Avery Dennison
Corporation
2018 Annual Report
Table of
Contents
A Note from Our Chairman
2018 Financial Snapshot
A Note from Our Chairman-Elect,
President and CEO
Businesses at a Glance
Directors and Executive Officers
Financial Information
i
ii
iii
iv
vi
vii
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.
A Note from Our Chairman
Dear Fellow Shareholders,
It has been an honor and a privilege to serve this great company and its shareholders, board, customers and employees for the
past 35 years, culminating in my role as chairman of the board. In February 2019, I informed our board of my decision not to
stand for re-election at our 2019 annual meeting of shareholders. I am delighted that our board of directors unanimously elected
our President and CEO, Mitch Butier, to serve as chairman following the annual meeting. Mitch has and will continue to lead this
company toward an even more successful future.
I want to thank our team members worldwide for their hard work and continued commitment to our customers, and for upholding
the values of our company while delivering long-term value. I’m also thankful for the company’s continued commitment to doing
business in a more sustainable way. Thank you, our shareholders, for joining us on this journey, and for your continued belief and
investment in Avery Dennison.
Dean Scarborough
i
2018 FINANCIAL SNAPSHOT
$7.2 BIL.
Net sales
$467.4 MIL.
Net income
$5.28
Net income
per common share
$2.01
Dividends
per common share
OUR VALUES
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.
OUR SUSTAINABILITY GOALS
Products and Solutions
70% of products we sell will conform to, or will enable
end products to conform to, our sustainability principles.
Paper
We will source 100% certified paper, of which 70% will
be Forest Stewardship Council®-certified.
Films
70% of the films we buy will conform to our
sustainability principles.
Chemicals
70% of the chemicals we buy will conform to our
sustainability principles.
Greenhouse Gas Emissions
We will reduce absolute greenhouse gas emissions
by 3% every year.
Waste
Our operations will be 95% landfill-free, with 75% of
our waste repurposed, and we will help our customers
reduce the waste from our products by 70%.
People
We will maintain world-class safety and engagement
scores and cultivate a diverse workforce with 40% of
leadership positions filled by women.
Transparency
We will be public and transparent in the reporting of
our progress.
OUR STRATEGIES
OUR STAKEHOLDERS
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.
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.
ii
Avery Dennison Corporation 2018 Annual Report
A Note from Our Chairman-Elect, President and CEO
Fellow Shareholders,
Achieving Our Long-Term Objectives
I am pleased to report that we achieved our five-year financial targets through 2018, with our seventh consecutive year of solid
organic sales growth, margin expansion and double-digit growth in adjusted earnings per share. We are on track to achieve our
2021 targets as we aim to consistently deliver GDP+ organic growth and top quartile return on total capital.
LGM Continued to Deliver
Our Label and Graphic Materials (LGM) business delivered another year of strong sales growth, reflecting above-average growth
in emerging markets and high-value product categories, as well as pricing. And, LGM’s operating margin remained strong,
despite significant inflation in the cost of raw materials. Specialty labels led the way for LGM’s high-value categories, while growth
in emerging markets was led by South Asia.
RBIS Exceeded Its 2018 Goals
Our Retail Branding and Information Solutions (RBIS) business posted strong organic sales growth and significant margin
expansion again this year, driven by the ongoing execution of our multi-year transformation strategy and continued strength in
sales of our RFID-enabled intelligent labels. Sales in RBIS’s base business increased across all product categories, while sales in
RFID increased by more than 20%. We continue to increase our investment in expanding our intelligent label platform to enable
a future where every item can have a digital twin and digital life.
IHM Turnaround Underway
It was a challenging year for our Industrial and Healthcare Materials (IHM) business due to a decline in the China automotive
market. That said, our industrial business grew in North America and Europe at mid-single-digit rates, with improved profitability
in the second half of the year, and our medical business grew organically at a high-single-digit rate. Despite a tough year, we
remain confident in IHM’s ability to achieve its 2021 targets.
Our Values in Action
We are committed to putting our values first, providing a safe, supportive and inclusive work environment, and sustaining a thriving
business that is a force for good. I am pleased to report that we are making solid progress toward our 2025 sustainability goals.
We are exceeding our commitment to reduce our absolute greenhouse gas emissions, and we are on track to achieve our Forest
Stewardship Council-certified paper sourcing and landfill-free goals. We are tackling industry-wide challenges, with an increased
focus on packaging recyclability, by leveraging our existing products and capabilities, and developing new opportunities through
collaboration with our customers and partners.
A Transition in Board Leadership
Dean Scarborough leaves the board after serving nine years as chairman, capping a storied career with Avery Dennison that
began in 1983. On behalf of the company and our board, I would like to thank him for his many years of leadership and
contributions, which have helped lay the foundation for our growth and generate long-term value for all of our stakeholders.
I’m honored to be elected chairman, and I look forward to another successful year for Avery Dennison. I am confident that we
will continue to deliver on our goals, creating long-term value for our customers, investors, employees and communities.
On behalf of our global team, thank you for your investment in Avery Dennison.
Mitch Butier
iii
Businesses
at a Glance
REPORTABLE SEGMENT
Label and Graphic Materials
BUSINESSES
Label and Packaging Materials
Graphics Solutions
Reflective Solutions
2018 SALES IN MILLIONS
$4,851
% OF SALES
68%
GLOBAL BRANDS
Avery Dennison®
Fasson®
DESCRIPTION
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
Retail Branding and
Information Solutions
Printer Solutions
2018 SALES IN MILLIONS
$1,613
% OF SALES
22%
GLOBAL BRANDS
Avery Dennison®
Monarch®
DESCRIPTION
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
Performance Tapes
Fastener Solutions
Vancive Medical Technologies
2018 SALES IN MILLIONS
$695
% OF SALES
10%
GLOBAL BRANDS
Avery Dennison®
Vancive Medical Technologies™
DESCRIPTION
Our Industrial and Healthcare Materials
businesses provide tape products, including
coated and adhesive transfer tapes; fasteners,
primarily precision-extruded and injection-
molded plastic devices; and wound care,
ostomy, surgical, and electromedical device
products for manufacturers, clinicians,
and patients.
iv
Avery Dennison Corporation 2018 Annual Report
PRODUCTS/SOLUTIONS
CUSTOMERS
WEBSITES
Pressure-sensitive labeling materials; packaging
materials and solutions; roll-fed sleeves; 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; brand protection and security
solutions; intelligent labeling solutions with unique
digital identities including RFID and sensor
technologies
Apparel manufacturing and retail supply chain;
food service and supply chain; hard goods and
supply chain; pharmaceutical supply chain;
logistics; food and beauty brands and retailers’
supply chain to customers; aviation asset tracking
CUSTOMERS
Apparel and footwear brands; manufacturers
and retailers; food service, grocery, and
pharmaceutical supply chains; consumer
goods brands; automotive manufacturers;
transportation companies; airlines and airports
www.rbis.averydennison.com
www.rfid.averydennison.com
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
Greg Lovins
Senior Vice President and Chief Financial
Officer; Interim General Manager, Industrial
and Healthcare Materials
v
EXECUTIVE OFFICERS
Mitchell R. Butier
President and
Chief Executive Officer
Anne Hill
Senior Vice President and
Chief Human Resources Officer
Gregory S. Lovins
Senior Vice President and
Chief Financial Officer
Susan C. Miller
Senior Vice President,
General Counsel and Secretary
Lori J. Bondar
Vice President, Controller and
Chief Accounting Officer
Georges Gravanis
President
Label and Graphic Materials
Deon M. Stander
Vice President and
General Manager
Retail Branding and
Information Solutions
Directors and
Executive Officers
Ken C. Hicks 1, 2
Chairman and
Chief Executive Officer
Academy Sports + Outdoors,
a sports and recreation retailer
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 PLC,
a sensors and controls company
BOARD OF DIRECTORS
Dean A. Scarborough
Chairman
Avery Dennison Corporation
Bradley A. Alford 1, 3
Retired Chairman and
Chief Executive Officer
Nestlé USA, a nutrition,
health, and wellness 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
Mark J. Barrenechea
Vice Chair, Chief Executive Officer,
and Chief Technology Officer
OpenText Corporation,
a global software company
Mitchell R. Butier
President and
Chief Executive Officer
Avery Dennison Corporation
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
vi
Avery Dennison Corporation 2018 Annual Report
Financial
Information
Five-Year Summary
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Consolidated Financial Statements
Notes to Consolidated
Financial Statements
Report of Independent Registered
Public Accounting Firm
Other Information
2
4
17
22
50
51
vii
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 29, 2018 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 our
markets due to competitive conditions, technological developments, laws and regulations, and 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 U.S. 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, including risks
related to the termination of our U.S. pension plan; 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
2018 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)(3)
Interest expense
Other non-operating expense(3)
Income from continuing operations before taxes
Provision for income taxes(4)
Equity method investment net losses
Income from continuing operations
Loss from discontinued operations, net of tax
Net income
2018
2017
2016
2015
2014(1)
Dollars
%
Dollars
%
Dollars
%
Dollars
%
Dollars
%
1,812.2
1,105.2
36.5
63.0
18.0
589.5
307.7
$7,159.0 100.0 $6,613.8 100.0 $6,086.5 100.0 $5,966.9 100.0 $6,330.3 100.0
26.1
18.0
1.1
1.0
.4
5.7
1.8
– N/A
3.9
(2.2) N/A
3.9
26.8
1,915.5
15.7
1,127.5
1.0
69.9
.8
58.5
1.5
104.8
7.7
554.8
85.4
1.2
(2.0) N/A
6.5
– N/A
6.5
1,645.8
1,087.8
64.5
60.5
24.1
408.9
134.5
–
274.4
(.1)
274.3
27.9
17.8
.4
1.0
.9
7.8
2.6
– N/A
5.3
– N/A
5.3
27.4
16.7
.6
1.0
.3
8.9
4.7
– N/A
4.3
– N/A
4.3
1,699.7
1,085.7
23.8
59.9
53.2
477.1
156.4
1,651.2
1,138.3
66.6
63.3
22.2
360.8
113.5
27.6
18.2
1.1
1.0
.4
6.9
2.3
N/A
4.6
N/A
4.6
467.4
467.4
245.1
320.7
247.3
281.8
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)
2018
5.35
–
5.35
5.28
–
5.28
2.01
87.3
88.6
$
2017
3.19
–
3.19
3.13
–
3.13
1.76
88.3
90.1
$
2016
3.60
–
3.60
3.54
–
3.54
1.60
89.1
90.7
$
2015
3.01
–
3.01
2.95
–
2.95
1.46
91.0
92.9
$
2014
2.64
(.03)
2.61
2.58
(.02)
2.56
1.34
93.8
95.7
At End of Year
Property, plant and equipment, net
Total assets
Long-term debt and capital leases
Total debt
Shareholders’ equity(5)
Other Information
Depreciation and amortization expense
Research and development expense
Effective tax rate(4)(6)
$1,137.4
5,177.5
1,771.6
1,966.2
955.1
$1,097.9
5,136.9
1,316.3
1,581.7
1,046.2
$ 915.2
4,396.4
713.4
1,292.5
925.5
$ 847.9
4,133.7
963.6
1,058.9
965.7
$ 875.3
4,356.9
940.1
1,144.4
1,047.7
$ 181.0
98.2
15.4%
$ 178.7
93.4
52.2%
$ 180.1
89.7
32.8%
$ 188.3
91.9
32.9%
$ 201.6
102.5
31.5%
(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, Argentine peso remeasurement transition loss, reversal of
acquisition-related contingent consideration, and other items.
(3) In the first quarter of 2018, we adopted Accounting Standards Update (ASU) No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, on a
retrospective basis. This ASU requires employers with defined benefit plans to present the components of net periodic benefit cost, other than service cost, outside of operating income. Prior year
results have been reclassified as required by the ASU.
(4) In the fourth quarter of 2018, we finalized our provisional estimate as defined under SEC Staff Accounting Bulletin No. 118 related to the U.S. Tax Cuts and Jobs Act (‘‘TCJA’’) of 2017.
(5) Amounts in 2014 and 2015 included continuing and discontinued operations.
