Avery Dennison
Corporation
2017 Annual Report
Table of
Contents
2017 at a Glance
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.
STOCKHOLDER RETURN PERFORMANCE
Comparison of Five-Year Cumulative Total Return as of December 31, 2017
Refer to page 3 for information regarding this stockholder return performance graph, including the definition of “Market Basket.”
$305
$280
$255
$230
$205
$180
$155
$130
$105
$80
12/31/2012
Avery Dennison Corporation
S&P 500 Index
Market Basket (Weighted Average)
Market Basket (Median)
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
OUR STAKEHOLDERS
OUR STRATEGIES
OUR VALUES
Customers
We provide innovative, high-quality
products and solutions with industry-
leading service.
Employees
We cultivate a diverse, engaged,
safe, and healthy workforce.
Communities
We are responsible stewards of the
environment and a force for good in
our communities.
Investors
We are committed to delivering
superior shareholder returns over
the long term.
Drive outsized growth in high-
value categories with higher
growth and margin potential (e.g.,
specialty labels, graphics, industrial
tapes, and RFID).
Grow profitably in our base
business through tailored go-to-
market strategies and disciplined
execution.
Maintain our relentless focus
on productivity through continued
operational excellence and enterprise
lean sigma.
Deploy capital effectively
by
balancing investments in organic
growth, productivity, and acquisitions,
while returning cash to shareholders.
Integrity
We are driven by doing the right
thing. Always.
Courage
We are brave in the face of
adversity and the unknown.
External Focus
We get out to get better.
Diversity
We gain strength from diverse
ideas and teams.
Sustainability
We are focused on the long-term
health of our business, planet,
and communities.
Innovation
We use imagination and intellect
to create new possibilities.
Teamwork
We are better when we work together
and put others ahead of ourselves.
Excellence
We expect the best from ourselves
and each other.
2017 SNAPSHOT
$6.6 BIL.
Net sales
$281.8 MIL.
Net income
$3.13
Net income
per common share
$1.76
Dividends
per common share
i
Avery Dennison Corporation 2017 Annual Report
Letter to
Shareholders
Fellow Shareholders,
Another Year of Excellent Progress
We are pleased to report that we once again delivered strong revenue
growth and operating margin expansion. The strength and consistency of
our performance reflect our focus on our core strategies, and solid growth
driven by our continued push into faster-growing markets, including higher value categories such as RFID, as well as emerging
markets. We expect to achieve or exceed the five-year financial targets we set through the end of 2018, and we are making
progress toward both our 2021 financial targets and 2025 sustainability goals.
LGM Continues Its Expansion
Our Label and Graphic Materials (LGM) segment delivered another year of strong performance, with sales growth, excluding
the impact of currency, nearing 7% and further margin expansion. Benefiting from recent acquisitions that broaden its
capabilities, LGM continues to increase its penetration of high-value product categories and its market position in higher-
growth emerging markets.
Transformation Driving Profitable RBIS Growth
Retail Branding and Information Solutions (RBIS) achieved organic sales growth of 5% and significant margin expansion,
resulting in exceptional operating profit growth for 2017. As the segment’s business-model transformation has taken root,
RBIS is profitably growing its base business while capitalizing on the growth of RFID-enabled products and services.
IHM Builds a Platform for Value Creation
Our Industrial and Healthcare Materials (IHM) group delivered solid organic growth and completed two acquisitions
that combined drove a 30% increase in sales, excluding the impact of currency. Despite near-term margin challenges, we
remain confident in IHM’s ability to build profitable positions in high-value segments across a range of large and growing
end markets.
Building a Strong Culture Through Our Values
We are committed to putting our values first, providing a safe, supportive, and inclusive workplace, and building a sustainable
business. We recently refreshed our values to reflect the realities of today’s business world and the expectations of our
stakeholders, not least of which is our global workforce. We demonstrate these values every day because it is our firm belief
that this is how we remain an industry leader, today and in the future.
We look forward to another successful year at Avery Dennison, and we are confident we will continue to deliver on our goals,
creating long-term value for our customers, investors, employees, and communities.
Thank you for your investment in Avery Dennison.
Dean Scarborough
Chairman
Mitch Butier
President and Chief Executive Officer
ii
Businesses
at a Glance
REPORTABLE SEGMENT
Label and Graphic Materials
BUSINESSES
2017 SALES IN MILLIONS
% OF SALES
DESCRIPTION
Label and Packaging Materials
Graphics Solutions
Reflective Solutions
$4,512
68%
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
2017 SALES IN MILLIONS
% OF SALES
DESCRIPTION
Retail Branding and
Information Solutions
Printer Solutions
$1,511
23%
GLOBAL BRANDS
Avery Dennison®
Monarch®
Our Retail Branding and Information Solutions
businesses provide intelligent, creative, and
sustainable solutions that elevate brands and
accelerate performance primarily through the
global retail supply chain.
REPORTABLE SEGMENT
Industrial and Healthcare Materials
BUSINESSES
2017 SALES IN MILLIONS
% OF SALES
DESCRIPTION
Performance Tapes
Fastener Solutions
Vancive Medical Technologies
$591
9%
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.
iii
Avery Dennison Corporation 2017 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
Gregory S. Lovins
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
Deon M. Stander
Vice President and
General Manager
Retail Branding and
Information Solutions
Andres A. Lopez2
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
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 2017 Annual Report
Financial
Information
Five-year Summary
2
Management’s
Discussion and Analysis
of Financial Condition and
Results of Operations
Consolidated Financial
Statements
Notes to Consolidated
Financial Statements
Corporate Information
4
17
22
51
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 30, 2017 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 foreign 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; 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 including the Tax Cuts and Jobs Act, 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) 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; (3) competitors’ actions, including pricing, expansion in key markets, and product offerings; 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
2017 Annual Report
Five-Year Summary
(Dollars in millions, except percentages
and per share amounts)
For the Year
Net sales
Gross profit
Marketing, general and administrative expense
Other expense, net(2)
Interest expense
Income from continuing operations before taxes
Provision for income taxes(5)
Income from continuing operations
Loss from discontinued operations, net of tax
Net income
2017
2016
2015
2014(1)
2013
Dollars
%
Dollars
%
Dollars
%
Dollars
%
Dollars
%
1,812.2
1,123.2
36.5
63.0
589.5
307.7
281.8
$6,613.8 100.0 $6,086.5 100.0 $5,966.9 100.0 $6,330.3 100.0 $6,140.0 100.0
26.7
1,637.7
19.1
1,174.2
.6
36.6
1.0
60.9
6.0
366.0
2.0
124.3
241.7
3.9
(28.5) N/A
3.5
213.2
27.6
18.6
1.1
1.0
6.9
2.3
4.6
(.1) N/A
4.6
1,651.2
1,158.9
68.2
63.3
360.8
113.5
247.3
(2.2)
245.1
27.9
18.0
1.1
1.0
7.8
2.6
5.3
– N/A
5.3
27.4
17.0
.6
1.0
8.9
4.7
4.3
– N/A
4.3
1,699.7
1,097.5
65.2
59.9
477.1
156.4
320.7
1,645.8
1,108.1
68.3
60.5
408.9
134.5
274.4
26.1
18.3
1.1
1.0
5.7
1.8
3.9
N/A
3.9
274.3
320.7
281.8
Per Share Information
Income per common share from continuing operations
Loss per common share from discontinued operations
Net income per common share
Income per common share from continuing operations,
$
assuming dilution
Loss 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)
Effective tax rate(3)(5)
2017
3.19
–
3.19
3.13
–
3.13
1.76
88.3
90.1
$ 114.86
70.14 to
117.10
$1,097.9
5,136.9
1,316.3
1,581.7
1,046.2
$
2016
3.60
–
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
$
2015
3.01
–
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
2014
2013
$
2.64
(.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
$
2.46
(.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
$ 178.7
93.4
52.2%
$ 180.1
89.7
32.8%
$ 188.3
91.9
32.9%
$ 201.6
102.5
31.5%
$ 204.3
96.0
34.0%
(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, loss from settlement of pension obligations, and other items.
(3) Amounts are for continuing operations only.
(4) Amounts are for continuing and discontinued operations.
(5) ‘‘Provision for income taxes’’ for fiscal year 2017 includes the estimated impact of the Tax Cuts and Jobs Act (‘‘TCJA’’) enacted in the U.S. on December 22, 2017. The TCJA significantly revises U.S.
corporate income taxation, among other changes, lowering corporate income tax rates, implementing a modified territorial tax regime, and imposing a one-time transition tax through a deemed
repatriation of accumulated untaxed earnings and profits of foreign subsidiaries. This provision includes a reasonable estimate (‘‘provisional amount’’) of the impact of the TCJA on our tax provision
following the guidance of SEC Staff Accounting Bulletin No. 118 (‘‘SAB 118’’).
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, 2017.
Comparison of Five-Year Cumulative Total Return as of December 31, 2017
Avery Dennison Corporation
S&P 500 Index
Market Basket (Weighted Average)
Market Basket (Median)
$305
$280
$255
$230
$205
$180
$155
$130
$105
$80
12/31/2012
Total Return Analysis(1)
12/31/2013
12/31/2014
12/31/2015
12/31/2016
28FEB201823082190
12/31/2017
Avery Dennison Corporation
S&P 500 Index
Market Basket (Weighted Average)(2)
Market Basket (Median)
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
$100.00
100.00
100.00
100.00
$138.87
125.93
133.70
134.32
$147.24
139.51
149.72
149.00
$178.63
138.50
146.41
135.06
$202.93
151.11
172.49
157.84
$306.70
177.93
213.06
192.44
(1) Assumes $100.00 invested on December 31, 2012 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
2017 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
7
9
14
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 presentation of our financial results that are prepared in
accordance with GAAP. Based on feedback from investors and financial
analysts, we believe that the supplemental non-GAAP financial
measures we provide are useful to their assessments of our
performance and operating trends, as well as liquidity.
Our non-GAAP financial measures exclude the impact of certain
events, activities or strategic decisions. The accounting effects of these
events, activities or decisions, which are included in the GAAP financial
measures, may make it difficult to assess our underlying performance in
a single period. By excluding the accounting effects, 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 that facilitates an understanding of our core operating
results and liquidity measures. These non-GAAP financial measures are
used internally to evaluate trends in our underlying performance, as well
as to facilitate comparison to the results of competitors for a single
period. While some of the items we exclude from GAAP financial
measures recur, they tend to be disparate in amount, frequency, or
timing.
We use the following non-GAAP financial measures in this MD&A:
(cid:129) Sales change ex. currency refers to the increase or decrease in
sales excluding the estimated impact of foreign currency
translation. The estimated
foreign currency
translation is calculated on a constant currency basis, with
prior period results translated at current period average
exchange rates to exclude the effect of foreign currency
fluctuations.
impact of
(cid:129) Organic sales change refers to the increase or decrease in
sales excluding the estimated impact of foreign currency
translation, product line exits, acquisitions and divestitures,
and, where applicable, an extra week in our fiscal year.
We believe that sales change ex. currency and organic
sales change assist investors in evaluating the sales growth
from the ongoing activities of our businesses and provide
greater ability to evaluate our results from period to period.
(cid:129) Free cash flow refers to cash flow from operations, less
payments for property, plant and equipment, software and
other deferred charges, plus proceeds from sales of property,
plant and equipment, plus (minus) net proceeds from sales
(purchases) of investments, plus (minus) free cash outflow
(inflow) from discontinued operations. We believe that free
cash flow assists investors by showing the amount of cash we
reductions, dividends, share
have available
repurchases, and acquisitions.
for debt
(cid:129) Operational working capital refers to trade accounts receivable
and inventories, net of accounts payable, and excludes cash
and cash equivalents, short-term borrowings, deferred taxes,
other current assets and other current liabilities, as well as 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
activities managed at the operating
level and do not
necessarily reflect the underlying trends in our operations.
(cid:129) 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 2017, 2016, and 2015 fiscal years
consisted of 52-week periods ending December 30, 2017,
December 31, 2016, and January 2, 2016, respectively.
4
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Net Sales
Impact of Cost Reduction Actions
The factors impacting the reported sales change are shown in the
During fiscal year 2017, we realized $59.5 million in savings, net of
table below:
Reported sales change
Foreign currency translation
Sales change ex. currency
Acquisitions
Organic sales change
2017
2016
9%
(1)
8%
(4)
4%
2%
3
4%
5% plans.
(1)
transition costs, primarily from our 2015/2016 Actions.
We anticipate incremental savings, net of transition costs, primarily from
our 2015/2016 Actions of approximately $30 million to $35 million in 2018. We
estimate cash restructuring costs of at least $15 million in 2018. However, we
continue to assess restructuring options and may adjust our restructuring
Restructuring charges were included in ‘‘Other expense, net’’ in the
Consolidated Statements of Income. Refer to Note 13, ‘‘Cost Reduction
Actions,’’ to the Consolidated Financial Statements for more information.
In both years, net sales increased on an organic basis due to higher
volume.
Income from Continuing Operations
Income from continuing operations decreased from approximately
$321 million in 2016 to approximately $282 million in 2017. Major factors
affecting the change in income from continuing operations in 2017
compared to 2016 included:
(cid:129) Higher income taxes primarily due to our provisional estimate
of the impact resulting from the enactment of the Tax Cuts and
Jobs Act (‘‘TCJA’’)
(cid:129) Higher employee-related costs
(cid:129) Net impact of pricing and raw material costs
(cid:129) Higher restructuring charges
Offsetting factors:
(cid:129) Volume/mix
(cid:129) Benefits from productivity initiatives, including savings from
restructuring actions, net of transition costs
(cid:129) Prior-year loss from settlement of pension obligations
Acquisitions
During 2017, we completed the stock acquisitions of Yongle
Tape Ltd. and Finesse Medical Limited, and the net asset acquisition of
Hanita Coatings Rural Cooperative Association Limited and stock
acquisition of certain of its subsidiaries (collectively, the ‘‘2017
Acquisitions’’), which were not material, individually or in the aggregate,
to the Consolidated Financial Statements. In 2016, we completed the
acquisition of the European business of Mactac (‘‘Mactac’’), which was
not material to the Consolidated Financial Statements. Refer to Note 2,
‘‘Acquisitions,’’ to the Consolidated Financial Statements for more
information.
Cost Reduction Actions
2015/2016 Actions
During fiscal year 2017, we recorded $34.1 million in restructuring
charges, net of reversals, related to restructuring actions initiated during
the third quarter of 2015 (‘‘2015/2016 Actions’’). These charges
consisted of severance and related costs for the reduction of
approximately 920 positions, lease cancellation costs, and asset
impairment charges.
During fiscal year 2016, we recorded $20.9 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 440 positions, lease cancellation costs, and asset
impairment charges.
Cash Flow
(In millions)
Net cash provided by operating activities
Purchases of property, plant and
2017
2016
2015
$ 650.1
$ 585.3
$ 473.7
equipment
(190.5)
(176.9)
(135.8)
Purchases of software and other
deferred charges
(35.6)
(29.7)
(15.7)
Proceeds from sales of property, plant
and equipment
Purchases of investments, net
Plus: free cash outflow from
discontinued operations
6.0
(8.3)
–
8.5
(.1)
–
7.6
(.5)
.1
Free cash flow
$ 421.7
$ 387.1
$ 329.4
In 2017, net cash provided by operating activities increased compared to
2016 primarily due to higher income from continuing operations before taxes,
as well as lower pension plan contributions, partially offset by higher income
tax payments, net of refunds. Net cash provided by operating activities in
2017 reflected the impact of our adoption of the accounting guidance update
related to stock-based payments described in Note 1, ‘‘Summary of
Significant Accounting Policies,’’ to the Consolidated Financial Statements.
Free cash flow increased due to higher net cash flow provided by operating
activities, partially offset by higher net capital and software expenditures.
In 2016, net cash provided by operating activities 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 incentive compensation paid in 2016
for the 2015 performance year and higher pension plan contributions. Free
cash flow increased due to higher net cash flow provided by operating
activities, partially offset by higher capital and software expenditures.
Outlook
Certain factors that we believe may contribute to our 2018 results are
described below:
(cid:129) We expect our net sales to increase by approximately 8%.
(cid:129) Assuming the continuation of foreign currency rates in effect at
year-end 2017, we expect foreign currency translation to increase
pre-tax operating income by approximately $20 million.
(cid:129) We expect our full year effective tax rate to be in the mid-twenty
percent range.
(cid:129) We anticipate capital and software expenditures of approximately
$250 million.
(cid:129) We estimate cash restructuring costs of at least $15 million.
5
Avery Dennison Corporation
2017 Annual Report
operations before taxes
$ 589.5
$ 477.1
$ 408.9
Income from continuing operations
Gross profit margin
27.4%
27.9%
before taxes
27.6% Provision for income taxes
ANALYSIS OF RESULTS OF OPERATIONS
Income from Continuing Operations before Taxes
(In millions, except percentages)
2017
2016
2015
Net sales
Cost of products sold
Gross profit
Marketing, general and
administrative expense
Other expense, net
Interest expense
Income from continuing
$6,613.8
4,801.6
$6,086.5
4,386.8
$5,966.9
4,321.1
1,812.2
1,699.7
1,645.8
1,123.2
36.5
63.0
1,097.5
65.2
59.9
1,108.1
68.3
60.5
Gross Profit Margin
Gross profit margin in 2017 decreased compared to 2016 due to
margin decline in the Industrial and Healthcare Materials reportable
segment driven by the impact of acquisitions, growth investments,
near-term operational challenges, and a program loss in personal care
tapes, which began impacting results in mid-2016.
