,516.0
68.5
$
9.8
$
45.7
$
22.0
Net Sales
The factors impacting the reported sales change are shown in the
Net Sales
The factors impacting the reported sales change are shown in the
table below:
Reported sales change
Foreign currency translation
Acquisitions
Extra week in 2014 fiscal year
Organic sales change (1)
(1) Totals may not sum due to rounding.
2016
2015
4%
3
(1)
–
5%
(6)%
10
–
1
5%
Reported sales change
Foreign currency translation
Product line divestiture
Extra week in 2014 fiscal year
Organic sales change (1)
(1) Totals may not sum due to rounding.
2016
2015
–%
2
2
–
3%
(5)%
4
2
1
3%
In 2016, net sales increased on an organic basis primarily due to
higher volume from sales of radio-frequency identification products.
In 2015, net sales increased on an organic basis primarily due to
higher volume.
Operating Income
In both years, net sales increased on an organic basis primarily due
to higher volume.
In 2016, net sales increased on an organic basis at a low-teen digit
rate in emerging markets, at a mid-single digit rate in Western Europe,
and at a low-single digit rate in North America.
In 2015, net sales increased on an organic basis at mid-single digit
rates in both Western Europe and emerging markets and at a low-single
digit rate in North America.
Operating Income
Operating income increased in 2016 compared to 2015 due to
higher volume and benefits from productivity initiatives, including
Operating income increased in 2016 compared to 2015 due to
higher volume, lower restructuring charges, benefits from productivity
initiatives, including savings from restructuring, net of transition costs,
and the loss on sale of a product line and related transaction and exit
costs in the prior year, partially offset by higher employee-related costs
and the impact of strategic pricing actions.
Operating income decreased in 2015 compared to 2014 due to
higher employee-related costs, higher restructuring charges, the impact
of strategic pricing actions, and the loss on sale of a product line and
related exit costs, partially offset by benefits from productivity initiatives,
including savings from restructuring, net of transition costs, as well as
higher volume.
8
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Industrial and Healthcare Materials
(In millions)
2016
2015
2014
FINANCIAL CONDITION
2016
2015
Net losses from asset impairments and
Liquidity
Operating Activities
(In millions)
Net income
Depreciation and amortization
Provision for doubtful accounts and
sales returns
Loss on sale of businesses
Indefinite-lived intangible asset
impairment charge
sales/disposals of assets
Stock-based compensation
Loss from settlement of pension
obligations
Other non-cash expense and loss
Trade accounts receivable
Inventories
Other current assets
Accounts payable
Accrued liabilities
Income taxes (deferred and accrued)
Other assets
Long-term retirement benefits and other
2016
2015
2014
$320.7
180.1
$ 274.3
188.3
$245.1
201.6
54.4
–
46.5
–
45.2
3.4
–
–
3.0
1.5
27.2
41.4
46.2
(88.2)
(19.6)
(7.6)
31.6
32.4
38.2
(1.2)
12.2
26.3
10.2
28.3
–
50.1
(135.9)
(34.4)
3.9
65.5
7.0
(10.8)
(.3)
–
44.2
(65.4)
(33.0)
(33.7)
(62.8)
(18.2)
(2.6)
(3.5)
liabilities
(71.8)
(19.0)
(6.9)
Net cash provided by operating
activities
$585.3
$ 473.7
$354.9
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 2016, cash flow provided by operating activities increased
compared to 2015 due to higher net income, lower severance
payments, benefits from changes in operational working capital, and
lower income tax payments, net of refunds, partially offset by higher
incentive compensation paid in 2016 for the 2015 performance year and
higher pension contributions.
In 2015, cash flow provided by operating activities increased
compared to 2014 due to the timing of vendor payments, higher net
income and lower incentive compensation paid in 2015 for the 2014
performance year, partially offset by the timing of collections from
customers and higher payments for taxes.
Net sales including intersegment sales
Less intersegment sales
$461.0
(7.2)
$506.2
(14.8)
$534.7
(19.1)
Net sales
Operating income (1)
$453.8
54.6
$491.4
57.1
$515.6
45.2
(1) Included charges associated with restructuring in
all years and transaction costs in 2016.
$
1.9
$
8.0
$
4.3
Net Sales
The factors impacting the reported sales change are shown in the
table below:
Reported sales change
Foreign currency translation
Acquisition
Extra week in 2014 fiscal year
Organic sales change
(8)% (5)%
2
(2)
–
9
–
1
(8)%
5%
In 2016, net sales decreased on an organic basis primarily due to
lower volume in the Performance Tapes product group. Net sales
decreased on an organic basis at a high-single digit rate for the
Performance Tapes product group primarily due to a personal care
program loss.
In 2015, net sales increased on an organic basis primarily due to
higher volume. Net sales increased on an organic basis at a mid-teen
digit rate for the Performance Tapes product group.
Operating Income
Operating income decreased in 2016 compared to 2015 primarily
due to lower volume, partially offset by benefits from productivity
initiatives, including savings from restructuring, net of transition costs,
and lower restructuring charges.
Operating income increased in 2015 compared to 2014 primarily
due to benefits from productivity initiatives, including savings from
restructuring, net of transition costs, the net impact of pricing and raw
material input costs, and higher volume, partially offset by the impact of
unfavorable product mix and higher restructuring charges.
9
Avery Dennison Corporation
2016 Annual Report
Investing Activities
(In millions)
Purchases of property, plant and
2016
2015
2014
equipment
$(176.9) $(135.8) $(147.9)
Purchases of software and other
deferred charges
(29.7)
(15.7)
(27.1)
Proceeds from sales of property, plant
and equipment
(Purchases) sales of investments, net
Payments for acquisitions and equity
method investments, net of cash
acquired
Other
8.5
(.1)
(237.2)
–
7.6
(.5)
–
1.5
4.3
.3
–
–
Net cash used in investing activities
$(435.4) $(142.9) $(170.4)
Capital and Software Spending
In 2016, we invested in new equipment to support growth in Asia,
North America, and Europe and to improve manufacturing productivity.
In 2015 and 2014, we invested in new equipment to support growth,
primarily
improve manufacturing
productivity.
in Asia and Europe, and
to
Information technology investments in 2016 and 2015 were
primarily associated with standardization initiatives in Asia and North
America. Information technology investments in 2014 were primarily
associated with standardization initiatives in Europe and North America.
Payments for Acquisitions and Equity Method Investments, Net of
Cash Acquired
In connection with the Mactac acquisition, we paid consideration,
net of cash received, of approximately $220 million, which we funded
primarily through existing credit facilities. We also made payments for a
small acquisition and an investment accounted for using the equity
method.
Refer to Note 2, ‘‘Acquisitions,’’ to the Consolidated Financial
Statements for more information.
Other
In May 2015, we received $1.5 million from the sale of a product line
in our RBIS reportable segment.
Financing Activities
(In millions)
Net change in borrowings and
repayments of debt
Dividends paid
Share repurchases
Proceeds from exercises of stock
options, net
Other
2016
2015
2014
$ 232.2
(142.5)
(262.4)
$(105.8)
(133.1)
(232.3)
$ 124.9
(125.1)
(355.5)
71.0
(4.5)
104.0
(.1)
34.2
(2.0)
Net cash used in financing activities
$(106.2)
$(367.3)
$(323.5)
Borrowings and Repayment of Debt
In March 2016, we entered into an agreement to establish a
Euro-Commercial Paper Program pursuant to which we may issue
unsecured commercial paper notes up to a maximum aggregate
amount outstanding of $500 million. Proceeds from issuances under
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
this program may be used for general corporate purposes. The
maturities of the notes may vary, but may not exceed 364 days from the
date of issuance. Our payment obligations with respect to any notes
issued under this program are backed by our revolving credit facility
(the ‘‘Revolver’’). There are no financial covenants under this program.
As of December 31, 2016, $209 million was outstanding under this
program.
In 2016, our commercial paper borrowings were used primarily to
the Mactac acquisition, capital
fund share repurchase activity,
expenditures, and dividend payments. In 2015, our U.S. commercial
paper borrowings were used primarily to fund share repurchase activity,
dividend payments, and capital and software expenditures.
Refer to Note 2, ‘‘Acquisitions,’’ and Note 4, ‘‘Debt and Capital
for more
the Consolidated Financial Statements
to
Leases,’’
information.
Refer to ‘‘Capital Resources’’ below for further information on 2016
and 2015 borrowings and repayment of debt.
Dividend Payments
We paid dividends of $1.60 per share in 2016 compared to $1.46
per share in 2015. In April 2016, we increased our quarterly dividend to
$.41 per share, representing an 11% increase from our previous
dividend rate of $.37 per share.
Share Repurchases
for other corporate purposes.
From time to time, our Board of Directors (‘‘Board’’) authorizes the
repurchase of shares of our outstanding common stock. Repurchased
shares may be reissued under our stock option and incentive plan or
used
In 2016, we repurchased
approximately 3.8 million shares of our common stock at an aggregate
cost of $262.4 million. In 2015, we repurchased approximately
3.9 million shares of our common stock at an aggregate cost of
$232.3 million.
On December 4, 2014, our Board 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 is
the only one currently in effect and it will remain in effect until shares in
the amount authorized have been repurchased. As of December 31,
2016, shares of our common stock in the aggregate amount of
approximately $105 million remained authorized for repurchase under
this Board authorization.
Proceeds from Exercises of Stock Options, net
The number of stock options exercised was approximately
1.4 million, 2.5 million, and 1 million in 2016, 2015, and 2014,
respectively. Refer to Note 12, ‘‘Long-Term Incentive Compensation,’’ to
the Consolidated Financial Statements for more information.
Analysis of Selected Balance Sheet Accounts
Long-lived Assets
Goodwill increased by approximately $107 million to $794 million at
year-end 2016, which primarily reflected the preliminary valuation of
goodwill associated with the Mactac acquisition, partially offset by the
impact of foreign currency translation.
Other
from business acquisitions, net,
increased by approximately $21 million to $67 million at year-end 2016,
intangibles resulting
10
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
which primarily reflected the valuation of other intangibles resulting from
the Mactac acquisition, partially offset by current year amortization
expense and the impact of foreign currency translation.
Refer to Note 3, ‘‘Goodwill and Other Intangibles Resulting from
Business Acquisitions,’’ to the Consolidated Financial Statements for
more information.
Other assets decreased by approximately $3 million to $403 million
at year-end 2016, which primarily reflected amortization expense related
to software and other deferred charges, net of purchases, and the
impact of foreign currency translation, partially offset by an increase in
the cash surrender value of our corporate-owned life insurance policies.
Shareholders’ Equity Accounts
The balance of our shareholders’ equity decreased by
approximately $40 million to $926 million at year-end 2016, which
reflected the effect of share repurchases, dividend payments, and the
net increase in ‘‘Accumulated other comprehensive loss.’’ These
decreases were partially offset by net income and the use of treasury
shares to settle exercises of stock options and vesting of stock-based
awards and fund contributions to our U.S. defined contribution plan.
The balance of our treasury stock increased by approximately
$185 million to $1.77 billion at year-end 2016, which primarily reflected
share repurchase activity, partially offset by the use of treasury shares to
settle exercises of stock options and vesting of stock-based awards and
fund contributions to our U.S. defined contribution plan.
comprehensive
Accumulated other
increased by
approximately $69 million to $752 million at year-end 2016 primarily due
to net actuarial losses in our pension and other postretirement plans as
a result of lower discount rates and the unfavorable impact of foreign
currency translation, partially offset by the effect of certain pension
settlements related to our U.S. pension plan.
loss
Refer to Note 6, ‘‘Pension and other postretirement benefits,’’ to the
Consolidated Financial Statements for more information.
Impact of Foreign Currency Translation
(In millions)
Change in net sales
Change in net income from continuing operations
2016
2015
$(147) $(528)
(34)
(12)
In 2016, international operations generated approximately 75% of
our net sales. Our future results are subject to changes in political and
economic conditions in the regions in which we operate and the impact
of fluctuations in foreign currency exchange and interest rates.
The unfavorable impact of foreign currency translation on net sales
in 2016 compared to 2015 was primarily related to sales in China and
Argentina, as well as euro-denominated sales.
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 2016, 2015,
or 2014.
Effect of Foreign Currency Transactions
The impact on net income from transactions denominated in
foreign currencies is largely mitigated because the costs of our
products are generally denominated in the same currencies in which
they are sold. In addition, to reduce our income and cash flow exposure
to transactions in foreign currencies, we enter into foreign exchange
forward, option and swap contracts where available and appropriate.
11
Avery Dennison Corporation
2016 Annual Report
Analysis of Selected Financial Ratios
We utilize the financial ratios discussed below to assess our
financial condition and operating performance.
Working Capital (Deficit) and Operational Working Capital Ratios
Working capital (deficit) (current assets minus current liabilities), as
a percentage of net sales, was (1.6)% in 2016 compared to 5.3% in 2015
primarily driven by an increase in short-term debt associated with the
reclassification of senior notes due on October 1, 2017 to the current
portion of long-term debt and an increase in commercial paper
borrowings to fund the Mactac acquisition, partially offset by increases
in inventory, trade accounts receivable, and cash and cash equivalents.
Operational working capital, as a percentage of net sales, is
reconciled with working capital (deficit) below. Our objective is to
minimize our investment in operational working capital, as a percentage
of sales, to maximize our cash flow and return on investment.
(In millions, except percentages)
(A) Working capital (deficit)
Reconciling items:
Cash and cash equivalents
Current refundable income taxes and other
current assets
Assets held for sale
Short-term borrowings and current portion
of long-term debt and capital leases
Current income taxes payable and other
current accrued liabilities
(B) Operational working capital
(C) Net sales
2016
2015
$ (99.5) $ 316.3
(195.1)
(158.8)
(182.8)
(6.8)
(170.7)
(2.5)
579.1
95.3
583.3
549.2
$ 678.2
$ 628.8
$6,086.5
$5,966.9
Working capital (deficit), as a percentage of
net sales (A) (cid:3) (C)
Operational working capital, as a percentage
of net sales (B) (cid:3) (C)
(1.6)%
5.3%
11.1%
10.5%
Accounts Receivable Ratio
The average number of days sales outstanding was 62 days in
2016 compared to 60 days in 2015, calculated using the four-quarter
average accounts receivable balance divided by the average daily sales
in 2016 and 2015, respectively. The increase in the average number of
days sales outstanding from the prior year reflected the timing of
collections, partially offset by the impact of increased accounts
receivable reserves.