(6) Amounts in 2014 and 2015 included continuing operations only.
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, 2018.
Comparison of Five-Year Cumulative Total Return as of December 31, 2018
$240
$220
$200
$180
$160
$140
$120
$100
$80
12/31/2013
Total Return Analysis(1)
Avery Dennison Corporation
S&P 500 Index
Industrials and Materials (Weighted Average)
Industrials and Materials (Median)
12/31/2014
12/31/2015
12/31/2016
12/31/2017
24FEB201902140815
12/31/2018
Avery Dennison Corporation
S&P 500 Index
Market Basket (Weighted Average)(2)
Market Basket (Median)
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
$100.00
100.00
100.00
100.00
$106.03
110.79
112.10
110.93
$128.63
109.98
109.65
101.68
$143.13
120.00
130.43
118.90
$220.86
141.29
160.25
144.67
$170.81
132.19
139.53
121.00
(1) Assumes $100.00 invested on December 31, 2013 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
2018 Annual Report
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
ORGANIZATION OF INFORMATION
Management’s Discussion and Analysis of Financial Condition and
Results of Operations, or MD&A, provides management’s views on our
financial condition and results of operations, should be read in
conjunction with the accompanying Consolidated Financial Statements
and notes thereto, and includes the following sections:
Non-GAAP Financial Measures . . . . . . . . . . . . . . . . . . . . .
Overview and Outlook . . . . . . . . . . . . . . . . . . . . . . . . . .
Analysis of Results of Operations . . . . . . . . . . . . . . . . . . .
Results of Operations by Reportable Segment
. . . . . . . . . . .
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Critical Accounting Estimates . . . . . . . . . . . . . . . . . . . . . .
Recent Accounting Requirements . . . . . . . . . . . . . . . . . . .
. . . . . . .
Market-Sensitive Instruments and Risk Management
4
4
6
8
9
13
15
15
NON-GAAP FINANCIAL MEASURES
We report our financial results in conformity with accounting
principles generally accepted in the United States of America, or GAAP,
and also communicate with investors using certain non-GAAP financial
measures. These non-GAAP financial measures are not in accordance
with, nor are they a substitute for or superior to, the comparable GAAP
financial measures. These non-GAAP financial measures are intended
to supplement presentation of our financial results that are prepared in
accordance with GAAP. Based upon feedback from investors and
financial analysts, we believe that the supplemental non-GAAP financial
measures we provide are useful to their assessments of our
performance and operating trends, as well as liquidity.
Our non-GAAP financial measures exclude the impact of certain
events, activities or strategic decisions. The accounting effects of these
events, activities or decisions, which are included in the GAAP financial
measures, may make it difficult to assess our underlying performance in
a single period. By excluding the accounting effects, positive or
negative, of certain items (e.g., restructuring charges, legal settlements,
certain effects of strategic transactions and related costs, losses from
debt extinguishments, gains or losses from curtailment or settlement of
pension obligations, gains or losses on sales of certain assets, and
other items), we believe that we are providing meaningful supplemental
information that facilitates an understanding of our core operating
results and liquidity measures. 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 and currency adjustment for transitional reporting
of highly inflationary economies (Argentina). The estimated
impact of foreign currency translation is calculated on a
constant currency basis, with prior period results translated at
current period average exchange rates to exclude the effect of
currency fluctuations.
(cid:129) Organic sales change refers to sales change ex. currency,
excluding
line exits,
acquisitions and divestitures, and, where applicable, the extra
week in our fiscal year.
impact of product
the estimated
We believe that sales change ex. currency and organic
sales change assist investors in evaluating the sales change
from the ongoing activities of our businesses and enhance
their ability to evaluate our results from period to period.
(cid:129) Free cash flow refers to cash flow provided by operating
activities, less payments for property, plant and equipment,
software and other deferred charges, plus proceeds from sales
of property, plant and equipment, plus (minus) net proceeds
from sales (purchases) of investments and proceeds from
insurance. Free cash flow is also adjusted for the cash
contributions related to the termination of our U.S. pension
plan. We believe that free cash flow assists investors by
showing the amount of cash we have available for debt
reductions, dividends, share repurchases, and acquisitions.
(cid:129) Operational working capital as a percentage of annualized
current quarter net sales refers to trade accounts receivable
and inventories, net of accounts payable, and excludes cash
and cash equivalents, short-term borrowings, deferred taxes,
other current assets and other current liabilities, as well as net
current assets or liabilities held-for-sale divided by annualized
current quarter net sales. We believe that operational working
capital as a percentage of annualized current quarter net sales
assists
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.
investors
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 2018, 2017, and 2016 fiscal years
consisted of 52-week periods ending December 29, 2018,
December 30, 2017, and December 31, 2016, respectively.
4
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Net Sales
The factors impacting the reported sales change are shown in the
table below.
Reported sales change
Foreign currency translation
Sales change ex. currency
Acquisitions
Organic sales change
2018
8%
(1)
7%
(1)
6%
In both years, net sales increased on an organic basis primarily due
to higher volume.
Net Income
2017
9%
(1)
be partially offset by headcount additions in other locations, resulting in
a net reduction of approximately 150 positions. During fiscal year 2018,
we recorded $55.2 million in restructuring charges, net of reversals,
related to the 2018 Plan. These charges consisted of severance and
related costs for the reduction of approximately 345 positions to date, as
well as asset impairment charges. The vast majority of the cash
payments associated with these charges is expected to be made in
8% 2019. We anticipate annualized savings from the 2018 Plan of
approximately $25 million, beginning in the second half of 2019, and
(4)
expect the 2018 Plan to be substantially complete by the end of 2019.
In addition to restructuring charges recorded under the 2018 Plan,
we recorded $4.2 million in restructuring charges in the fourth quarter
2018 related to our 2018/2019 Actions. These charges consisted of
severance and related costs for the reduction of approximately 85
positions, as well as asset impairment charges.
4%
Net income increased from approximately $282 million in 2017 to
approximately $467 million in 2018. The major factors affecting the
change in net income in 2018 compared to 2017 were:
Positive factors:
(cid:129) Lower income taxes due to the combined effects of the 2017
tax charges related to the enactment of the U.S. Tax Cuts and
Jobs Act (‘‘TCJA’’) and a net tax benefit from a discrete foreign
tax planning action
(cid:129) The combined effect of volume and mix
(cid:129) Benefits from productivity initiatives, including savings from
restructuring actions, net of transition costs
Offsetting factors:
(cid:129) Pension plan settlement charges
(cid:129) Higher restructuring charges
(cid:129) Higher employee-related costs
(cid:129) Growth investments
(cid:129) Net impact of pricing and raw material inflation
U.S. Pension Plan Termination
In July 2018, our Board of Directors (‘‘Board’’) approved the
termination of the Avery Dennison Pension Plan (the ‘‘ADPP’’), a U.S.
defined benefit plan, effective as of September 28, 2018. In connection
with the termination, we contributed $200 million to the ADPP in August
2018 using U.S. commercial paper borrowings. During the fourth
quarter of 2018, we settled approximately $152 million of the ADPP
liability through lump-sum payments from existing plan assets to eligible
participants who elected to receive them and recorded approximately
$85 million of non-cash charges associated with these settlements. We
expect to settle the remaining liability of approximately $792 million
through the purchase of group annuity contract(s) from one or more
yet-to-be-identified highly rated insurance companies in the first half of
2019. Upon transfer of this remaining liability, we expect to recognize an
additional $490 million of non-cash pre-tax charges and related tax
benefits of $190 million. As of December 29, 2018, the ADPP was
underfunded by approximately $57 million.
Cost Reduction Actions
2018/2019 Actions
In April 2018, we approved a restructuring plan (the ‘‘2018 Plan’’)
associated with the consolidation of the European footprint of our Label
and Graphic Materials (‘‘LGM’’) reportable segment that is expected to
result in a headcount reduction of approximately 400 positions related
to the closure of a manufacturing facility. This reduction is expected to
5
Avery Dennison Corporation
2018 Annual Report
2015/2016 Actions
During fiscal year 2018, we recorded $14.3 million in restructuring
charges, net of reversals, related to restructuring actions initiated during
the third quarter of 2015. These charges consisted of severance and
related costs for the reduction of approximately 625 positions, lease
cancellation costs, and asset impairment charges.
During fiscal year 2017, we recorded $34.1 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 920 positions, lease cancellation costs, and asset
impairment charges.
The activities and related charges and payments for our 2015/2016
Actions were substantially completed in 2018.
Impact of Cost Reduction Actions
During fiscal year 2018, we realized approximately $30 million in
savings, net of transition costs, primarily from our 2015/2016 Actions.
We anticipate incremental savings from restructuring, net of
transition costs, of approximately $35 million in 2019, primarily related to
our 2018/2019 Actions. We estimate cash restructuring costs of at least
$20 million in 2019.
Restructuring charges were included in ‘‘Other expense, net’’ in the
Consolidated Statements of Income. Refer to Note 13, ‘‘Cost Reduction
for more
Actions,’’
information.
the Consolidated Financial Statements
to
Acquisitions
During 2017, we completed the stock acquisitions of Yongle
Tape Ltd. (‘‘Yongle Tape’’) 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
the
Consolidated Financial Statements for more information
‘‘Acquisitions,’’
to Note 2,
to
Accounting Guidance Updates
Refer to Note 1, ‘‘Summary of Significant Accounting Policies,’’ to
the Consolidated Financial Statements for this information.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Cash Flow
(In millions)
Net cash provided by operating activities
Purchases of property, plant and
2018
2017
2016
$ 457.9
$ 645.7
$ 582.1
equipment
(226.7)
(190.5)
(176.9)
Purchases of software and other
deferred charges
(29.9)
(35.6)
(29.7)
Proceeds from sales of property, plant
and equipment
Proceeds from insurance and sales
(purchases) of investments, net
Plus: Pension plan contribution for plan
termination
Free cash flow
9.4
6.0
18.5
(3.9)
200.0
–
8.5
3.1
–
$ 429.2
$ 421.7
$ 387.1
ANALYSIS OF RESULTS OF OPERATIONS
Income before Taxes
(In millions, except percentages)
Net sales
Cost of products sold
Gross profit
Marketing, general and
administrative expense
Other expense, net
Interest expense
Other non-operating expense
2018
2017
2016
$7,159.0
5,243.5
$6,613.8
4,801.6
$6,086.5
4,386.8
1,915.5
1,812.2
1,699.7
1,127.5
69.9
58.5
104.8
1,105.2
36.5
63.0
18.0
1,085.7
23.8
59.9
53.2
Income before taxes
$ 554.8
$ 589.5
$ 477.1
Gross profit margin
26.8%
27.4%
27.9%
In 2018, net cash provided by operating activities decreased compared
to 2017 primarily due to our $200 million contribution to the ADPP in
connection with its termination, as well as higher income tax payments, net of
refunds, changes in operational working capital, and higher incentive
compensation payments, partially offset by higher net income. In 2018, free
cash flow increased compared to 2017 primarily due to higher cash provided
by operating activities adjusted for the ADPP contribution and higher net
proceeds from insurance and sales of investments and proceeds from sales
of property, plant and equipment, partially offset by higher capital
expenditures.
In 2017, net cash provided by operating activities increased compared to
2016 primarily due to higher income 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. Free cash flow increased due to higher net cash flow provided by
operating activities, partially offset by higher net capital and software
expenditures.
Outlook
Certain factors that we believe may contribute to our 2019 results are
described below:
(cid:129) We expect our net sales, including the effects of foreign currency
translation, to increase by approximately 1.5%.
(cid:129) Assuming the continuation of foreign currency rates in effect at
year-end 2018, currency translation will reduce our net sales by
approximately 2.5% and our pre-tax operating
income by
approximately $25 million compared to 2018.
(cid:129) We expect our full year effective tax rate to be in the single-digit
range.
(cid:129) We anticipate capital and software expenditures of $275 million to
$285 million.
(cid:129) We estimate cash restructuring costs of at least $20 million.
(cid:129) We estimate the net effect of non-cash charges and the tax impact
related to the ADPP termination to reduce net income by
approximately $300 million.