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, partially offset
by higher employee-related costs, the net impact of pricing and raw
material costs, and unfavorable geographic mix.
Marketing, General and Administrative Expense
Marketing, general and administrative expense increased in 2017
compared to 2016 due to acquisitions. Before the
impact of
acquisitions, the benefits from productivity initiatives, including savings
from restructuring, net of transition costs, were partially offset by higher
employee-related costs.
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.
Other Expense, net
(In millions)
Other expense, net by type
Restructuring charges:
2017
2016
2015
Severance and related costs
Asset impairment charges and lease
$31.2
$14.7
$52.5
cancellation costs
Other items:
Transaction costs
Net gains on sales of assets
Net loss from curtailment and settlement
of pension obligations
Legal settlements
Loss on sale of a product line and
related exit costs
Other expense, net
2.2
5.2
7.0
5.2
(2.1)
5.0
(1.1)
–
(1.7)
–
–
–
41.4
–
.3
(.3)
–
10.5
$36.5
$65.2
$68.3
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Refer to Note 13, ‘‘Cost Reduction Actions,’’ and Note 6, ‘‘Pension
and Other Postretirement Benefits,’’ to the Consolidated Financial
Statements for more information.
Interest Expense
Interest expense increased approximately $3 million in 2017
compared to 2016, primarily due to additional long-term borrowings
made in 2017. Refer to Note 4, ‘‘Debt and Capital Leases,’’ to the
Consolidated Financial Statements for more information.
Net Income and Earnings per Share
(In millions, except percentages and per
share amounts)
Income from continuing operations
Loss from discontinued operations, net
of tax
Net income
Net income per common share
Net income per common share,
2017
2016
2015
$589.5
307.7
$477.1
156.4
$408.9
134.5
281.8
320.7
274.4
–
–
(.1)
$281.8
$320.7
$274.3
$ 3.19
$ 3.60
$ 3.01
assuming dilution
3.13
3.54
2.95
Effective tax rate for continuing
operations
52.2%
32.8%
32.9%
Provision for Income Taxes
The 2017 effective tax rate for continuing operations included a net
tax charge of $172 million related to the enactment of the TCJA,
$5.1 million of tax benefit from the release of valuation allowance on
certain state deferred tax assets, $4.2 million of tax benefit, including
previously accrued interest and penalties, from effective settlements
and changes in our judgment about tax filing positions as a result of new
information, and $4.4 million of tax benefit from decreases in certain tax
reserves, including interest and penalties, as a result of closing tax
years.
The 2017 effective tax rate also included a net benefit of $16 million
related to our adoption of the accounting guidance update related to
stock-based payments described in Note 1, ‘‘Summary of Significant
Accounting Policies,’’ to the Consolidated Financial Statements. This
accounting guidance update required that the effect of excess tax
benefits associated with stock-based payments be recognized in the
income statement instead of in capital in excess of par value as was the
case prior to our adoption of this update. Excess tax benefits are the
effects of tax deductions in excess of compensation expense
recognized for financial accounting purposes. These benefits related to
stock-based awards generally are generated as a result of stock price
appreciation during the vesting period or between the time of grant and
the time of exercise. We expect future excess tax benefits to vary
depending on our stock-based payments in future reporting periods.
These excess tax benefits may cause variability in our future effective tax
rate as they can fluctuate based on vesting and exercise activity, as well
as our future stock price.
In 2017, as a result of intra-entity sales and transfers of assets other
than inventory related to the recent integration of an acquisition, we
recognized a total of approximately $14 million of tax-related deferred
6
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
charges in ‘‘Other current assets’’ and ‘‘Other assets.’’ However, we
expect the tax-related deferred charges to be derecognized as an
adjustment to retained earnings upon our adoption of the accounting
guidance update described in Note 1, ‘‘Summary of Significant
Accounting Policies,’’ to the Consolidated Financial Statements.
The 2016 effective tax rate for continuing operations included
$7.6 million of tax expense associated with the cost to repatriate current
earnings of certain foreign subsidiaries and $46.3 million of tax expense
related to U.S. income and foreign withholding taxes resulting from
changes in indefinite reinvestment assertions on certain foreign
earnings and profits; 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 $8.4 million of tax
expense from deferred tax adjustments resulting from tax rate changes
in certain foreign jurisdictions.
The 2015 effective tax rate for continuing operations included tax
expense of $20 million associated with the tax cost to repatriate current
earnings of certain 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, as a result of
the enactment of the Protecting Americans from Tax Hikes Act of 2015
(‘‘PATH Act’’), 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
that had expired on
December 31, 2014.
look-through
(‘‘CFC’’)
rule
Refer to Note 14, ‘‘Taxes Based on Income,’’ to the Consolidated
Financial Statements for more information.
7
Avery Dennison Corporation
2017 Annual Report
RESULTS OF OPERATIONS BY REPORTABLE SEGMENT
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 2017 and 2016, gains on sale of assets
in 2017 and 2015, and losses from
curtailment and settlement of pension
obligations in 2015.
2017
2016
2015
$4,575.8
(64.1)
$4,250.7
(63.4)
$4,093.4
(61.3)
$4,511.7
567.3
$4,187.3
516.2
$4,032.1
453.4
$
14.5
$
13.0
$
12.1
Net Sales
The factors impacting reported sales change are shown in the table
below:
Reported sales change
Foreign currency translation
Sales change ex. currency
Acquisitions
Organic sales change(1)
(1) Totals may not sum due to rounding.
2017
2016
8%
(1)
7
(3)
4%
3
7
(1)
4%
5%
In both years, net sales increased on an organic basis due to higher
volume.
In 2017, net sales increased on an organic basis at mid-single digit
rates in emerging markets and Western Europe and at a low-single digit
rate in North America.
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.
Operating Income
Operating income increased in 2017 compared to 2016 primarily
reflecting higher volume/mix and benefits from productivity initiatives,
including savings from restructuring, net of transition costs, partially
offset by higher employee-related costs and the net impact of pricing
and raw material costs.
Operating income increased in 2016 compared to 2015 due to
higher volume and benefits from productivity initiatives, including
savings from restructuring, net of transition costs, partially offset by the
net impact of pricing and raw material costs, unfavorable geographic
mix, the unfavorable impact of foreign currency translation, and higher
employee-related costs.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Retail Branding and Information Solutions
(In millions)
2017
2016
2015
Industrial and Healthcare Materials
(In millions)
2017
2016
2015
Net sales including intersegment
sales
Less intersegment sales
Net sales
Operating income(1)
(1) Included charges associated with
restructuring and transaction costs related
to the sale of a product line in all years,
gains on sales of assets in 2017 and
2016, and legal settlement in 2015.
$1,514.4
(3.2)
$1,448.3
(2.9)
$1,446.3
(2.9)
$1,511.2
122.9
$1,445.4
102.6
$1,443.4
51.6
Net sales including intersegment sales
Less intersegment sales
$598.6
(7.7)
$461.0
(7.2)
$506.2
(14.8)
Net sales
Operating income(1)
$590.9
50.5
$453.8
54.6
$491.4
57.1
(1) Included charges associated with restructuring in
all years and transaction costs in 2017 and 2016.
$
3.7
$
1.9
$
8.0
$
18.1
$
9.8
$
45.7
The factors impacting reported sales change are shown in the table
Net Sales
below:
Net Sales
The factors impacting reported sales change are shown in the table
below:
Reported sales change
Foreign currency translation
Sales change ex. currency
Product line divestiture
Organic sales change(1)
(1) Totals may not sum due to rounding.
Reported sales change
2017
2016
Foreign currency translation
5%
–
5
–
–% Sales change ex. currency
2
Acquisitions
2
2
Organic sales change
5%
3%
2017
2016
30%
–
30
(28)
(8)%
2
(6)
(2)
2%
(8)%
In 2017, net sales increased on an organic basis due to higher
volume, reflecting growth in both base apparel tickets and tags and
radio-frequency identification products.
In 2016, net sales increased on an organic basis primarily due to
higher volume from sales of radio-frequency identification products.
Operating Income
Operating income increased in 2017 compared to 2016 due to
benefits
from
initiatives,
restructuring actions, net of transition costs, and higher volume, partially
offset by higher employee-related costs.
including savings
from productivity
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.
In 2017, net sales increased on an organic basis due to higher
volume, as growth in industrial categories more than offset the
anticipated decline in healthcare categories.
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 program loss in
personal care tapes.
Operating Income
Operating income decreased in 2017 compared to 2016 due to the
program loss in personal care tapes, which began impacting results in
mid-2016, higher employee-related costs, and growth investments,
partially offset by volume growth in the industrial categories and the
impact of acquisitions.
Operating income decreased in 2016 compared to 2015 primarily
due to lower volume, including the program loss in personal care tapes,
partially offset by benefits from productivity initiatives, including savings
from restructuring, net of transition costs, and lower restructuring
charges.
8
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION
Liquidity
Operating Activities
(In millions)
Investing Activities
(In millions)
Purchases of property, plant and
2017
2016
2015
2017
2016
2015
Purchases of software and other
equipment
$(190.5) $(176.9) $(135.8)
Net income
Depreciation and amortization
Provision for doubtful accounts and
$ 281.8
178.7
$320.7
180.1
$ 274.3
188.3
sales returns
37.6
54.4
46.5
Net losses from asset impairments and
sales/disposals of assets
Stock-based compensation
Loss from settlement of pension
obligations
Deferred income taxes
Other non-cash expense and loss
Trade accounts receivable
Inventories
Other current assets
Accounts payable
Accrued liabilities
Taxes on income
Other assets
Long-term retirement benefits and
1.4
30.2
1.5
27.2
12.2
26.3
–
151.6
53.9
(141.2)
(14.9)
(6.5)
83.4
(.6)
29.6
(11.8)
41.4
52.3
46.2
(88.2)
(19.6)
(7.6)
31.6
32.4
(14.1)
(1.2)
–
12.9
50.1
(135.9)
(34.4)
3.9
65.5
7.0
(23.7)
(.3)
other liabilities
(23.1)
(71.8)
(19.0)
Net cash provided by operating
activities
$ 650.1
$585.3
$ 473.7
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 2017, cash flow provided by operating activities increased
compared to 2016 primarily due to higher income from continuing
operations before taxes, as well as lower pension plan contributions,
partially offset by higher income tax payments, net of refunds. In
addition, operating activities reflected the impact of our adoption of the
accounting guidance update related
to stock-based payments
described in Note 1, ‘‘Summary of Significant Accounting Policies,’’ to
the Consolidated Financial Statements.
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.
9
Avery Dennison Corporation
2017 Annual Report
deferred charges
(35.6)
(29.7)
(15.7)
Proceeds from sales of property, plant
and equipment
Purchases of investments, net
Payments for acquisitions, net of cash
acquired, and investments in
businesses
Other
6.0
(8.3)
8.5
(.1)
(319.3)
–
(237.2)
–
7.6
(.5)
–
1.5
Net cash used in investing activities
$(547.7) $(435.4) $(142.9)
Capital and Software Spending
In 2017 and 2016, we invested in new equipment to support growth
in Asia, Europe and North America and to improve manufacturing
productivity. In 2015, we invested in new equipment to support growth,
primarily
improve manufacturing
productivity.
in Asia and Europe, and
to
In 2017, we invested in information technology primarily associated
with enterprise resource planning system implementations in North
America, Asia, and Europe. Information technology investments in 2016
and 2015 were primarily associated with standardization initiatives in
Asia and North America.
Payments for Acquisitions and Investments in Businesses
In 2017 and 2016, the aggregate payments for acquisitions, net of
cash acquired, and investments in businesses were approximately
$319 million and $237 million, respectively, which we funded through
cash and commercial paper borrowings. The 2017 Acquisitions were
also partially funded through proceeds from the senior notes we issued
in 2017.
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
Additional long-term borrowings
Dividend payments
Share repurchases
Proceeds from exercises of stock
2017
2016
2015
$(343.0)
542.9
(155.5)
(129.7)
$ 232.2
–
(142.5)
(262.4)
$(105.8)
–
(133.1)
(232.3)
options, net
22.0
71.0
104.0
Tax withholding for and excess tax
benefit from stock-based
compensation, net
(20.6)
(4.5)
(.1)
Net cash used in financing activities
$ (83.9)
$(106.2)
$(367.3)
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. As of December 31, 2016,
$209 million was outstanding under this program, which reflected
borrowings to fund a portion of our acquisition of Mactac. As of
December 30, 2017, no balance was outstanding under this program.
In March 2017, we issued e500 million of senior notes, due March
2025. The senior notes bear an interest rate of 1.25% per year, payable
annually in arrears. The net proceeds from the offering, after deducting
underwriting discounts and estimated offering expenses, were
$526.6 million (e495.5 million), a portion of which we used to repay
commercial paper borrowings used to finance a portion of our
acquisition of Mactac and the remainder of which we used for general
corporate purposes and the 2017 Acquisitions.
Given the seasonality of our cash flow from operating activities,
during 2017, 2016, and 2015, our commercial paper borrowings were
also used to fund share repurchase activity, dividend payments, and
capital expenditures. In October 2017, we repaid $250 million of senior
notes at maturity using U.S. commercial paper borrowings.
Refer to Note 2, ‘‘Acquisitions,’’ and Note 4, ‘‘Debt and Capital
for more
the Consolidated Financial Statements
to
Leases,’’
information.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Tax Withholding
Compensation, Net
for and Excess Tax Benefit
from Stock-Based
In 2017, tax withholding for and excess tax benefit from stock-
based compensation, net, reflected the impact of our adoption of the
accounting guidance update related
to stock-based payments
described in Note 1, ‘‘Summary of Significant Accounting Policies,’’ to
the Consolidated Financial Statements.
Analysis of Selected Balance Sheet Accounts
Long-lived Assets
Property, plant and equipment, net, increased by approximately
$183 million to $1.1 billion at year-end 2017, which primarily reflected
purchases of property, plant and equipment, as well as the preliminary
valuation of property, plant and equipment from the 2017 Acquisitions of
approximately $66 million and the
foreign currency
impact of
translation, partially offset by depreciation expense.
Goodwill increased by approximately $192 million to $985.1 million
at year-end 2017, which primarily reflected the preliminary valuation of
goodwill associated with the 2017 Acquisitions and the impact of foreign
currency translation.
Other
intangibles resulting
from business acquisitions, net,
increased by approximately $100 million to $166.3 million at year-end
2017, which primarily reflected the valuation of intangibles resulting
from the 2017 Acquisitions and the impact of foreign currency
translation, partially offset by amortization expense.
Dividend Payments
We paid dividends of $1.76 per share in 2017 compared to $1.60
per share in 2016. In April 2017, we increased our quarterly dividend to
$.45 per share, representing an increase of approximately 10% from our
previous dividend rate of $.41 per share.
Share Repurchases
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 long-term incentive plan or used for
other corporate purposes. In 2017, we repurchased approximately
1.5 million shares of our common stock at an aggregate cost of
$129.7 million. In 2016, we repurchased approximately 3.8 million
shares of our common stock at an aggregate cost of $262.4 million.
In April 2017, our Board authorized the repurchase of shares of our
common stock with a fair market value of up to $650 million, exclusive of
any fees, commissions or other expenses related to such purchases, in
addition to the amount outstanding under our previous Board
authorization. Board authorizations remain in effect until shares in the
amount authorized
thereunder have been repurchased. As of
December 30, 2017, shares of our common stock in the aggregate
amount of $625.2 million remained authorized for repurchase under this
Board authorization. As of December 31, 2016, shares of our common
stock in the aggregate amount of $104.9 million remained authorized
under our previous Board authorization.
Proceeds from Exercises of Stock Options, net
The number of stock options exercised was approximately
.6 million, 1.4 million, and 2.5 million in 2017, 2016, and 2015,
respectively. Refer to Note 12, ‘‘Long-Term Incentive Compensation,’’ to
the Consolidated Financial Statements for more information.
Refer to Note 3, ‘‘Goodwill and Other Intangibles Resulting from
Business Acquisitions,’’ to the Consolidated Financial Statements for
more information.
Other assets
increased by approximately $51 million
to
$453.4 million at year-end 2017, which primarily reflected an increase in
the cash surrender value of our corporate-owned life insurance policies,
an increase to tax-related deferred charges associated with the recent
integration of an acquisition, and the impact of the 2017 Acquisitions,
partially offset by amortization expense related to software and other
deferred charges, net of purchases.
Shareholders’ Equity Accounts
The balance of our shareholders’ equity
increased by
approximately $121 million to $1.05 billion at year-end 2017, which
reflected current year net income, 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, and the net
decrease in ‘‘Accumulated other comprehensive loss.’’ These increases
were partially offset by dividend payments and share repurchases.