Inventory Ratio
Average inventory turnover was 8.2 in 2016 compared to 8.6 in
2015, calculated using the annual cost of sales in 2016 and 2015,
respectively, divided by the four-quarter average inventory balance. The
decrease in the current year average inventory turnover primarily
reflected the timing of inventory purchases.
Accounts Payable Ratio
The average number of days payable outstanding was 71 days in
2016 compared to 70 days in 2015, calculated using the four-quarter
average accounts payable balance divided by the average daily cost of
products sold in 2016 and 2015, respectively. The increase in average
number of days payable outstanding from the prior year primarily
reflected the timing of vendor payments and the impact of foreign
currency translation.
Net Debt to EBITDA Ratio
(In millions, except ratios)
Net income
Reconciling items:
Interest expense
Provision for income taxes
Depreciation
Amortization
2016
2015
2014
$ 320.7
$ 274.3
$ 245.1
59.9
156.4
117.5
62.5
60.5
134.5
125.2
62.9
63.3
113.5
135.5
65.9
EBITDA
$ 717.0
$ 657.4
$ 623.3
Total debt and capital leases
Less cash and cash equivalents
$1,292.5
(195.1)
$1,058.9
(158.8)
$1,144.4
(207.2)
Net debt
$1,097.4
$ 900.1
$ 937.2
Net debt to EBITDA ratio
1.5
1.4
1.5
The net debt to EBITDA ratio was higher in 2016 compared to 2015
primarily due to higher net debt as a result of higher commercial paper
borrowings primarily to fund the Mactac acquisition and share
repurchase activity, partially offset by higher net income.
The net debt to EBITDA ratio was lower in 2015 compared to 2014
primarily due to higher net income and lower net debt as a result of
lower commercial paper borrowings.
Financial Covenants
The Revolver contains financial covenants requiring that we
maintain specified ratios of total debt and interest expense in relation to
certain measures of income. As of December 31, 2016 and January 2,
2016, we were in compliance with our financial covenants.
Fair Value of Debt
includes commercial paper
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
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
$1.31 billion at December 31, 2016 and $1.08 billion at January 2, 2016.
Fair value amounts were determined based primarily on Level 2 inputs.
Refer to Note 1, ‘‘Summary of Significant Accounting Policies,’’ to the
Consolidated Financial Statements for more information.
Capital Resources
Capital resources include cash flows from operations, cash and
cash equivalents and debt financing. At year-end 2016, we had cash
and cash equivalents of $195.1 million held in accounts at third-party
financial institutions.
Our cash balances are held in numerous locations throughout the
world. At year-end 2016, 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 foreign subsidiaries, and
repatriating foreign earnings. However, if we were to repatriate
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
incremental foreign earnings, we may be subject to additional taxes in
the U.S.
In October 2014, we amended and restated the Revolver,
increasing the amount available from certain domestic and foreign
banks 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 year-end
2016 or 2015. Commitment fees associated with the Revolver in 2016,
2015, and 2014 were $1.1 million, $1.9 million, and $1.3 million,
respectively.
In addition to the Revolver, we have significant short-term lines of
credit available in various countries totaling approximately $300 million
at December 31, 2016. These lines may be cancelled at any time by us
or the issuing banks. Short-term borrowings outstanding under our lines
of credit were $72.9 million and $65 million at December 31, 2016 and
January 2, 2016, respectively, with a weighted-average interest rate of
6.5% and 8.7%, respectively.
In March 2016, we entered into an agreement to establish a
Euro-Commercial Paper Program pursuant to which we may issue
unsecured commercial paper notes up to a maximum aggregate
amount outstanding of $500 million. Proceeds from issuances under
this program may be used for general corporate purposes. The
maturities of the notes may vary, but may not exceed 364 days from the
date of issuance. Our payment obligations with respect to any notes
issued under this program are backed by the Revolver. There are no
financial covenants under this program. As of December 31, 2016,
$209 million was outstanding under this program.
We had $44.5 million and $28 million of borrowings from U.S.
commercial paper issuances outstanding at year-end 2016 and 2015,
respectively, with a weighted-average interest rate of .9% and .7%,
respectively.
We had medium-term notes of $45 million outstanding at each
year-end 2016 and 2015. During the second quarter of 2015, we repaid
$5 million of medium-term notes.
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 $234 million to
$1.29 billion at year-end 2016 compared to $1.06 billion at year-end
2015, primarily reflecting an increase in commercial paper borrowings
used to fund share repurchase activity, the Mactac acquisition, dividend
payments, and capital expenditures, as well as an increase in short-term
borrowings to support operational requirements. Refer to ‘‘Borrowings
and Repayment of Debt’’ above for more information.
Credit ratings are a significant factor in our ability to raise short- and
long-term financing. The credit ratings assigned to us also impact the
interest rates paid and our access to commercial paper, credit facilities,
12
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
and other borrowings. A downgrade of our short-term credit ratings
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 team. We
remain committed to maintaining an investment grade rating.
During 2017, we are exploring the possible incurrence of long-term
debt to refinance some of our outstanding commercial paper and other
indebtedness and for general corporate purposes.
Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Contractual Obligations at End of Year 2016
(In millions)
Total
2017
2018
2019
2020
2021 Thereafter
Payments Due by Period
Short-term borrowings
Long-term debt
Payments related to long-term capital leases
Interest on long-term debt
Operating leases
Pension and postretirement benefit payments (unfunded plans)
$ 326.3 $326.3 $
945.0
41.1
276.6
137.8
126.2
250.0
5.4
46.6
40.0
16.0
– $
–
5.4
34.2
29.6
36.1
– $
–
5.3
34.2
20.0
10.6
265.0
5.0
24.0
13.9
9.2
– $
–
–
4.8
19.6
8.8
9.8
$
–
430.0
15.2
118.0
25.5
44.5
Total contractual obligations
$1,853.0 $684.3 $105.3 $70.1 $317.1 $43.0
$633.2
We enter into operating leases primarily for office and warehouse
space and equipment for information technology, machinery, and
transportation. The table above includes minimum annual rental
commitments on operating
initial or remaining
non-cancelable lease terms of one year or more.
leases having
The table above does not include:
• Purchase obligations or open purchase orders at year-end – It
is impracticable for us to 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.
• Cash funding requirements for pension benefits payable to
certain eligible current and future retirees under our funded
plans – Benefits under 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 information regarding expected contributions
to our plans.
to
It
• Deferred compensation plan benefit payments –
is
impracticable for us to obtain a reasonable estimate for 2017
and beyond due to the volatility of the payment amounts and
certain events that could trigger immediate payment of
benefits to participants. In addition, participant account
balances are marked-to-market monthly and benefit payments
are adjusted annually. Refer to Note 6, ‘‘Pension and Other
Postretirement Benefits,’’
the Consolidated Financial
Statements for more information.
to
• 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 as of the end of
their respective performance periods, and, therefore, we
13
Avery Dennison Corporation
2016 Annual Report
cannot reasonably estimate the amounts to be paid on the
vesting dates. Refer to Note 12, ‘‘Long-term Incentive
Compensation,’’ to the Consolidated Financial Statements for
further information on cash awards.
• 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
significant costs related to these arrangements.
• Unrecognized tax benefit reserves of $89.5 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.
• Acquisition-related obligations – Obligations related to recently
including Hanita Coatings and
announced acquisitions,
Yongle Tape. These acquisitions are subject to customary
regulatory approvals.
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 our critical accounting
estimates include accounting for goodwill, pension and postretirement
benefits, taxes based on income, long-term incentive compensation,
litigation matters, and environmental expenditures.
Goodwill
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; fastener
solutions; adhesives; 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
increase or decrease depending on changes in the inputs and
assumptions. Our annual first step impairment analysis in the fourth
quarter of 2016 indicated that the fair values of our reporting units
exceeded their respective carrying amounts, including goodwill. The fair
value of the reporting units tested exceeded their carrying amounts by
79% to 442%.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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. 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. As of December 31, 2016, a .25% increase in the
discount rate in the U.S. would have decreased our year-end projected
benefit obligation by approximately $28 million and would have
increased expected periodic benefit cost for the coming year by
approximately $.2 million. Conversely, a .25% decrease in the discount
rate in the U.S. would have increased our year-end projected benefit
obligation by approximately $29 million and would have decreased
expected periodic benefit cost for the coming year by approximately
$.3 million. As of December 31, 2016, a .25% increase in the discount
rate associated with our international plans would have decreased our
year-end projected benefit obligation by $39 million and would have
increased expected periodic benefit cost for the coming year by
approximately $3 million. Conversely, a .25% decrease in the discount
rate associated with our foreign plans would have increased our
year-end projected benefit obligation by approximately $42 million and
would have decreased expected periodic benefit cost for the coming
year by approximately $2 million.
In 2016, we used a full yield curve approach to estimate the service
and interest cost components of net periodic benefit cost for our
pension and other postretirement benefit plans. Under this approach,
we applied multiple discount rates from a yield curve composed of the
rates of return on several hundred high-quality, fixed income corporate
bonds available at the measurement date. We believe this approach
provides a more precise measurement of service and interest cost by
aligning the timing of the plans’ liability cash flows to the corresponding
rates on the yield curve. Historically, we estimated the service and
interest cost components using a single weighted-average discount
rate derived from the yield curve used to measure the benefit obligation
at the beginning of the period.
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 returns in our asset classes, and the
mix of active and passive investments. Additionally, current market
14
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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 2017 periodic benefit
cost by approximately $2 million. An increase or decrease of .25% on
the long-term return on assets associated with our international plans
would have decreased or increased, respectively, our 2017 periodic
benefit cost by approximately $1 million.
benefits granted by certain countries, including the Netherlands,
Luxembourg, Belgium, and Ireland, to other companies constituted
illegal state aid. We continue to monitor state aid developments since
they involve jurisdictions in which we have significant operations, and
consider these matters in determining our uncertain tax positions.
Further information is available in Note 14, ‘‘Taxes Based on
Income,’’ to the Consolidated Financial Statements.
Long-Term Incentive Compensation
Taxes Based on Income
We have not capitalized expense associated with our long-term
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 to evaluate 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 established
valuation allowances associated with certain acquired net deferred tax
assets. 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.
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
the Accounting Standards Codification (‘‘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
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. We review
our tax positions quarterly and adjust the balances as new information
becomes available. 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 tax
issue is subject to management’s assessment of relevant facts and
into
circumstances existing at
consideration existing
laws, regulations and practices of any
governmental authorities exercising jurisdiction over our operations. For
example, in 2016, the European Commission concluded that certain tax
the balance sheet date,
taking
15
Avery Dennison Corporation
2016 Annual Report
incentive compensation.
Changes in estimated forfeiture rates are recorded as cumulative
adjustments in the period estimates are revised.
Valuation of Stock-Based Awards
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
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 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 the component of PUs that is 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 the other component of PUs, is determined
using the Monte-Carlo simulation model, which utilizes multiple input
variables,
including expected stock price volatility and other
assumptions appropriate for determining fair value, to estimate the
probability of satisfying the 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 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 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.
Environmental Expenditures
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.
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.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
We generally do not purchase or hold foreign currency or interest
rate or commodity contracts for trading purposes.
Our objective in managing our exposure to foreign currency
changes is to reduce the risk to our earnings and cash flow associated
with foreign exchange rate changes. As a result, we enter into foreign
exchange forward, option and swap contracts to reduce risks
associated with the value of our existing foreign currency assets,
liabilities, firm commitments and anticipated foreign revenues and
costs, when available and appropriate. The gains and losses on these
contracts are intended to offset changes in the related exposures. We
do not hedge our foreign currency 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.
Foreign Exchange Value-At-Risk
We use a Value-At-Risk (‘‘VAR’’) model to determine the estimated
maximum potential one-day loss in earnings associated with our foreign
exchange positions and contracts. This approach assumes that market
rates or prices for foreign exchange positions and contracts are
normally distributed. VAR model estimates were made assuming
normal market conditions. The model includes all of our debt as well as
all interest rate and foreign exchange derivative contracts and market
sensitive equity
firm
investments. Forecasted
commitments, and accounts receivable and accounts payable
denominated in foreign currencies, which certain of these instruments
are intended to hedge, were excluded from the model.
transactions,
In both 2016 and 2015, 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 $1.6 million at year-end
2016 and $1 million at year-end 2015.
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
In 2016, an assumed 20 basis point move in interest rates affecting
our variable-rate borrowings (10% of our weighted-average interest rate
on floating rate debt) would have increased interest expense by
approximately $.5 million.
In 2015, an assumed 40 basis point move in interest rates affecting
our variable-rate borrowings (10% of our weighted-average interest rate
on floating rate debt) would have increased interest expense by
approximately $.7 million.