Gross Profit Margin
Gross profit margin in 2018 decreased compared to 2017 reflecting
the net impact of pricing and raw material inflation and higher
employee-related costs, as well as growth investments, partially offset
by the benefits from productivity initiatives, including savings from
restructuring, net of transition costs.
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,
operational challenges, and a program loss in personal care tapes,
which began impacting results in mid-2016.
Marketing, General and Administrative Expense
Marketing, general and administrative expense increased in 2018
compared to 2017 reflecting the impact of acquisitions and other growth
investments and the negative impact of changes in foreign currency,
partially offset by the benefits from productivity initiatives, including
savings from restructuring, net of transition costs.
Marketing, general and administrative expense increased in 2017
impact of
compared to 2016 due to acquisitions. Before the
acquisitions, the benefits from productivity initiatives, including savings
from restructuring, net of transition costs, were partially offset by higher
employee-related costs.
Other Expense, net
(In millions)
Other expense, net by type
Restructuring charges:
Severance and related costs
Asset impairment charges and lease
cancellation costs
Other items:
Argentine peso remeasurement
transition loss
Other restructuring-related charge
Transaction costs
Reversal of acquisition-related
contingent consideration
Net gains on sales of assets
Other expense, net
2018
2017
2016
$63.0
$31.2
$14.7
10.7
2.2
5.2
3.4
.5
–
–
–
5.2
–
–
5.0
(5.0)
(2.7)
–
(2.1)
–
(1.1)
$69.9
$36.5
$23.8
Refer to Note 13, ‘‘Cost Reduction Actions,’’ to the Consolidated
Financial Statements for more information.
6
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Interest Expense
Interest expense decreased approximately $4.5 million in 2018
compared to 2017, reflecting the repayment of senior notes in October
2017, which was financed by commercial paper borrowed at a lower
interest rate.
Interest expense increased approximately $3 million in 2017
compared to 2016, primarily due to additional long-term debt borrowed
in 2017.
We expect our interest expense in 2019 to be higher than in 2018
due to our issuance of $500 million of senior notes in the fourth quarter
of 2018.
Other Non-Operating Expense
In the first quarter of 2018, we adopted an accounting guidance
update that requires employers with defined benefit plans to present the
components of net periodic benefit cost other than service cost, outside
of operating income. Refer to Note 1, ‘‘Summary of Significant
Accounting Policies,’’ to the Consolidated Financial Statements for
more information. Other non-operating expense increased in 2018
compared to 2017 due to settlement losses associated with the ADPP
and two U.S. nonqualified benefit plans and two of our international
benefit plans, partially offset by a higher expected return on plan assets
in certain of our international defined benefit pension plans.
Refer to Note 4, ‘‘Debt and Capital Leases,’’ in the Consolidated
Financial Statements for more information.
Net Income and Earnings per Share
(In millions, except percentages and per
share amounts)
2018
2017
2016
Income before taxes
Provision for income taxes
Equity method investment net losses
$554.8
85.4
(2.0)
$589.5
307.7
–
$477.1
156.4
–
Net income
Net income per common share
Net income per common share,
$467.4
$281.8
$320.7
$ 5.35
$ 3.19
$ 3.60
assuming dilution
5.28
3.13
3.54
Effective tax rate
15.4%
52.2%
32.8%
Provision for Income Taxes
The 2018 effective
tax rate
included measurement period
adjustments to our 2017 provisional amount related to the TCJA in
accordance with guidance provided under SEC Staff Accounting
Bulletin No. 118 (‘‘SAB 118’’). In 2018, we adjusted our 2017 provisional
amount by recognizing a net tax benefit of $34.7 million. This amount
primarily reflected: (i) $39.6 million of tax benefit related to the
remeasurement of the net deferred tax asset from cash contributions to
the ADPP and realized foreign currency loss, both of which resulted
from our decision to accelerate the related deductions on our 2017 U.S.
federal income tax return; (ii) $3.6 million of tax charges for changes in
our indefinite reinvestment assertions related to our investments in
certain foreign subsidiaries after information required to make such
determinations was obtained; (iii) $9.5 million of tax charge for
adjustments made to the one-time transition tax, primarily due to a
change in our filing position and to reflect regulatory and administrative
guidance subsequently issued by the Internal Revenue Service and
certain state taxing authorities; and (iv) $9.4 million of tax benefit from
releasing a previously recorded uncertain tax position after the position
was not taken on our 2017 U.S. federal income tax return.
The 2018 effective tax rate also included net tax charges related to:
(i) the effects of certain U.S. international tax provisions imposed by the
TCJA, including $16 million of tax charge on Global Intangible
Low-taxed Income (‘‘GILTI’’) and $9 million of tax charge on Base
Erosion Antiabuse Tax (‘‘BEAT’’), partially offset by $2 million of tax
benefit on Foreign Derived Intangible Income (‘‘FDII’’); (ii) $7.9 million of
tax charges for foreign withholding taxes on our current year earnings;
(iii) $8.8 million of tax benefit, including previously accrued interest and
penalties, primarily from changes in our judgment about tax filing
positions due to the effective settlement of our German tax audit for tax
years 2006-2010; and (iv) $8 million of tax benefit from decreases in
certain tax reserves, including interest and penalties, as a result of
closing tax years.
During 2018, after our adoption of the accounting guidance update
related to intra-entity transfers of assets other than inventory, certain
foreign owned intellectual property was transferred between our foreign
subsidiaries. Refer to Note 1, ‘‘Summary of Significant Accounting
Policies,’’
for more
information. Accordingly, we recognized a net discrete tax benefit of
$31 million primarily due to the recognition of a deferred tax asset in a
higher tax rate jurisdiction, partially offset by a taxable gain recognized
in a lower tax rate jurisdiction.
the Consolidated Financial Statements
to
The 2017 effective tax rate included: (i) $172 million of net tax
charge related to the enactment of the TCJA; (ii) $5.1 million of tax
benefit from the release of valuation allowance on certain state deferred
tax assets; (iii) $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
(iv) $4.4 million of tax benefit from decreases in certain tax reserves,
including interest and penalties, as a result of closing tax years.
in
from changes
taxes resulting
The 2016 effective tax rate included: (i) $7.6 million of tax charge
associated with the cost to repatriate current earnings of certain foreign
subsidiaries; (ii) $46.3 million of tax charge related to U.S. income and
foreign withholding
indefinite
reinvestment assertions on certain foreign earnings and profits;
(iii) $16.8 million of tax benefit resulting from settlements of certain
foreign audits; (iv) $5.4 million of tax benefit resulting from expirations of
statutes of limitations; (v) $6.7 million of tax benefit 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; (vi) $3.6 million of tax benefit from the release of valuation
allowances on certain state deferred tax assets; and (vii) $8.4 million of
tax charge from deferred tax adjustments resulting from tax rate
changes in certain foreign jurisdictions.
Refer to Note 14, ‘‘Taxes Based on Income,’’ to the Consolidated
Financial Statements for more information.
7
Avery Dennison Corporation
2018 Annual Report
2018
2017
7%
–
7%
5%
–
5%
RESULTS OF OPERATIONS BY REPORTABLE SEGMENT
Retail Branding and Information Solutions
(In millions)
2018
2017
2016
Operating income refers to income before interest and taxes.
Net sales including intersegment
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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, Argentine peso
remeasurement transition loss, other
restructuring-related charge and loss on
sale of assets in 2018, gains on sales of
assets in 2017, and transaction costs in
2017 and 2016.
2018
2017
2016
sales
Less intersegment sales
Net sales
Operating income(1)
$1,617.9
(4.7)
$1,514.4
(3.2)
$1,448.3
(2.9)
$1,613.2
170.4
$1,511.2
126.7
$1,445.4
105.0
$4,929.8
(78.7)
$4,575.8
(64.1)
$4,250.7
(63.4)
$4,851.1
568.2
$4,511.7
577.4
$4,187.3
522.0
(1) Included charges associated with
restructuring and net gains on sales of
assets in all years and transaction costs
related to sale of product line in 2017 and
2016.
$
11.4
$
18.1
$
9.8
Net Sales
The factors impacting reported sales change are shown in the table
$
61.8
$
14.5
$
13.0
below.
Net Sales
The factors impacting reported sales change are shown in the table
below.
Reported sales change
Foreign currency translation
Organic sales change
Reported sales change
Foreign currency translation
Sales change ex. currency
Acquisitions
Organic sales change
2018
2017
8%
(2)
6
–
8%
(1)
7
(3)
6%
4%
In 2018, net sales increased on an organic basis due to higher
volume and pricing actions. Net sales increased on an organic basis at
mid-single digit rates in emerging markets and North America and at a
low-single digit rate in Western Europe.
In 2017, net sales increased on an organic basis due to higher
volume. 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.
Operating Income
Operating income decreased in 2018 compared to 2017 reflecting
higher restructuring charges, employee-related costs and the net
impact of pricing and raw material costs, excluding the effects of foreign
currency, partially offset by the combined effect of volume and mix, as
well as a net benefit from changes in foreign currency.
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.
In 2018, net sales increased on an organic basis driven by strength
in both radio-frequency identification solutions and the base business.
In 2017, net sales increased on an organic basis due to higher
volume, reflecting growth in both the base business and radio-
frequency identification solutions.
Operating Income
Operating income increased in 2018 compared to 2017 reflecting
higher volume, the benefits from productivity initiatives, including
savings from restructuring actions, net of transition costs, and lower
amortization of other intangibles resulting from business acquisitions,
partially offset by higher employee-related costs and growth
investments.
Operating income increased in 2017 compared to 2016 due to the
benefits
from
initiatives,
restructuring actions, net of transition costs, and higher volume, partially
offset by higher employee-related costs.
including savings
from productivity
Industrial and Healthcare Materials
(In millions)
2018
2017
2016
Net sales including intersegment sales
Less intersegment sales
$703.5
(8.8)
$598.6
(7.7)
$461.0
(7.2)
Net sales
Operating income(1)
$694.7
62.9
$590.9
52.6
$453.8
56.1
(1) Included charges associated with restructuring in
all years, transaction costs in 2017 and 2016, and
reversal of acquisition-related contingent
consideration in 2018.
$ (1.0)
$
3.7
$
1.9
8
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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
In 2018, net sales increased on an organic basis primarily due to
higher volume in industrial categories.
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.
Operating Income
Operating income increased in 2018 compared to 2017 driven by
the net impact of acquisitions and organic growth, partially offset by
growth investments.
Operating income decreased in 2017 compared to 2016 due to a
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.
FINANCIAL CONDITION
Liquidity
Operating Activities
(In millions)
Net income
Depreciation and amortization
Provision for doubtful accounts and
2018
2017
2016
$467.4
181.0
$281.8
178.7
$320.7
180.1
sales returns
45.6
37.6
54.4
Net losses (gains) from impairments,
sale of assets and investment
settlements
Stock-based compensation
Losses from settlements of pension
obligations
Deferred income taxes and other
non-cash 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 other
6.8
34.3
93.7
(32.7)
53.6
(62.5)
(70.5)
(5.6)
43.6
(29.8)
(35.5)
(6.0)
(.4)
30.2
(.6)
27.2
–
41.4
151.6
53.9
(141.2)
(14.9)
(7.9)
83.4
(.6)
29.6
(13.0)
52.3
46.2
(88.2)
(19.6)
(7.6)
31.6
32.4
(14.1)
(2.3)
liabilities
(225.5)
(23.1)
(71.8)
Net cash provided by operating activities
$457.9
$645.7
$582.1
9
Avery Dennison Corporation
2018 Annual Report
2018
2017
18% 30%
(2)
–
30
(28)
16
(15)
1%
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 2018, cash flow provided by operating activities decreased
compared to 2017 primarily due to our $200 million contribution to the
ADPP in connection with its termination, higher income tax payments,
net of refunds, changes in operational working capital, and higher
incentive compensation payments, partially offset by higher net income.
In 2017, cash flow provided by operating activities increased
compared to 2016 primarily due to higher income before taxes, as well
2% 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.