The balance of our treasury stock increased by approximately
$85 million to $1.86 billion at year-end 2017, 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.
Accumulated other
loss decreased by
approximately $71 million to $680.5 million at year-end 2017 primarily
due to the favorable impact of foreign currency translation and
amortization of net actuarial losses related to our pension plans.
comprehensive
Refer to Note 6, ‘‘Pension and Other Postretirement Benefits,’’ to
the Consolidated Financial Statements for more information.
10
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Impact of Foreign Currency Translation
(In millions)
Change in net sales
Change in net income from continuing operations
2017
2016
$29
1
$(147)
(12)
In 2017, international operations generated approximately 76% of
our net sales. Our future results are subject to changes in political and
economic conditions in the regions in which we operate and the impact
of fluctuations in foreign currency exchange and interest rates.
The favorable impact of foreign currency translation on net sales in
2017 compared to 2016 was primarily related to euro-denominated
sales and sales in Brazil, partially offset by the unfavorable impact of
foreign currency translation on sales in China.
Effect of Foreign Currency Transactions
The impact on net income from transactions denominated in
foreign currencies is largely mitigated because the costs of our
products are generally denominated in the same currencies in which
they are sold. In addition, to reduce our income and cash flow exposure
to transactions in foreign currencies, we enter into foreign exchange
forward, option and swap contracts where available and appropriate.
We also utilize certain foreign-currency-denominated debt to mitigate
our foreign currency translation exposure from our net investment in
foreign operations.
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 4% in 2017 compared to (1.6)% in 2016.
The increase was primarily driven by increases in trade accounts
receivable and inventories, as well as the decrease in short-term debt as
a result of lower commercial paper borrowings, partially offset by an
increase in accounts payable.
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.
11
Avery Dennison Corporation
2017 Annual Report
(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
2017
2016
$ 266.1
$ (99.5)
(224.4)
(195.1)
(217.3)
(6.3)
(182.8)
(6.8)
265.4
579.1
699.2
583.3
$ 782.7
$ 678.2
$6,613.8
$6,086.5
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)
4.0%
(1.6)%
11.8%
11.1%
Accounts Receivable Ratio
The average number of days sales outstanding was 63 days in
2017 compared to 62 days in 2016, calculated using the four-quarter
average accounts receivable balance divided by the average daily sales
in 2017 and 2016, respectively. The increase in the average number of
days sales outstanding reflected the impact of foreign currency
translation and the timing of collections.
Inventory Ratio
Average inventory turnover was 7.9 in 2017 compared to 8.2 in
2016, calculated using the annual cost of sales in 2017 and 2016,
respectively, and divided by the four-quarter average inventory balance.
The decrease in the average inventory turnover primarily reflected the
timing of inventory purchases.
Accounts Payable Ratio
The average number of days payable outstanding was 72 days in
2017 compared to 71 days in 2016, calculated using the four-quarter
average accounts payable balance divided by the average daily cost of
products sold in 2017 and 2016, respectively. The increase in average
number of days payable outstanding primarily reflected the impact of
foreign currency translation and the timing of vendor payments.
Net Debt to EBITDA Ratio
(In millions, except ratios)
Net income
Reconciling items:
Interest expense
Provision for income taxes
Depreciation
Amortization
2017
2016
2015
$ 281.8
$ 320.7
$ 274.3
63.0
307.7
126.6
52.1
59.9
156.4
117.5
62.5
60.5
134.5
125.2
62.9
EBITDA
$ 831.2
$ 717.0
$ 657.4
Total debt and capital leases
Less cash and cash equivalents
$1,581.7
(224.4)
$1,292.5
(195.1)
$1,058.9
(158.8)
Net debt
$1,357.3
$1,097.4
$ 900.1
Net debt to EBITDA ratio
1.6
1.5
1.4
The net debt to EBITDA ratio was higher in 2017 compared to 2016
primarily due to higher net debt as a result of the issuance of
e500 million of senior notes, a portion of which was used to repay
commercial paper borrowings that we used to finance a portion of our
acquisition of Mactac and the remainder of which was used for general
corporate purposes and the 2017 Acquisitions, partially offset by higher
EBITDA.
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 EBITDA.
Financial Covenants
Our revolving credit facility (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 30, 2017 and December 31, 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 increase in the fair value of our total
debt from $1.31 billion at December 31, 2016 to $1.6 billion at
December 30, 2017 primarily reflected our issuance of e500 million of
senior notes in 2017, partially offset by a reduction in commercial paper
borrowings in that year. 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 2017, we had cash
and cash equivalents of $224.4 million held in accounts at third-party
financial institutions.
Our cash balances are held in numerous locations throughout the
world. At year-end 2017, 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 and profits. However, if we were to
repatriate incremental foreign earnings and profits, we may be subject
to withholding taxes imposed by foreign tax authorities and additional
U.S. taxes due to the impact of foreign currency movements related to
such earnings and profits.
In November 2017, we amended and restated the Revolver,
increasing the amount available from certain domestic and foreign
banks from $700 million to $800 million. The amendment also extended
the Revolver’s maturity date to November 8, 2022. The maturity date
may be extended for additional one-year periods under certain
circumstances. The commitments under the Revolver may be increased
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
by up to $300 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 year-end
2017 or 2016. Commitment fees associated with the Revolver in 2017,
2016, and 2015 were $1.1 million, $1.1 million, and $1.9 million,
respectively.
In addition to the Revolver, we have significant short-term lines of
credit available in various countries totaling approximately $330 million
at December 30, 2017. These lines may be cancelled at any time by us
or the issuing banks. Short-term borrowings outstanding under our lines
of credit were $76.1 million and $72.9 million at December 30, 2017 and
December 31, 2016, respectively, with a weighted-average interest rate
of 6.2% and 6.5%, 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 30, 2017, no balance was outstanding under this program.
We had $183.8 million and $44.5 million of borrowings from U.S.
commercial paper issuances outstanding at year-end 2017 and 2016,
respectively, with a weighted-average interest rate of 1.8% and .9%,
respectively.
We had medium-term notes of $45 million outstanding at year-end 2017
and 2016.
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 $289 million to $1.58 billion at
year-end 2017 compared to $1.29 billion at year-end 2016, primarily reflecting
the issuance of e500 million of senior notes, a portion of which we used to
repay commercial paper borrowings used to finance a portion of our
acquisition of Mactac and the remainder of which we used for general
corporate purposes and to fund the 2017 Acquisitions.
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,
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.
12
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Contractual Obligations at End of Year 2017
(In millions)
Short-term borrowings
Long-term debt
Payments related to long-term capital leases
Interest on long-term debt
Operating leases
Total contractual obligations
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
initial or remaining
commitments on operating
non-cancelable lease terms of one year or more.
leases having
The table above does not include:
(cid:129) 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 entered into at fair value and cancelable without
penalty.
(cid:129) Cash funding requirements for pension benefits payable to
certain eligible current and future retirees under our funded
plans – Benefits 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 these plans.
to
(cid:129) Pension and postretirement benefit payments – As of
December 30, 2017, we had unfunded benefit obligations from
certain defined benefit plans. Refer to Note 6, ‘‘Pension and
Other Postretirement Benefits,’’ to the Consolidated Financial
Statements for more information, including expected benefit
payments over the next 10 years.
(cid:129) 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
It
13
Avery Dennison Corporation
2017 Annual Report
Payments Due by Period
Total
2018
2019
2020
2021
2022 Thereafter
$ 259.9 $259.9 $
– $
– $
1,304.5
37.2
283.2
189.7
1.5
6.2
41.6
48.2
15.0
6.2
41.6
35.8
265.0
5.6
31.5
26.3
– $
–
5.3
27.1
18.2
–
–
4.8
27.1
13.6
$
–
1,023.0
9.1
114.3
47.6
$2,074.5 $357.4 $98.6 $328.4 $50.6 $45.5
$1,194.0
Postretirement Benefits,’’
Statements for more information.
to
the Consolidated Financial
(cid:129) Cash awards to employees under incentive compensation
plans – The amounts to be paid to employees under these
awards are based on our stock price and, if applicable,
achievement of certain performance objectives as of the end of
their respective performance periods, and, therefore, we
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
more information.
(cid:129) Unfunded termination indemnity benefits to certain employees
outside of the U.S. – These benefits are subject to applicable
agreements, local laws and regulations. We have not incurred
significant costs related to these arrangements.
(cid:129) Unrecognized tax benefits of $108.7 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 more information.
(cid:129) The TCJA transition tax – We estimated a provisional cash tax
impact related to the transition tax resulting from the TCJA to
be approximately $27.8 million, which we will elect, to pay over
a period of eight years, free of interest, with the first installment
due in 2018 and the final installment due in 2025. This amount
may materially change pending completion of the analysis
related to the impact of the TCJA following the guidance of
SEC Staff Accounting Bulletin No. 118 (‘‘SAB 118’’). Refer to
Note 14, ‘‘Taxes Based on Income,’’ to the Consolidated
Financial Statements for more information.
(cid:129) Contingent consideration liabilities – The amounts to be paid
the 2017
for earn-out payments related
Acquisitions are subject
the acquired company’s
to
achievement of certain performance targets and may differ
from the amounts accrued as of December 30, 2017. Refer to
the Consolidated Financial
Note 2,
Statements for more information.
‘‘Acquisitions,’’
to certain of
to
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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 these estimates.
Critical accounting estimates are those that are important to our
financial condition and results, and which require us to make difficult,
subjective and/or complex judgments. Critical accounting estimates
cover accounting matters that are inherently uncertain because their
future resolution is unknown. We believe our critical accounting
estimates include accounting for goodwill, pension and postretirement
benefits, taxes based on income, long-term incentive compensation,
litigation matters, and environmental expenditures.
the fair values of our reporting units exceeded their respective carrying
amounts, including goodwill. The fair values of the reporting units tested
exceeded their carrying amounts by 100% or more.
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 costs.
Goodwill
Discount Rate
Our reporting units are composed of either a discrete business or
an aggregation of businesses with similar economic characteristics. In
performing the required impairment tests, we perform a quantitative
assessment, primarily consisting of a present value (discounted cash
flow) method, to determine the fair value of the reporting units with
goodwill. For certain reporting units the goodwill of which is acquired in
the current period, we perform a qualitative assessment to determine
whether a quantitative assessment was necessary. 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 compare the fair value of each reporting unit to its carrying
amount, and to the extent the carrying amount exceeds the fair value, an
impairment of goodwill is recognized for the excess up to the amount of
goodwill of that reporting unit.
In consultation with outside specialists, we estimate the fair value of
our reporting units using various valuation techniques, with the primary
technique being a discounted cash flow analysis. A discounted cash
flow analysis requires us to make various assumptions about the
reporting units, including sales, operating margins, growth rates, and
discount rates. Assumptions about discount rates are based on a
for comparable companies.
weighted-average cost of capital
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 materially differ from
these estimates and projections. The valuation methodology used to
inputs and
estimate the
assumptions that reflect current market conditions, as well as the impact
of planned business and operational strategies
require
management judgment. The estimated fair value could increase or
decrease depending on changes in the inputs and assumptions. Our
annual impairment analysis in the fourth quarter of 2017 indicated that
fair value of reporting units requires
that
In consultation with our actuaries, we annually review and
determine the discount rates to be used in 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 30, 2017, a .25% increase in the discount
rate in the U.S. would have decreased our year-end projected benefit
obligation by approximately $30 million and increased expected
periodic benefit cost for the coming year by approximately $.1 million.
Conversely, a .25% decrease in the discount rate in the U.S. would have
increased our year-end projected benefit obligation by approximately
$31 million and decreased expected periodic benefit cost for the
coming year by approximately $.2 million. As of December 30, 2017, a
.25% increase in the discount rate associated with our international
plans would have decreased our year-end projected benefit obligation
by $40 million and increased expected periodic benefit cost for the
coming year by approximately $2 million. Conversely, a .25% decrease
in the discount rate associated with our international plans would have
increased our year-end projected benefit obligation by approximately
$43 million and decreased expected periodic benefit cost for the
coming year by approximately $3 million.
In 2016, we began using the full yield curve approach to estimate
the service and interest cost components of net periodic benefit cost for
our pension and other postretirement benefit plans. 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
14
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
equity and fixed income markets, taking into account our asset
allocation, the correlation between returns in our asset classes, and our
mix of active and passive investments. Additionally, current market
conditions, including interest rates, are evaluated and market data is
reviewed for reasonableness and appropriateness. An increase or
decrease of .25% on the long-term return on assets 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 $2 million.
Taxes Based on Income
Deferred income tax assets represent amounts available to reduce
income taxes payable in future years. These assets arise because of
temporary differences between the financial reporting and tax bases of
assets and liabilities, as well as from net operating 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. Our forecasted earnings by jurisdiction are determined by
the manner in which we operate our business and any changes to our
operations may affect our effective tax rate. For example, our future
income tax rate could be adversely affected by earnings being lower
than anticipated in jurisdictions in which we carry significant deferred tax
assets. We use historical experience along with operating forecasts to
evaluate expected future taxable income. To the extent we do not
consider it more likely than not that a deferred tax asset will be
recovered, a valuation allowance is established in the period we make
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.’’
Our income tax rate is significantly affected by the different tax rates
applicable in the jurisdictions in which we do business. For example, the
TCJA had a significant impact on our effective tax rate for the fourth
quarter of 2017. Additionally, our effective tax rate depends on the extent
earnings are
Indefinite
reinvestment is determined using management’s judgment about our
ability and intent concerning estimates of our future financial results,
cash flows, capital investment plans and our actions to return cash to
shareholders.
indefinitely reinvested outside
the U.S.
Furthermore, our current income tax provision reflects certain tax
incentives realized through the application of lower income tax rates in
certain jurisdictions that may be subject to expirations absent of options
to renew or other replacements.
Changes in accounting for intercompany transactions may also
affect our effective tax rate. For example, with the adoption of the
accounting guidance update related to intra-entity sales and transfers of
assets other than inventory effective January 1, 2018, as described in
Note 1,
the
‘‘Summary of Significant Accounting Policies,’’
Consolidated Financial Statements, the income tax effects of an
intercompany transfer will be recognized in the period in which the
to
15
Avery Dennison Corporation
2017 Annual Report
transfer occurs, rather than amortized over time, which may increase the
impact of the transfer on our effective tax rate in a particular period.
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.
the balance sheet date,
Tax laws are complex and subject to different interpretations by
taxpayers and 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 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
circumstances existing at
into
consideration existing
laws, regulations and practices of any
governmental authorities exercising jurisdiction over our operations. For
example, the European Commission has conducted investigations in
multiple countries focusing on whether local country tax rulings or tax
legislation provides preferential tax treatment that violates European
Union state aid rules and concluded that certain countries, including the
Netherlands, Luxembourg, Belgium, and Ireland, have provided illegal
state aid in certain cases. 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.
taking
Our income tax provision for fiscal year 2017 includes the estimated
impact of the TCJA enacted in the U.S. on December 22, 2017. The
TCJA significantly revises U.S. corporate income taxation by, among
other changes, lowering corporate income tax rates, implementing a
modified territorial tax regime, and imposing a one-time transition tax
through a deemed repatriation of accumulated untaxed earnings and
profits of foreign subsidiaries. Due to the magnitude of changes
adopted by the TCJA and uncertainties pending further regulatory and
interpretative guidance, our results of operations may be affected in the
future. Complying with the TCJA and accounting for its provisions will
require accumulation of information not previously required or regularly
produced, hence, we included a reasonable estimate (‘‘provisional
amount’’) of the impact of the TCJA on our tax provision following the
guidance of SAB 118. The final impact of the TCJA may materially differ
from the provisional amount, due to, among other things, further
refinement of our estimates in calculating the effect, changes in
interpretations and assumptions,
regulatory and administrative
guidance, changes to certain estimates and amounts related to
earnings and profits of and taxes paid by certain foreign subsidiaries,
and actions we may take as a result of the TCJA.
Refer to Note 14, ‘‘Taxes Based on Income,’’ to the Consolidated
Financial Statements for more information.
Long-Term Incentive Compensation
We have not capitalized expense associated with our long-term
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
financial
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. LTI Units are classified as liability
awards and remeasured at each quarter-end over the applicable vesting
or performance period. In addition to LTI Units with terms and conditions
that mirror those of RSUs, we also grant certain employees LTI Units
with terms and conditions that mirror those of PUs and MSUs.
RECENT ACCOUNTING REQUIREMENTS
Refer to Note 1, ‘‘Summary of Significant Accounting Policies,’’ to
the Consolidated Financial Statements for this information.
MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
Risk Management
We are exposed to the impact of changes in 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 translation exposure in a manner that
would entirely eliminate the effects of changes in foreign exchange rates
foreign-currency-
on our net
denominated debt to mitigate our foreign currency translation exposure
from our net investment in foreign operations.
income. We also utilize certain
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 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 and compliance
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 foreign exchange
derivative contracts. Forecasted transactions, firm 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.