16
Consolidated Balance Sheets
(Dollars in millions, except per share amount)
Assets
Current assets:
Cash and cash equivalents
Trade accounts receivable, less allowances of $47.8 and $31.5 at year-end 2016 and 2015, respectively
Inventories, net
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
Income taxes payable
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 2016 and 2015; issued –
124,126,624 shares at year-end 2016 and 2015; outstanding – 88,308,860 shares and 89,967,697 shares at
year-end 2016 and 2015, respectively
Capital in excess of par value
Retained earnings
Treasury stock at cost, 35,817,764 shares and 34,158,927 shares at year-end 2016 and 2015, respectively
Accumulated other comprehensive loss
Total shareholders’ equity
See Notes to Consolidated Financial Statements
December 31,
2016
January 2,
2016
$
195.1
1,001.0
519.1
30.3
6.8
152.5
1,904.8
915.2
793.6
66.7
313.2
402.9
$
158.8
964.7
478.7
30.9
2.5
139.8
1,775.4
847.9
686.2
45.8
372.2
406.2
$ 4,396.4
$ 4,133.7
$
579.1
841.9
217.4
95.2
37.9
232.8
2,004.3
713.4
660.9
92.3
$
95.3
814.6
194.6
85.4
45.1
224.1
1,459.1
963.6
637.4
107.9
124.1
852.0
2,473.3
(1,772.0)
(751.9)
124.1
834.0
2,277.6
(1,587.0)
(683.0)
925.5
965.7
$ 4,396.4
$ 4,133.7
17
Avery Dennison Corporation
2016 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 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 number of shares outstanding:
Common shares
Common shares, assuming dilution
See Notes to Consolidated Financial Statements
2016
2015
2014
$6,086.5
4,386.8
1,699.7
1,097.5
59.9
65.2
477.1
156.4
320.7
–
$5,966.9
4,321.1
1,645.8
1,108.1
60.5
68.3
408.9
134.5
274.4
(.1)
$6,330.3
4,679.1
1,651.2
1,158.9
63.3
68.2
360.8
113.5
247.3
(2.2)
$ 320.7
$ 274.3
$ 245.1
$
$
$
$
$
3.60
–
3.60
3.54
–
3.54
1.60
89.1
90.7
$
$
$
$
$
3.01
–
3.01
2.95
–
2.95
1.46
91.0
92.9
$
$
$
$
$
2.64
(.03)
2.61
2.58
(.02)
2.56
1.34
93.8
95.7
18
Consolidated Statements of Comprehensive Income
(In millions)
Net income
Other comprehensive (loss) income, net tax:
Foreign currency translation:
Translation loss
Pension and other postretirement benefits:
Net loss recognized from actuarial gain/loss and prior service cost/credit
Reclassifications to net income
Cash flow hedges:
Gains (losses) recognized on cash flow hedges
Reclassifications to net income
Other comprehensive loss, net of tax
Total comprehensive income (loss), net of tax
See Notes to Consolidated Financial Statements
2016
2015
2014
$320.7
$ 274.3
$ 245.1
(53.7)
(139.0)
(149.8)
(62.9)
44.2
(18.9)
22.9
(125.2)
16.9
.7
2.8
(.5)
(2.0)
.1
.9
(68.9)
(137.5)
(257.1)
$251.8
$ 136.8
$ (12.0)
19
Avery Dennison Corporation
2016 Annual Report
Consolidated Statements of Shareholders’ Equity
(Dollars in millions, except per share amounts)
Balance as of December 28, 2013
Net income
Other comprehensive loss, net of tax
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 401(k) Plan
Dividends: $1.34 per share
Balance as of January 3, 2015
Net income
Other comprehensive loss, net of tax
Repurchase of 3,858,376 shares for treasury
Issuance of 3,019,001 shares under stock-based compensation plans,
including tax of $10.6
Contribution of 348,116 shares to 401(k) Plan
Dividends: $1.46 per share
Balance as of January 2, 2016
Net income
Other comprehensive loss, net of tax
Repurchase of 3,781,528 shares for treasury
Issuance of 1,842,165 shares under stock-based compensation plans,
including tax of $12.3
Contribution of 280,526 shares to 401(k) Plan
Dividends: $1.60 per share
Common Capital in
excess of
stock, $1
par value
par value
Retained
earnings
Treasury
stock
Accumulated
other
comprehensive
loss
Total
$124.1
–
–
–
$812.3 $1,992.3 $(1,172.2)
–
245.1
–
–
(355.5)
–
–
–
–
$(288.4) $1,468.1
245.1
(257.1)
(355.5)
–
(257.1)
–
–
–
–
11.6
–
–
(2.0)
6.2
(125.1)
43.2
13.2
–
–
–
–
52.8
19.4
(125.1)
$124.1
–
–
–
$823.9 $2,116.5 $(1,471.3)
–
274.3
–
–
(232.3)
–
–
–
–
$(545.5) $1,047.7
274.3
(137.5)
(232.3)
–
(137.5)
–
–
–
–
10.1
–
–
11.8
8.1
(133.1)
104.5
12.1
–
–
–
–
126.4
20.2
(133.1)
$124.1
–
–
–
$834.0 $2,277.6 $(1,587.0)
–
320.7
–
–
(262.4)
–
–
–
–
$(683.0) $ 965.7
320.7
(68.9)
(262.4)
–
(68.9)
–
–
–
–
18.0
–
–
7.7
9.8
(142.5)
67.2
10.2
–
–
–
–
92.9
20.0
(142.5)
Balance as of December 31, 2016
$124.1
$852.0 $2,473.3 $(1,772.0)
$(751.9) $ 925.5
See Notes to Consolidated Financial Statements
20
Consolidated Statements of Cash Flows
(In millions)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2016
2015
2014
$ 320.7
$ 274.3
$ 245.1
117.5
62.6
54.4
–
–
1.5
27.2
41.4
46.2
(88.2)
(19.6)
(7.6)
31.6
32.4
(14.1)
52.3
(1.2)
(71.8)
585.3
(176.9)
(29.7)
8.5
(.1)
(237.2)
–
(435.4)
234.9
(2.7)
(142.5)
(262.4)
71.0
(4.5)
(106.2)
(7.4)
36.3
158.8
125.2
63.1
46.5
–
–
12.2
26.3
–
50.1
(135.9)
(34.4)
3.9
65.5
7.0
(23.7)
12.9
(.3)
(19.0)
473.7
(135.8)
(15.7)
7.6
(.5)
–
1.5
(142.9)
(98.4)
(7.4)
(133.1)
(232.3)
104.0
(.1)
(367.3)
(11.9)
(48.4)
207.2
135.5
66.1
45.2
3.4
3.0
10.2
28.3
–
44.2
(65.4)
(33.0)
(33.7)
(62.8)
(18.2)
15.3
(17.9)
(3.5)
(6.9)
354.9
(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)
(143.9)
351.1
$ 195.1
$ 158.8
$ 207.2
Depreciation
Amortization
Provision for doubtful accounts and sales returns
Loss on sale of businesses
Indefinite-lived intangible asset impairment charge
Net losses from asset impairments and sales/disposals of assets
Stock-based compensation
Loss from settlement of pension obligations
Other non-cash expense and loss
Changes in assets and liabilities and other adjustments:
Trade accounts receivable
Inventories
Other current assets
Accounts payable
Accrued liabilities
Taxes on income
Deferred income 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 sales of property, plant and equipment
(Purchases) sales of investments, net
Payments for acquisitions and equity method investments, net of cash acquired
Other
Net cash used in investing activities
Financing Activities
Net increase (decrease) in borrowings (maturities of three months or less)
Repayments of debt (maturities greater than three months)
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
Increase (decrease) 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
21
Avery Dennison Corporation
2016 Annual Report
Notes to Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Nature of Operations
include pressure-sensitive
We develop identification and decorative solutions for businesses
labeling
worldwide. Our products
technology and materials; films for graphic and reflective applications;
brand and price tickets, tags and labels (including radio-frequency
identification (‘‘RFID’’) inlays); performance tapes; and pressure-
sensitive adhesive products for surgical, wound care, ostomy, and
electromedical applications.
Principles of Consolidation
The consolidated financial statements include the accounts of
majority-owned subsidiaries. Intercompany accounts, transactions, and
profits are eliminated in consolidation. We apply the equity method of
accounting for investments in which we have significant influence but
not a controlling interest.
Cash and cash equivalents generally consist of cash on hand,
deposits in banks, cash-in-transit, and bank drafts and short-term
investments with maturities of three months or less when purchased or
received. The carrying value of these assets approximates fair value due
to the short maturity of the instruments.
Accounts Receivable
We record trade accounts receivable at the invoiced amount. The
allowance for doubtful accounts 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
reduce gross trade receivables to their net realizable values. We record
these allowances based on estimates related to the following:
• Customer-specific allowances;
• Amounts based upon an aging schedule; and
• An amount based on our historical experience.
Segment Information
In the fourth quarter of 2016, we changed our operating structure to
align with our overall business strategy, and our Chief Executive Officer,
who is also our chief operating decision maker, requested changes in
the information that he regularly reviews for purposes of allocating
resources and assessing performance. As a result of these events, our
fiscal year 2016 results are reported based on our new reportable
segments, as described in Note 15, ‘‘Segment Information.’’ We have
reclassified certain prior period amounts to reflect our new operating
structure.
No single customer represented 10% or more of our net sales in, or
trade accounts receivable at, year-end 2016 or 2015. However, during
2016, 2015, and 2014, our ten largest customers by net sales
represented approximately 14%, 15%, and 13% of our net sales,
respectively. As of December 31, 2016 and January 2, 2016, our ten
largest customers by
represented
trade accounts
approximately 14% of our trade accounts receivable. These customers
were concentrated primarily in our Label and Graphic Materials
reportable segment. We generally do not require our customers to
provide collateral.
receivable
Fiscal Year
Inventories
Normally, our fiscal years consist of 52 weeks, but every fifth or sixth
fiscal year consists of 53 weeks. Our 2016 and 2015 fiscal years
consisted of 52-week periods ending December 31, 2016 and
January 2, 2016, respectively. Our 2014 fiscal year consisted of a
53-week period ending January 3, 2015.
Financial Presentation
As
further discussed
‘‘Supplemental Financial
in Note 16,
Information,’’ we have classified certain costs associated with the
divestiture of our former Office and Consumer Products (‘‘OCP’’) and
(‘‘DES’’) businesses as
Designed and Engineered Solutions
discontinued operations in the Consolidated Statements of Income for
fiscal years 2015 and 2014. Unless otherwise noted, the results and
financial condition of discontinued operations have been excluded from
the notes to our Consolidated Financial Statements. Certain prior year
amounts have been reclassified to conform to the current year
presentation.
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.
Inventories are stated at the lower of cost or net realizable value and
are categorized as raw materials, work-in-progress, or finished goods.
Cost is determined using the first-in, first-out 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
22
Notes to Consolidated Financial Statements
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, which is
generally between five and ten years.
Impairment of Long-lived Assets
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
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; fastener
solutions; adhesives; 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
23
Avery Dennison Corporation
2016 Annual Report
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.
We test indefinite-lived intangible assets, consisting of trade names
and trademarks, for impairment in the fourth quarter or whenever events
or circumstances indicate that it is more likely than not that their carrying
amounts 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.
Gains and losses resulting from hedging the value of investments in
certain international operations and from the translation of balance
sheet accounts are recorded directly as a component of other
comprehensive income.
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. Derivatives not
designated as hedges are recorded on the balance sheets at fair value,
with changes in fair value recognized in earnings. 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 that 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, hedges 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 free on board (f.o.b.) shipping point or f.o.b. destination, depending
upon local business customs. In regions where f.o.b. shipping point
terms are utilized, sales are recorded at the time of shipment because
this is when title and risk of loss are transferred. In regions where f.o.b.
destination terms are utilized, 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.
Notes to Consolidated Financial Statements
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 in
2016, 2015, or 2014.
Changes in estimated forfeiture rates are recorded as cumulative
adjustments in the period that the 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 the component of PUs that is subject to
the 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 the other component of PUs, is determined
using the Monte-Carlo simulation model, which utilizes multiple input
variables,
including expected stock price volatility and other
assumptions appropriate for determining fair value, to estimate the
probability of satisfying the 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
Sales rebates and discounts are common practices 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
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
24
Notes to Consolidated Financial Statements
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 use the short-cut method to calculate the historical pool of
windfall tax benefits related to non-employee director and employee
stock-based compensation awards. In addition, we 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.’’
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 2017, the Financial Accounting Standards Board
(‘‘FASB’’) issued amended guidance that simplifies the subsequent
measurement of goodwill. This amended guidance eliminates step two
of the goodwill impairment test, and a goodwill impairment will be the
amount by which a reporting unit’s carrying value exceeds its fair value,
not to exceed the carrying amount of goodwill. This guidance will be
effective
interim periods beginning after
December 15, 2019 and early adoption is permitted. While we are
currently assessing the timing of our adoption of this guidance, we do
not anticipate that its adoption will have a significant impact on our
financial position, results of operations, cash flows, or disclosures.
fiscal years and
for
In January 2017, the FASB issued guidance that changes the
definition of a business to assist entities with evaluating when a set of
transferred assets and activities is a business. This guidance will be
effective
interim periods beginning after
December 15, 2017 and early adoption is permitted. While we are
currently assessing the timing of our adoption of this guidance, we do
not anticipate that its adoption will have a significant impact on our
financial position, results of operations, cash flows, and disclosures.
fiscal years and
for
In October 2016, the FASB issued guidance that requires
companies to recognize the income tax effects of intra-entity sales and
transfers of assets other than inventory in the period in which the
transfer occurs. This guidance will be effective for fiscal years and
interim periods beginning after December 15, 2017 and early adoption
is permitted. The guidance requires modified retrospective adoption.
We are currently assessing the timing of our adoption of this guidance
and its impact on our financial position, results of operations, cash
flows, and disclosures.
In August 2016, the FASB issued guidance to reduce the diversity in
the presentation of certain cash receipts and cash payments presented
and classified in the statement of cash flows. This guidance requires
25
Avery Dennison Corporation
2016 Annual Report
retrospective adoption and will be effective for fiscal years and interim
periods beginning after December 15, 2017. Early adoption is
permitted. We are currently assessing the impact of this guidance on
our cash flows.
In March 2016, the FASB issued guidance to simplify several
aspects of the accounting for share-based payment transactions,
including the income tax consequences, classification of awards as
either equity or liabilities, and classification on the statement of cash
flows. The guidance will be effective for fiscal years and interim periods
beginning after December 15, 2016, and early adoption is permitted.
Different components of
require prospective,
retrospective and/or modified retrospective adoption. We are currently
assessing the impact of this guidance on our financial position, results
of operations, cash flows, and disclosures.
the guidance
including
In March 2016, the FASB issued guidance on accounting for leases
that requires lessees to recognize most leases on their balance sheets
for the rights and obligations created by those leases. This guidance
also requires enhanced disclosures regarding the amount, timing, and
uncertainty of cash flows arising from leases and will be effective for
interim and annual periods beginning after December 15, 2018. Early
adoption is permitted. A modified retrospective approach is required for
adoption with respect to all leases that exist at or commence after the
date of initial application with an option to use certain practical
expedients. We are currently assessing the impact of this guidance on
our financial position, results of operations, cash flows, and disclosures.