Investing Activities
(In millions)
Purchases of property, plant and
2018
2017
2016
equipment
$(226.7) $(190.5) $(176.9)
Purchases of software and other
deferred charges
(29.9)
(35.6)
(29.7)
Proceeds from sales of property, plant
and equipment
Proceeds from insurance and sales
(purchases) of investments, net
Payments for acquisitions, net of cash
acquired, and investments in
businesses
9.4
6.0
18.5
(3.9)
8.5
3.1
(3.8)
(319.3)
(237.2)
Net cash used in investing activities
$(232.5) $(543.3) $(432.2)
Purchases of Property, Plant and Equipment
In 2018, we invested in equipment to support growth primarily in
Asia, North America and Europe and to improve manufacturing
productivity. In 2017 and 2016, we invested in new equipment to
support growth in Asia, Europe and North America and to improve
manufacturing productivity.
Purchases of Software and Other Deferred Charges
In 2018, we invested in information technology primarily associated
with enterprise resource planning system implementations in North
America and Asia. 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 were primarily associated with
standardization initiatives in Asia and North America.
Proceeds from Insurance and Sales (Purchases) of Investments, Net
In 2018, proceeds from insurance were associated with our
corporate-owned life insurance policies. We also had higher proceeds
from net sales of investments in 2018.
Payments for Acquisitions and Investments in Businesses
In 2018, we paid $3.8 million for investments in unconsolidated
businesses. In 2017 and 2016, the aggregate payments for acquisitions,
net of cash acquired, and
in businesses were
approximately $319 million and $237 million, respectively, which we
investments
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
funded through cash and commercial paper borrowings. The 2017
Acquisitions were also partially funded through proceeds from the
senior notes we issued in 2017.
$.52 per share, representing an increase of approximately 16% from our
previous dividend rate of $.45 per share.
Refer to Note 2, ‘‘Acquisitions,’’ to the Consolidated Financial
Share Repurchases
Statements for more information.
Financing Activities
(In millions)
Net change in borrowings and
repayments of debt and capital
leases
Additional long-term borrowings
Dividends paid
Share repurchases
Net (tax withholding) proceeds
related to stock-based
compensation
Payments of contingent
consideration
2018
2017
2016
$ (84.0)
493.3
(175.0)
(392.9)
$(343.0)
542.9
(155.5)
(129.7)
$ 232.2
–
(142.5)
(262.4)
(32.2)
1.4
66.5
(17.3)
–
–
Net cash used in financing activities
$(208.1)
$ (83.9)
$(106.2)
Borrowings and Repayment of Debt
In December 2018, we issued $500 million of senior notes, due
December 2028. The senior notes bear an interest rate of 4.875% per
year, payable semi-annually in arrears. The net proceeds from the
offering, after deducting underwriting discounts and estimated offering
expenses, were $493.3 million, which we used to repay commercial
paper borrowings. Prior to the issuance of these senior notes, we used
commercial paper borrowings in the third quarter to fund our
$200 million contribution to the ADPP in connection with its termination.
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 borrowed to finance a portion of the purchase price
for our acquisition of the European business of Mactac and the
remainder of which we used for general corporate purposes, including
other acquisitions.
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. Borrowings from this program were
used to fund a portion of the purchase price for our acquisition of the
European business of Mactac in 2016.
Given the seasonality of our cash flow from operating activities,
during 2018, 2017, and 2016, our commercial paper borrowings were
used to fund share repurchase activity, dividend payments, and capital
expenditures, and for other general corporate purposes.
Refer to Note 2, ‘‘Acquisitions,’’ and Note 4, ‘‘Debt and Capital
for more
the Consolidated Financial Statements
to
Leases,’’
information.
Dividends Paid
We paid dividends of $2.01 per share in 2018 compared to $1.76
per share in 2017. In April 2018, we increased our quarterly dividend to
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 2018, we repurchased approximately 4 million shares of
our common stock at an aggregate cost of $392.9 million. In 2017, we
repurchased approximately 1.5 million shares of our common stock at
an aggregate cost of $129.7 million.
In April 2017, our Board authorized the repurchase of additional
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
thereunder have been
until shares
repurchased. As of December 29, 2018, shares of our common stock in
the aggregate amount of $232.4 million remained authorized for
repurchase under this Board authorization.
the amount authorized
in
Net (Tax Withholding) Proceeds Related to
Stock-Based Compensation
In 2018, tax withholding for stock-based compensation increased
compared to 2017 as a result of higher vesting-date share prices for
equity awards vested during the year. In 2017, tax withholding for stock-
based compensation, reflected the impact of our adoption of the
accounting guidance update related to stock-based payments.
The number of stock options exercised was approximately
.03 million, .6 million, and 1.4 million in 2018, 2017, and 2016,
respectively. Refer to Note 12, ‘‘Long-Term Incentive Compensation,’’ to
the Consolidated Financial Statements for more information.
Analysis of Selected Balance Sheet Accounts
Long-lived Assets
Property, plant and equipment, net, increased by approximately
$40 million to $1.1 billion at year-end 2018, which primarily reflected
purchases of property, plant and equipment and the impact of foreign
currency translation, partially offset by depreciation expense.
Goodwill decreased by approximately $43 million to $941.8 million
at year-end 2018 due to purchase price adjustments related to the
acquisition of Yongle Tape and the impact of foreign currency
translation.
Other
from business acquisitions, net,
decreased by approximately $22 million to $144 million at year-end
2018, which primarily reflected amortization expense.
intangibles resulting
Refer to Note 3, ‘‘Goodwill and Other Intangibles Resulting from
Business Acquisitions,’’ to the Consolidated Financial Statements for
more information.
Long-term retirement benefits and other liabilities decreased by
approximately $295 million to $334.7 million, primarily reflecting our
pension plan contribution and the reclassification of the remaining
obligations to other current liabilities as a result of the termination of the
ADPP, a reduction in contingent consideration liabilities, and lower net
obligation for our international pension plans as a result of higher
returns on plan assets and discount rates.
10
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Shareholders’ Equity Accounts
The balance of our shareholders’ equity decreased by
approximately $91 million to $955 million at year-end 2018, which
reflected share repurchases, dividend payments and foreign currency
translation, partially offset by current year net income, the net decrease
in ‘‘accumulated other comprehensive loss,’’ and the use of treasury
shares to settle the exercise of stock options and vesting of stock-based
awards, as well as to fund contributions to our U.S. defined contribution
plan.
Refer to Note 6, ‘‘Pension and Other Postretirement Benefits,’’ and
Note 11,
Income
‘‘Supplemental Equity and Comprehensive
Information,’’ to the Consolidated Financial Statements for more
information.
(In millions, except percentages)
(A) Working capital
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
2018
2017
$ 304.0
$ 266.1
(232.0)
(224.4)
(221.3)
(3.6)
(217.3)
(6.3)
194.6
265.4
current accrued liabilities
768.9
699.2
(B) Operational working capital
$ 810.6
$ 782.7
(C) Fourth-quarter net sales, annualized
$7,074.8
$6,941.2
Impact of Foreign Currency Translation
(In millions)
Change in net sales
2018
2017
$86
$29
Operational working capital, as a percentage
of annualized current-quarter net
sales (B) (cid:3) (C)
11.5%
11.3%
In 2018, international operations generated approximately 77% 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
2018 compared to 2017 was primarily related to euro-denominated
sales and sales in China, partially offset by the unfavorable impact of
foreign currency translation on sales in Brazil and Turkey.
On July 1, 2018, we began accounting for our operations in
Argentina as highly inflationary, as the country’s three-year cumulative
inflation rate exceeded 100%. As a result, the functional currency of our
Argentine subsidiary became the U.S. dollar.
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.
Operational Working Capital Ratio
Operational working capital, as a percentage of annualized current-
quarter net sales, is reconciled to working capital below. Our objective is
to minimize our investment in operational working capital, as a
percentage of annualized current-quarter net sales, to maximize our
cash flow and return on investment. Operational working capital, as a
percentage of annualized current-quarter net sales in 2018 was
comparable to 2017.
Accounts Receivable Ratio
The average number of days sales outstanding was 62 days in
2018 compared to 63 days in 2017, calculated using the four-quarter
average accounts receivable balance divided by the average daily sales
in 2018 and 2017, respectively. The decrease in the average number of
days sales outstanding primarily reflected the impact of foreign
currency translation.
Inventory Ratio
Average inventory turnover was 7.8 in 2018 compared to 7.9 in
2017, calculated using the annual cost of sales in 2018 and 2017,
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 73 days in
2018 compared to 72 days in 2017, calculated using the four-quarter
average accounts payable balance divided by the average daily cost of
products sold in 2018 and 2017, respectively. The increase in average
number of days payable outstanding primarily reflected the timing of
vendor payments, partially offset by the impact of the 2017 Acquisitions
and foreign currency translation.
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 29, 2018 and December 30, 2017, we were in compliance
with our financial covenants.
Fair Value of Debt
The estimated fair value of our long-term debt is primarily based on
the credit spread above U.S. Treasury securities on notes with similar
rates, credit rating, and remaining maturities. The fair value of short-term
borrowings, which
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 $1.6 billion at December 30, 2017 to $2 billion at
includes commercial paper
11
Avery Dennison Corporation
2018 Annual Report
December 29, 2018 primarily reflected our issuance of $500 million of
senior notes in 2018. 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,
the
‘‘Summary of Significant Accounting Policies,’’
Consolidated Financial Statements for more information.
to
Capital Resources
Capital resources include cash flows from operations, cash and
cash equivalents and debt financing, including ready access to
commercial paper. We plan to use these resources to fund operational
needs, including payments related to the ADPP termination and cost
reduction actions.
At year-end 2018, we had cash and cash equivalents of $232 million
held in accounts at third-party financial institutions. Our cash balances
are held in numerous locations throughout the world. At year-end 2018,
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
by up to $300 million, subject to lender approvals and customary
requirements. The Revolver is used as a back-up facility for our
commercial paper program and can be used for other corporate
purposes.
No balances were outstanding under the Revolver as of year-end
2018 or 2017. Commitment fees associated with the Revolver in 2018,
2017, and 2016 were $1.2 million, $1.1 million, and $1.1 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 29, 2018. These lines may be cancelled at any time by us
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
or the issuing banks. Short-term borrowings outstanding under our lines
of credit were $45.5 million and $76.1 million at December 29, 2018 and
December 30, 2017, respectively, with a weighted-average interest rate
of 7% and 6.2%, 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 29, 2018, no
balance was outstanding under this program.
We had $131 million and $183.8 million of U.S. commercial paper
borrowings outstanding at year-end 2018 and 2017, respectively, with a
weighted-average interest rate of 2.75% and 1.79%, respectively.
We had medium-term notes of $45 million outstanding at year-end
2018 and 2017.
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 $385 million to
$1.97 billion at year-end 2018 compared to $1.58 billion at year-end
2017, primarily reflecting our issuance of $500 million of senior notes, a
portion of which we used to repay commercial paper borrowings.
Credit ratings are a significant factor in our ability to raise short- and
long-term financing. The credit ratings assigned to us also impact the
interest rates 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.
Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Contractual Obligations at End of Year 2018
(In millions)
Short-term borrowings
Long-term debt
Payments related to long-term capital leases
Interest on long-term debt
Operating leases
Payments Due by Period
Total
2019
2020
2021
2022
2023 Thereafter
$ 176.5 $176.5 $
– $
1,782.3
30.5
482.2
184.8
14.4
5.9
65.7
47.7
265.0
5.4
55.6
38.9
– $
–
5.2
51.1
29.4
– $
–
4.8
51.1
18.8
–
250.0
4.7
45.2
12.9
$
–
1,252.9
4.5
213.5
37.1
Total contractual obligations
$2,656.3 $310.2 $364.9 $85.7 $74.7 $312.8
$1,508.0
12
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
We enter into operating leases primarily for office and warehouse
space and equipment for information technology, machinery, and
transportation. The table above includes minimum annual rental
commitments on operating
initial or remaining
non-cancelable lease terms of one year or more.
leases having
The table above does not include:
(cid:129) Payments related to cost reduction actions – The payments for
severance and other contract terminations are subject to
applicable agreements, local laws and practices. Refer to
Note 13, ‘‘Cost Reduction Actions,’’ to the Consolidated
Financial Statements for more information.