In both 2017 and 2016, 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 $1.1 million at year-end
2017 and $1.6 million at year-end 2016.
The VAR model is a risk analysis tool and does not represent actual
losses in fair value that we could incur, nor does it consider the potential
effect of favorable changes in market factors.
Interest Rate Sensitivity
In 2017, an assumed 30 basis point move in interest rates affecting
our variable-rate borrowings (10% of our weighted-average interest rate
on floating rate debt) would have increased interest expense by
approximately $.7 million.
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.
16
Consolidated Balance Sheets
(Dollars in millions, except per share amount)
Assets
Current assets:
Cash and cash equivalents
Trade accounts receivable, less allowances of $36.2 and $47.8 at year-end 2017 and 2016, 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 2017 and 2016;
issued – 124,126,624 shares at year-end 2017 and 2016; outstanding – 88,011,541 shares and 88,308,860
shares at year-end 2017 and 2016, respectively
Capital in excess of par value
Retained earnings
Treasury stock at cost, 36,115,083 shares and 35,817,764 shares at year-end 2017 and 2016, respectively
Accumulated other comprehensive loss
Total shareholders’ equity
See Notes to Consolidated Financial Statements
December 30,
2017
December 31,
2016
$
224.4
1,180.3
609.6
28.9
6.3
188.4
2,237.9
1,097.9
985.1
166.3
196.3
453.4
$
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
$ 5,136.9
$ 4,396.4
$
265.4
1,007.2
248.5
112.3
49.2
289.2
1,971.8
1,316.3
629.3
173.3
$
579.1
841.9
217.4
95.2
37.9
232.8
2,004.3
713.4
660.9
92.3
124.1
862.6
2,596.7
(1,856.7)
(680.5)
1,046.2
124.1
852.0
2,473.3
(1,772.0)
(751.9)
925.5
$ 5,136.9
$ 4,396.4
17
Avery Dennison Corporation
2017 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
Other expense, net
Interest expense
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 per common share:
Continuing operations
Discontinued operations
Net income per common share
Net income 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
2017
2016
2015
$6,613.8
4,801.6
1,812.2
1,123.2
36.5
63.0
589.5
307.7
281.8
–
$6,086.5
4,386.8
1,699.7
1,097.5
65.2
59.9
477.1
156.4
320.7
–
$5,966.9
4,321.1
1,645.8
1,108.1
68.3
60.5
408.9
134.5
274.4
(.1)
$ 281.8
$ 320.7
$ 274.3
$
$
$
$
$
3.19
–
3.19
3.13
–
3.13
1.76
88.3
90.1
$
$
$
$
$
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
18
Consolidated Statements of Comprehensive Income
(In millions)
Net income
Other comprehensive income (loss), net of tax:
Foreign currency translation:
Translation gain (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:
(Losses) gains recognized on cash flow hedges
Reclassifications to net income
Other comprehensive income (loss), net of tax
Total comprehensive income, net of tax
See Notes to Consolidated Financial Statements
2017
2016
2015
$281.8
$320.7
$ 274.3
56.4
(53.7)
(139.0)
(3.0)
19.3
(2.2)
.9
(62.9)
44.2
(18.9)
22.9
.7
2.8
(.5)
(2.0)
71.4
(68.9)
(137.5)
$353.2
$251.8
$ 136.8
19
Avery Dennison Corporation
2017 Annual Report
Consolidated Statements of Shareholders’ Equity
(Dollars in millions, except per share amounts)
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
Balance as of December 31, 2016
Net income
Other comprehensive income, net of tax
Repurchase of 1,488,890 shares for treasury
Issuance of 960,656 shares under stock-based compensation plans
Contribution of 230,915 shares to 401(k) Plan
Dividends: $1.76 per share
Common Capital in
excess of
stock, $1
par value
par value
Retained
earnings
Treasury
stock
Accumulated
other
comprehensive
loss
Total
$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
–
$124.1
–
–
–
–
–
–
$852.0 $2,473.3 $(1,772.0)
–
281.8
–
–
(129.7)
–
36.2
(14.4)
8.8
11.5
–
(155.5)
–
–
–
10.6
–
–
–
–
–
92.9
20.0
(142.5)
$(751.9) $ 925.5
281.8
71.4
(129.7)
32.4
20.3
(155.5)
–
71.4
–
–
–
–
Balance as of December 30, 2017
$124.1
$862.6 $2,596.7 $(1,856.7)
$(680.5) $1,046.2
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:
2017
2016
2015
$ 281.8
$ 320.7
$ 274.3
126.6
52.1
37.6
1.4
30.2
–
151.6
53.9
(141.2)
(14.9)
(6.5)
83.4
(.6)
29.6
(11.8)
(23.1)
650.1
(190.5)
(35.6)
6.0
(8.3)
(319.3)
–
(547.7)
(89.2)
542.9
(253.8)
(155.5)
(129.7)
22.0
(20.6)
(83.9)
10.8
29.3
195.1
117.5
62.6
54.4
1.5
27.2
41.4
52.3
46.2
(88.2)
(19.6)
(7.6)
31.6
32.4
(14.1)
(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
–
12.9
50.1
(135.9)
(34.4)
3.9
65.5
7.0
(23.7)
(.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
$ 224.4
$ 195.1
$ 158.8
Depreciation
Amortization
Provision for doubtful accounts and sales returns
Net losses from asset impairments and sales/disposals of assets
Stock-based compensation
Loss from settlement of pension obligations
Deferred income taxes
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
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 of investments, net
Payments for acquisitions, net of cash acquired, and investments in businesses
Other
Net cash used in investing activities
Financing Activities
Net (decrease) increase in borrowings (maturities of three months or less)
Additional long-term borrowings
Repayments of long-term debt
Dividend payments
Share repurchases
Proceeds from exercises of stock options, net
Tax withholding for and excess tax benefit from stock-based compensation, net
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
2017 Annual Report
Notes to Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
Nature of Operations
include pressure-sensitive
We develop identification and decorative solutions for businesses
worldwide. Our products
labeling
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 and controlled 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.
Fiscal Year
Normally, our fiscal years consist of 52 weeks, but every fifth or sixth
fiscal year consists of 53 weeks. Our 2017, 2016, and 2015 fiscal years
consisted of 52-week periods ending December 30, 2017,
December 31, 2016, and January 2, 2016, respectively.
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
Designed and Engineered Solutions
(‘‘DES’’) businesses as
discontinued operations in the Consolidated Statements of Income for
fiscal year 2015. Unless otherwise noted, the results and financial
condition of discontinued operations have been excluded from the
notes to our Consolidated Financial Statements.
Accounting Guidance Update
In the first quarter of 2017, we adopted an accounting guidance
update that simplifies several aspects of the accounting for stock-based
payment transactions. As a result of adopting this update, beginning in
the first quarter of 2017, (i) the tax effects related to stock-based
payments at settlement or expiration were recognized through the
income statement, a change from the previous requirement that certain
tax effects be recognized in capital in excess of par value, and, as
required by this guidance, this change was applied prospectively, and
(ii) all tax-related cash flows resulting from stock-based payments were
reported as operating activities on the statements of cash flows, a
change from the previous requirement to present excess tax benefits as
an inflow from financing activities and an outflow from operating
activities, and, as permitted by this update, these changes were applied
prospectively. Refer to Note 14, ‘‘Taxes Based on Income,’’ for more
information.
In the third quarter of 2017, we adopted an accounting guidance
update that simplifies the measurement of goodwill impairment. This
guidance update eliminates step two of the goodwill impairment test, so
that goodwill impairment is the amount by which a reporting unit’s
carrying value exceeds its fair value, not to exceed the carrying amount
of goodwill. Our adoption of this guidance update did not have a
significant impact on our financial position, results of operations, cash
flows, or disclosures.
The preparation of
financial statements
in conformity with
accounting principles generally accepted in the United States of
America, or GAAP, requires management to make estimates and
assumptions for the reporting period and as of the date of the financial
statements. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent liabilities
and the reported amounts of revenue and expense. Actual results could
differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents 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:
(cid:129) Customer-specific allowances;
(cid:129) Amounts based upon an aging schedule; and
(cid:129) An amount based on our historical experience.
No single customer represented 10% or more of our net sales in, or
trade accounts receivable at, year-end 2017 or 2016. However, during
2017, 2016, and 2015, our ten largest customers by net sales
represented approximately 15%, 14%, and 15% of our net sales,
respectively. As of December 30, 2017 and December 31, 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
Inventories
Inventories are stated at the lower of cost or net realizable value and
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
22
Notes to Consolidated Financial Statements
related accumulated depreciation, with any resulting gain or loss
included in net income.
Software
We capitalize internal and external software costs incurred during
the application development stage of software development, including
costs incurred for design, coding, installation to hardware, testing, and
upgrades and enhancements that provide the software or hardware with
additional functionalities and capabilities. Internal and external software
costs during the preliminary project stage are expensed, as are those
costs during the post-implementation and/or operation stage, including
internal and external training costs and maintenance costs. Capitalized
software, which is included in ‘‘Other assets’’ in the Consolidated
Balance Sheets, is amortized on a straight-line basis over the estimated
useful life of the software, 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.
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 materially differ from
these estimates and projections. The valuation methodology used to
estimate the
inputs and
assumptions that reflect current market conditions, as well as the impact
of planned business and operational strategies
require
management judgment. The estimated fair value could increase or
decrease depending on changes in the inputs and assumptions.
fair value of reporting units requires
that
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.’’
Goodwill and Other
Acquisitions
Intangibles Resulting
from Business
Foreign Currency
Business combinations are accounted for using the acquisition
method, with the excess of the acquisition cost over the fair value of net
tangible assets and identified intangible assets acquired considered
goodwill. As a result, we disclose goodwill separately from other
intangible assets. Other identifiable intangibles include customer
relationships, patents and other acquired technology, and trade names
and trademarks.
In performing the required impairment tests, we perform a
quantitative assessment, primarily consisting of a present value
(discounted cash flow) method, to determine the fair value of the
reporting units with goodwill. For certain reporting units the goodwill of
which was acquired in the current period, we perform a qualitative
assessment to determine whether a quantitative assessment is
necessary. 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 compare the fair value of each reporting unit to its carrying
amount, and, to the extent the carrying amount exceeds the fair value,
an impairment of goodwill is recognized for the excess up to the amount
of goodwill of that reporting unit.
In consultation with outside specialists, we estimate the fair value of
our reporting units using various valuation techniques, with the primary
technique being a discounted cash flow analysis. A discounted cash
flow analysis requires us to make various assumptions about the
reporting units, including sales, operating margins, growth rates, and
discount rates. Assumptions about discount rates are based on a
23
Avery Dennison Corporation
2017 Annual Report
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 derivative 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
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). Other derivatives
not designated as hedges are recorded on the balance sheets at fair
value, with changes in fair value recognized in earnings. 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
Notes to Consolidated Financial Statements
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.
We also utilize certain foreign-currency-denominated debt to
mitigate our foreign currency translation exposure from our net
investment in foreign operations.
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
The accounting guidance update that simplifies several aspects of
the accounting for stock-based payment transactions provided an
accounting policy election in accounting for forfeitures of stock-based
awards. We elected to continue our current practice of estimating
expected forfeitures in determining the compensation cost to be
recognized each period, rather than accounting for forfeitures as they
occur.
No long-term incentive compensation expense was capitalized in
See also Note 5, ‘‘Financial Instruments,’’ for more information.
2017, 2016, or 2015.
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 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.
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
upon estimates at the time products are sold. These estimates are
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
to market-leveraged stock units
compensation expense related
(‘‘MSUs’’) is based on the fair value of awards, adjusted for estimated
forfeitures, and amortized on a graded-vesting basis over their
respective performance periods.
Compensation expense for awards with a market condition as a
performance objective, which includes PUs and MSUs, is not adjusted if
the condition is not met, as long as the requisite service period is met.
The fair value of stock options is estimated as of the date of grant
using the Black-Scholes option-pricing model. This model requires
input assumptions for our expected dividend yield, expected stock price
volatility, risk-free interest rate, and the expected option term.
The fair value of RSUs and the component of PUs that is subject to
the achievement of a performance objective based on a financial
performance condition 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
24
Notes to Consolidated Financial Statements
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. LTI Units are classified as liability
awards and remeasured at each quarter-end over the applicable vesting
or performance period. In addition to LTI Units with terms and conditions
that mirror those of RSUs, we also grant certain employees LTI Units
with terms and conditions that mirror those of PUs and MSUs.
See also Note 12, ‘‘Long-term Incentive Compensation,’’ for more
information.
Taxes Based on Income
Our provision for income taxes is determined using the asset and
liability approach in accordance with GAAP. 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.
Our income tax provision for fiscal year 2017 includes the estimated
impact of the TCJA enacted in the U.S. on December 22, 2017. The
TCJA significantly revises U.S. corporate income taxation, among other
changes, lowering corporate income tax rates, implementing a modified
territorial tax regime, and imposing a one-time transition tax through a
deemed repatriation of accumulated untaxed earnings and profits of
foreign subsidiaries. We include a reasonable estimate (‘‘provisional
amount’’) of the impact of the TCJA on our tax provision following the
guidance of SAB 118. The final impact of the TCJA may differ from the
provisional amount as included, possibly materially, due to, among
other things, further refinement of our calculations, changes in
interpretations and assumptions we have made, regulatory and
administrative guidance that may be issued, and actions we may take
as a result of the TCJA.
See also Note 14, ‘‘Taxes Based on Income,’’ for more information.
Recent Accounting Requirements
In February 2018, the Financial Accounting Standards Board
(‘‘FASB’’) issued guidance that provides entities with the option to
reclassify certain tax effects of the TCJA in accumulated other
comprehensive income to retained earnings. This guidance can be
applied either in the period of adoption or retrospectively to each period
in which the effect of the change in the U.S. federal income tax rate
pursuant to the TCJA is recognized. The guidance is effective for interim
and annual periods beginning after December 15, 2018, with early
adoption permitted for reporting periods for which financial statements
have yet to be issued or made available for issuance. We are currently
assessing the impact of this guidance on our financial position and
disclosures.
In August 2017, the FASB issued amended guidance to improve
the financial reporting of hedging relationships to better reflect the
economic results of an entity’s risk management activities in its financial
statements, as well as to simplify the application of hedge accounting.
The amended presentation and disclosure guidance is required
prospectively. The guidance will be effective for interim and annual
25
Avery Dennison Corporation
2017 Annual Report
periods beginning after December 15, 2018, and early adoption is
permitted. We are currently assessing the impact of this guidance on
our financial position, results of operations, cash flows, and disclosures.
In May 2017, the FASB issued amended guidance that provides
clarity on which changes to share-based awards are considered
substantive and require modification accounting to be applied. This
guidance is effective for interim and annual periods beginning after
December 15, 2017. We do not regularly modify the terms and
conditions of share-based awards and do not believe our adoption of
this amended guidance will have a significant effect on our financial
position, results of operations, cash flows, and disclosures.
In March 2017, the FASB issued guidance that requires employers
with defined benefit plans to present only the service cost component of
net periodic benefit cost in the same income statement line item(s) as
other employee compensation costs arising from services rendered
during the period. Employers are required to present the other
components of the net periodic benefit cost separately from the line
item(s) that includes the service cost and outside of any subtotal of
operating income. Components other than the service cost component
will not be eligible for capitalization in assets. Employers are required to
apply the guidance on the presentation of the components of net
periodic benefit cost in the income statement retrospectively, while the
guidance that limits the capitalization of net periodic benefit cost in
assets to the service cost component must be applied prospectively.
This guidance is effective for interim and annual periods beginning after
December 15, 2017. The non-service cost components of net periodic
pension cost totaled approximately $18 million and $53 million for the
years ended 2017 and 2016, respectively. The amount in 2016 included
a recognized loss on settlement of pension obligations of approximately
$41 million. We do not expect this guidance to have a significant impact
on the presentation of our results of operations and disclosures.
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 qualifies as a business. This guidance is
for fiscal years and interim periods beginning after December 15, 2017
and early adoption is permitted. We do not anticipate that our adoption
of this guidance will have a significant impact on our financial position,
results of operations, cash flows, and disclosures.
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 they occur.
This guidance is effective for fiscal years and interim periods beginning
after December 15, 2017. The guidance requires modified retrospective
adoption. Upon adoption, we expect to derecognize tax-related
deferred charges, including tax-related deferred charges recorded in
2017, and recognize deferred taxes related to certain intra-entity asset
transfers as a net reduction to retained earnings. Refer to Note 14,
‘‘Taxes Based on Income,’’ for more information. We do not believe
adoption of this guidance will have a significant effect 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 and classification of certain cash receipts and cash
payments in the statement of cash flows. This guidance requires
retrospective adoption and is effective for fiscal years and interim
periods beginning after December 15, 2017. Early adoption is
permitted. Based on the information we have to date, we do not
anticipate that the adoption of this guidance will have a significant
impact on our cash flows.