In May 2014, and in subsequent updates, 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,
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, 2017, and interim periods within
those fiscal years, and can be applied retrospectively either to each
prior reporting period presented (‘‘full retrospective’’) or with the
cumulative effect of adoption recognized at the date of initial application
(‘‘modified retrospective’’). Early adoption is permitted for fiscal periods
beginning after December 15, 2016. We expect to adopt the new
standard under the modified retrospective approach in the first quarter
of 2018. Based on the information we have evaluated to date, we do not
anticipate that the adoption of this revised guidance will have a
significant impact on our financial position, results of operations, or
cash flows.
NOTE 2. ACQUISITIONS
On August 1, 2016, we completed the acquisition of the European
business of Mactac (‘‘Mactac’’) from Platinum Equity through the
purchase of Evergreen Holding V, LLC. Mactac manufactures pressure-
sensitive materials that primarily complement our existing graphics
portfolio. The total consideration for this acquisition, net of cash
received, was approximately $220 million, which we funded primarily
through existing credit facilities. Due to the allowable time required to
complete our assessment, the valuation of certain acquired assets and
liabilities, including environmental liabilities and taxes, is currently
pending. This acquisition was not material to our Consolidated Financial
Statements.
In December 2016, we announced our agreement to acquire Hanita
Coatings, a pressure-sensitive manufacturer of specialty films and
laminates, from Kibbutz Hanita Coatings and Tene Investment Funds for
a purchase price of $75 million, subject to customary adjustments. We
expect to complete this acquisition in the first quarter of 2017.
Notes to Consolidated Financial Statements
In February 2017, we announced our agreement to acquire Yongle
Tape Company Ltd. (‘‘Yongle Tape’’), a manufacturer of specialty tapes
and related products used in a variety of industrial markets, from Yongle
Tape’s management and ShawKwei & Partners. The purchase price is
$190 million, which is subject to customary adjustments, with an
additional earn-out opportunity of up to $55 million to be paid based on
the acquired business’ achievement of certain performance targets over
the next two years. We expect to complete this acquisition in mid-2017.
NOTE 3. GOODWILL AND OTHER INTANGIBLES RESULTING
FROM BUSINESS ACQUISITIONS
Goodwill
Results from our annual goodwill impairment test in the fourth
quarter of 2016 indicated that no impairment occurred in 2016. The fair
value of these assets was primarily based on Level 3 inputs.
Changes in the net carrying amount of goodwill for 2016 and 2015 by reportable segment were as follows:
(In millions)
Goodwill as of January 3, 2015
Acquisition adjustments
Translation adjustments
Goodwill as of January 2, 2016
Acquired during the current period (1)
Transfer (2)
Translation adjustments
Goodwill as of December 31, 2016
Label and
Graphic
Materials
$306.6
–
(28.7)
277.9
107.8
–
(12.4)
Retail
Branding and
Information
Solutions
Industrial and
Healthcare
Materials
$415.0
(.4)
(6.3)
408.3
–
(53.1)
(1.3)
$
–
–
–
–
14.3
53.1
(1.0)
Total
$721.6
(.4)
(35.0)
686.2
122.1
–
(14.7)
$373.3
$353.9
$66.4
$793.6
(1) Goodwill acquired during the current period primarily related to the Mactac acquisition.
(2) In connection with our operating structure changes in 2016, we allocated goodwill associated with our fastener solutions reporting unit from Retail Branding and Information Solutions (‘‘RBIS’’) to
Industrial and Healthcare Materials (‘‘IHM’’) based on the relative fair values of our fastener solutions and RBIS reporting units. Prior to 2016, no reporting units within IHM had allocated goodwill.
Refer to Note 1, ‘‘Summary of Significant Accounting Policies,’’ for more information.
The carrying amounts of goodwill at December 31, 2016 and January 2, 2016 were net of accumulated impairment losses of $820 million, which
were included in our RBIS reportable segment.
In connection with the Mactac acquisition, we recognized goodwill based on our expectation of synergies and other benefits of combining our
businesses. These synergies and benefits include the use of our existing commercial infrastructure to expand sales of products of the acquired
business in a cost-efficient manner. The amount of goodwill recognized is not expected to be deductible for income tax purposes.
Indefinite-Lived Intangible Assets
Results from our annual indefinite-lived intangible assets impairment test in the fourth quarter of 2016 indicated that no impairment occurred in
2016.
The carrying value of indefinite-lived intangible assets resulting from business acquisitions, consisting of trade names and trademarks, was
$20.3 million and $7.8 million at December 31, 2016 and January 2, 2016, respectively. In connection with the Mactac acquisition in 2016, we acquired
approximately $13 million of indefinite-lived intangible assets, which consist of trade names. These intangible assets were not subject to amortization
as they were classified as indefinite-lived assets.
26
Notes to Consolidated Financial Statements
Finite-Lived Intangible Assets
In connection with the Mactac acquisition in 2016, we acquired approximately $29 million of identifiable intangible assets, which consist of
customer relationships and patents and other acquired technology. The table below summarizes the amounts and weighted useful lives of these
intangible assets:
Customer relationships
Patents and other acquired technology
Weighted-average
amortization
period
(in years)
15
4
Amount
(in millions)
$26.1
2.5
The following table sets forth our finite-lived intangible assets resulting from business acquisitions at December 31, 2016 and January 2, 2016,
which continue to be amortized:
(In millions)
Customer relationships (1)
Patents and other acquired technology (1)
Trade names and trademarks
Other intangibles
Total
2016
Accumulated
Amortization
$209.4
46.7
18.2
11.5
Net
Carrying
Amount
$37.7
5.3
3.2
.2
Gross
Carrying
Amount
$224.3
49.0
22.0
11.8
$285.8
$46.4
$307.1
2015
Accumulated
Amortization
$193.9
45.3
18.7
11.2
$269.1
Net
Carrying
Amount
$30.4
3.7
3.3
.6
$38.0
Gross
Carrying
Amount
$247.1
52.0
21.4
11.7
$332.2
(1) Includes respective finite-lived intangible assets acquired from the Mactac acquisition.
Amortization expense from continuing operations for finite-lived intangible assets resulting from business acquisitions was $19.9 million for 2016,
$20.5 million for 2015, and $24.4 million for 2014.
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:
As of December 31, 2016, $209 million was outstanding under this
program.
(In millions)
2017
2018
2019
2020
2021
Estimated
Amortization
Expense
$12.2
4.9
4.0
3.3
3.0
NOTE 4. DEBT AND CAPITAL LEASES
Short-Term Borrowings
We had $44.5 million and $28 million of borrowings from U.S.
commercial paper issuances outstanding at December 31, 2016 and
January 2, 2016, respectively, with a weighted-average interest rate of
.9% and .7%, respectively.
In March 2016, we entered into an agreement to establish a
Euro-Commercial Paper Program pursuant to which we may issue
unsecured commercial paper notes up to a maximum aggregate
amount outstanding of $500 million. Proceeds from issuances under
this program may be used for general corporate purposes. The
maturities of the notes may vary, but may not exceed 364 days from the
date of issuance. Our payment obligations with respect to any notes
issued under this program are backed by our revolving credit facility
(the ‘‘Revolver’’). There are no financial covenants under this program.
27
Avery Dennison Corporation
2016 Annual Report
Short-Term Credit Facilities
In October 2014, we amended and restated the Revolver,
increasing the amount available from certain domestic and foreign
banks 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 for other corporate
purposes.
No balances were outstanding under
the Revolver as of
December 31, 2016 or January 2, 2016. Commitment fees associated
with the Revolver in 2016, 2015, and 2014 were $1.1 million, $1.9 million,
and $1.3 million, respectively.
In addition to the Revolver, we have significant short-term lines of
credit available in various countries totaling approximately $300 million
at December 31, 2016. These lines may be cancelled at any time by us
or the issuing banks. Short-term borrowings outstanding under our lines
of credit were $72.9 million and $65 million at December 31, 2016 and
January 2, 2016, respectively, with a weighted-average interest rate of
6.5% and 8.7%, respectively.
From time to time, certain of our subsidiaries provide guarantees on
certain arrangements with banks. Our exposure to these guarantees is
not material.
Notes to Consolidated Financial Statements
Long-Term Borrowings and Capital Leases
Long-term debt, including its respective interest rates, and capital
lease obligations at year-end consisted of the following:
(In millions)
2016
2015
Long-term debt and capital leases
Medium-term notes:
Series 1995 due 2020 through 2025
$ 44.9
$ 44.9
the
Graphic Materials business. Because ownership of the facility transfers
to us at the end of the lease term, it was accounted for as a capital lease.
The carrying value of
lease at December 31, 2016 was
approximately $22 million, of which approximately $20 million was
included in ‘‘Long-term debt and capital leases’’ and approximately
$2 million was included in ‘‘Short-term borrowings and current portion
of long-term debt and capital leases’’ in the Consolidated Balance
Sheets at December 31, 2016.
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 leases
Less amount classified as current (1)
249.7
249.3
248.4
148.6
25.2
(252.7)
249.4
249.0
248.2
148.6
26.0
(2.5)
Total long-term debt and capital leases (2)
$ 713.4
$963.6
(1) In 2016, we reclassified approximately $250 million of senior notes due on October 1, 2017
from long-term debt to current portion of long-term debt.
(2) Includes unamortized debt issuance cost and debt discount of $3.6 million and $.4 million as
of year-end 2016 and $4.4 million and $.5 million as of year-end 2015, respectively.
At year-end 2016, our medium-term notes had maturities from 2020
through 2025 and accrued interest at a weighted-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
2017 (classified as current)
2018
2019
2020
2021
2022 and thereafter
(In millions)
$254.1
4.1
4.0
268.6
3.5
440.9
The maturities of capital lease payments in the table above include
$5 million of imputed interest, $1.1 million of which is expected to be
paid in 2017.
In May 2015, we extended and amended the lease on our Mentor,
Ohio facility for an additional ten years. This facility is used primarily as
the North American headquarters and research center of our Label and
Other
The Revolver contains financial covenants requiring that we
maintain specified ratios of total debt and interest expense in relation to
certain measures of income. As of December 31, 2016 and January 2,
2016, we were in compliance with our financial covenants.
Our total interest costs from continuing operations in 2016, 2015,
and 2014 were $63.5 million, $63.5 million, and $67.2 million,
respectively, of which $3.6 million, $3 million, and $3.9 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 includes 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
$1.31 billion at December 31, 2016 and $1.08 billion at January 2, 2016.
Fair value amounts were determined based primarily on Level 2 inputs,
which are inputs other than quoted prices in active markets that are
either directly or indirectly observable. Refer to Note 1, ‘‘Summary of
Significant Accounting Policies,’’ for more information.
NOTE 5. FINANCIAL INSTRUMENTS
As of December 31, 2016, the aggregate U.S. dollar equivalent
notional value of our outstanding commodity contracts and foreign
exchange contracts was $2.8 million and $1.55 billion, respectively.
We recognize 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 designate foreign exchange contracts on existing balance sheet
items as fair value hedges.
The following table shows the fair value and balance sheet locations of derivatives as of December 31, 2016:
(In millions)
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Asset
Liability
Foreign exchange contracts
Commodity contracts
Commodity contracts
Other current assets
Other current assets
Other assets
Other accrued liabilities
Other accrued liabilities
$4.6
.5
.1
$5.2
$7.8
–
$7.8
28
Notes to Consolidated Financial Statements
The following table shows the fair value and balance sheet locations of derivatives as of January 2, 2016:
(In millions)
Balance Sheet Location
Fair Value
Balance Sheet Location
Foreign exchange contracts
Commodity contracts
Other current assets
Other current assets
$5.6
–
$5.6
Other accrued liabilities
Other accrued liabilities
Fair Value
$4.5
.7
$5.2
Asset
Liability
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.
The following table shows the components of the net gains (losses)
recognized in income related to fair value hedge contracts. The
corresponding gains or losses on the underlying hedged items
approximated the net gains (losses) on these fair value hedge contracts.
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.
We are also obligated to pay unfunded termination indemnity
benefits to certain employees outside of the U.S., which are subject to
applicable agreements, laws and regulations. We have not incurred
significant costs related to these benefits, and, therefore, no related
costs are included in the disclosures below.
(In millions)
Location of Net
Gains
(Losses) in
Income
2016
2015
2014
Foreign exchange
Cost of
contracts
products sold
$2.8
$2.9
$ (1.6)
Foreign exchange
Marketing,
contracts
general and
administrative
expense
4.1
$6.9
2.9
(43.3)
$5.8
$(44.9)
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 impacts 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), before taxes, recognized in ‘‘Accumulated other
comprehensive loss’’ (effective portion) on derivatives related to cash
flow hedge contracts were as follows:
(In millions)
Foreign exchange contracts
Commodity contracts
2016
2015
2014
$.2
.6
$.8
$(.1)
(.7)
$ 1.3
(1.2)
$(.8)
$ .1
The amounts 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 were
immaterial in 2016, 2015, and 2014.
As of December 31, 2016, we expected a net loss of approximately
$2.6 million to be reclassified from ‘‘Accumulated other comprehensive
loss’’ to earnings within the next 12 months.
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
29
Avery Dennison Corporation
2016 Annual Report
In December 2015, we offered eligible former employees who were
vested participants in the Avery Dennison Pension Plan (the ‘‘ADPP’’),
our U.S. pension plan, the opportunity to receive their benefits
immediately as either a lump-sum payment or an annuity, rather than
waiting until they are retirement eligible under the terms of the plan. In
the second quarter of 2016, approximately $70 million of pension
obligations related to this plan were settled from existing plan assets
and a non-cash pre-tax settlement charge of $41.4 million was recorded
in ‘‘Other expense, net’’ in the Consolidated Statements of Income. This
settlement required us to remeasure the remaining net pension
obligations of the ADPP. As a result, we recognized approximately
$72 million of additional net pension obligations with a corresponding
increase
‘‘Accumulated other
comprehensive loss,’’ primarily due to lower discount rates in effect
when the plan was remeasured.
in actuarial
recorded
losses
in
Employees who participated in the ADPP between December 1,
1986 and November 30, 1997 may also have had a benefit in 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 his or her 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 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, rather than wait to make such election
upon termination of employment. These amendments resulted in an
actuarial loss of approximately $20 million to the ADPP in 2013. By
October 2014, all participants with a SHARE Account completed their
elections and the existing SHARE Accounts were terminated, which
resulted in the recording of 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 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
target 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.