(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 trusts or trust equivalents. Cash funding requirements
for our funded plans, which can be significantly impacted by
earnings on investments, the discount rate, changes in the
plans, and funding laws and regulations, are not included as
we are not able to estimate required contributions to the trusts
or trust equivalents. Refer to Note 6, ‘‘Pension and Other
the Consolidated Financial
Postretirement Benefits,’’
Statements for information regarding expected contributions
to these plans and plan terminations and settlements.
to
(cid:129) Pension and postretirement benefit payments – As of
December 29, 2018, 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.
It
(cid:129) Deferred compensation plan benefit payments –
is
impracticable for us to obtain a reasonable estimate for 2019
and beyond due to the volatility of the payment amounts and
certain events that could trigger immediate payment of
benefits to participants. In addition, participant account
balances are marked-to-market monthly and benefit payments
are adjusted annually. Refer to Note 6, ‘‘Pension and Other
Postretirement Benefits,’’
the Consolidated Financial
Statements for more information.
to
(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 $80.8 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.
13
Avery Dennison Corporation
2018 Annual Report
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,
incentive
compensation.
taxes based on
income, and
long-term
Goodwill
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 have the option to first
assess qualitative factors before performing a quantitative assessment
for goodwill impairment. If the qualitative assessment indicates that it is
more-likely-than-not that the fair value of a reporting unit is less than its
carrying value, a quantitative assessment is performed. A quantitative
assessment primarily consists 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 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
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
In our annual impairment analysis in the fourth quarter of 2018, the
goodwill of reporting units in our Label and Graphic Materials and Retail
Branding and Information Solutions reportable segments were tested
utilizing a qualitative assessment. Based on this assessment we
determined that the fair values of the reporting units in both reportable
segments were greater than their carrying values. Therefore, the
goodwill in these reporting units was not impaired.
Additionally, in our annual impairment analysis, the goodwill of
reporting units in our Industrial and Healthcare Materials reportable
segment were
tested utilizing a quantitative assessment. This
assessment indicated that the fair values of these reporting units
exceeded their respective carrying amounts, including goodwill. Except
for our Yongle Tape reporting unit acquired in 2017, the fair values of
these reporting units exceeded their carrying amounts by 100% or
more. Yongle Tape’s fair value exceeded its carrying value by 22%,
assuming a discount rate of 12% and a perpetual growth rate of 3.5%.
As of December 29, 2018, the carrying value of Yongle Tape’s goodwill
was $81.7 million.
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.
Discount Rate
In consultation with our actuaries, we annually review and
determine the discount rates to be used in valuing our postretirement
obligations. With the exception of the ADPP, 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 29, 2018, the
discount rate for the ADPP after reflecting plan termination was set
based on estimated insurer pricing. As of December 29, 2018, a .25%
increase in the discount rate in the U.S. would have decreased our
year-end projected benefit obligation by approximately $23 million and
increased expected periodic benefit cost for the coming year by
approximately $.04 million. Conversely, a .25% decrease in the discount
rate in the U.S. would have increased our year-end projected benefit
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
obligation by approximately $24 million and decreased expected
periodic benefit cost for the coming year by approximately $.1 million.
As of December 29, 2018, a .25% increase in the discount rate
associated with our international plans would have decreased our
year-end projected benefit obligation by $34 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 $37 million and
decreased expected periodic benefit cost for the coming year by
approximately $2 million.
We use the full yield curve approach to estimate the service and
interest cost components of net periodic benefit cost for our pension
and other postretirement benefit plans. 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.
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 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 periodic benefit cost for
the coming year by approximately $.5 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 periodic benefit cost for the coming year 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 losses and tax credit
carryforwards. These amounts are adjusted, as appropriate, to reflect
changes in tax rates expected to be in effect when the temporary
differences reverse. We evaluate the 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 have significant deferred tax
assets that are dependent on such earnings to be realized. We use
historical experience along with operating forecasts to evaluate
expected future taxable income. To the extent we do not consider it
more likely than not that a deferred tax asset will be recovered, a
14
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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.
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
into
circumstances existing at
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
for
Our
income
tax provision
fiscal year 2018
included
measurement period adjustments to our 2017 provisional amount
related to the TCJA in accordance with guidance provided under
SAB 118. We completed our analysis based on our interpretation of
available U.S. Treasury regulations and administrative interpretations.
However, the provisions of the TCJA are subject to further amendments,
interpretations, regulations, and court cases, any of which could
increase or decrease one or more impacts of the legislation.
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.
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
financial
achievement of performance objectives based on a
performance condition is determined based on the fair market value of
our common stock as of the date of grant, adjusted for foregone
dividends.
The fair value of stock-based awards that are subject to
achievement of performance objectives based on a market condition,
which includes MSUs and the other component of PUs, is determined
using the Monte-Carlo simulation model, which utilizes multiple input
variables,
including expected stock price volatility and other
assumptions appropriate for determining fair value, to estimate the
probability of satisfying the target performance objectives established
for the award.
Certain of these assumptions are based on management’s
estimates, in consultation with outside specialists. Significant changes
in assumptions for future awards and actual forfeiture rates could
materially impact stock-based compensation expense and our results of
operations.
Valuation of Cash-Based Awards
Cash-based awards consist of long-term incentive units (‘‘LTI
Units’’) granted to eligible employees. 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.
Changes in estimated forfeiture rates are recorded as cumulative
RECENT ACCOUNTING REQUIREMENTS
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.
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.
We generally do not purchase or hold foreign currency or interest
rate or commodity contracts for trading purposes.
15
Avery Dennison Corporation
2018 Annual Report
Our objective in managing our exposure to foreign currency
changes is to reduce the risk to our earnings and cash flow associated
with foreign exchange rate changes. As a result, we enter into foreign
exchange forward, option and swap contracts to reduce risks
associated with the value of our existing foreign currency assets,
liabilities, firm commitments and anticipated foreign revenues and
costs, when available and appropriate. The gains and losses on these
contracts are intended to offset changes in the related exposures. We
do not hedge our foreign currency translation exposure in a manner that
would entirely eliminate the effects of changes in foreign exchange rates
on our net
foreign-currency-
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.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Foreign Exchange Value-At-Risk
We use a Value-At-Risk (‘‘VAR’’) model to determine the estimated
maximum potential one-day loss in earnings associated with our foreign
exchange positions and contracts. This approach assumes that market
rates or prices for foreign exchange positions and contracts are
normally distributed. VAR model estimates 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 2018 and 2017, 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 $.5 million at year-end
2018 and $1.1 million at year-end 2017.
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 2018, 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 $1.3 million.
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.
16
Consolidated Balance Sheets
(Dollars in millions, except per share amount)
Assets
Current assets:
Cash and cash equivalents
Trade accounts receivable, less allowances of $21.1 and $36.2 at year-end 2018 and 2017, 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 2018 and 2017;
issued – 124,126,624 shares at year-end 2018 and 2017; outstanding – 84,723,655 shares and 88,011,541
shares at year-end 2018 and 2017, respectively
Capital in excess of par value
Retained earnings
Treasury stock at cost, 39,402,969 shares and 36,115,083 shares at year-end 2018 and 2017, respectively
Accumulated other comprehensive loss
Total shareholders’ equity
See Notes to Consolidated Financial Statements
December 29,
2018
December 30,
2017
$
232.0
1,189.7
651.4
27.0
3.6
194.3
2,298.0
1,137.4
941.8
144.0
205.3
451.0
$
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
$ 5,177.5
$ 5,136.9
$
194.6
1,030.5
217.9
129.8
58.1
363.1
1,994.0
1,771.6
334.7
122.1
$
265.4
1,007.2
248.5
112.3
49.2
289.2
1,971.8
1,316.3
629.3
173.3
124.1
872.0
2,864.9
(2,223.9)
(682.0)
124.1
862.6
2,596.7
(1,856.7)
(680.5)
955.1
1,046.2
$ 5,177.5
$ 5,136.9
17
Avery Dennison Corporation
2018 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
Other non-operating expense
Income before taxes
Provision for income taxes
Equity method investment net losses
Net income
Per share amounts:
Net income per common share
Net income per common share, assuming dilution
Weighted average number of shares outstanding:
Common shares
Common shares, assuming dilution
See Notes to Consolidated Financial Statements
2018
2017
2016
$7,159.0
5,243.5
1,915.5
1,127.5
69.9
58.5
104.8
554.8
85.4
(2.0)
$6,613.8
4,801.6
$6,086.5
4,386.8
1,812.2
1,105.2
36.5
63.0
18.0
589.5
307.7
–
1,699.7
1,085.7
23.8
59.9
53.2
477.1
156.4
–
$ 467.4
$ 281.8
$ 320.7
$
$
5.35
5.28
$
$
3.19
3.13
$
$
3.60
3.54
87.3
88.6
88.3
90.1
89.1
90.7
18
Consolidated Statements of Comprehensive Income
(In millions)
Net income
Other comprehensive (loss) income, net of tax:
Foreign currency translation:
Translation (loss) gain
Pension and other postretirement benefits:
Net loss recognized from actuarial gain/loss and prior service cost/credit
Reclassifications to net income
Cash flow hedges:
Gains (losses) recognized on cash flow hedges
Reclassifications to net income
Other comprehensive (loss) income, net of tax
Total comprehensive income, net of tax
See Notes to Consolidated Financial Statements
2018
2017
2016
$467.4
$281.8
$320.7
(91.2)
56.4
(53.7)
(4.1)
93.8
1.1
(1.1)
(1.5)
(3.0)
19.3
(2.2)
.9
(62.9)
44.2
.7
2.8
71.4
(68.9)
$465.9
$353.2
$251.8
19
Avery Dennison Corporation
2018 Annual Report
Consolidated Statements of Shareholders’ Equity
(Dollars in millions, except per share amounts)
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
Balance as of December 30, 2017
Tax accounting for intra-entity asset transfers(1)
Balance as of December 31, 2017
Net income
Other comprehensive loss, net of tax
Repurchase of 3,951,215 shares for treasury
Issuance of 458,506 shares under stock-based compensation plans
Contribution of 204,823 shares to 401(k) Plan
Dividends: $2.01 per share
Common Capital in
excess of
stock, $1
par value
par value
Retained
earnings
Treasury
stock
Accumulated
other
comprehensive
loss
Total
$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
–
–
–
–
–
–
$124.1
–
$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
–
–
$862.6 $2,596.7 $(1,856.7)
–
(13.8)
–
$862.6 $2,582.9 $(1,856.7)
–
467.4
–
–
(392.9)
–
17.6
(24.1)
8.1
13.7
–
(175.0)
–
–
–
9.4
–
–
–
–
–
92.9
20.0
(142.5)
$(751.9) $ 925.5
281.8
71.4
(129.7)
32.4
20.3
(155.5)
–
71.4
–
–
–
–
$(680.5) $1,046.2
(13.8)
–
$(680.5) $1,032.4
467.4
(1.5)
(392.9)
2.9
21.8
(175.0)
–
(1.5)
–
–
–
–
Balance as of December 29, 2018
$124.1
$872.0 $2,864.9 $(2,223.9)
$(682.0) $ 955.1
(1) In the first quarter of 2018, we adopted an accounting guidance update that requires recognition of the income tax effects of intra-entity sales and transfers of assets other than inventory in the period
in which they occur. Refer to Note 1, ‘‘Summary of Significant Accounting Policies,’’ for more information.