In March 2016, and in subsequent updates, the FASB issued
revised guidance on accounting for leases that requires lessees to
recognize the rights and obligations created by leases on their balance
sheets. This guidance, which will be effective for interim and annual
periods beginning after December 15, 2018, also requires enhanced
disclosures regarding the amount, timing and uncertainty of cash flows
arising from leases. Early adoption is permitted. We expect to adopt this
guidance as of the effective date. 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. The guidance provides an optional
transition practical expedient to not evaluate existing or expired land
easements that were not previously accounted for as leases under the
current guidance. We are currently assessing the impact of this
guidance on our financial position, results of operations, cash flows,
and disclosures, and expect its adoption to have a significant impact on
our financial position and disclosures.
including
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
industry-specific guidance. This
recognition guidance,
revised guidance requires 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’’). We will adopt the new standard under the
modified retrospective approach in the first quarter of 2018. To prepare
for this adoption, we established a project plan and cross-functional
team to manage the assessment, design, and implementation of this
new guidance. 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. However, our evaluation of the impact could change if we
enter into new revenue arrangements in the future or interpretations of
the new guidance evolve. Upon adoption of this revised guidance,
allowances for customer returns, currently presented as a reduction of
Notes to Consolidated Financial Statements
trade accounts receivable, will be classified as a returns liability. Our
allowance for customer returns was $11.1 million and $10 million as of
December 30, 2017 and December 31, 2016, respectively. The value of
return assets is not expected to be significant. Effective beginning on
the first day of our 2018 fiscal year, we have implemented appropriate
changes to processes, policies, systems, and controls to support
revenue recognition and disclosures in accordance with the revised
guidance.
NOTE 2. ACQUISITIONS
On June 23, 2017, we completed the stock acquisition of Yongle
Tape Ltd. (‘‘Yongle Tape’’), a China-based manufacturer of specialty
tapes and related products used in a variety of industrial markets, from
Yongle Tape’s management and Shaw Kwei & Partners.
On May 19, 2017, we completed the stock acquisition of Finesse
Medical Limited (‘‘Finesse Medical’’), an Ireland-based manufacturer of
healthcare products used in the management of wound care and skin
conditions, from Finesse Medical’s management.
On March 1, 2017, we completed the net asset acquisition of Hanita
Coatings Rural Cooperative Association Limited and stock acquisition
of certain of its subsidiaries (‘‘Hanita’’), an Israel-based pressure-
sensitive manufacturer of specialty films and laminates, from Kibbutz
Hanita Coatings and Tene Investment Funds.
We expect the acquisitions of Yongle Tape, Finesse Medical, and
Hanita (collectively, the ‘‘2017 Acquisitions’’) to expand our product
portfolio and provide new growth opportunities.
is subject
The aggregate purchase consideration for these acquisitions,
which
to customary post-closing adjustments, was
approximately $360 million. This included $15 million of payments
based on Yongle Tape’s achievement of certain pre-acquisition
performance targets. The 2017 Acquisitions were funded through cash
and existing credit facilities. In addition to the cash paid at the closing of
the 2017 Acquisitions, certain sellers are eligible for earn-out payments
of up to approximately $45 million related to the achievement of certain
performance targets for 2017 and 2018. Based on our current estimates,
we have accrued approximately $45 million for these additional earn-out
payments, which has been included in the $360 million of aggregate
purchase consideration.
Consistent with the allowable time to complete our assessment, the
including
valuations of certain acquired assets and
environmental liabilities and income taxes, are currently pending.
liabilities,
The 2017 Acquisitions were not material, individually or in the
aggregate, to our Consolidated Financial Statements.
On August 1, 2016, we completed the acquisition of the European
business of Mactac (‘‘Mactac’’) from Platinum Equity through the
purchase of Evergreen Holdings 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. This acquisition was not
material to our Consolidated Financial Statements.
26
Notes to Consolidated Financial Statements
NOTE 3. GOODWILL AND OTHER INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
Goodwill
Results from our annual goodwill impairment test in the fourth quarter of 2017 indicated that no impairment occurred during 2017. The fair value
of these assets was primarily based on Level 3 inputs.
Changes in the net carrying amount of goodwill for 2017 and 2016 by reportable segment were as follows:
(In millions)
Goodwill as of January 2, 2016
Acquisitions(1)
Transfer(2)
Translation adjustments
Goodwill as of December 31, 2016
2017 Acquisitions(1)
Acquisition adjustments(3)
Translation adjustments
Goodwill as of December 30, 2017
Label and
Graphic
Materials
Retail
Branding and
Information
Solutions
Industrial and
Healthcare
Materials
$277.9
107.8
–
(12.4)
373.3
17.5
4.8
33.9
$408.3
–
(53.1)
(1.3)
353.9
–
–
1.5
$
–
14.3
53.1
(1.0)
66.4
125.5
.7
7.6
Total
$686.2
122.1
–
(14.7)
793.6
143.0
5.5
43.0
$429.5
$355.4
$200.2
$985.1
(1) Goodwill acquired in 2016 primarily related to the Mactac acquisition. Goodwill acquired in 2017 related to the acquisitions of Hanita, which is included in our Label and Graphic Materials (‘‘LGM’’)
reportable segment, and Finesse Medical and Yongle Tape, which are included in our Industrial and Healthcare Materials (‘‘IHM’’) reportable segment.
(2) In connection with our 2016 change in operating structure, we allocated goodwill associated with our fastener solutions reporting unit from our Retail Branding and Information Solutions (‘‘RBIS’’)
reportable segment to 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.
(3) Goodwill purchase price allocation adjustments related to the acquisition of Mactac in August 2016.
The carrying amounts of goodwill at December 30, 2017 and December 31, 2016 were net of accumulated impairment losses of $820 million
recognized in fiscal year 2009 by our RBIS reportable segment.
In connection with the 2017 Acquisitions, we recognized goodwill based on our expectation of synergies and other benefits from acquiring these
businesses. We expect the majority of the recognized goodwill related to the Hanita acquisition 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 indicated that no impairment occurred in 2017.
The carrying value of indefinite-lived intangible assets resulting from business acquisitions, consisting of trade names and trademarks, was
$21.2 million and $20.3 million at December 30, 2017 and December 31, 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.
Finite-Lived Intangible Assets
In connection with the 2017 Acquisitions, we acquired approximately $110 million of identifiable intangible assets, which consisted of customer
relationships, trade names and trademarks, and patents and other acquired technology. We utilized the income approach to estimate the fair values
of the identifiable intangibles associated with the 2017 Acquisitions, using primarily Level 3 inputs. The discount rates we used to value these assets
were between 11% and 16.5%.
The table below summarizes the preliminary amounts and weighted useful lives of these intangible assets:
Customer relationships
Patents and other acquired technology
Trade names and trademarks
Amount
(in millions)
$71.5
34.0
4.2
Weighted-average
amortization
period
(in years)
16
8
6
In connection with the Mactac acquisition in 2016, we acquired approximately $29 million of identifiable intangible assets, which consisted of
customer relationships and patents and other acquired technology. 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%.
27
Avery Dennison Corporation
2017 Annual Report
The table below summarizes the amounts and weighted useful lives of these intangible assets:
Notes to Consolidated Financial Statements
Customer relationships
Patents and other acquired technology
Refer to Note 2, ‘‘Acquisitions,’’ for more information.
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 30, 2017 and December 31,
2016, which continue to be amortized:
(In millions)
Customer relationships(1)
Patents and other acquired technology(1)
Trade names and trademarks(2)
Other intangibles
Total
2017
Accumulated
Amortization
$226.4
51.3
21.0
12.0
Net
Carrying
Amount
$102.8
35.6
6.7
–
Gross
Carrying
Amount
$247.1
52.0
21.4
11.7
$310.7
$145.1
$332.2
2016
Accumulated
Amortization
$209.4
46.7
18.2
11.5
$285.8
Net
Carrying
Amount
$37.7
5.3
3.2
.2
$46.4
Gross
Carrying
Amount
$329.2
86.9
27.7
12.0
$455.8
(1) Includes respective finite-lived intangible assets acquired from the 2017 Acquisitions and the Mactac acquisition.
(2) Includes respective finite-lived intangible assets acquired from the 2017 Acquisitions.
Amortization expense for finite-lived intangible assets resulting from business acquisitions was $18.6 million for 2017, $19.9 million for 2016, and
$20.5 million for 2015.
The estimated amortization expense for finite-lived intangible
assets resulting from business acquisitions for each of the next five
fiscal years is expected to be as follows:
(In millions)
2018
2019
2020
2021
2022
Estimated
Amortization
Expense
$14.7
13.9
12.0
11.8
10.8
NOTE 4. DEBT AND CAPITAL LEASES
Short-Term Borrowings
We had $183.8 million and $44.5 million of borrowings from U.S.
commercial paper issuances outstanding at December 30, 2017 and
December 31, 2016, respectively, with a weighted-average interest rate
of 1.79% and .9%, 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.
As of December 30, 2017, there was no balance outstanding under this
program.
Short-Term Credit Facilities
In November 2017, we amended and restated the Revolver,
increasing the amount available from certain domestic and foreign
banks from $700 million to $800 million. The amendment also extended
the Revolver’s maturity date to November 8, 2022. 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 $300 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 balance was outstanding under
the Revolver as of
December 30, 2017 or December 31, 2016. Commitment fees
associated with the Revolver in 2017, 2016, and 2015 were $1.1 million,
$1.1 million, and $1.9 million, respectively.
In addition to the Revolver, we have significant short-term lines of
credit available in various countries totaling approximately $330 million
at December 30, 2017. These lines may be cancelled at any time by us
or the issuing banks. Short-term borrowings outstanding under our lines
of credit were $76.1 million and $72.9 million at December 30, 2017 and
December 31, 2016, respectively, with a weighted-average interest rate
of 6.2% and 6.5%, respectively.
From time to time, certain of our subsidiaries provide guarantees on
certain arrangements with banks. Our exposure to these guarantees is
not material.
Long-Term Borrowings and Capital Leases
In March 2017, we issued e500 million of senior notes, due March
2025. The senior notes bear an interest rate of 1.25% per year, payable
annually in arrears. The net proceeds from the offering, after deducting
underwriting discounts and estimated offering expenses, were
28
Notes to Consolidated Financial Statements
$526.6 million (e495.5 million), a portion of which we used to repay
commercial paper borrowings used to finance a portion of our
acquisition of Mactac, and the remainder of which we used for general
corporate purposes and the 2017 Acquisitions. We designated the
senior notes as a net investment hedge of our investment in foreign
operations. Refer to Note 5, ‘‘Financial Instruments,’’ for more
information.
In October 2017, we repaid $250 million of senior notes at maturity
using U.S. commercial paper borrowings.
Long-term debt, including its respective interest rates, and capital
lease obligations at year-end consisted of the following:
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
Graphic Materials business. Because ownership of the facility transfers
to us at the end of the lease term, we accounted for it as a capital lease.
The carrying value of
lease at December 30, 2017 was
approximately $20 million, of which approximately $18 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 30, 2017.
the
(In millions)
2017
2016
Other
Long-term debt and capital leases
Medium-term notes:
Series 1995 due 2020 through 2025
$
44.9
$ 44.9
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 2025 at 1.25%
Senior notes due 2033 at 6.0%
Capital leases
Other borrowings(1)
Less amount classified as current
–
249.5
248.7
588.4
148.7
25.0
16.6
(5.5)
249.7
249.3
248.4
–
148.6
25.2
–
(252.7)
Total long-term debt and capital leases(2)
$1,316.3
$ 713.4
(1) Other borrowings consisted of long-term bank borrowings by foreign subsidiaries.
(2) Includes unamortized debt issuance cost and debt discount of $7.1 million and $.7 million as
of year-end 2017, respectively, and $3.6 million and $.4 million as of year-end 2016,
respectively.
At year-end 2017, our medium-term notes had maturities from 2020
through 2025 and accrued interest at a weighted-average fixed rate of
7.5%.
We expect maturities of long-term debt and capital lease payments
for each of the next five fiscal years and thereafter to be as follows:
Year
2018 (classified as current)
2019
2020
2021
2022
2023 and thereafter
(In millions)
$
6.4
19.9
269.3
3.9
3.4
1,030.6
The maturities of capital lease payments in the table above include
$3.9 million of imputed interest, $1 million of which is expected to be
paid in 2018.
Our 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 30, 2017 and
December 31, 2016, we were in compliance with our financial
covenants.
Our total interest costs from continuing operations in 2017, 2016,
and 2015 were $67.9 million, $63.5 million, and $63.5 million,
respectively, of which $4.9 million, $3.6 million, and $3 million,
respectively, were capitalized as part of the cost of assets.
The estimated fair value of our long-term debt is primarily based on
the credit spread above U.S. Treasury securities or euro government
bond securities, as applicable, on notes with similar rates, credit ratings,
and remaining maturities. The fair value of short-term borrowings, which
includes commercial paper issuances and short-term lines of credit,
approximates carrying value given the short duration of these
obligations. The fair value of our total debt was $1.6 billion at
December 30, 2017 and $1.31 billion at December 31, 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 30, 2017, the aggregate U.S. dollar equivalent
notional value of our outstanding commodity contracts and foreign
exchange contracts was $3.8 million and $1.37 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.
We also enter into foreign exchange contracts to offset risks arising from
foreign exchange rate fluctuations.
The following table shows the fair value and balance sheet locations of cash flow hedges as of December 30, 2017 and December 31, 2016:
Asset
Liability
(In millions)
Balance Sheet Location
2017
2016
Balance Sheet Location
Foreign exchange contracts
Commodity contracts
Commodity contracts
Other current assets
Other current assets
Other assets
$ .4
–
–
$3.0
.5
.1
$ .4
$3.6
Other accrued liabilities
Other accrued liabilities
2017
2016
$ .6
–
$1.0
–
$ .6
$1.0
29
Avery Dennison Corporation
2017 Annual Report
Notes to Consolidated Financial Statements
The following table shows the fair value and balance sheet locations of other derivatives as of December 30, 2017 and December 31, 2016:
(In millions)
Balance Sheet Location
2017
2016
Balance Sheet Location
Foreign exchange contracts
Other current assets
$3.5
$1.6
Other accrued liabilities
2017
2016
$5.6
$6.8
Asset
Liability
Cash Flow Hedges
Net Investment Hedge
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
ineffectiveness or hedge
derivatives, representing either 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
2017
2016
2015
$(2.2)
(.6)
$(2.8)
$.2
.6
$.8
$(.1)
(.7)
$(.8)
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 2017, 2016, and 2015.
As of December 30, 2017, we expected a net loss of approximately
$.3 million to be reclassified from ‘‘Accumulated other comprehensive
loss’’ to earnings within the next 12 months.
Other Derivatives
For other derivative instruments, which are not designated as
hedging instruments, the gain or loss is recognized in current earnings.
These derivatives are intended to offset certain of our economic
exposures. The following table shows the components of the net gains
(losses) recognized in income related to these derivative instruments.
(In millions)
Foreign exchange
contracts
Foreign exchange
contracts
Location of Net Gains
(Losses) in Income
Cost of products
sold
Marketing, general
and administrative
expense
2017
2016
2015
$ (1.2)
$2.8
$2.9
(42.9)
4.1
$(44.1)
$6.9
2.9
$5.8
In March 2017, we designated our e500 million of
euro-denominated 1.25% senior notes due 2025 as a net investment
hedge of our investment in foreign operations. The net assets from the
investment in foreign operations were greater than the senior notes, and
as such, the net investment hedge was effective. Refer to Note 4, ‘‘Debt
and Capital Leases,’’ for more information.
Gain (loss), before tax, recognized in ‘‘Accumulated other
comprehensive loss’’ (effective portion) related to the net investment
hedge was as follows:
(In millions)
2017
2016
2015
Foreign currency denominated debt
$(63.7) N/A
N/A
We recorded no ineffectiveness from our net investment hedge in
earnings during 2017.
NOTE 6. PENSION AND OTHER POSTRETIREMENT BENEFITS
Defined Benefit Plans
We sponsor a number of defined benefit plans, the accrual of
benefits under some of which has been frozen, covering eligible
employees in the U.S. and certain other countries. Benefits payable to
an employee are based primarily on years of service and the
employee’s compensation during the course of his or her employment
with us.
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 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, in 2016, we recognized
approximately $72 million of additional net pension obligations with a
corresponding increase in actuarial losses recorded in ‘‘Accumulated
other comprehensive loss,’’ primarily due to lower discount rates in
effect when the plan was remeasured.
30
Notes to Consolidated Financial Statements
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 includes both risk-seeking
(‘‘growth portfolio’’) and liability-hedging components. 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
allocation for our international plans combined is 39% in equity
securities, 43% in fixed income securities and cash, and 18% 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.
These methods 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)
2017
Cash
Pooled funds – liability-hedging portfolio(1)
Pooled funds – growth portfolio(1)
Total U.S. plan assets
2016
Cash
Pooled funds – liability-hedging portfolio(1)
Pooled funds – growth portfolio(1)
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
$
–
275.6
464.6
$740.2
$
–
269.0
403.1
$672.1
(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 U.S. plan assets.