Assets in 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
Notes to Consolidated Financial Statements
allocation for our international plans combined is 38% in equity
securities, 49% in fixed income securities and cash, and 13% in
insurance contracts and other investments, 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. Mutual funds are valued at fair
value as determined by quoted market prices, based upon the net asset
value (‘‘NAV’’) of shares held at year-end. Pooled funds are structured
as collective trusts, not publicly traded, and valued by calculating NAV
per unit based on the NAV of the underlying funds/trusts as a practical
expedient for the fair value of the pooled funds. 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.
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 (as applicable), U.S. plan assets (all in the ADPP) at fair value:
(In millions)
2016
Cash
Pooled funds – liability hedging portfolio (1)
Pooled funds – growth portfolio (1)
Total U.S. plan assets
2015
Cash
Pooled funds – liability hedging portfolio (1)
Pooled funds – growth portfolio (1)
Other assets (2)
Total U.S. plan assets
Fair Value Measurements Using
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservable
Inputs
(Level 3)
$ –
$
–
$
–
$ –
$
–
$
–
Total
$
–
269.0
403.1
$672.1
$
–
335.9
368.9
.1
$704.9
(1) Pooled funds that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in
this table are intended to reconcile to total U.S. plan assets.
(2) Includes accrued recoverable taxes.
30
Notes to Consolidated Financial Statements
The following table sets forth, by level within the fair value hierarchy (as applicable), international plan assets at fair value:
(In millions)
2016
Cash
Insurance contracts
Pooled funds – fixed income securities (1)
Pooled funds – equity securities (1)
Pooled funds – other investments (1)
Total international plan assets at fair value
2015
Cash
Insurance contracts
Pooled funds – fixed income securities (1)
Pooled funds – equity securities (1)
Pooled funds – other investments (1)
Total international plan assets at fair value
Fair Value Measurements Using
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservable
Inputs
(Level 3)
$3.0
–
$ –
–
$
–
30.5
$ .8
–
$ –
–
$
–
21.4
Total
$
3.0
30.5
284.2
223.4
43.1
$584.2
$
.8
21.4
275.7
218.1
36.1
$552.1
(1) Pooled funds that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in
this table are intended to reconcile to total international plan assets.
The following table presents a reconciliation of Level 3 international plan asset activity during the year ended December 31, 2016:
(In millions)
Balance at January 2, 2016
Acquisition (1)
Net realized and unrealized gain
Purchases
Settlements
Impact of changes in foreign currency exchange rates
Balance at December 31, 2016
Level 3 Assets
Insurance Contracts
$21.4
8.9
.5
2.6
(1.5)
(1.4)
$30.5
(1) In connection with the Mactac acquisition completed in August 2016, we assumed plan assets associated with two defined benefit plans in Belgium.
Postretirement Health Benefits
We provide postretirement health benefits to certain retired U.S.
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 used to value our postretirement
obligations. The assumed discount rate for each pension plan reflects
market rates for high quality corporate bonds currently available. 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 bond portfolios
to determine a rate that reflects the liability duration unique to our plans.
In 2016, we began using a full yield curve approach to estimate the
service and interest cost components of net periodic benefit cost for our
pension and other postretirement benefit plans. Under this approach,
we applied multiple discount rates from a yield curve composed of the
rates of return on several hundred high-quality, fixed income corporate
bonds available at the measurement date. We believe this approach
provides a more precise measurement of service and interest cost by
aligning the timing of the plans’ liability cash flows to the corresponding
rates on the yield curve. Historically, we estimated the service and
interest cost components using a single weighted-average discount
rate derived from the yield curve used to measure the benefit obligation
at the beginning of the period.
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 returns in our asset classes, and the
mix of active and passive investments. Additionally, current market
31
Avery Dennison Corporation
2016 Annual Report
conditions, including interest rates, are evaluated and market data is
reviewed for reasonableness and appropriateness.
A one-percentage-point change in assumed health care cost trend
rates would have the following effects:
Notes to Consolidated Financial Statements
Healthcare Cost Trend Rate
Our practice is to fund the cost of postretirement benefits from
operating cash flows. For measurement purposes, a 7% annual rate of
increase in the per capita cost of covered health care benefits was
assumed for 2017. This rate is expected to decrease to 5% by 2024.
One-percentage-point
Increase
One-percentage-point
Decrease
$.01
.3
$(.01)
(.3)
(In millions)
Effect on total of service
and interest cost
components
Effect on postretirement
benefit obligations
Measurement Date
We measure the actuarial value of our benefit obligations and plan
assets using the calendar month-end closest to our fiscal year-end and
adjust for any contributions or other significant events between the
measurement date and our fiscal year-end.
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
Actuarial loss (gain)
Plan transfers
Acquisition (1)
Benefits paid
Curtailments
Settlements (2)
Foreign currency translation
Pension Benefits
U.S. Postretirement
Health Benefits
2016
2015
2016
2015
U.S.
Int’l
U.S.
Int’l
$1,088.9
.4
34.4
–
–
39.1
–
–
(59.9)
–
(69.2)
–
$674.7
13.9
16.4
2.9
(.6)
123.8
–
14.6
(21.8)
(.3)
–
(60.7)
$1,161.1
.4
45.8
–
–
(58.3)
–
–
(60.1)
–
–
–
$737.1
13.8
17.3
3.1
(.7)
(1.4)
2.5
–
(19.0)
(2.7)
(13.3)
(62.0)
$ 5.9
–
.2
.5
–
(.2)
–
–
(1.4)
–
–
–
Projected benefit obligations at end of year
$1,033.7
$762.9
$1,088.9
$674.7
$ 5.0
Accumulated benefit obligations at end of year
$1,033.7
$704.8
$1,088.9
$625.4
(1) In connection with the Mactac acquisition completed in August 2016, we assumed benefit obligations associated with two defined benefit plans in Belgium.
(2) In 2016, settlements were related to the lump-sum pension payments associated with the ADPP.
$ 8.0
–
.2
.8
–
(1.4)
–
–
(1.7)
–
–
–
$ 5.9
32
Notes to Consolidated Financial Statements
Plan Assets
(In millions)
Change in plan assets
Plan assets at beginning of year
Actual return on plan assets
Plan transfers
Acquisition (1)
Employer contributions
Participant contributions
Benefits paid
Settlements (2)
Foreign currency translation
Plan assets at end of year
Pension Benefits
U.S. Postretirement
Health Benefits
2016
2015
2016
2015
U.S.
Int’l
U.S.
Int’l
$704.9
42.9
–
–
53.4
–
(59.9)
(69.2)
–
$552.1
79.4
–
8.9
13.8
2.9
(21.8)
–
(51.1)
$778.9
(28.3)
–
–
14.4
–
(60.1)
–
–
$618.1
(7.4)
(.3)
–
14.3
3.1
(19.0)
(4.6)
(52.1)
$
–
–
–
–
.9
.5
(1.4)
–
–
$
–
–
–
–
.9
.8
(1.7)
–
–
$672.1
$584.2
$704.9
$552.1
$
–
$
–
(1) In connection with the Mactac acquisition completed in August 2016, we assumed plan assets associated with two defined benefit plans in Belgium.
(2) In 2016, settlements were related to the lump-sum pension payments associated with the ADPP.
Funded Status
(In millions)
Funded status of the plans
Other accrued liabilities
Long-term retirement benefits and other liabilities (1)
Plan assets less than benefit obligations
Pension Benefits
U.S. Postretirement
Health Benefits
2016
2015
2016
2015
U.S.
Int’l
U.S.
Int’l
$ (13.5)
(348.1)
$
(2.0)
(176.7)
$ (13.4)
(370.6)
$
(2.2)
(120.4)
$ (.8)
(4.2)
$(361.6)
$(178.7)
$(384.0)
$(122.6)
$(5.0)
$(1.2)
(4.7)
$(5.9)
(1) In accordance with our funding strategy, we have the option to fund certain of these liabilities with proceeds from our corporate-owned life insurance policies.
Pension Benefits
U.S. Postretirement
Health Benefits
2016
2015
2014
2016
2015
2014
U.S.
Int’l
U.S.
Int’l
U.S.
Int’l
Weighted-average assumptions used to determine year-end benefit
obligations
Discount rate
Compensation rate increase
4.25% 2.12% 4.55% 2.95% 4.00% 2.54% 3.95% 4.13% 3.50%
–
2.21
2.27
2.22
–
–
–
–
–
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 $1.80 billion and $1.26 billion, respectively, at year-end 2016 and $1.77 billion and $1.26 billion, respectively,
at year-end 2015.
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 $1.74 billion and $1.26 billion, respectively, at year-end 2016 and $1.38 billion and $910.9 million,
respectively, at year-end 2015.
33
Avery Dennison Corporation
2016 Annual Report
Accumulated Other Comprehensive Loss
The following table sets forth the pre-tax amounts recognized in ‘‘Accumulated other comprehensive loss’’ in the Consolidated Balance Sheets:
Notes to Consolidated Financial Statements
Pension Benefits
U.S. Postretirement
Health Benefits
2016
2015
2016
2015
U.S.
Int’l
U.S.
Int’l
$564.2
17.5
–
$213.6
(4.9)
.2
$585.5
18.7
–
$171.9
(4.9)
.3
$ 18.5
(16.4)
–
$ 20.4
(19.6)
–
$
.8
(In millions)
Net actuarial loss
Prior service cost (credit)
Net transition obligation
Net amount recognized in accumulated other comprehensive loss
$581.7
$208.9
$604.2
$167.3
$ 2.1
The following table sets forth the pre-tax 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 obligation
Curtailments
Settlements
Pension Benefits
U.S. Postretirement
Health Benefits
2016
2015
2014
2016
2015
2014
U.S.
Int’l
U.S.
Int’l
U.S.
Int’l
$ 39.1
–
$48.9
(.6)
$ 21.1
–
$11.3
(.7)
$135.6
–
$51.3
(7.3)
$ (.2)
–
$(1.4)
–
$ .3
–
(19.0)
(1.2)
–
–
(41.4)
(7.0)
.4
(.1)
–
–
(20.0)
(1.2)
–
–
–
(9.4)
.3
–
.2
(4.3)
(16.2)
(1.2)
–
–
(.6)
(5.2)
(.4)
–
(.6)
(.4)
(1.7)
3.2
–
–
–
(2.2)
3.3
–
–
–
(2.8)
3.3
–
–
–
Net amount recognized in other comprehensive (income) loss
$(22.5)
$41.6
$
(.1)
$ (2.6)
$117.6
$37.4
$ 1.3
$ (.3)
$ .8
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:
(In millions)
Service cost
Interest cost
Actuarial (gain) loss
Expected return on plan assets
Amortization of actuarial loss
Amortization of prior service cost (credit)
Amortization of transition obligation
Recognized (gain) loss on curtailments
Recognized loss on settlements (1)
Pension Benefits
U.S. Postretirement
Health Benefits
2016
2015
2014
2016
2015
2014
U.S.
Int’l
U.S.
Int’l
U.S.
Int’l
$
.4
34.4
(.2)
(42.7)
19.0
1.2
–
–
41.4
$ 13.9
16.4
–
(21.4)
7.0
(.4)
.1
(.2)
–
$
.4
45.8
.4
(51.5)
20.0
1.2
–
–
–
$ 13.8
17.3
–
(21.5)
9.4
(.3)
–
(.2)
4.3
$
.4
47.9
4.0
(51.9)
16.2
1.2
–
–
.6
$ 12.9
23.8
–
(26.0)
5.2
.4
–
.6
.4
$
–
.1
–
–
1.7
(3.2)
–
–
–
$
–
.3
–
–
2.2
(3.3)
–
–
–
$
–
.3
–
–
2.8
(3.3)
–
–
–
Net periodic benefit cost (credit)
$ 53.5
$ 15.4
$ 16.3
$ 22.8
$ 18.4
$ 17.3
$(1.4) $ (.8) $ (.2)
(1) In 2016, we recognized a loss on settlements related to the ADPP as a result of making the lump-sum pension payments described above. In 2015, we recognized a loss on settlements related to
pension plans in Germany and France as a result of the sale of a product line in our RBIS reportable segment. We also recognized a loss on settlements for events in Switzerland in 2015 and 2014.
These losses on settlements were recorded in ‘‘Other expense, net’’ in Consolidated Statements of Income.
The following table sets forth the weighted-average assumptions used to determine net periodic cost:
Pension Benefits
U.S. Postretirement
Health Benefits
2016
2015
2014
2016
2015
2014
U.S.
Int’l
U.S.
Int’l
U.S.
Int’l
Discount rate
Expected return on assets
Compensation rate increase
4.55% 2.95% 4.00% 2.54% 4.85% 3.88% 4.13% 3.50% 3.45%
7.75
7.25
–
–
4.82
2.24
4.27
2.22
4.14
2.24
7.50
–
–
–
–
–
–
–
34
Notes to Consolidated Financial Statements
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. The following table sets forth our expected contributions in
2017:
(In millions)
U.S.
Int’l
U.S. postretirement health benefits
$13.8
13.0
.8
Future Benefit Payments
Anticipated future benefit payments, which reflect expected service
periods for eligible participants, were as follows:
(In millions)
2017
2018
2019
2020
2021
2022 - 2026
Pension Benefits
U.S.
Int’l
$ 61.6
83.2
58.9
59.1
60.7
305.1
$ 16.0
16.7
20.1
19.2
19.5
120.0
U.S. Postretirement
Health Benefits
$ .8
.5
.5
.4
.4
1.5
Estimated Amortization Amounts in Accumulated Other
Comprehensive Loss
Our estimates of fiscal year 2017 amortization of amounts included
in ‘‘Accumulated other comprehensive loss’’ were as follows:
Pension
Benefits
U.S. Postretirement
Health Benefits
(In millions)
Net actuarial loss
Prior service cost (credit)
Net transition obligation
U.S.