See Notes to Consolidated Financial Statements
20
2018
2017
2016
$ 467.4
$ 281.8
$ 320.7
141.5
39.5
45.6
6.8
34.3
93.7
(32.7)
53.6
(62.5)
(70.5)
(5.6)
43.6
(29.8)
(35.5)
(6.0)
(225.5)
457.9
(226.7)
(29.9)
9.4
18.5
(3.8)
(232.5)
(77.6)
493.3
(6.4)
(175.0)
(392.9)
(32.2)
(17.3)
(208.1)
(9.7)
7.6
224.4
126.6
52.1
37.6
(.4)
30.2
–
151.6
53.9
(141.2)
(14.9)
(7.9)
83.4
(.6)
29.6
(13.0)
(23.1)
645.7
(190.5)
(35.6)
6.0
(3.9)
(319.3)
(543.3)
(89.2)
542.9
(253.8)
(155.5)
(129.7)
1.4
–
(83.9)
10.8
29.3
195.1
117.5
62.6
54.4
(.6)
27.2
41.4
52.3
46.2
(88.2)
(19.6)
(7.6)
31.6
32.4
(14.1)
(2.3)
(71.8)
582.1
(176.9)
(29.7)
8.5
3.1
(237.2)
(432.2)
234.9
–
(2.7)
(142.5)
(262.4)
66.5
–
(106.2)
(7.4)
36.3
158.8
$ 232.0
$ 224.4
$ 195.1
Consolidated Statements of Cash Flows
(In millions)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Amortization
Provision for doubtful accounts and sales returns
Net losses (gains) from impairments, sale of assets and investment settlements
Stock-based compensation
Losses from settlements of pension obligations
Deferred income taxes and other non-cash 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
Proceeds from insurance and sales (purchases) of investments, net
Payments for acquisitions, net of cash acquired, and investments in businesses
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 and capital leases
Dividends paid
Share repurchases
Net (tax withholding) proceeds related to stock-based compensation
Payments of contingent consideration
Net cash used in financing activities
Effect of foreign currency translation on cash balances
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See Notes to Consolidated Financial Statements
21
Avery Dennison Corporation
2018 Annual Report
Notes to Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Guidance Updates
Revenue Recognition
Nature of Operations
Our businesses include the production of pressure-sensitive
materials and a variety of tickets, tags, labels and other converted
products. We sell most of our pressure-sensitive materials to label
printers and converters that convert the materials into labels and other
products through embossing, printing, stamping and die-cutting. We
sell other pressure-sensitive materials in converted form as tapes and
reflective sheeting. We also manufacture and sell a variety of other
involving pressure-sensitive
converted products and
items not
components, such as
tags, radio-frequency
identification (‘‘RFID’’) inlays and tags, and imprinting equipment and
related solutions, which serve the apparel and other end markets.
fasteners,
tickets,
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.
Reclassifications
Certain amounts in the prior year’s Consolidated Financial
Statements have been reclassified to conform to the current year
presentation.
Fiscal Year
Normally, our fiscal years consist of 52 weeks, but every fifth or sixth
fiscal year consists of 53 weeks. Our 2018, 2017, and 2016 fiscal years
consisted of 52-week periods ending December 29, 2018,
December 30, 2017, and December 31, 2016, respectively.
In the first quarter of 2018, we adopted an accounting guidance
update that provides a single comprehensive model on accounting for
revenue arising from contracts with customers and supersedes most
current revenue recognition guidance, including industry-specific
guidance. We adopted this guidance using the modified retrospective
method, which means that reporting periods beginning in 2018 are
presented in accordance with this guidance, while prior period amounts
continue to be reported in accordance with the previous guidance. As
allowed by this guidance, we began to apply it to contracts with
customers that were not completed as of the beginning of 2018. As a
result of the adoption of this guidance, our allowance for customer
returns, presented as a reduction of trade accounts receivable in prior
years, is now presented as a returns liability in ‘‘Other accrued
liabilities.’’ As of December 29, 2018, the returns liability was
$11.7 million. Our adoption of this guidance did not have a material
impact on our financial position, results of operations, or cash flows. The
disclosures required by this guidance are included in Note 15,
‘‘Segment and Disaggregated Revenue Information,’’ and Note 16,
‘‘Supplemental Financial Information.’’
Presentation of Net Periodic Pension and Postretirement Benefit Costs
In the first quarter of 2018, we adopted an accounting guidance
update that requires employers with defined benefit plans to present 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 net periodic benefit cost, including
gains or losses from settlements or terminations, 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
are no longer eligible for capitalization in assets. Employers are required
to apply the portion of this guidance on the presentation of the
components of net periodic benefit cost in the income statement
retrospectively, while the portion of this guidance that limits the
capitalization of net periodic benefit cost in assets to the service cost
component must be applied prospectively.
Prior year results have been reclassified as required by this guidance. The effects of our adoption of this guidance on our Consolidated
Statements of Income for the prior years were as follows:
(In millions)
Marketing, general and administrative expense
Other expense, net
Other non-operating expense
Classification of Certain Cash Payments
2017
2016
As
Previously
Reported
$1,123.2
36.5
–
Reclassi-
fication
As
Reclassified
$(18.0)
–
18.0
$1,105.2
36.5
18.0
As
Previously
Reported
$1,097.5
65.2
–
Reclassi-
fication
As
Reclassified
$(11.8)
(41.4)
53.2
$1,085.7
23.8
53.2
In the first quarter of 2018, we adopted an accounting guidance update that reduces the diversity in the presentation and classification of certain
cash receipts and cash payments in statements of cash flows.
22
Notes to Consolidated Financial Statements
Prior year results have been reclassified as required by this guidance. The effects of our adoption of this guidance, which primarily relate to the
classification of corporate-owned life insurance cash flows, on our Consolidated Statements of Cash Flows for the prior years were as follows:
(In millions)
Net cash provided by operating activities
Net cash used in investing activities
Intra-Entity Transfers of Assets Other Than Inventory
In the first quarter of 2018, we adopted an accounting guidance
update that requires recognition of the income tax effects of intra-entity
sales and transfers of assets other than inventory in the period in which
they occur. Upon adoption, we derecognized tax-related deferred
charges and recognized deferred tax assets related to certain intra-
entity asset transfers as a $13.8 million net reduction to retained
earnings.
Implementation Costs Incurred in a Cloud Computing Arrangement
In the third quarter of 2018, we adopted an accounting guidance
update that requires companies to capitalize implementation costs
incurred in a hosting arrangement that is a service contract. We adopted
this guidance early and on a prospective basis. Our adoption of this
guidance did not have a material impact on our financial position,
results of operations, or cash flows.
Defined Benefit Plan Disclosures
In the fourth quarter of 2018, we adopted an accounting update to
improve the effectiveness of disclosures by removing and adding
certain disclosures related to defined benefit plans. Refer to Note 6,
‘‘Pension and Other Postretirement Benefits,’’ for more information.
Use of Estimates
The preparation of
financial statements
in conformity with
accounting principles generally accepted in the United States of
America, or GAAP, requires management to make estimates and
assumptions for the reporting period and as of the date of the financial
statements. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent liabilities
and the reported amounts of revenue and expense. Actual results could
differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents 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.
Trade 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. 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.
23
Avery Dennison Corporation
2018 Annual Report
2017
2016
As
Previously
Reported
$ 650.1
(547.7)
Reclassi-
fication
As
Reclassified
As
Previously
Reported
Reclassi-
fication
As
Reclassified
$(4.4)
4.4
$ 645.7
(543.3)
$ 585.3
(435.4)
$(3.2)
3.2
$ 582.1
(432.2)
No single customer represented 10% or more of our net sales in, or
trade accounts receivable at, year-end 2018 or 2017. However, during
2018, 2017, and 2016, our ten largest customers by net sales in the
aggregate represented approximately 15%, 15%, and 14% of our net
sales, respectively. As of December 29, 2018 and December 30, 2017,
our ten largest customers by trade accounts receivable in the aggregate
represented 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.
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
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. In addition,
incurred under a hosting
we capitalize
arrangement that is a service contract. 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.
implementation costs
Impairment of Long-lived Assets
Impairment charges are recorded when the carrying amounts of
long-lived assets are determined not to be recoverable. Recoverability is
measured by comparing the undiscounted cash flows expected from
their use and eventual disposition to the carrying value of the related
asset or asset group. The amount of impairment loss is calculated as the
excess of the carrying value over the fair value. Historically, changes in
market conditions and management strategy have caused us to
reassess the carrying amount of our long-lived assets.
Goodwill and Other
Acquisitions
Intangibles Resulting
from Business
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 have the option to
first assess qualitative factors to determine whether it is necessary to
perform a quantitative assessment for goodwill impairment. If the
qualitative assessment indicates that it is more-likely-than-not that the
fair value of a reporting unit is less than its carrying value, a quantitative
assessment is performed. A quantitative assessment primarily consists
of a present value (discounted cash flow) method to determine the fair
value of the reporting units with goodwill. We perform our annual
impairment test of goodwill during the fourth quarter.
Certain factors may result in the need to perform an impairment test
prior to the fourth quarter, including significant underperformance of a
business relative to expected operating results, significant adverse
economic and industry trends, significant decline in our market
capitalization for an extended period of time relative to net book value,
or a decision to divest a portion of a reporting unit.
We 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 forecasted sales, operating margins and
growth rates, and discount rates. Assumptions about discount rates are
for comparable
based on a weighted-average cost of capital
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
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.
fair value of reporting units requires
that
Notes to Consolidated Financial Statements
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.
We amortize finite-lived intangible assets, consisting of customer
relationships, patents and other acquired technology, trade names and
trademarks, and other intangibles, on a straight-line basis over the
estimated useful life of the assets.
See Note 3, ‘‘Goodwill and Other Intangibles Resulting from
Business Acquisitions,’’ for more information.
Foreign Currency
Asset and liability accounts of international operations are
translated into U.S. dollars at current rates. Revenues and expenses are
translated at the weighted-average currency rate for the fiscal year.
Gains and losses resulting from hedging the value of investments in
certain international operations and from the translation of balance
sheet accounts are recorded directly as a component of other
comprehensive income.
On July 1, 2018, we began accounting for our operations in
Argentina as highly inflationary, as the country’s three-year cumulative
inflation rate exceeded 100%. As a result, the functional currency of our
Argentine subsidiary became the U.S. dollar.
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. From time to time, 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 our hedges are highly effective. If it is determined that a
hedge is not highly effective, we prospectively discontinue hedge
accounting. For cash flow hedges, the effective portion of the related
gains and losses is recorded as a component of other comprehensive
income, and the ineffective portion is reported in earnings. Amounts in
accumulated other comprehensive income (loss) are reclassified into
earnings in the same period during which the hedged transaction
24
Notes to Consolidated Financial Statements
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.
as fulfillment costs and not as separate performance obligations. As a
practical expedient, we have elected not to disclose the value of
unsatisfied performance obligations for contracts with an original
expected length of less than one year. We generally expense sales
commissions when incurred because the amortization period would
have been one year or less. These costs are recorded in ‘‘Marketing,
general and administrative expense’’ in the Consolidated Statements of
Income.
Research and Development
We also utilize certain foreign-currency-denominated debt to
mitigate our foreign currency translation exposure from our net
investment in foreign operations.
Research and development costs are related to research, design,
and testing of new products and applications and are expensed as
incurred.
See Note 5, ‘‘Financial Instruments,’’ for more information.
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 or as we satisfy a performance
obligation by transferring control of a product or service to a customer,
in an amount that reflects the consideration to which we expect to be
entitled in exchange for the product or service. We consider a number of
factors in determining when we have transferred control to a customer,
including the following: (i) our present right to payment; (ii) the
customer’s legal title to the asset; (iii) physical possession of the asset;
(iv) the customer’s significant risks and rewards of ownership of the
asset; and (v) the customer’s acceptance of the asset.
Generally, payment terms with our customers are consistent with
those used in our industries and the regions in which we operate.
Sales returns are accepted in certain limited circumstances. We
record an estimate for returns liabilities and a corresponding reduction
to sales, in the amount we expect to repay or credit customers, which
we base on historical returns and outstanding customer claims.
Changes in estimates are updated each reporting period.
Sales rebates, discounts, and other customer concessions are
common in the industries and regions in which we operate and are
accounted for as a reduction to sales based on estimates at the time at
which products are sold. These estimates are based on our historical
experience, as well as current information such as sales forecasts. We
review our estimates regularly and, as additional information becomes
available, we adjust our sales and the respective accruals, if necessary.
Sales tax, value-added tax, and other taxes we collect from
customers are excluded from sales. Shipping and handling activities
after control of a product is transferred to a customer are accounted for
25
Avery Dennison Corporation
2018 Annual Report
Long-Term Incentive Compensation
We estimate 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
2018, 2017, or 2016.
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
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 bases
of assets and liabilities. We record a valuation allowance to reduce our
deferred tax assets when uncertainty regarding their realizability exists.