31
Avery Dennison Corporation
2017 Annual Report
The following table sets forth, by level within the fair value hierarchy (as applicable), international plan assets at fair value:
Notes to Consolidated Financial Statements
(In millions)
2017
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
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
Fair Value Measurements Using
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservable
Inputs
(Level 3)
$1.7
–
$ –
–
$
–
35.7
$3.0
–
$ –
–
$
–
30.5
Total
$
1.7
35.7
278.5
277.3
90.5
$683.7
$
3.0
30.5
284.2
223.4
43.1
$584.2
(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 30, 2017:
(In millions)
Balance at December 31, 2016
Net realized and unrealized gain
Purchases
Settlements
Impact of changes in foreign currency exchange rates
Balance at December 30, 2017
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 the full yield curve approach to estimate
the service and interest cost components of net periodic benefit cost for
Level 3 Assets
Insurance Contracts
$30.5
.7
2.8
(1.4)
3.1
$35.7
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
conditions, including interest rates, are evaluated and market data is
reviewed for reasonableness and appropriateness.
32
Notes to Consolidated Financial Statements
Healthcare Cost Trend Rate
Measurement Date
Our practice is to fund the cost of postretirement benefits from
operating cash flows. For measurement purposes, we assumed a 7%
annual rate of increase in the per capita cost of covered health care
benefits for 2018. This rate is expected to decrease to 5% by 2024.
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.
A one-percentage-point change in assumed health care cost trend
rates would have the following effects:
(In millions)
Effect on total of service
and interest cost
components
Effect on postretirement
benefit obligations
One-percentage-point
Increase
One-percentage-point
Decrease
$.01
.3
$(.01)
(.2)
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
2017
2016
2017
2016
U.S.
Int’l
U.S.
Int’l
$1,033.7
.5
35.3
–
–
73.1
–
–
(60.5)
–
–
–
$762.9
18.2
14.3
3.4
(2.1)
(26.4)
(1.3)
–
(22.5)
–
–
90.2
$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)
$ 5.0
–
.1
.5
–
(.1)
–
–
(1.4)
–
–
–
$ 5.9
–
.2
.5
–
(.2)
–
–
(1.4)
–
–
–
$ 5.0
Projected benefit obligations at end of year
$1,082.1
$836.7
$1,033.7
$762.9
$ 4.1
Accumulated benefit obligations at end of year
$1,082.1
$355.6
$1,033.7
$704.8
(1) In connection with the Mactac acquisition 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.
33
Avery Dennison Corporation
2017 Annual Report
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
Notes to Consolidated Financial Statements
Pension Benefits
U.S. Postretirement
Health Benefits
2017
2016
2017
2016
U.S.
Int’l
U.S.
Int’l
$672.1
90.1
–
–
38.5
–
(60.5)
–
–
$584.2
34.2
(.7)
–
14.0
3.4
(22.5)
–
71.1
$704.9
42.9
–
–
53.4
–
(59.9)
(69.2)
–
$552.1
79.4
–
8.9
13.8
2.9
(21.8)
–
(51.1)
$
–
–
–
–
.9
.5
(1.4)
–
–
$
–
–
–
–
.9
.5
(1.4)
–
–
$740.2
$683.7
$672.1
$584.2
$
–
$
–
(1) In connection with the Mactac acquisition 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)
Pension Benefits
U.S. Postretirement
Health Benefits
2017
2016
2017
2016
U.S.
Int’l
U.S.
Int’l
Funded status of the plans
Other accrued liabilities
Long-term retirement benefits and other liabilities(1)
$ (33.4)
(308.5)
$
(2.4)
(150.6)
$ (13.5)
(348.1)
$
(2.0)
(176.7)
$ (.5)
(3.6)
Plan assets less than benefit obligations
$(341.9)
$(153.0)
$(361.6)
$(178.7)
$(4.1)
(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.
$ (.8)
(4.2)
$(5.0)
Pension Benefits
U.S. Postretirement
Health Benefits
2017
2016
2017
2016
U.S.
Int’l
U.S.
Int’l
Weighted-average assumptions used to determine year-end benefit obligations
Discount rate
Compensation rate increase
3.71% 2.25% 4.25% 2.12%
–
2.29
–
2.27
3.55%
–
3.95%
–
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 $1.92 billion and $1.42 billion, respectively, at year-end 2017 and $1.80 billion and $1.26 billion, respectively,
at year-end 2016.
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 $1.44 billion and $994 million, respectively, at year-end 2017 and $1.74 billion and $1.26 billion,
respectively, at year-end 2016.
Accumulated Other Comprehensive Loss
The following table sets forth the pre-tax amounts recognized in ‘‘Accumulated other comprehensive loss’’ in the Consolidated Balance Sheets:
(In millions)
Net actuarial loss
Prior service cost (credit)
Net transition obligation
Pension Benefits
U.S. Postretirement
Health Benefits
2017
2016
2017
2016
U.S.
Int’l
U.S.
Int’l
$567.2
16.7
–
$186.5
(7.4)
.1
$564.2
17.5
–
$213.6
(4.9)
.2
$ 17.0
(13.1)
–
$ 18.5
(16.4)
–
Net amount recognized in accumulated other comprehensive loss
$583.9
$179.2
$581.7
$208.9
$ 3.9
$ 2.1
34
Notes to Consolidated Financial Statements
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
2017
2016
2015
2017
2016
2015
U.S.
Int’l
U.S.
Int’l
U.S.
Int’l
$ 21.8
–
$(17.2)
(2.1)
$ 39.1
–
$48.9
(.6)
$ 21.1
–
$
$11.3
(.7)
–
–
$
(.2)
–
$ (1.4)
–
(18.7)
(.9)
–
–
–
(10.8)
.4
–
–
–
(19.0)
(1.2)
–
–
(41.4)
(7.0)
.4
(.1)
–
–
(20.0)
(1.2)
–
–
–
(9.4)
.3
–
.2
(4.3)
(1.5)
3.3
–
–
–
(1.7)
3.2
–
–
–
(2.2)
3.3
–
–
–
Net amount recognized in other comprehensive (income)
loss
$ 2.2
$(29.7)
$(22.5)
$41.6
$
(.1)
$ (2.6)
$ 1.8
$ 1.3
$
(.3)
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:
Pension Benefits
U.S. Postretirement
Health Benefits
2017
2016
2015
2017
2016
2015
(In millions)
U.S.
Int’l
U.S.
Int’l
U.S.
Int’l
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 net (gain) loss on curtailments
Recognized loss on settlements(1)
$
.5
35.3
1.7
(40.5)
18.7
.9
–
–
–
$ 18.2
14.3
–
(21.1)
10.8
(.4)
–
–
–
$
.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
$
–
.1
–
–
1.5
(3.3)
–
–
–
$
–
.1
–
–
1.7
(3.2)
–
–
–
$
–
.3
–
–
2.2
(3.3)
–
–
–
Net periodic benefit cost (credit)
$ 16.6
$ 21.8
$ 53.5
$ 15.4
$ 16.3
$ 22.8
$ (1.7)
$ (1.4)
$
(.8)
(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 in Switzerland in 2015. These losses on
settlements were recorded in ‘‘Other expense, net’’ in the 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
2017
2016
2015
2017
2016
2015
U.S.
Int’l
U.S.
Int’l
U.S.
Int’l
4.18% 2.12% 4.55% 2.95% 4.00% 2.54% 3.95% 4.13% 3.50%
7.50
7.00
–
–
4.27
2.22
3.77
2.27
4.14
2.24
7.25
–
–
–
–
–
–
–
Discount rate
Expected return on assets
Compensation rate increase
35
Avery Dennison Corporation
2017 Annual Report
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
2018:
(In millions)
U.S.
Int’l
U.S. postretirement health benefits
$34.0
14.9
.5
Future Benefit Payments
Anticipated future benefit payments, which reflect expected service
periods for eligible participants, were as follows:
(In millions)
2018
2019
2020
2021
2022
2023 - 2027
Pension Benefits
U.S.
Int’l
$ 83.0
58.9
59.0
60.6
60.5
305.9
$ 20.4
21.8
21.3
23.0
25.9
145.5
U.S. Postretirement
Health Benefits
$ .5
.4
.3
.3
.3
1.3
Estimated Amortization Amounts in Accumulated Other
Comprehensive Loss
Our estimates of fiscal year 2018 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
$20.8
.8
–
$8.1
(.5)
.1
Net loss (gain) to be recognized
$21.6
$7.7
$ 1.4
(3.3)
–
$(1.9)
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
$20.2 million, $20 million, and $20.2 million in 2017, 2016, and 2015,
respectively, related to our employer contributions and employer match
of participant contributions to the Savings Plan.
Other Retirement Plans
We have deferred compensation plans that 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 2017 and 2016, we had accrued $86.9 million and
$78.7 million, respectively, for our obligations under these plans. A
portion of the interest on certain of our contributions may be forfeited by
Notes to Consolidated Financial Statements
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 equity plans. 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 .2 million and
.1 million DSUs were outstanding as of year-end 2017 and 2016,
respectively, with an aggregate value of $17.8 million and $10.2 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 $243.5 million and $230.6 million at year-end 2017 and
2016, 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
2018
2019
2020
2021
2022
2023 and thereafter
Total minimum lease payments
(In millions)
$ 48.2
35.8
26.3
18.2
13.6
47.6
$189.7
Rent expense for operating leases from continuing operations was
approximately $64 million in 2017 and approximately $58 million in both
2016 and 2015. Operating leases primarily relate to office and
technology,
warehouse space and equipment
machinery, and transportation. These leases do not impose significant
restrictions or unusual obligations.
information
for
Refer to Note 4, ‘‘Debt and Capital Leases,’’ for more information.
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.
36
Notes to Consolidated Financial Statements
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 30, 2017, 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
settlement of our liability related to any of the sites has been agreed
NOTE 9. FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
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 2017 and 2016 related to our environmental liabilities
was as follows:
(In millions)
Balance at beginning of year
Acquisitions
Charges (reversals), net
Payments
Balance at end of year
2017
2016
$21.3
3.0
2.8
(6.0)
$17.7
–
11.6
(8.0)
$21.1
$21.3
As of December 30, 2017 and December 31, 2016, approximately
$5 million and $8 million, respectively, of the balance was classified as
short-term and
the
in
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 30, 2017:
Fair Value Measurements Using
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservable
Inputs
(Level 3)
$17.7
–
18.4
$
.1
–
$5.0
3.9
–
$6.1
–
$
–
–
–
$
–
45.0
Total
$22.7
3.9
18.4
$ 6.2
45.0
(In millions)
Assets
Trading securities
Derivative assets
Bank drafts
Liabilities
Derivative liabilities
Contingent consideration liabilities
37
Avery Dennison Corporation
2017 Annual Report
The following table provides the assets and liabilities carried at fair value, measured on a recurring basis, as of December 31, 2016:
Notes to Consolidated Financial Statements
(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 30, 2017, trading securities of $.4 million
and $22.3 million were included in ‘‘Cash and cash equivalents’’ and
‘‘Other current assets,’’ respectively, in the Consolidated Balance
Sheets. 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.
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.
to estimated earn-out
Contingent consideration
payments associated with certain of the 2017 Acquisitions. These
payments are based on the achievement of certain performance targets
in 2017 and 2018 based on the applicable terms of the purchase
agreements, and our estimates are based on the expected payments
related to these targets under the terms of their respective agreements.
We have classified these liabilities as Level 3. As of December 30, 2017,
contingent consideration liabilities of approximately $18 million and
$27 million were included in ‘‘Other accrued liabilities’’ and ‘‘Long-term
the
retirement benefits and other
Consolidated Balance Sheets.
liabilities relate
respectively,
liabilities,’’
in
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
$ –
–
–
$ –
NOTE 10. NET INCOME PER COMMON SHARE
Net income per common share was computed as follows:
(In millions, except per share amounts)
2017
2016
2015
(A) Income from continuing operations
(B) Loss from discontinued operations,
$281.8
$320.7
$274.4
net of tax
–
–
(.1)
(C) Net income available to common
shareholders
$281.8
$320.7
$274.3
(D) Weighted average number of
common shares outstanding
88.3
89.1
91.0
Dilutive shares (additional common
shares issuable under stock-
based awards)
1.8
1.6
1.9
(E) Weighted average number of
common shares outstanding,
assuming dilution
Net income 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 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)
90.1
90.7
92.9
$ 3.19
–
$ 3.60
–
$ 3.01
–
$ 3.19
$ 3.60
$ 3.01
$ 3.13
–
$ 3.54
–
$ 2.95
–
$ 3.13
$ 3.54
$ 2.95
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 from the computation were not
significant in 2017. Stock-based compensation awards excluded from
the computation totaled approximately .2 million shares in 2016 and
1 million shares in 2015.
38
Notes to Consolidated Financial Statements
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 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 long-term incentive plan or used for other corporate
purposes. In 2017, we repurchased approximately 1.5 million shares of
our common stock at an aggregate cost of $129.7 million. In 2016, we
repurchased approximately 3.8 million shares of our common stock at
an aggregate cost of $262.4 million.
In April 2017, our Board authorized the repurchase of shares of our
common stock with a fair market value of up to $650 million, exclusive of
any fees, commissions or other expenses related to such purchases, in
addition to the amount outstanding under our previous Board
authorization. Board authorizations remain in effect until shares in the
amount authorized
thereunder have been repurchased. As of
December 30, 2017, shares of our common stock in the aggregate
amount of $625.2 million remained authorized for repurchase under this
Board authorization. As of December 31, 2016, shares of our common
stock in the aggregate amount of $104.9 million remained authorized
under our previous 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.
Other Comprehensive Income
The changes in ‘‘Accumulated other comprehensive loss’’ (net of
tax) for 2017 and 2016 were as follows:
Foreign
Pension and
Other
Currency Postretirement Cash Flow
Hedges
Benefits
Translation
The amounts reclassified from ‘‘Accumulated other comprehensive
loss’’ to increase (decrease) income from continuing operations were
as follows:
(In millions)
2017
2016
2015 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)
$
.2
$ (3.0) $ 3.9 Cost of products sold
.2
(.7)
(1.3) Cost of products sold
(1.8)
(1.4)
.5
(.1)
(.1) Interest expense
(3.8)
1.0
2.5 Total before tax
(.5) Provision for income taxes
(.9)
(2.8)
2.0 Net of tax
(28.2)
8.9
(66.8)
22.6
(33.3)
10.4 Provision for income taxes
(19.3)
(44.2)
(22.9) Net of tax
Total reclassifications
for the period
$(20.2) $(47.0) $(20.9) 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:
(In millions)
2017
2016
2015
Foreign currency translation:
Translation gain (loss)
Pension and other postretirement benefits:
Net loss recognized from actuarial gain/
$(25.1) $ (3.3) $ (2.2)
loss and prior service cost/credit
Reclassifications to net income
.5
8.9
(24.2)
22.6
(11.4)
10.4
Cash flow hedges:
(Losses) gains recognized on cash flow
(In millions)
Balance as of January 2,
2016
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
December 31, 2016
Other comprehensive
income (loss) before
reclassifications, net of
tax
Reclassifications to net
income, net of tax
Net current-period other
comprehensive income
(loss), net of tax
Balance as of
Total
hedges
Reclassifications to net income
(.6)
.5
.1
1.0
(.3)
(.5)
$(158.9)
$(521.6)
$(2.5) $(683.0)
Income tax benefit related to items of other
comprehensive loss
$(15.8) $ (3.8) $ (4.0)
(53.7)
–
(62.9)
44.2
.7
(115.9)
2.8
47.0
(53.7)
(18.7)
3.5
(68.9)
$(212.6)
$(540.3)
$ 1.0
$(751.9)
56.4
–
(3.0)
19.3
(2.2)
51.2
.9
20.2
56.4
16.3
(1.3)
71.4
NOTE 12. LONG-TERM INCENTIVE COMPENSATION
Stock-Based 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.
In April 2017, our shareholders approved our 2017 Incentive Award
Plan (the ‘‘Equity Plan’’) to replace our Amended and Restated Stock
Option and Incentive Plan. The Equity Plan, a long-term incentive plan
for eligible employees and non-employee directors, allows us to grant
stock-based compensation awards – including stock options, restricted
stock units, performance units, and market-leveraged stock units – or a
December 30, 2017
$(156.2)
$(524.0)
$ (.3) $(680.5)
39
Avery Dennison Corporation
2017 Annual Report
Notes to Consolidated Financial Statements
combination of these and other awards. Under the Equity Plan, the
aggregate number of shares available for issuance is 5.4 million shares
and each full value award is counted as 1.5 shares for purposes of the
number of shares authorized for issuance. Full value awards include
restricted stock units, performance units, and market-leveraged stock
units.
Stock-based compensation expense from continuing operations
and the related recognized tax benefit were as follows:
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
(In millions)
Stock-based compensation expense
Tax benefit
2017
2016
2015
$30.2
4.3
$27.2
8.5
$26.3
8.2
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
This expense was
included
in
‘‘Marketing, general and
under our stock option and incentive plans.
administrative expense’’ in the Consolidated Statements of Income.
As of December 30, 2017, we had approximately $38 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 employees may be granted at no less
than 100% of the fair market value of our common stock on the date of
the grant and generally vest ratably over a four-year period. Options
expire ten years from the date of grant.