Int’l
$18.4
.9
–
$10.1
(.4)
.1
Net loss (gain) to be recognized
$19.3
$ 9.8
$ 1.6
(3.3)
–
$(1.7)
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 $20 million,
$20.2 million, and $19.4 million in 2016, 2015, and 2014, respectively,
related to our employer contributions and employer match of participant
contributions to the Savings Plan.
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, earns specified and variable rates of
return. As of year-end 2016 and 2015, we had accrued $78.7 million and
$77.9 million, respectively, for our obligations under these plans. A
portion of the interest on certain of our contributions may be forfeited by
35
Avery Dennison Corporation
2016 Annual Report
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 2016
and 2015, with an aggregate value of $10.2 million and $8 million,
respectively.
We hold corporate-owned life insurance policies, the proceeds
from which 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 $230.6 million and $227.1 million at year-end 2016 and
2015, 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
2017
2018
2019
2020
2021
2022 and thereafter
Total minimum lease payments
(In millions)
$ 40.0
29.6
20.0
13.9
8.8
25.5
$137.8
Rent expense for operating leases from continuing operations was
approximately $58 million in both 2016 and 2015 and $67 million in
2014. Operating leases primarily relate to office and warehouse space
and equipment
technology, machinery, and
transportation. The terms of these leases do not impose significant
restrictions or unusual obligations.
information
for
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. 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.
Because of the uncertainties associated with claims resolution and
litigation, future expenses to resolve these matters could be higher than
the liabilities we have accrued; however, we are unable to reasonably
estimate a range of potential expenses. If information were to become
available that allowed us to reasonably estimate a range of potential
expenses in an amount higher or lower than what we have accrued, we
would adjust our accrued liabilities accordingly. Additional lawsuits,
claims, inquiries, and other regulatory and compliance matters could
arise in the future. The range of expenses for resolving any future
matters would be assessed as they arise; until then, a range of potential
expenses for such resolution cannot be determined. Based upon
current information, we believe that the impact of the resolution of these
matters would not be, individually or in the aggregate, material to our
financial position, results of operations or cash flows.
Environmental Expenditures
Environmental expenditures are generally expensed. 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 (‘‘PRP’’). 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.
As of December 31, 2016, we have been designated by the U.S.
Environmental Protection Agency (‘‘EPA’’) and/or other responsible
state agencies as a PRP at thirteen waste disposal or waste recycling
sites that are the subject of separate investigations or proceedings
concerning alleged soil and/or groundwater contamination. No
NOTE 9. FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
Notes to Consolidated Financial Statements
settlement of our liability related to any of the sites has been agreed
upon. We are participating with other PRPs at these sites and anticipate
that our share of remediation costs will be determined pursuant to
agreements that we negotiate with the EPA or other governmental
authorities.
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 a range of potential expenses in an
amount higher or lower than what we have accrued, we would adjust
our environmental liabilities accordingly. In addition, we may be
identified as a PRP at additional sites in the future. The range of
expenses for remediation of any future-identified sites would be
addressed as they arise; until then, a range of expenses for such
remediation cannot be determined.
The activity in 2016 and 2015 related to our environmental liabilities
was as follows:
(In millions)
Balance at beginning of year
Charges (reversals), net
Payments
Balance at end of year
2016
2015
$17.7
11.6
(8.0)
$26.2
1.2
(9.7)
$21.3
$17.7
As of December 31, 2016 and January 2, 2016, approximately
$8 million and $7 million, respectively, of the balance was classified as
the
in
short-term and
Consolidated Balance Sheets.
‘‘Other accrued
liabilities’’
included
in
The following table provides the assets and liabilities carried at fair value, measured on a recurring basis, as of December 31, 2016:
(In millions)
Assets
Trading securities
Derivative assets
Bank drafts
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
$18.1
5.2
14.3
$11.7
.6
14.3
$ 7.8
$
–
$6.4
4.6
–
$7.8
$ –
–
–
$ –
36
Notes to Consolidated Financial Statements
The following table provides the assets and liabilities carried at fair value, measured on a recurring basis, as of January 2, 2016:
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
5.6
24.8
$11.3
–
24.8
$ 5.2
$
.7
$6.6
5.6
–
$4.5
$ –
–
–
$ –
NOTE 10. NET INCOME PER COMMON SHARE
Net income per common share was computed as follows:
(In millions, except per share amounts)
2016
2015
2014
(A) Income from continuing operations
(B) Loss from discontinued operations,
$320.7
$274.4
$247.3
net of tax
–
(.1)
(2.2)
(C) Net income available to common
shareholders
$320.7
$274.3
$245.1
(D) Weighted average number of
common shares outstanding
89.1
91.0
93.8
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)
1.6
1.9
1.9
90.7
92.9
95.7
$ 3.60
–
$ 3.01
–
$ 2.64
(.03)
$ 3.60
$ 3.01
$ 2.61
$ 3.54
–
$ 2.95
–
$ 2.58
(.02)
$ 3.54
$ 2.95
$ 2.56
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 .2 million shares in 2016, 1 million shares in 2015, and
3 million shares in 2014.
the computation
from
(In millions)
Assets
Trading securities
Derivative assets
Bank drafts
Liabilities
Derivative liabilities
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 NAV. As of December 31, 2016, trading securities of $.5 million
and $17.6 million were included in ‘‘Cash and cash equivalents’’ and
‘‘Other current assets,’’ respectively, in the Consolidated Balance
Sheets. As of January 2, 2016, trading securities of $.3 million and
$17.6 million were included in ‘‘Cash and cash equivalents’’ and ‘‘Other
current assets,’’ respectively, in the Consolidated Balance Sheets.
Derivatives that are exchange-traded are measured at fair value using
quoted market prices and classified within Level 1 of the valuation
hierarchy. Derivatives measured based on foreign exchange rate inputs
that are readily available in public markets are classified within Level 2 of
the valuation hierarchy. Bank drafts (maturities greater than three
months) are valued at face value due to their short-term nature and were
included in ‘‘Other current assets’’ in the Consolidated Balance Sheets.
We utilized an income approach to estimate the fair values of the
identifiable intangibles acquired from Mactac, using primarily Level 3
inputs. The discount rates we used to value these assets were between
10.5% and 12.5%.
37
Avery Dennison Corporation
2016 Annual Report
NOTE 11. SUPPLEMENTAL EQUITY AND COMPREHENSIVE
INCOME INFORMATION
Common Stock and Share Repurchase Program
Our Certificate of Incorporation authorizes five million shares of $1
par value preferred stock (of which none are outstanding), with respect
to which our Board of Directors (‘‘Board’’) 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 authorizes the repurchase of shares of
our outstanding common stock. Repurchased shares may be reissued
under our stock option and incentive plan or used for other corporate
purposes. In 2016, we repurchased approximately 3.8 million shares of
our common stock at an aggregate cost of $262.4 million.
On December 4, 2014, our Board 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 is
the only one currently in effect and it will remain in effect until shares in
the amount authorized have been repurchased. As of December 31,
2016, shares of our common stock in the aggregate amount of
approximately $105 million remained authorized for repurchase under
this Board authorization.
Treasury Shares Reissuance
We fund a portion of our employee-related expenses using shares
of our common stock held in treasury. We record net gains or losses
associated with our use of treasury shares to retained earnings.
Notes to Consolidated Financial Statements
The amounts reclassified from ‘‘Accumulated other comprehensive
loss’’ to increase (decrease) income from continuing operations were
as follows:
(In millions)
2016
2015
2014 Income is Presented
Affected Line Item in the
Statements Where Net
Cash flow hedges:
Foreign exchange
contracts
Commodity
contracts
Interest rate
contracts
Pension and other
postretirement
benefits (1)
$ (3.0) $ 3.9
$ (1.2) Cost of products sold
(.7)
(1.3)
.1 Cost of products sold
(.1)
(3.8)
1.0
(2.8)
(.1)
2.5
(.5)
2.0
(.1) Interest expense
(1.2) Total before tax
.3 Provision for income taxes
(.9) Net of tax
(66.8)
22.6
(33.3)
10.4
(24.1)
7.2 Provision for income taxes
(44.2)
(22.9)
(16.9) Net of tax
Total reclassifications
for the period
$(47.0) $(20.9) $(17.8) Total, net of tax
(1) See Note 6, ‘‘Pension and Other Postretirement Benefits,’’ for more information.
The following table sets forth the income tax (benefit) expense
allocated to each component of other comprehensive loss:
Other Comprehensive Income
(In millions)
2016
2015
2014
The changes in ‘‘Accumulated other comprehensive loss’’ (net of
tax) for 2016 and 2015 were as follows:
Pension and other postretirement benefits:
Net loss recognized from actuarial gain/
loss and prior service cost/credit
Reclassifications to net income
$(24.2) $(11.4) $(54.7)
7.2
10.4
22.6
Foreign
Pension and
Other
Currency Postretirement Cash Flow
Hedges
Benefits
Translation
Cash flow hedges:
Total
Gains (losses) recognized on cash flow
hedges
$ (19.9)
$(525.6)
$
–
$(545.5)
Reclassifications to net income
(139.0)
(18.9)
(.5)
(158.4)
comprehensive loss
$
(.5) $ (1.8) $(47.1)
Income tax benefit related to items of other
–
22.9
(2.0)
20.9
(139.0)
4.0
(2.5)
(137.5)
.1
1.0
(.3)
(.5)
.1
.3
(In millions)
Balance as of January 3,
2015
Other comprehensive loss
before reclassifications,
net of tax
Reclassifications to net
income, net of tax
Net current-period other
comprehensive (loss)
income, net of tax
Balance as of January 2,
2016
$(158.9)
$(521.6)
$(2.5) $(683.0)
Other comprehensive
(loss) income before
reclassifications, net of
tax
Reclassifications to net
income, net of tax
Net current-period other
comprehensive (loss)
income, net of tax
Balance as of
(53.7)
(62.9)
.7
(115.9)
–
44.2
2.8
47.0
(53.7)
(18.7)
3.5
(68.9)
December 31, 2016
$(212.6)
$(540.3)
$ 1.0
$(751.9)
38
Notes to Consolidated Financial Statements
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. 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
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 the implied
and the total related recognized tax benefit were as follows:
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.
The weighted-average grant date fair value per share for stock
options granted in 2016 was $14.17. No stock options were granted in
fiscal years 2015 and 2014.
The underlying weighted-average assumptions used were as
follows:
Risk-free interest rate
Expected stock price volatility
Expected dividend yield
Expected option term
2016
1.75%
24.58%
2.58%
6.5 years
Number
of options Weighted-average
exercise price
(in thousands)
2,369.9
141.1
(1,384.1)
(11.7)
1,115.2
1,091.3
974.1
$45.30
73.96
51.35
58.16
$41.29
40.57
$36.55
Weighted-average
remaining
contractual life
(in years)
Aggregate
intrinsic value
(in millions)
3.68
$43.8
4.72
4.62
4.04
$32.8
32.8
$32.8
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
$68.04, $51.37, and $47.85 in 2016, 2015, and 2014, respectively.
(In millions)
Stock-based compensation expense
Tax benefit
2016
2015
2014
$27.2
8.5
$26.3
8.2
$28.3
10.5
This expense was
included
in
‘‘Marketing, general and
administrative expense’’ in the Consolidated Statements of Income.
As of December 31, 2016, we had approximately $37 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 following table sets forth stock option information during 2016:
Outstanding at January 2, 2016
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2016
Options vested and expected to vest at December 31, 2016
Options exercisable at December 31, 2016
The total intrinsic value of stock options exercised was $31.7 million
in 2016, $43.3 million in 2015, and $15.4 million in 2014. We received
approximately $71 million in 2016, $104 million in 2015, and
$34.2 million in 2014 from the exercise of stock options. The tax benefit
associated with these exercised options was $11.3 million in 2016,
$15.6 million in 2015, and $5.3 million in 2014. The intrinsic value of a
stock option is based on the amount by which the market value of the
underlying stock exceeds the exercise price of the option.
Performance Units (‘‘PUs’’)
PUs are performance-based awards granted to eligible employees
under our stock option and incentive plan. PUs are payable in shares of
39
Avery Dennison Corporation
2016 Annual Report
The following table summarizes information related to awarded
Restricted Stock Units (‘‘RSUs’’)
Notes to Consolidated Financial Statements
PUs:
Number of
Weighted-
average
PUs grant-date
fair value
(in thousands)
Unvested at January 2, 2016
Granted at target
Adjustment for above-target performance (1)
Vested
Forfeited/cancelled
Unvested at December 31, 2016
447.1
244.7
155.6
(315.6)
(41.0)
$47.63
68.04
43.91
43.82
54.84
490.8
$58.47
(1) Reflects awards granted in excess of target as a result of our achieving above-target
performance for the 2013-2015 performance period.
RSUs are service-based awards granted to eligible employees
under our stock option and incentive plan, which generally 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 that condition is not met,
unvested RSUs are generally forfeited. The weighted-average grant
date fair value for RSUs was $67.66, $53.29, and $45.91 in 2016, 2015,
and 2014, respectively.
The following table summarizes information related to awarded
RSUs:
Number of
RSUs
(in thousands)
214.6
52.8
(147.3)
(2.4)
Weighted-
average
grant-date
fair value
$40.96
67.66
36.14
38.74
The fair value of vested PUs was $13.8 million in 2016 and
$12.2 million in 2015. In 2014, the PUs granted in 2011 were cancelled
as the performance objective was not met as of the end of the three-year
performance period.
Unvested at January 2, 2016
Granted
Vested
Forfeited/cancelled
Market-Leveraged Stock Units (‘‘MSUs’’)
MSUs are performance-based awards granted
to eligible
employees under our stock option and incentive plan. MSUs are
payable in shares of our common stock 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 provided that, at a minimum,
threshold performance is achieved. The number of 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 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 stock price 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 $72.93, $56.46, and $52.76 in 2016, 2015, and
2014, respectively.