We recognize and measure our uncertain tax positions following the
more likely than not threshold for financial statement recognition and
measurement for tax positions taken or expected to be taken in a tax
return.
See Note 14, ‘‘Taxes Based on Income,’’ for more information.
Recent Accounting Requirements
In November 2018, the Financial Accounting Standards Board
(‘‘FASB’’) issued guidance that clarifies the interaction between
guidance regarding collaborative arrangements and revenue from
contracts with customers. This guidance is effective for interim and
annual periods beginning after December 15, 2019, with early adoption
permitted. We are currently assessing the impact of this guidance on
our financial position, results of operations, cash flows, and disclosures.
In February 2018, the 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 do not expect to reclassify the tax benefits included in
accumulated other comprehensive income to retained earnings upon
adoption. We also do not anticipate that our adoption will have a
significant impact on our financial position, results of operations, cash
flows, or 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.
Adoption of this amended guidance is required prospectively. This
guidance is effective for interim and annual periods beginning after
December 15, 2018, and early adoption is permitted. We do not
anticipate that our adoption will have a significant impact on our
financial position, results of operations, cash flows, or disclosures.
In June 2016, the FASB issued revised guidance on the
measurement of credit losses on financial instruments. Credit losses on
loans, trade and other receivables, held-to-maturity debt securities, and
Notes to Consolidated Financial Statements
other instruments will reflect the current estimate of the expected credit
losses. This guidance is effective for interim and annual periods
beginning after December 15, 2019, with early adoption permitted. We
do not anticipate that the adoption of this guidance will have a
significant impact on our financial position, results of operations, cash
flows, and disclosures.
In March 2016, and in subsequent updates, the FASB issued
guidance on accounting for leases that requires lessees to recognize
the rights and obligations created by leases on their balance sheets.
This guidance also requires enhanced disclosures regarding the
amount, timing, and uncertainty of cash flows arising from leases and is
effective for interim and annual periods beginning after December 15,
2018. As allowed under this guidance, we have elected to apply the
guidance under a modified retrospective approach, under which this
guidance applies to all leases that exist at or commence after the date of
initial application, with the option to use certain practical expedients. We
plan to elect the transition practical expedients allowed under this
guidance. As discussed in Note 7. ‘‘Commitments,’’ we have operating
leases with remaining minimum lease payments totaling approximately
$185 million, and, upon transition, we will record right of use assets and
lease liabilities related to these leases. We established a cross-
the assessment, design, and
functional
implementation of this new guidance. We are continuing to implement
processes and information technology tools and to evaluate our
accounting policies and controls to address this guidance and are in the
process of coordinating our transition to the revised guidance. We
anticipate the adoption of this guidance will have a significant impact on
our financial position and disclosures and are in the process of
assessing its impact on our results of operations and cash flows.
to manage
team
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.
The aggregate purchase consideration for these acquisitions (the
‘‘2017 Acquisitions’’) was approximately $340 million. The 2017
Acquisitions were funded through cash and existing credit facilities.
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. 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 2018 indicated that no impairment occurred during 2018. The
assumptions used in the assessment of these assets were primarily based on Level 3 inputs.
Changes in the net carrying amount of goodwill for 2018 and 2017 by reportable segment were as follows:
(In millions)
Goodwill as of December 31, 2016
2017 Acquisitions(1)
Acquisition adjustments(2)
Translation adjustments
Goodwill as of December 30, 2017
Acquisition adjustments(3)
Translation adjustments
Goodwill as of December 29, 2018
Label and
Graphic
Materials
$373.3
17.5
4.8
33.9
429.5
–
(14.0)
Retail
Branding and
Information
Solutions
Industrial and
Healthcare
Materials
$353.9
–
–
1.5
355.4
–
(5.7)
$ 66.4
125.5
.7
7.6
200.2
(17.7)
(5.9)
Total
$793.6
143.0
5.5
43.0
985.1
(17.7)
(25.6)
$415.5
$349.7
$176.6
$941.8
(1) Goodwill acquired in 2017 related to the acquisitions of Hanita, which is included in our Label and Graphic Materials reportable segment, and Finesse Medical and Yongle Tape, which are included
in our Industrial and Healthcare Materials reportable segment.
(2) Goodwill purchase price allocation adjustments related to the acquisition of Mactac.
(3) Goodwill purchase price allocation adjustments and measurement period adjustments for contingent consideration liabilities related to the acquisition of Yongle Tape.
The carrying amounts of goodwill at December 29, 2018 and December 30, 2017 were net of accumulated impairment losses of $820 million
recognized in fiscal year 2009 by our Retail Branding and Information Solutions (‘‘RBIS’’) reportable segment.
Indefinite-Lived Intangible Assets
Results from our annual indefinite-lived intangible assets impairment test in the fourth quarter indicated that no impairment occurred in 2018.
The carrying value of indefinite-lived intangible assets resulting from business acquisitions, consisting of trade names and trademarks, was
$21.1 million and $21.2 million at December 29, 2018 and December 30, 2017, respectively. In connection with the Mactac acquisition, we acquired
approximately $13 million of indefinite-lived intangible assets in 2016, 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 $107 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 amounts and weighted useful lives of these intangible assets at acquisition.
Customer relationships
Patents and other acquired technology
Trade names and trademarks
Amount
(in millions)
$70.9
31.9
4.2
Weighted-average
amortization
period
(in years)
16
9
6
In connection with the Mactac acquisition, we acquired approximately $29 million of identifiable intangible assets in 2016, 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%.
The table below summarizes the amounts and weighted useful lives of these intangible assets at acquisition.
Customer relationships
Patents and other acquired technology
Refer to Note 2, ‘‘Acquisitions,’’ for more information.
27
Avery Dennison Corporation
2018 Annual Report
Amount
(in millions)
$26.1
2.5
Weighted-average
amortization
period
(in years)
15
4
Notes to Consolidated Financial Statements
The following table sets forth our finite-lived intangible assets resulting from business acquisitions at December 29, 2018 and December 30,
2017, which continue to be amortized:
(In millions)
Customer relationships
Patents and other acquired technology
Trade names and trademarks
Other intangibles
Total
2018
Accumulated
Amortization
$231.8
56.8
21.7
11.9
Net
Carrying
Amount
$ 90.4
27.2
5.3
–
Gross
Carrying
Amount
$329.2
86.9
27.7
12.0
2017
Accumulated
Amortization
$226.4
51.3
21.0
12.0
Net
Carrying
Amount
$102.8
35.6
6.7
–
$322.2
$122.9
$455.8
$310.7
$145.1
Gross
Carrying
Amount
$322.2
84.0
27.0
11.9
$445.1
Amortization expense for finite-lived intangible assets resulting from business acquisitions was $15.2 million for 2018, $18.6 million for 2017, and
$19.9 million for 2016.
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:
requirements. The Revolver is used as a back-up facility for our
commercial paper program and can be used for other corporate
purposes.
(In millions)
2019
2020
2021
2022
2023
Estimated
Amortization
Expense
$13.4
12.3
12.1
11.0
10.0
NOTE 4. DEBT AND CAPITAL LEASES
Short-Term Borrowings
We had $131 million and $183.8 million of borrowings from U.S.
commercial paper issuances outstanding at December 29, 2018 and
December 30, 2017, respectively, with a weighted-average interest rate
of 2.75% and 1.79%, 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 29, 2018, 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 approvals and customary
No balance was outstanding under
the Revolver as of
December 29, 2018 or December 30, 2017. Commitment fees
associated with the Revolver in 2018, 2017, and 2016 were $1.2 million,
$1.1 million, and $1.1 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 29, 2018. These lines may be cancelled at any time by us
or the issuing banks. Short-term borrowings outstanding under our lines
of credit were $45.5 million and $76.1 million at December 29, 2018 and
December 30, 2017, respectively, with a weighted-average interest rate
of 7% and 6.2%, 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 December 2018, we issued $500 million of senior notes, due
December 2028. The senior notes bear an interest rate of 4.875% per
year, payable semiannually in arrears. The net proceeds from the
offering, after deducting underwriting discounts and offering expenses,
were $493.3 million, which we used to repay commercial paper
borrowings. Prior to the issuance of these senior notes, we used
commercial paper borrowings in the third quarter to fund our
$200 million contribution to the Avery Dennison Pension Plan (‘‘ADPP’’)
in connection with its termination. Refer to Note 6, ‘‘Pension and Other
Postretirement Benefits.’’
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 purchase
price for the acquisition of Mactac, and the remainder of which we used
for general corporate purposes and the 2017 Acquisitions. We
designated a portion of these senior notes as a net investment hedge of
our investment in foreign operations. Refer to Note 5, ‘‘Financial
Instruments,’’ for more information.
28
Notes to Consolidated Financial Statements
Long-term debt, including its respective interest rates, and capital
Other
lease obligations at year-end consisted of the following:
(In millions)
2018
2017
Long-term debt and capital leases
Medium-term notes:
Series 1995 due 2020 through 2025
$
45.0
$
44.9
Long-term notes:
Senior notes due 2020 at 5.4%
Senior notes due 2023 at 3.4%
Senior notes due 2025 at 1.25%(1)
Senior notes due 2028 at 4.875%
Senior notes due 2033 at 6.0%
Capital leases
Other borrowings(2)
Less amount classified as current
249.7
248.9
569.0
493.3
148.8
20.7
14.4
(18.2)
249.5
248.7
588.4
–
148.7
25.0
16.6
(5.5)
Total long-term debt and capital leases(3)
$1,771.6
$1,316.3
(1) These senior notes are euro-denominated
(2) Other borrowings consisted of long-term bank borrowings by foreign subsidiaries.
(3) Includes unamortized debt issuance cost and debt discount of $6.8 million and $6.3 million as
of year-end 2018, respectively, and $7.1 million and $.7 million as of year-end 2017,
respectively.
At year-end 2018 and 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
2019 (classified as current)
2020
2021
2022
2023
2024 and thereafter
(In millions)
$
19.0
269.0
3.9
3.5
253.3
1,257.1
The maturities of capital lease payments in the table above include
$3 million of imputed interest, $1 million of which is expected to be paid
in 2019.
The Revolver contains financial covenants requiring that we
maintain specified ratios of total debt and interest expense in relation to
income. As of December 29, 2018 and
certain measures of
December 30, 2017, we were in compliance with our financial
covenants.
Our total interest costs in 2018, 2017, and 2016 were $63.8 million,
$67.9 million, and $63.5 million, respectively, of which $5.3 million,
$4.9 million, and $3.6 million, respectively, was 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 $2 billion at
December 29, 2018 and $1.6 billion at December 30, 2017. 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 29, 2018, the aggregate U.S. dollar equivalent
notional value of our outstanding commodity contracts and foreign
exchange contracts was $3.2 million and $1.33 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 29, 2018 and December 30, 2017:
(In millions)
Balance Sheet Location
2018
2017
Balance Sheet Location
Foreign exchange contracts
Commodity contracts
Other current assets
Other current assets
$ .5
.1
$ .4
–
Other accrued liabilities
Asset
Liability
$ .6
$ .4
2018
2017
$ .8
$ .6
$ .8
$ .6
The following table shows the fair value and balance sheet locations of other derivatives as of December 29, 2018 and December 30, 2017:
(In millions)
Balance Sheet Location
2018
2017
Balance Sheet Location
Foreign exchange contracts
Other current assets
$3.0
$3.5
Other accrued liabilities
2018
2017
$7.9
$5.6
Asset
Liability
29
Avery Dennison Corporation
2018 Annual Report
Cash Flow Hedges
NOTE 6. PENSION AND OTHER POSTRETIREMENT BENEFITS
Notes to Consolidated Financial Statements
For derivative instruments that are designated and qualify as cash
flow hedges, the effective portion of the gain or loss on the derivative is
reported as a component of ‘‘Accumulated other comprehensive loss’’
and reclassified into earnings in the same period(s) during which the
hedged transaction impacts earnings. Gains and losses on the
derivatives, representing either hedge
ineffectiveness or hedge
components excluded from the assessment of effectiveness, are
recognized in current earnings.