The fair value of stock options is estimated as of the date of grant
using the Black-Scholes option-pricing model. This model requires
The following table sets forth stock option information during 2017:
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 2017 and 2015.
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
Outstanding at December 31, 2016
Exercised
Outstanding at December 30, 2017
Options vested and expected to vest at December 30, 2017
Options exercisable at December 30, 2017
The total intrinsic value of stock options exercised was $26.8 million
in 2017, $31.7 million in 2016, and $43.3 million in 2015. We received
approximately $22 million in 2017, $71 million in 2016, and $104 million
in 2015 from the exercise of stock options. The tax benefit associated
with these exercised options was $10.1 million in 2017, $11.3 million in
2016, and $15.6 million in 2015. 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.
Number
of options Weighted-average
exercise price
(in thousands)
Weighted-average
remaining
contractual life
(in years)
Aggregate
intrinsic value
(in millions)
1,115.2
(571.6)
543.6
527.4
402.5
$41.29
38.50
$44.22
43.30
$33.79
4.72
4.94
4.83
3.72
$32.8
$38.4
37.7
$32.6
weighted-average grant date fair value for PUs was $82.15, $68.04, and
$51.37 in 2017, 2016, and 2015, respectively.
The following table summarizes information related to awarded
PUs:
Number of
Weighted-
average
PUs grant-date
fair value
(in thousands)
Performance Units (‘‘PUs’’)
PUs are performance-based awards granted to eligible employees
under our equity plans. PUs are payable in shares of our common stock
at the end of a three-year cliff vesting period provided that certain
performance objectives are achieved at the end of the period. Over the
performance period, the estimated number of shares of our common
stock issuable upon vesting is adjusted upward or downward based
upon the probability of the achievement of the performance objectives
established for the award. The actual number of shares issued can
range from 0% to 200% of the target shares at the time of grant. The
Unvested at December 31, 2016
Granted at target
Adjustment for above-target performance(1)
Vested
Forfeited/cancelled
Unvested at December 30, 2017
490.8
164.4
114.2
(231.5)
(52.8)
$58.47
82.15
48.59
48.26
66.08
485.1
$68.15
(1) Reflects adjustments for awards vesting based on above-target performance for the
2014-2016 performance period.
The fair value of vested PUs was $11.2 million in 2017, $13.8 million
in 2016, and $12.2 million in 2015.
40
Notes to Consolidated Financial Statements
Market-Leveraged Stock Units (‘‘MSUs’’)
The fair value of vested RSUs was $2.7 million, $5.3 million, and
MSUs are performance-based awards granted
to eligible
employees under our equity plans. 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
$91.40, $72.93, and $56.46 in 2017, 2016, and 2015, respectively.
The following table summarizes information related to awarded
MSUs:
Number of
Weighted-
average
MSUs grant-date
fair value
(in thousands)
Unvested at December 31, 2016
Granted at target
Adjustments for above-target performance(1)
Vested
Forfeited/cancelled
Unvested at December 30, 2017
530.7
123.7
126.0
(342.0)
(34.8)
$62.09
91.40
55.24
56.33
71.15
403.6
$70.07
(1) Reflects adjustments for awards vesting based on above-target performance for each of the
performance periods vesting in 2017.
The fair value of vested MSUs was $19.3 million in 2017,
$12.4 million in 2016, and $9.8 million in 2015.
Restricted Stock Units (‘‘RSUs’’)
RSUs are service-based awards granted to eligible employees
under our equity plans, which generally vest ratably over a period of four
years for employees. Prior to 2017, RSUs granted to non-employee
directors under our equity plans vested ratably over a period of three
years. Beginning in 2017, RSUs granted to non-employee directors
generally vest over a period of one year. The vesting of RSUs is subject
to continued service 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 $82.77, $67.66,
and $53.29 in 2017, 2016, and 2015, respectively.
The following table summarizes information related to awarded
RSUs:
Unvested at December 31, 2016
Granted
Vested
Forfeited/cancelled
Number of
RSUs
(in thousands)
117.7
74.5
(47.6)
(4.2)
Weighted-
average
grant-date
fair value
$58.87
82.77
55.72
59.53
Unvested at December 30, 2017
140.4
$72.62
41
Avery Dennison Corporation
2017 Annual Report
$8.4 million in 2017, 2016, and 2015, respectively.
Cash-Based 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 $36.6 million in 2017, $23.8 million in 2016, and
$27.1 million in 2015. This expense was included in ‘‘Marketing, general
and administrative expense’’ in the Consolidated Statements of Income.
The total recognized tax benefit related to LTI Units was $8.3 million in
2017, $7.8 million in 2016, and $8.6 million in 2015.
NOTE 13. COST REDUCTION ACTIONS
Restructuring Charges
formulas under
We have compensation plans that provide eligible employees with
severance in the event of an involuntary termination. We calculate
severance using benefit
the respective plans.
Accordingly, we record restructuring charges from qualifying cost
reduction actions 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 overseas jurisdictions, liabilities for
restructuring charges are recognized when incurred.
2015/2016 Actions
During fiscal year 2017, we recorded $34.1 million in restructuring
charges, net of reversals, related to restructuring actions initiated during
the third quarter of 2015 (‘‘2015/2016 Actions’’). These charges
consisted of severance and related costs for the reduction of
Notes to Consolidated Financial Statements
approximately 920 positions, lease cancellation costs, and asset
impairment charges.
During fiscal year 2016, we recorded $20.9 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 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.
Prior Actions
During fiscal year 2015, we recorded $33.4 million in restructuring
charges, net of reversals, related to prior restructuring actions. These
charges consisted of severance and related costs for the reduction of
approximately 605 positions, lease cancellation costs, and asset
impairment charges.
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.
During 2017, restructuring charges and payments were as follows:
(In millions)
2015/2016 Actions
Severance and related costs
Lease cancellation costs
Asset impairment charges
Prior actions
Severance and related costs
Total
Accrual at
December 31,
2016
Charges
(Reversals),
net
Cash
Payments
Non-cash
Impairment
Foreign
Currency
Translation
Accrual at
December 30,
2017
$3.3
.2
–
1.3
$4.8
$31.9
1.2
1.0
$(30.8)
(.8)
–
$
–
–
(1.0)
(.7)
(.6)
–
$33.4
$(32.2)
$(1.0)
$(.1)
–
–
–
$(.1)
$4.3
.6
–
–
$4.9
During 2016, restructuring charges and payments were as follows:
(In millions)
2015/2016 Actions
Severance and related costs
Asset impairment charges
Lease cancellation 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
5.5
$14.1
$15.7
4.1
1.1
$(20.9)
–
(1.1)
$
–
(4.1)
–
(1.0)
(3.2)
–
$19.9
$(25.2)
$(4.1)
$ .1
–
–
–
$ .1
$3.3
–
.2
1.3
$4.8
The table below shows the total amount of restructuring charges
NOTE 14. TAXES BASED ON INCOME
incurred by reportable segment and Corporate:
Taxes based on income were as follows:
(In millions)
2017
2016
2015
Restructuring charges by reportable
segment and Corporate
Label and Graphic Materials
Retail Branding and Information Solutions
Industrial and Healthcare Materials
Corporate
Total
$14.8
18.4
.2
–
$ 8.5
10.5
.9
–
$13.6
35.7
8.0
2.2
$33.4
$19.9
$59.5
(In millions)
Current:
U.S. federal tax
State taxes
International taxes
Deferred:
U.S. federal tax
State taxes
International taxes
2017
2016
2015
$ 47.0
.2
111.0
$ 10.1
.6
77.3
$ 26.4
(.1)
92.7
158.2
88.0
119.0
134.8
(3.7)
18.4
149.5
64.4
(3.0)
7.0
68.4
6.3
.5
8.7
15.5
Provision for income taxes
$307.7
$156.4
$134.5
42
Notes to Consolidated Financial Statements
The principal items accounting for the difference between taxes
computed at the U.S. statutory rate and taxes recorded were as follows:
(In millions)
2017
2016
2015
Computed tax at 35% of income before
taxes
$206.7
$167.0
$143.1
Increase (decrease) in taxes resulting
from:
State taxes, net of federal tax benefit
Tax Cuts and Jobs Act(1)
Foreign earnings taxed at different
(3.2)
172.0
2.2
–
1.3
–
rates(2)
(40.2)
27.0
(7.5)
Excess tax benefits associated with
stock-based payments(3)
Valuation allowance
Corporate-owned life insurance
U.S. federal research and
development tax credits
Tax contingencies and audit
settlements
Other items, net
(16.0)
(1.4)
(6.7)
–
(11.9)
(4.3)
–
.9
(1.9)
(4.9)
(2.9)
(2.6)
(1.9)
3.3
(20.7)
–
5.1
(3.9)
Provision for income taxes
$307.7
$156.4
$134.5
(1) During 2017, we recognized a net tax charge of $172 million as a result of the TCJA. This
amount includes the direct impacts of the TCJA, including items that would otherwise be
separately disclosed as tax effects of foreign earnings taxed at different rates, tax
contingencies and audit settlements, and other items.
(2) Included foreign earnings taxed in the U.S., net of credits, in all years.
(3) During 2017, we recognized a tax benefit of $16 million as a result of our adoption of the
accounting guidance update related to stock-based payments.
Income from continuing operations before taxes from our U.S. and
international operations was as follows:
(In millions)
U.S.
International
2017
2016
2015
$ 49.0
540.5
$ 17.9
459.2
$ 33.9
375.0
Income from continuing operations
before taxes
$589.5
$477.1
$408.9
The effective tax rate for continuing operations was 52.2%, 32.8%,
and 32.9% for fiscal years 2017, 2016, and 2015, respectively.
The 2017 effective tax rate for continuing operations included a net
tax charge of $172 million related to the enactment of the TCJA,
$5.1 million of tax benefit from the release of valuation allowance on
certain state deferred tax assets, $4.2 million of tax benefit, including
previously accrued interest and penalties, from effective settlements
and changes in our judgment about tax filing positions as a result of new
information, and $4.4 million of tax benefit from decreases in certain tax
reserves, including interest and penalties, as a result of closing tax
years.
The 2017 effective tax rate also included a net benefit of $16 million
related to our adoption of the accounting guidance update related to
stock-based payments described in Note 1, ‘‘Summary of Significant
Accounting Policies.’’ This accounting guidance update required that
the effect of excess tax benefits associated with stock-based payments
to be recognized in the income statement instead of in capital in excess
of par value as was the case prior to our adoption of this update. Excess
tax benefits are the effects of tax deductions in excess of compensation
expense recognized for financial accounting purposes. These benefits
43
Avery Dennison Corporation
2017 Annual Report
related to stock-based awards generally are generated as a result of
stock price appreciation during the vesting period or between the time
of grant and the time of exercise. We expect future excess tax benefits to
vary depending on our stock-based payments in future reporting
periods. These excess tax benefits may cause variability in our future
effective tax rate as they can fluctuate based on vesting and exercise
activity, as well as our future stock price.
In 2017, as a result of intra-entity sales and transfers of assets other
than inventory related to the recent integration of an acquisition, we
recognized a total of approximately $14 million of tax-related deferred
charges in ‘‘Other current assets’’ and ‘‘Other assets.’’ However, we
expect the tax-related deferred charges to be derecognized as an
adjustment to retained earnings upon our adoption of the accounting
guidance update described in Note 1, ‘‘Summary of Significant
Accounting Policies.’’
The 2016 effective tax rate for continuing operations included
$7.6 million of tax expense associated with the cost to repatriate current
earnings of certain foreign subsidiaries and $46.3 million of tax expense
related to U.S. income and foreign withholding taxes resulting from
changes in indefinite reinvestment assertions on certain foreign
earnings and profits; 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 $8.4 million of tax
expense from deferred tax adjustments resulting from 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 our assessment, we record
valuation allowances only with respect to the portion of the deferred tax
asset that is more likely than not to be realized. Our assessment of the
future realizability of our deferred tax assets relies heavily on our
forecasted earnings in certain jurisdictions, and such forecasted
earnings are determined by the manner in which we operate our
business. Any changes to our operations may affect our assessment of
deferred tax assets considered realizable if the positive evidence no
longer outweighs the negative evidence.
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 and profits that would be affected as a result
of our actions to improve structural and operational efficiency. Our
evaluation considered working capital, long-term liquidity, capitalization
improvement, acquisition plans, and alignment of our 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 and we recorded a tax provision for the
effects of changes in indefinite reinvestment assertions in 2016.
The 2015 effective tax rate for continuing operations included tax
expense of $20 million associated with the tax cost to repatriate current
earnings of certain 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, as a result of
the enactment of the Protecting Americans from Tax Hikes Act of 2015
(‘‘PATH Act’’), 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
that had expired on
December 31, 2014.
look-through
(‘‘CFC’’)
rule
U.S. Tax Reform
On December 22, 2017, the TCJA was enacted in the U.S. The
TCJA significantly revises U.S. corporate income taxation by, among
other changes,
to 21%,
implementing a modified territorial tax regime and imposing a one-time
transition tax through a deemed repatriation of accumulated untaxed
earnings and profits of foreign subsidiaries.
lowering corporate
tax rates
income
Based on currently available information, we included a provisional
amount of $172 million as the estimated impact resulting from the TCJA
in our results for the fourth quarter and full year 2017. This provisional
amount includes expenses of $147 million related to the estimated
transition tax, $49.2 million resulting from the estimated remeasurement
of net U.S. deferred tax assets at the lower corporate income tax rate, a
$9.3 million reserve related to potential uncertainties of our accumulated
tax attributes that were used in our estimated transition tax calculation,
$5.3 million from the estimated reduction of previously recognized U.S.
deferred tax assets that we no longer anticipate to benefit from due to
changes in the future deductibility of executive compensation, partially
offset by a net benefit of $38.8 million, primarily from the reversal of the
deferred tax liability that we previously recorded for future tax costs
associated with repatriations of certain foreign earnings and profits that
we consider not to be indefinitely reinvested.
the
tax,
includes
recorded
transition
We have not finalized the accounting for income tax effects of the
TCJA and we are relying on the guidance in SAB 118 to include our
provisional amount of the accounting impact of the TCJA in our financial
statements for the fourth quarter and full year 2017. Specifically, the
provisional amount
the
remeasurement of deferred taxes and uncertain tax positions as they
related to the TCJA, changes to certain estimates and amounts related
to earnings and profits of and taxes paid by certain foreign subsidiaries,
changes in limitations governing the future deductibility of our
previously recorded deferred tax assets on executive compensation,
and an accrual for foreign withholding taxes associated with our
previous indefinite reinvestment assertions. Furthermore, we are still in
the process of analyzing the effects of new tax provisions related to
certain types of foreign incomes, such as Global Intangible Low-taxed
Income (‘‘GILTI’’), Base Erosion Antiabuse Tax (‘‘BEAT’’), and Foreign
Derived Intangible Income (‘‘FDII’’), as well as other domestic
provisions that are effective starting in 2018. Additionally, we are
reevaluating our previous indefinite reinvestment assertions and,
should we decide to change such assertions, we will adjust our income
tax provision in the period in which such determination is made. We
have not made a determination on our accounting policy choice of
whether to treat taxes on our GILTI as period costs or to recognize
deferred taxes for basis differences expected to reverse as GILTI. The
final impact of the TCJA may materially differ from our provisional
amount, due to, among other things, further refinement of our data,
calculations and analysis, changes in interpretations and assumptions,
regulatory and administrative guidance, and actions we may take as a
result of the TCJA.
Notes to Consolidated Financial Statements
The TCJA implements a modified territorial tax regime that provides
a full exemption for foreign dividends received by a U.S. corporation
from a foreign corporation in which the U.S. corporation owns at least a
10% stake. In connection with the full dividend exemption, the TCJA
also eliminates future foreign tax credits for foreign income taxes or
withholding taxes paid or accrued with respect to any dividend to which
the new exemption applies. Absent the availability of foreign tax credits
to offset against potential foreign withholding taxes related to future
repatriation of certain foreign earnings and profits that we consider not
to be indefinitely reinvested, we reflected a net incremental impact of
$11.5 million as an increase to our deferred tax liability. This tax expense
was included in our provisional amount of $172 million referenced
above. For the remaining undistributed earnings of our foreign
subsidiaries, we continue to consider such earnings to be indefinitely
reinvested according to our current operating plans and no deferred tax
liability has been recorded for potential future taxes related to such
earnings. The imposition of the transition tax by the TCJA significantly
reduced the largest component of potential future tax liabilities
associated with future repatriation of our foreign earnings and profits. As
a result, we continue to evaluate our previous indefinite reinvestment
assertions and, should we decide to change such assertions, we will
adjust our income tax provision in the period in which such
determination is made.
SAB 118 provides for a measurement period up to one year from
the enactment of the TCJA within which we may complete our final
assessment of the legislation’s impact. We will reflect and disclose in
subsequent reporting periods any material adjustments to our
provisional amount.