The following table summarizes information related to awarded
MSUs:
Number of
Weighted-
average
MSUs grant-date
fair value
(in thousands)
Unvested at January 2, 2016
Granted at target
Adjustments for above-target performance (1)
Vested
Forfeited/cancelled
Unvested at December 31, 2016
606.1
182.9
67.4
(264.3)
(61.4)
$55.04
72.93
51.58
46.88
57.80
530.7
$62.09
(1) Reflects adjustments as a result of achieving above-target performance for each of the
performance periods paid out in 2016.
The fair value of vested MSUs was $12.4 million in 2016,
$9.8 million in 2015, and $5.6 million in 2014.
Unvested at December 31, 2016
117.7
$58.87
The fair value of vested RSUs was $5.3 million, $8.4 million, and
$9.5 million in 2016, 2015, and 2014, respectively.
Cash Awards
Long-Term Incentive Units (‘‘LTI Units’’)
LTI Units are granted to eligible employees under our long-term
incentive unit plan. 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 periods. 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 $23.8 million in 2016, $27.1 million in 2015, and
$17.8 million in 2014. This expense was included in ‘‘Marketing, general
40
Notes to Consolidated Financial Statements
and administrative expense’’ in the Consolidated Statements of Income.
The total recognized tax benefit related to LTI Units was $7.8 million in
2016, $8.6 million in 2015, and $5.7 million in 2014.
charges consisted of severance and related costs for the reduction of
approximately 430 positions, lease cancellation costs, and asset
impairment charges.
No employees impacted by our 2015/2016 Actions taken through
NOTE 13. COST REDUCTION ACTIONS
December 31, 2016 remained employed by us as of such date.
Restructuring Charges
2014/2015 Actions
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 benefit formulas
under the respective 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 in
restructuring charges are
overseas
recognized when incurred.
jurisdictions,
liabilities
for
2015/2016 Actions
During fiscal year 2016, we recorded $20.9 million in restructuring
charges, net of reversals, related to restructuring actions initiated during
the third quarter of 2015 (‘‘2015/2016 Actions’’) that we expect to
continue through 2017. These charges consisted of severance and
related costs for the reduction of approximately 440 positions, lease
cancellation costs, and asset impairment charges.
During fiscal year 2015, we recorded $26.1 million in restructuring
charges, net of reversals, related to our 2015/2016 Actions. These
During 2016, restructuring charges and payments were as follows:
During fiscal year 2015, we recorded $33.4 million in restructuring
charges, net of reversals, related to restructuring actions we initiated in
2014 that continued through the second quarter of 2015 (‘‘2014/2015
Actions’’). These charges consisted of severance and related costs for
the reduction of approximately 605 positions, lease cancellation costs,
and asset impairment charges.
During fiscal year 2014, we recorded $66.5 million in restructuring
charges, net of reversals, related to our 2014/2015 Actions. These
charges consisted of severance and related costs for the reduction of
approximately 1,420 positions, lease cancellation costs, and asset
impairment charges.
No employees impacted by our 2014/2015 Actions remained
employed by us as of December 31, 2016.
Accruals for severance and related costs and lease cancellation
costs were included in ‘‘Other accrued liabilities’’ in the Consolidated
Balance Sheets. Asset impairment charges were based on the
estimated market value of the assets, less selling costs, if applicable.
Restructuring charges in continuing operations were included in ‘‘Other
expense, net’’ in the Consolidated Statements of Income.
(In millions)
2015/2016 Actions
Severance and related costs
Asset impairment charges
Lease cancellation costs
2014/2015 Actions
Severance and related costs
Prior actions
Severance and related costs
Total
Accrual at
January 2,
2016
Charges
(Reversals),
net
Cash
Payments
Non-cash
Impairment
Foreign
Currency
Translation
Accrual at
December 31,
2016
$ 8.4
–
.2
4.8
.7
$15.7
4.1
1.1
(.9)
(.1)
$(20.9)
–
(1.1)
(3.2)
–
$
–
(4.1)
–
–
–
$ .1
–
–
–
–
$ 3.3
–
.2
.7
.6
$14.1
$19.9
$(25.2)
$(4.1)
$ .1
$ 4.8
During 2015, restructuring charges and payments were as follows:
(In millions)
2015/2016 Actions
Severance and related costs
Asset impairment charges
Lease cancellation costs
2014/2015 Actions
Severance and related costs
Asset impairment charges
Lease cancellation costs
Prior actions
Severance and related costs
Total
Accrual at
January 3,
2015
Charges
(Reversals),
net
Cash
Payments
Non-cash
Impairment
Foreign
Currency
Translation
Accrual at
January 2,
2016
$
–
–
–
16.8
–
.1
.8
$17.7
$22.7
2.9
.5
29.8
3.3
.3
–
$(14.3)
–
(.3)
(40.9)
–
(.4)
–
$
–
(2.9)
–
–
(3.3)
–
–
$
–
–
–
(.9)
–
–
(.1)
$ 8.4
–
.2
4.8
–
–
.7
$59.5
$(55.9)
$ (6.2)
$(1.0)
$14.1
41
Avery Dennison Corporation
2016 Annual Report
Notes to Consolidated Financial Statements
The table below shows the total amount of restructuring charges
Income (loss) from continuing operations before taxes from our
incurred by reportable segment and Corporate:
U.S. and international operations was as follows:
(In millions)
2016
2015
2014
Restructuring charges by reportable
segment and Corporate
Label and Graphic Materials
Retail Branding and Information Solutions
Industrial and Healthcare Materials
Corporate
$ 8.5
10.5
.9
–
$13.6
35.7
8.0
2.2
$40.1
21.3
4.3
.4
(In millions)
U.S.
International
2016
2015
2014
$ 17.9
459.2
$ 33.9
375.0
$
(.1)
360.9
Income from continuing operations
before taxes
$477.1
$408.9
$360.8
The effective tax rate for continuing operations was 32.8%, 32.9%,
Total
$19.9
$59.5
$66.1
and 31.5% for fiscal years 2016, 2015, and 2014, respectively.
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
2016
2015
2014
$ 10.1
.6
77.3
$ 26.4
(.1)
92.7
$ 14.5
(.2)
116.0
88.0
119.0
130.3
64.4
(3.0)
7.0
68.4
6.3
.5
8.7
(16.1)
1.9
(2.6)
15.5
(16.8)
Provision for income taxes
$156.4
$134.5
$113.5
The principal items accounting for the difference between taxes
computed at the U.S. statutory rate and taxes recorded were as follows:
(In millions)
2016
2015
2014
Computed tax at 35% of income before
taxes
$167.0
$143.1
$126.2
Increase (decrease) in taxes resulting
from:
State taxes, net of federal tax benefit
Foreign earnings taxed at different
rates (1)
Valuation allowance
Corporate-owned life insurance
U.S. federal research and development
tax credits
Tax contingencies and audit
settlements
Other items, net
2.2
1.3
1.4
27.0
(11.9)
(4.3)
(7.5)
.9
(1.9)
(14.9)
9.9
(4.2)
(2.9)
(2.6)
(1.6)
(20.7)
–
5.1
(3.9)
(1.5)
(1.8)
Provision for income taxes
$156.4
$134.5
$113.5
(1) Included foreign earnings taxed in the U.S., net of credits, in all years.
The 2016 effective tax rate for continuing operations included a tax
expense of $7.6 million associated with the cost to repatriate
foreign
non-permanently reinvested current earnings of certain
subsidiaries and a tax expense of $46.3 million related to the U.S.
income and foreign withholding taxes resulting from changes in
indefinite reinvestment assertions on certain foreign earnings; benefits
from changes in certain tax reserves, including interest and penalties, of
$16.8 million resulting from settlements of certain foreign audits and
$5.4 million resulting from expirations of statutes of limitations; benefits
of $6.7 million from the release of valuation allowances against certain
deferred tax assets in a foreign jurisdiction associated with a structural
simplification approved by the tax authority and $3.6 million from the
release of valuation allowances on certain state deferred tax assets; and
a tax expense of $8.4 million from deferred tax adjustments resulting
from enacted tax rate changes in certain foreign jurisdictions.
We assess the available positive and negative evidence to estimate
if sufficient future taxable income will be generated to use existing
deferred tax assets. On the basis of this evaluation, we record valuation
allowances only with respect to the portion of the deferred tax asset that
is more likely than not to be realized. However, the amount of the
deferred tax asset considered realizable could be adjusted if estimates
of future taxable income during the carryforward period changes or if
objective negative evidence in the form of cumulative losses is no longer
present. For example,
improves at a
higher-than-expected rate, it is possible that the remaining valuation
allowances on state deferred tax assets could be subject to further
releases.
if our U.S. profitability
In connection with our initiatives to simplify our corporate legal
entity and intercompany financing structures, we evaluated the facts
and circumstances surrounding the indefinite reinvestment assertions
on certain foreign earnings that would be affected as a result of our
actions to improve structural and operational efficiency. Our evaluation
considered working capital,
liquidity, capitalization
improvement, acquisition plans, and alignment of the existing structure
with long-term strategic plans. As a result of this evaluation, we
determined that the excess of the amount for financial reporting over the
tax basis of investments in certain foreign subsidiaries is subject to
reversal in the foreseeable future. As a result, we recorded a tax
provision for the effects of changes in indefinite reinvestment assertions
in 2016.
long-term
reinvested 2015 earnings of certain
The 2015 effective tax rate for continuing operations included tax
expense of $20 million associated with the tax cost to repatriate
non-permanently
foreign
subsidiaries; benefits from changes in certain tax reserves, including
interest and penalties, of $5.8 million resulting from settlements of audits
and $8.2 million resulting from expirations of statutes of limitations; and
a tax benefit of $2.6 million from the extension of the federal research
and development credit.
42
Notes to Consolidated Financial Statements
The 2014 effective tax rate for continuing operations included 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 expirations of statutes of limitations; a
repatriation tax benefit of $9.8 million related to certain foreign losses; a
tax expense of $9.1 million from the taxable inclusion of a net foreign
currency gain related to the revaluation of certain intercompany loans; a
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 a
state tax expense of $2.5 million primarily related to gains arising as a
result of certain foreign reorganizations.
On December 18, 2015, the Protecting Americans from Tax Hikes
Act of 2015 (‘‘PATH Act’’) was enacted, which included a provision
making permanent the federal research and development tax credit for
the tax years 2015 and beyond. The PATH Act also retroactively
extended the controlled foreign corporation (‘‘CFC’’) look-through rule
that had expired on December 31, 2014. For periods during which the
look-through rule was effective, U.S. federal income tax on certain
dividends, interest, rents, and royalties received or accrued by a CFC of
a U.S. multinational enterprise from a related CFC are deferred. 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. The
extension of the CFC look-through rule is currently scheduled to expire
on December 31, 2019.
Due to recent changes in the U.S. government, U.S. tax reform may
be enacted in the near future. Significant changes that could occur
include a reduction of the corporate income tax rate, a one-time deemed
foreign earnings, border adjustability,
repatriation of untaxed
territoriality, and various increases to the tax base. Due to the lack of
clarity regarding if, how, and when any such tax reform will be enacted,
the potential impact of U.S. tax reform is unclear. We continue to closely
monitor these developments.
taxes
income
Deferred
for approximately $1.9 billion of
undistributed earnings of foreign subsidiaries have not been provided
as of December 31, 2016 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, dividends, and stock
repurchases.
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
Stock-based compensation
Pension and other postretirement benefits
Inventory reserves
Other assets
Valuation allowance
Total deferred tax assets (1)
Depreciation and amortization
Repatriation accrual (2)
Foreign operating loss recapture
Other liabilities
Total deferred tax liabilities (1)
Total net deferred tax assets
2016
2015
$ 42.1
195.9
111.3
28.4
207.7
7.1
.9
(60.4)
$ 35.1
253.3
114.4
37.3
204.6
6.9
8.9
(73.0)
533.0
587.5
(86.1)
(62.1)
(79.8)
(2.3)
(101.0)
(9.8)
(108.3)
(2.9)
(230.3)
(222.0)
$ 302.7
$ 365.5
(1) Reflect gross amounts before jurisdictional netting of deferred tax assets and liabilities.
(2) Included in the repatriation accruals as of December 31, 2016 and January 2, 2016 was a net
deferred tax liability of $62.4 million and $12.5 million, respectively, associated with the future
tax cost to repatriate non-permanently reinvested earnings of our foreign subsidiaries, which
is offset by a contra deferred tax liability of $.3 million and $2.7 million, respectively, 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 tax.
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 December 31, 2016 and January 2, 2016 was $60.4 million
and $73 million, respectively.
Net operating loss carryforwards of foreign subsidiaries at
December 31, 2016 and January 2, 2016 were $689.9 million and
$825.8 million, respectively. Tax credit carryforwards of both domestic
and foreign subsidiaries at December 31, 2016 and January 2, 2016
43
Avery Dennison Corporation
2016 Annual Report
totaled $111.3 million and $114.4 million, respectively. If unused, foreign
net operating losses and tax credit carryforwards will expire as follows:
A reconciliation of the beginning and ending amounts of
unrecognized tax benefits is set forth below:
Notes to Consolidated Financial Statements
(In millions)
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
Expires in 2035
Expires in 2036
Indefinite life/no expiration
Total
Net Operating
Losses (1)
Tax Credits
$ 10.0
12.6
4.7
5.4
4.1
9.6
6.7
11.2
4.4
.5
.2
.5
–
–
–
–
–
–
–
–
620.0
$689.9
$
.6
13.1
33.1
15.8
.4
9.6
5.1
.3
7.2
3.7
.2
.1
.1
.1
.1
1.6
2.9
2.5
3.4
3.0
8.4
$111.3
(1) Net operating losses are presented before tax effect and valuation allowance.
Based on current projections, certain indefinite-lived foreign net
operating losses may take up to 50 years to be fully utilized.
At December 31, 2016, we had net operating loss carryforwards in
certain state jurisdictions of $516 million before tax effect. Based on our
current ability to generate state taxable income, it is more likely than not
that the majority of these carryforwards will not be realized before they
expire. Accordingly, a valuation allowance has been recorded on
$513.7 million of the carryforwards.
We do not anticipate the expected expiration of our remaining tax
holidays in Thailand and Vietnam in 2017 to have a material effect on our
effective tax rate, operating results, or financial condition.
Unrecognized Tax Benefits
As of December 31, 2016, our unrecognized tax benefits totaled
$89.5 million, $71.5 million of which, if recognized, would reduce our
annual effective income tax rate. As of January 2, 2016, our
unrecognized tax benefits totaled $107.3 million, $89 million of which, if
recognized, would reduce our annual effective income tax rate.
Where applicable, we record potential accrued interest and
penalties related to unrecognized tax benefits from our global
operations in income tax expense. As a result, we recognized tax benefit
of $3.1 million, tax expense of $1.3 million, and tax benefit of $1.3 million
in the Consolidated Statements of Income in 2016, 2015, and 2014,
respectively. We have accrued $22.3 million and $26.1 million for
interest and penalties, net of tax benefit, in the Consolidated Balance
Sheets at December 31, 2016 and January 2, 2016, respectively.
(In millions)
Balance at beginning of year
Additions for tax positions of the current year
Reductions for tax positions of prior years
Settlements with tax authorities
Expirations of statutes of limitations
Changes due to translation of foreign currencies
Balance at end of year
2016
2015
$107.3
6.9
(15.7)
(2.1)
(4.2)
(2.7)
$122.6
11.1
(4.0)
(4.5)
(8.6)
(9.3)
$ 89.5
$107.3
The amount of income taxes we pay is subject to ongoing audits by
taxing jurisdictions around the world. Our estimate of the potential
outcome of any uncertain tax issue is subject to our assessment of the
relevant risks, facts, and circumstances existing at the time. We believe
that we have adequately provided for reasonably foreseeable outcomes
related to these matters. However, our future results may include
favorable or unfavorable adjustments to our estimated tax liabilities in
the period the assessments are made or resolved, which may impact
our effective tax rate. As of the date the 2016 financial statements are
being issued, we and our U.S. subsidiaries have completed the Internal
Revenue Service’s Compliance Assurance Process Program through
2015. We also expect the current German tax audit for tax years
2006-2010 to be completed in 2017. We are subject to routine tax
examinations in other jurisdictions. With some exceptions, we and our
subsidiaries are no longer subject to income tax 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 $16 million, primarily as a result of audit
settlements and closing tax years.
NOTE 15. SEGMENT INFORMATION
Segment Reporting
We have the following reportable segments:
• Label and Graphic Materials – manufactures and sells
pressure-sensitive labeling technology and materials and films
for graphic and reflective applications;
• 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
• Industrial and Healthcare Materials
– manufactures
performance tapes, fastener solutions, and an array of
pressure-sensitive adhesive products for various medical
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.
We do not disclose total assets by reportable segment since we
neither generate nor review such information internally. As our reporting
structure is not organized or reviewed internally by country, results by
individual country are not provided.
44
Notes to Consolidated Financial Statements
Financial information from continuing operations by reportable
(In millions)
2016
2015
2014
segment is set forth below:
(In millions)
2016
2015
2014
Net sales to unaffiliated customers
Label and Graphic Materials
Retail Branding and Information
$4,187.3 $4,032.1 $4,298.7
Solutions
Industrial and Healthcare Materials
1,445.4
453.8
1,443.4
491.4
1,516.0
515.6
Net sales to unaffiliated customers
$6,086.5 $5,966.9 $6,330.3
Intersegment sales
Label and Graphic Materials
Retail Branding and Information
Solutions
Industrial and Healthcare Materials
$
63.4 $
61.3 $
64.2
2.9
7.2
2.9
14.8
2.5
19.1
Other expense, net by type
Restructuring charges:
Severance and related costs
Asset impairment charges and lease
and other contract cancellation
costs
Other items:
Net loss from curtailment and
settlement of pension obligations
Net gains on sales of assets
Transaction costs
Legal settlements
Loss on sale of product line and
related exit costs
Indefinite-lived intangible asset
Intersegment sales
$
73.5 $
79.0 $
85.8
impairment charge
$
14.7 $
52.5 $
54.7
5.2
7.0
11.4
41.4
(1.1)
5.0
–
–
–
.3
(1.7)
–
(.3)
1.6
(2.5)
–
–
10.5
–
–
3.0
Income from continuing operations
before taxes
Label and Graphic Materials
Retail Branding and Information
Solutions
Industrial and Healthcare Materials
Corporate expense
Interest expense
Income from continuing operations
$ 516.2 $ 453.4 $ 396.9
102.6
54.6
(136.4)
(59.9)
51.6
57.1
(92.7)
(60.5)
68.5
45.2
(86.5)
(63.3)
before taxes
$ 477.1 $ 408.9 $ 360.8
Capital expenditures
Label and Graphic Materials
Retail Branding and Information
Solutions
Industrial and Healthcare Materials
$ 118.8 $
68.3 $ 100.6
50.9
7.2
51.0
19.6
37.3
14.3
Capital expenditures
$ 176.9 $ 138.9 $ 152.2
Depreciation and amortization
expense
Label and Graphic Materials
Retail Branding and Information
Solutions
Industrial and Healthcare Materials
$ 103.1 $ 104.9 $ 108.2
64.3
12.7
70.6
12.8
79.2
14.2
Depreciation and amortization expense $ 180.1 $ 188.3 $ 201.6
Other expense, net
$
65.2 $
68.3 $
68.2
Within our Industrial and Healthcare Materials reportable segment,
net sales to unaffiliated customers for the combined Performance Tapes
and Vancive Medical Technologies product groups were $377.4 million,
$414.6 million, and $440 million in 2016, 2015, and 2014, respectively.
Revenues from continuing operations by geographic area are set
forth below. Revenues are attributed to geographic areas based on the
location from which the product is shipped.
(In millions)
2016
2015
2014
Net sales to unaffiliated customers
U.S.
Europe
Asia
Latin America
Other international
$1,525.6 $1,546.8 $1,529.4
2,074.4
1,753.0
1,914.2
1,924.0
522.9
466.3
289.4
276.8
1,838.8
1,996.1
450.5
275.5
Net sales to unaffiliated customers
$6,086.5 $5,966.9 $6,330.3
Net sales to unaffiliated customers in Asia included sales in China
(including Hong Kong) of $1.14 billion in both 2016 and 2015 and
$1.11 billion in 2014.
Property, plant and equipment, net, in our U.S. and international
operations was as follows:
Other expense, net by reportable
segment
Label and Graphic Materials
Retail Branding and Information
Solutions
Industrial and Healthcare Materials
Corporate
$
13.0 $
12.1 $
41.5
9.8
1.9
40.5
45.7
8.0
2.5
22.0
4.3
.4
(In millions)
2016
2015
2014
Property, plant and equipment, net
U.S.
International
$278.5
636.7
$263.4
584.5
$261.5
613.8
Property, plant and equipment, net
$915.2
$847.9
$875.3
Other expense, net
$
65.2 $
68.3 $
68.2
45
Avery Dennison Corporation
2016 Annual Report
NOTE 16. SUPPLEMENTAL FINANCIAL INFORMATION
Supplemental Cash Flow Information
Notes to Consolidated Financial Statements
Cash paid for interest and income taxes, including amounts paid for
discontinued operations, was as follows:
(In millions)
2016
2015
2014
Interest, net of capitalized amounts
Income taxes, net of refunds
$ 58.9
106.1
$ 60.1
129.9
$ 61.6
108.8
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 $1.6 million, $6.1 million, and
$8.7 million in 2016, 2015, and 2014, respectively.
We had no operations in hyperinflationary economies in fiscal years
2016, 2015, or 2014.
Discontinued Operations
Loss from discontinued operations, net of tax, for 2015 included tax
expense related to the completion of certain tax returns related to the
sale of our former OCP and DES businesses. The loss from
discontinued operations, net of tax, for 2014 reflected costs related to
the resolution of certain post-closing adjustments in the third quarter of
2014. 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 the completion of tax return filings
in certain foreign jurisdictions in which we operated the OCP and DES
businesses.
Sale of Product Line
In May 2015, we sold certain assets and transferred certain
liabilities associated with a product line in our RBIS reportable segment
for $1.5 million. The pre-tax loss from the sale, when combined with exit
costs related to the sale, totaled $8.5 million. The exit costs included
$3.4 million of severance costs. In the first quarter of 2015, we recorded
an impairment charge of approximately $2 million related to certain
long-lived assets in this product line. This loss and these costs were
included in ‘‘Other expense, net’’ in the Consolidated Statements of
Income.
Inventories
Net inventories at year-end were as follows:
(In millions)
Raw materials
Work-in-progress
Finished goods
Inventories, net
2016
2015
$185.0
156.8
177.3
$180.5
143.0
155.2
$519.1
$478.7
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
2016
2015
$
29.3
565.3
1,949.5
117.3
$
30.4
579.3
1,922.3
67.9
2,661.4
(1,746.2)
2,599.9
(1,752.0)
Property, plant and equipment, net
$
915.2
$
847.9
Software
Capitalized software costs at year-end were as follows:
(In millions)
Cost
Accumulated amortization
Software, net
2016
2015
$ 415.5
(297.9)
$ 398.2
(270.8)
$ 117.6
$ 127.4
Software amortization expense from continuing operations was
$37.9 million in 2016, $37.6 million in 2015, and $36.4 million in 2014.
Equity Method Investment
In October 2016, we acquired a 22.6% interest in PragmatIC
Printing Limited (‘‘PragmatIC’’), a company that develops flexible
electronics technology. PragmatIC’s primary assets are intangible
assets related to its technology. We used the equity method to account
for this investment. The carrying value of this investment was
$9.5 million as of December 31, 2016 and was included in ‘‘Other
assets’’ in the Consolidated Balance Sheets.
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:
(In millions)
2016
2015
2014
Research and development expense
$89.7
$91.9
$102.5
46
Notes to Consolidated Financial Statements
NOTE 17. QUARTERLY FINANCIAL INFORMATION (Unaudited)
(In millions, except per share data)
2016
Net sales
Gross profit
Net income
Net income per common share
Net income per common share, assuming dilution
2015
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
‘‘Other expense, net’’ is presented by type for each quarter below:
(In millions)
2016
Restructuring charges:
Severance and related costs
Asset impairment charges and lease cancellation costs
Other items:
Loss from settlement of pension obligations
Loss (gain) on sales of assets
Transaction costs
Other expense, net
2015
Restructuring charges:
Severance and related costs
Asset impairment charges and lease cancellation costs
Other items:
Net loss from curtailment and settlement of pension obligations
Loss on sale of product line and related exit costs
Legal settlements
Gain on sale of assets
Other expense, net
47
Avery Dennison Corporation
2016 Annual Report
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$1,485.5
422.6
89.6
1.00
.98
$1,528.0
430.0
71.9
–
71.9
$1,541.5
434.1
80.0
.90
.88
$1,508.7
417.6
89.1
1.00
.98
$1,516.0
417.6
64.7
(1.0)
63.7
$1,468.1
405.9
81.3
.4
81.7
$1,550.8
425.4
62.0
.70
.69
$1,454.8
392.3
56.5
.5
57.0
.79
–
.79
.78
–
.78
.71
(.01)
.70
.69
(.01)
.68
.89
–
.89
.87
.01
.88
.62
.01
.63
.61
.01
.62
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 5.2
.4
–
–
–
$ 3.6
2.8
41.4
.3
2.1
$1.9
.7
–
–
2.0
$ 4.0
1.3
–
(1.4)
.9
$ 5.6
$50.2
$4.6
$ 4.8
$13.5
.4
$16.8
3.2
$4.7
1.9
$17.5
1.5
–
2.6
(.5)
(1.7)
–
7.7
–
–
–
.2
.2
–
.3
–
–
–
$14.3
$27.7
$7.0
$19.3
STATEMENT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
The consolidated financial statements and accompanying information are the responsibility of and were prepared by 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 our Board of Directors, through its
Audit and Finance Committee, which is comprised solely of independent directors. The Committee meets periodically with financial management,
internal auditors and our 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, and periodically 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 that 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 our chief executive officer and
chief financial officer, we 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 December 31, 2016. Management’s assessment of the effectiveness of internal control over financial reporting as of December 31,
2016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included herein.
21FEB201715482343
Mitchell R. Butier
President and
Chief Executive Officer
25FEB201618145429
Anne L. Bramman
Senior Vice President and
Chief Financial Officer
48
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
(the Company) at December 31, 2016 and January 2, 2016, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2016 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 December 31, 2016, 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 23, 2017
49
Avery Dennison Corporation
2016 Annual Report
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
Annual Meeting
Our Annual Meeting of Stockholders will be held at 1:30 p.m. Pacific
Time on April 27, 2017 at the Embassy Suites, 800 North Central
Avenue, Glendale, California 91203.
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.
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.
Other Information
We are including, as Exhibits 31.1 and 31.2 to our Annual Report on
Form 10-K for fiscal year 2016 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 29, 2016.
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
at
downloaded
www.investors.averydennison.com.
investor
website
from
our
Corporate Headquarters
Avery Dennison Corporation
207 Goode Avenue
Glendale, California 91203
Phone: (626) 304-2000
Stock and Dividend Data
Our common stock is listed on the NYSE.
Ticker symbol: AVY
Market Price
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividends per Common Share
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
2015
High
Low
High
Low
$72.86
77.12
78.84
78.04
$58.16
71.11
71.13
68.61
$54.64
63.18
64.65
66.18
$51.15
51.07
55.59
58.61
2016
2015
$
.37
.41
.41
.41
$
.35
.37
.37
.37
$ 1.60
$ 1.46
Number of shareholders of record as of year-end
5,106
5,357
50
Notes
Notes
N
o
t
e
s
Visit www.averydennison.com and follow
us on social media to learn more about
how we are creating superior long-term,
sustainable value for our customers,
employees and stockholders and
improving the communities in which
we operate.
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
www.averydennison.com/blog
www.averydennison.com/socialmedia
In support of our commitment to
sustainability, the paper for this
annual report is Forest Stewardship
Council® (FSC®) certified, 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