As a result of the transition tax imposed by the TCJA, we expect to
fully utilize all of our U.S. federal tax credit carryforwards of
$101.2 million, causing a reduction in our non-current deferred tax
assets at the end of 2017. The estimated cash tax impact of the
transition tax is $27.8 million, net of tax credit carryforwards and
expected tax credits estimated to be generated in 2017. We will elect to
pay the transition cash tax over an eight-year period, interest free, with
the first installment due in 2018. Accordingly, we classified the first
installment of $2.2 million in our current income taxes payable and the
remaining $25.6 million in our non-current income taxes payable. We
did not discount the cash tax related to the transition tax pursuant to the
exposure draft issued by the FASB in January 2018. We neither expect
our future cash tax rate to be materially impacted by the transition tax
nor our future cash tax rate to benefit significantly from the reduction in
the U.S. corporate income tax rate.
Undistributed Foreign Earnings and Profits
As of December 30, 2017, we have accumulated undistributed
earnings and profits of foreign subsidiaries of approximately $2.9 billion,
$2.5 billion of which was subject to the transition tax associated with the
TCJA and $.4 billion of which was otherwise previously taxed. Deferred
income taxes for approximately $2.3 billion of these accumulated
undistributed earnings and profits of foreign subsidiaries have not been
provided as of December 30, 2017 since they are intended to be
indefinitely reinvested in foreign operations. Notwithstanding the fact
that the TCJA reduced the significance of the U.S. federal income tax
consequences of future repatriation, we continue to face uncertainties
that significantly limit our ability to determine the amount of potential
unrecognized deferred
indefinite
reinvestment in our foreign subsidiaries. These uncertainties include,
but are not limited to, the timing, amount, and sequence of repatriation
liabilities
to our
related
tax
44
Notes to Consolidated Financial Statements
transactions; future foreign currency fluctuations; local country tax laws
or applicable treaty exemptions; entity classification and ownership
status; and the corporate actions we ultimately take to reverse our
investment basis differences at the time of assumed repatriation. As a
result, we believe it continues to be not practicable to calculate the
deferred taxes associated with these indefinitely reinvested earnings
and profits. In making this assertion, we evaluated, 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 share
repurchases.
Deferred Income Taxes
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
Unrealized foreign currency losses(1)
Other assets
Valuation allowance
2017
2016
$ 19.9
185.9
14.0
18.0
140.9
6.5
14.9
6.3
(63.4)
$ 42.1
195.9
111.3
28.4
207.7
7.1
–
.9
(60.4)
totaled $14 million and $111.3 million, respectively. If unused, foreign
net operating losses and tax credit carryforwards will expire as follows:
(In millions)
Year of Expiry
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
Indefinite life/no expiry
Total
Net Operating
Losses(1)
Tax Credits
$ 14.3
4.8
5.5
3.5
9.8
5.0
.4
2.3
.9
.8
–
–
–
–
–
–
.7
–
–
–
585.7
$633.7
$
.1
.1
.2
.4
.5
.5
.3
.3
1.6
.3
.1
.1
.2
.3
.4
–
–
–
–
–
8.6
$14.0
(1) Net operating losses are presented before tax effect and valuation allowance.
Total deferred tax assets(2)
343.0
533.0
Based on current projections, certain indefinite-lived foreign net
Depreciation and amortization
Repatriation accrual(3)
Foreign operating loss recapture
Other liabilities
Total deferred tax liabilities(2)
Total net deferred tax assets
(95.3)
(27.7)
(54.9)
(8.8)
(86.1)
(62.1)
(79.8)
(2.3)
(186.7)
(230.3)
$ 156.3
$ 302.7
(1) Primarily reflect the unrealized foreign currency losses in 2017 related to our net investment
hedge described in Note 5, ‘‘Financial Instruments.’’
(2) Reflect gross amounts before jurisdictional netting of deferred tax assets and liabilities.
(3) The repatriation accruals as of December 30, 2017 and December 31, 2016 primarily include
net deferred tax liabilities of $27.7 million and $62.4 million, respectively, associated with the
future tax cost to repatriate earnings of our foreign subsidiaries that are not indefinitely
reinvested.
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 30, 2017 and December 31, 2016 was
$63.4 million and $60.4 million, respectively.
Net operating loss carryforwards of foreign subsidiaries at
December 30, 2017 and December 31, 2016 were $633.7 million and
$689.9 million, respectively. Tax credit carryforwards of both domestic
and foreign subsidiaries at December 30, 2017 and December 31, 2016
operating losses may take up to 50 years to be fully utilized.
At December 30, 2017, we had net operating loss carryforwards in
certain state jurisdictions of $523 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
$521.1 million of the carryforwards.
As of December 30, 2017, our provision for income taxes does not
reflect any material benefits from applicable tax holidays in foreign
jurisdictions.
Unrecognized Tax Benefits
As of December 30, 2017, our unrecognized tax benefits totaled
$108.7 million, $83.9 million of which, if recognized, would reduce our
annual effective income tax rate. 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.
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
expense of $1.5 million, tax expense of $3.1 million, and tax benefit of
$1.3 million in the Consolidated Statements of Income in 2017, 2016,
and 2015, respectively. We have accrued $25.8 million and $22.3 million
for interest and penalties, net of tax benefit, in the Consolidated Balance
Sheets at December 30, 2017 and December 31, 2016, respectively.
45
Avery Dennison Corporation
2017 Annual Report
A reconciliation of the beginning and ending amounts of
unrecognized tax benefits is set forth below:
(In millions)
Balance at beginning of year
Additions for tax positions of the current year
Additions (reductions) for tax positions of prior
years
Settlements with tax authorities
Expirations of statutes of limitations
Changes due to translation of foreign currencies
2017
2016
$ 89.5
14.1
$107.3
6.9
3.0
(1.6)
(2.7)
6.4
(15.7)
(2.1)
(4.2)
(2.7)
Balance at end of year
$108.7
$ 89.5
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 2017 Consolidated Financial
Statements are being issued, we and our U.S. subsidiaries have
completed the Internal Revenue Service’s Compliance Assurance
Process Program through 2016. We also expect a German tax audit for
tax years 2006-2010 to be completed in 2018. 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 $22 million, primarily as a result of audit
settlements and closing tax years.
NOTE 15. SEGMENT INFORMATION
Segment Reporting
We have the following reportable segments:
(cid:129) Label and Graphic Materials – manufactures and sells
pressure-sensitive labeling technology and materials and films
for graphic and reflective applications;
(cid:129) Retail Branding and
Information Solutions – designs,
manufactures and sells a wide variety of branding and
information products and services, including brand and price
tickets, tags and labels (including RFID inlays), and related
services, supplies and equipment; and
(cid:129) 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.
Notes to Consolidated Financial Statements
We do not disclose total assets by reportable segment since we
neither generate nor review such information internally. As our reporting
structure is neither organized nor reviewed internally by country, results
by individual country are not provided.
Financial information from continuing operations by reportable
segment is set forth below:
(In millions)
2017
2016
2015
Net sales to unaffiliated customers
Label and Graphic Materials
Retail Branding and Information
$4,511.7 $4,187.3 $4,032.1
Solutions
Industrial and Healthcare Materials
1,511.2
590.9
1,445.4
453.8
1,443.4
491.4
Net sales to unaffiliated customers
$6,613.8 $6,086.5 $5,966.9
Intersegment sales
Label and Graphic Materials
Retail Branding and Information
Solutions
Industrial and Healthcare Materials
$
64.1 $
63.4 $
61.3
3.2
7.7
2.9
7.2
2.9
14.8
Intersegment sales
$
75.0 $
73.5 $
79.0
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
$ 567.3 $ 516.2 $ 453.4
122.9
50.5
(88.2)
(63.0)
102.6
54.6
(136.4)
(59.9)
51.6
57.1
(92.7)
(60.5)
before taxes
$ 589.5 $ 477.1 $ 408.9
Capital expenditures
Label and Graphic Materials
Retail Branding and Information
Solutions
Industrial and Healthcare Materials
$ 125.5 $ 118.8 $
68.3
48.8
19.5
50.9
7.2
51.0
19.6
Capital expenditures
$ 193.8 $ 176.9 $ 138.9
Depreciation and amortization
expense
Label and Graphic Materials
Retail Branding and Information
Solutions
Industrial and Healthcare Materials
$ 102.3 $ 103.1 $ 104.9
56.4
20.0
64.3
12.7
70.6
12.8
Depreciation and amortization expense $ 178.7 $ 180.1 $ 188.3
Other expense, net by reportable
segment
Label and Graphic Materials
Retail Branding and Information
Solutions
Industrial and Healthcare Materials
Corporate
$
14.5 $
13.0 $
12.1
18.1
3.7
.2
9.8
1.9
40.5
45.7
8.0
2.5
Other expense, net
$
36.5 $
65.2 $
68.3
46
Notes to Consolidated Financial Statements
(In millions)
2017
2016
2015
Property, Plant and Equipment
Other expense, net by type
Restructuring charges:
Severance and related costs
Asset impairment charges and lease
cancellation costs
Other items:
Transaction costs
Net gains on sales of assets
Net loss from curtailment and
settlement of pension obligations
Legal settlements
Loss on sale of product line and
related exit costs
Other expense, net
$
31.2 $
14.7 $
52.5
2.2
5.2
7.0
5.2
(2.1)
–
–
–
5.0
(1.1)
41.4
–
–
(1.7)
.3
(.3)
–
10.5
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
2017
2016
$
31.1
638.9
2,188.2
142.7
$
29.3
565.3
1,949.5
117.3
3,000.9
(1,903.0)
2,661.4
(1,746.2)
Property, plant and equipment, net
$ 1,097.9
$
915.2
$
36.5 $
65.2 $
68.3
Software
Capitalized software costs at year-end were as follows:
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 $515.1 million,
$377.4 million, and $414.6 million in 2017, 2016, and 2015, 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)
2017
2016
2015
Net sales to unaffiliated customers
U.S.
Europe
Asia
Latin America
Other international
$1,557.8 $1,525.6 $1,546.8
1,753.0
1,838.8
1,924.0
1,996.1
466.3
450.5
276.8
275.5
2,041.6
2,250.5
476.4
287.5
Net sales to unaffiliated customers
$6,613.8 $6,086.5 $5,966.9
Net sales to unaffiliated customers in Asia included sales in China
(including Hong Kong) of $1.3 billion in 2017, and $1.14 billion in both
2016 and 2015.
Property, plant and equipment, net, in our U.S. and international
operations was as follows:
(In millions)
Cost
Accumulated amortization
Software, net
2017
2016
$ 428.9
(301.8)
$ 415.5
(297.9)
$ 127.1
$ 117.6
Software amortization expense from continuing operations was
$29.3 million in 2017, $37.9 million in 2016, and $37.6 million in 2015.
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 values of this investment were
$9.1 million and $9.5 million as of December 30, 2017 and
December 31, 2016, respectively, and were 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)
2017
2016
2015
(In millions)
2017
2016
2015
Property, plant and equipment, net
U.S.
International
$ 286.4
811.5
$278.5
636.7
$263.4
584.5
Property, plant and equipment, net
$1,097.9
$915.2
$847.9
NOTE 16. SUPPLEMENTAL FINANCIAL INFORMATION
Inventories
Net inventories at year-end were as follows:
Research and development expense
$93.4
$89.7
$91.9
Supplemental Cash Flow Information
Cash paid for interest and income taxes, including amounts paid for
discontinued operations, were as follows:
(In millions)
2017
2016
2015
Interest, net of capitalized amounts
Income taxes, net of refunds
$ 57.7
125.6
$ 58.9
106.1
$ 60.1
129.9
(In millions)
Raw materials
Work-in-progress
Finished goods
Inventories, net
2017
2016
$214.6
179.8
215.2
$185.0
156.8
177.3
$609.6
$519.1
Foreign 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
47
Avery Dennison Corporation
2017 Annual Report
impacts, decreased net income by $4.1 million, $1.6 million, and
$6.1 million in 2017, 2016, and 2015, respectively.
We had no operations in hyperinflationary economies in fiscal years
2017, 2016, or 2015.
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. We continue to be subject
to certain indemnification obligations under the terms of the purchase
agreement.
NOTE 17. QUARTERLY FINANCIAL INFORMATION (Unaudited)
(In millions, except per share data)
2017
Net sales
Gross profit
Net income (loss)(1)
Net income (loss) per common share
Net income (loss) per common share, assuming dilution
2016
Net sales
Gross profit
Net income
Net income per common share
Net income per common share, assuming dilution
(1) During the fourth quarter of 2017, we recognized a net tax charge of $172 million as a result of the TCJA.
‘‘Other expense, net’’ is presented by type for each quarter below:
(In millions)
2017
Restructuring charges:
Severance and related costs
Asset impairment charges and lease cancellation costs
Other items:
Net gains on sales of assets
Transaction costs
Other expense, net
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
Notes to Consolidated Financial Statements
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.
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$1,572.1
442.4
112.2
1.27
1.25
$1,485.5
422.6
89.6
1.00
.98
$1,626.9
452.6
120.9
1.37
1.34
$1,541.5
434.1
80.0
.90
.88
$1,679.5
451.6
108.3
1.23
1.20
$1,508.7
417.6
89.1
1.00
.98
$1,735.3
465.6
(59.6)
(.68)
(.66)
$1,550.8
425.4
62.0
.70
.69
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$5.7
–
–
.8
$ 7.3
.3
$ 8.7
1.8
–
2.6
–
.3
$ 9.5
.1
(2.1)
1.5
$6.5
$10.2
$10.8
$ 9.0
$5.2
.4
–
–
–
$ 3.6
2.8
41.4
.3
2.1
$ 1.9
.7
$ 4.0
1.3
–
–
2.0
–
(1.4)
.9
$5.6
$50.2
$ 4.6
$ 4.8
48
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 30, 2017. Management’s assessment of the effectiveness of internal control over financial reporting as of December 30,
2017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included herein.
We have excluded Yongle Tape Ltd. (‘‘Yongle’’) from our assessment of internal control over financial reporting as of December 30, 2017 because
we acquired the company in a purchase business combination during fiscal year 2017. Yongle is a wholly-owned subsidiary whose total assets and
total revenues excluded from our assessment of internal control over financial reporting represent 3% and 2%, respectively, of the related
consolidated financial statement amounts as of and for the year ended December 30, 2017.
21FEB201715482343
Mitchell R. Butier
President and
Chief Executive Officer
22FEB201821250323
Gregory S. Lovins
Senior Vice President and
Chief Financial Officer
49
Avery Dennison Corporation
2017 Annual Report
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Avery Dennison Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Avery Dennison Corporation and its subsidiaries (the ‘‘Company’’) as of
December 30, 2017 and December 31, 2016, and the related consolidated statements of income, comprehensive income, shareholders’ equity and
cash flows for each of the three years in the period ended December 30, 2017, including the related notes (collectively referred to as the
‘‘consolidated financial statements’’). We also have audited the Company’s internal control over financial reporting as of December 30, 2017, based
on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (‘‘COSO’’).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 30, 2017 and December 31, 2016, and the results of their operations and their cash flows for each of the three years in the
period ended December 30, 2017 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 30, 2017, based on criteria established
in Internal Control – Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated 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 Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the
Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (‘‘PCAOB’’) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and
whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. 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.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Yongle Tape Ltd. (‘‘Yongle’’)
from its assessment of internal control over financial reporting as of December 30, 2017 because it was acquired by the Company in a purchase
business combination during fiscal year 2017. We have also excluded Yongle from our audit of internal control over financial reporting. Yongle is a
wholly-owned subsidiary whose total assets and total net sales excluded from management’s assessment and our audit of internal control over
financial reporting represent 3% and 2%, respectively, of the related consolidated financial statement amounts as of and for the year ended
December 30, 2017.
Definition and Limitations of Internal Control over Financial Reporting
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.
Los Angeles, California
February 21, 2018
27FEB201501102312
We have served as the Company’s auditor since at least 1960, which were the Company’s first financial statements subject to SEC reporting
requirements. We have not determined the specific year we began serving as auditor of the Company or a predecessor company.
50
Other Information
We are including, as Exhibits 31.1 and 31.2 to our Annual Report on
Form 10-K for fiscal year 2017 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 28, 2017.
A copy of our Annual Report on Form 10-K, as filed with the SEC,
will be furnished to shareholders and interested investors free of charge
upon written request to our Corporate Secretary. Copies may also be
downloaded
at
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
2017
2016
High
Low
High
Low
$ 81.85
88.78
99.93
117.10
$70.14
79.48
88.82
98.79
$72.86
77.12
78.84
78.04
$58.16
71.11
71.13
68.61
Dividends per Common Share
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2017
2016
$
.41
.45
.45
.45
$
.37
.41
.41
.41
$ 1.76
$ 1.60
Number of shareholders of record as of year-end
4,854
5,106
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 26, 2018 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.
51
Avery Dennison Corporation
2017 Annual Report
Notes
Notes
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 certified by the
Forest Stewardship Council (FSC®),
which promotes environmentally
responsible, socially beneficial and
economically viable management of
the world’s forests.
Avery Dennison Corporation
207 Goode Avenue
Glendale, California 91203
www.averydennison.com