Gains (losses), before taxes, recognized in ‘‘Accumulated other
comprehensive loss’’ (effective portion) on derivatives related to cash
flow hedge contracts were as follows:
(In millions)
Foreign exchange contracts
Commodity contracts
2018
$1.0
.4
$1.4
2017
2016
$(2.2)
(.6)
$(2.8)
$.2
.6
$.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 2018, 2017, and 2016.
As of December 29, 2018, we expected a net loss of approximately
$.4 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
2018
2017
2016
$ 4.5
$ (1.2)
$2.8
(27.0)
(42.9)
4.1
$(22.5) $(44.1)
$6.9
Net Investment Hedge
In March 2017, we designated e500 million of our 1.25% senior
notes due 2025 as a net investment hedge of our investment in foreign
operations. In January 2018, we reduced the amount we designate as a
net investment hedge to e255 million. 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.
Gains (losses), before tax, recognized in ‘‘Accumulated other
comprehensive loss’’ (effective portion) related to the net investment
hedge were as follows:
(In millions)
Foreign currency denominated debt
2018
$1.3
2017
2016
$(63.7)
$N/A
We recorded no ineffectiveness from our net investment hedge in
earnings during 2018 or 2017.
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 July 2018, our Board of Directors (‘‘Board’’) approved the
termination of the ADPP, a U.S. defined benefit plan, effective as of
September 28, 2018. In connection with the termination, we contributed
$200 million to the ADPP in August 2018 using U.S. commercial paper
borrowings. During the fourth quarter of 2018, we settled approximately
$152 million of the ADPP liability through lump-sum payments from
existing plan assets to eligible participants who elected to receive them
and recorded approximately $85 million of non-cash charges
associated with these settlements. We expect to settle the remaining
liability of approximately $792 million through the purchase of a group
annuity contract(s) from one or more yet-to-be-identified highly rated
insurance companies in the first half of 2019. Upon transfer of this
remaining liability, we expect to recognize an additional $490 million of
non-cash pretax charges and related tax benefits of $190 million. As of
December 29, 2018, the ADPP was underfunded by approximately
$57 million.
In December 2015, we offered eligible former employees who were
vested participants in the ADPP 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 the ADPP 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.
Plan Assets
Our investment management of our ADPP assets utilizes a liability
driven investment (LDI) strategy. Under an LDI strategy, the assets are
invested in a diversified portfolio that consists primarily of investment
grade fixed income securities and cash. This strategy is intended to
more closely match the short-term 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, hedging more of the interest rate
risk of the plan’s liabilities. The investment portfolio is designed to
hedge the plan’s liabilities and 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.
Assets in our international plans are invested in accordance with
locally accepted practices and primarily include equity securities, fixed
30
Notes to Consolidated Financial Statements
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 32% in equity
securities, 44% in fixed income securities and cash, and 24% in
insurance contracts and other investments, subject to periodic
fluctuations in these respective asset classes.
Fair Value Measurements
The valuation methodologies we use for assets measured at fair
value are described below.
Cash is valued at nominal value. Cash equivalents and 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.
Fixed income treasury securities are valued at fair value as determined
by quoted prices in active markets. The fixed income municipal and
corporate bonds are valued at fair value based on quoted prices for
similar instruments in active markets or other inputs that are observable
or can be corroborated by observable market data. 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 (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)
2018
Cash and cash equivalents
Equity securities
Fixed income securities – government and municipal bonds
Fixed income securities – corporate bonds
Other
Total U.S. plan assets
2017
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)
$27.1
–
66.3
–
–
$
–
.3
46.7
592.8
2.4
$
–
–
–
–
–
$
–
$
–
$
–
Total
$ 27.1
.3
113.0
592.8
2.4
$735.6
$
–
275.6
464.6
$740.2
(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 U.S. plan assets.
31
Avery Dennison Corporation
2018 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)
2018
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
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
Fair Value Measurements Using
Quoted
Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservable
Inputs
(Level 3)
$4.1
–
$ –
–
$
–
36.9
$1.7
–
$ –
–
$
–
35.7
Total
$
4.1
36.9
300.4
185.0
105.4
$631.8
$
1.7
35.7
278.5
277.3
90.5
$683.7
(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 29, 2018:
(In millions)
Balance at December 30, 2017
Net realized and unrealized gain
Purchases
Settlements
Transfer
Impact of changes in foreign currency exchange rates
Balance at December 29, 2018
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. With the exception of the ADPP, 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. As of December 29, 2018, the discount
rate for the ADPP, after reflecting the plan’s termination, was based on
estimated insurer pricing.
We use the full yield curve approach to estimate the service and
interest cost components of net periodic benefit cost for our pension
Level 3 Assets
Insurance Contracts
$35.7
1.0
5.9
(5.0)
.1
(.8)
$36.9
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.
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.
Measurement Date
We measure the actuarial value of our benefit obligations and plan
assets using the calendar month-end closest to our fiscal year-end and
adjust for any contributions or other significant events between the
measurement date and our fiscal year-end.
32
Notes to Consolidated Financial Statements
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 (gain) loss
Plan transfers
Benefits paid
Settlements(1)
Foreign currency translation
Pension Benefits
U.S. Postretirement
Health Benefits
2018
2017
2018
2017
U.S.
Int’l
U.S.
Int’l
$1,082.1
–
34.5
–
–
(13.2)
–
(61.8)
(173.1)
–
$836.7
19.2
15.7
3.8
–
(58.8)
–
(22.3)
(9.5)
(29.0)
$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
$ 4.1
–
.1
.5
–
.2
–
(1.1)
–
–
$ 5.0
–
.1
.5
–
(.1)
–
(1.4)
–
–
$ 4.1
Projected benefit obligations at end of year
$ 868.5
$755.8
$1,082.1
$836.7
$ 3.8
Accumulated benefit obligations at end of year
$ 868.5
$696.7
$1,082.1
$775.6
(1) In 2018, settlements in the U.S. related to lump-sum payments associated with the ADPP and two nonqualified benefit plans. Settlements in our international plans related to lump-sum payments in
the UK and France.
Plan Assets
(In millions)
Change in plan assets
Plan assets at beginning of year
Actual return on plan assets
Plan transfers
Employer contributions(1)
Participant contributions
Benefits paid
Settlements(2)
Foreign currency translation
Plan assets at end of year
Pension Benefits
U.S. Postretirement
Health Benefits
2018
2017
2018
2017
U.S.
Int’l
U.S.
Int’l
$ 740.2
(3.6)
–
233.9
–
(61.8)
(173.1)
–
$683.7
(13.3)
–
14.7
3.8
(22.3)
(9.5)
(25.3)
$672.1
90.1
–
38.5
–
(60.5)
–
–
$584.2
34.2
(.7)
14.0
3.4
(22.5)
–
71.1
$
–
–
–
.6
.5
(1.1)
–
–
$
–
–
–
.9
.5
(1.4)
–
–
$ 735.6
$631.8
$740.2
$683.7
$
–
$
–
(1) In connection with ADPP’s termination in the U.S., a contribution of $200 million was made in August 2018 using commercial paper borrowings.
(2) In 2018, settlements in the U.S. related to lump-sum payments associated with the ADPP and two nonqualified benefit plans. Settlements in our international plans related to lump-sum payments in
the UK and France.
33
Avery Dennison Corporation
2018 Annual Report
Funded Status
(In millions)
Notes to Consolidated Financial Statements
Pension Benefits
U.S. Postretirement
Health Benefits
2018
2017
2018
2017
U.S.
Int’l
U.S.
Int’l
Funded status of the plans
Other assets
Other accrued liabilities(1)
Long-term retirement benefits and other liabilities(2)
$
–
(65.1)
(67.8)
$ 12.6
(2.0)
(134.6)
$
–
(33.4)
(308.5)
$
–
(2.4)
(150.6)
$
–
(.4)
(3.4)
Plan assets less than benefit obligations
$(132.9)
$(124.0)
$(341.9)
$(153.0)
$(3.8)
(1) In connection with its termination, we reclassified the ADPP’s underfunded benefit obligation in the U.S. of approximately $57 million to other accrued liabilities
(2) In accordance with our funding strategy, we have the option to fund in the U.S. certain of these liabilities with proceeds from our corporate-owned life insurance policies.
$
–
(.5)
(3.6)
$(4.1)
Pension Benefits
U.S. Postretirement
Health Benefits
2018
2017
2018
2017
U.S.
Int’l
U.S.
Int’l
Weighted-average assumptions used to determine year-end benefit obligations
Discount rate
Compensation rate increase
3.72% 2.39% 3.71% 2.25% 4.21%
–
2.26
2.23
–
–
3.55%
–
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 $1.47 billion and $1.20 billion, respectively, at year-end 2018 and $1.92 billion and $1.42 billion, respectively,
at year-end 2017.
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 $1.02 billion and $792 million, respectively, at year-end 2018 and $1.44 billion and $994 million,
respectively, at year-end 2017.
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
2018
2017
2018
2017
U.S.
Int’l
U.S.
Int’l
$487.5
15.9
–
$149.3
(6.7)
.1
$567.2
16.7
–
$186.5
(7.4)
.1
$15.8
(9.8)
–
$ 17.0
(13.1)
–
$ 3.9
Net amount recognized in accumulated other comprehensive loss
$503.4
$142.7
$583.9
$179.2
$ 6.0
The following table sets forth the pre-tax amounts recognized in ‘‘Other comprehensive loss (income)’’:
(In millions)
Net actuarial loss (gain)
Prior service credit
Amortization of unrecognized:
Net actuarial loss
Prior service (cost) credit
Net transition obligation
Settlements
Pension Benefits
U.S. Postretirement
Health Benefits
2018
2017
2016
2018
2017
2016
U.S.
Int’l
U.S.
Int’l
U.S.
Int’l
$ 33.5
–
$(27.2)
–
$ 21.8
–
$(17.2)
(2.1)
$ 39.1
–
$48.9
(.6)
$ .2
–
$
–
–
$ (.2)
–
(21.2)
(.8)
–
(92.0)
(8.1)
.5
–
(1.7)
(18.7)
(.9)
–
–
(10.8)
.4
–
–
(19.0)
(1.2)
–
(41.4)
(7.0)
.4
(.1)
–
(1.4)
3.3
–
–
(1.5)
3.3
–
–
(1.7)
3.2
–
–
Net amount recognized in other comprehensive (income)
loss
$(80.5)
$(36.5)
$ 2.2
$(29.7)
$(22.5)
$41.6
$ 2.1
$ 1.8
$ 1.3
34
Notes to Consolidated Financial Statements
Plan Income Statement Reconciliations
The following table sets forth the components of net periodic benefit cost, which are recorded in net income for our defined benefit plans:
Pension Benefits
U.S. Postretirement
Health Benefits
2018
2017
2016
2018
2017
2016
(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 on curtailments
Recognized loss on settlements(1)
$
–
34.5
(.6)
(42.5)
21.2
.8
–
–
92.0
$ 19.2
15.7
–
(23.8)
8.1
(.5)
–
–
1.7
$
.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)
–
$
–
.1
–
–
1.4
(3.3)
–
–
–
$
–
.1
–
–
1.5
(3.3)
–
–
–
$
–
.1
–
–
1.7
(3.2)
–
–
–
Net periodic benefit cost (credit)
$105.4
$ 20.4
$ 16.6
$ 21.8
$ 53.5
$ 15.4
$(1.8)
$(1.7)
$(1.4)
(1) In 2018, settlements in the U.S. related to lump-sum payments associated with the ADPP and two nonqualified benefit plans. Settlements in our international plans related to lump-sum payments in
the UK and France. In 2016, we recognized a loss on settlements related to the ADPP as a result of making the lump-sum pension payments described above.
The following table sets forth the weighted-average assumptions used to determine net periodic cost:
Pension Benefits
U.S. Postretirement
Health Benefits
2018
2017
2016
2018
2017
2016
U.S.
Int’l
U.S.
Int’l
U.S.
Int’l
Discount rate
Expected return on assets
Compensation rate increase
3.72% 2.25% 4.18% 2.12% 4.55% 2.95%
7.00
–
3.77
2.24
3.78
2.26
4.14
2.24
7.00
–
7.25
–
3.55%
–
–
3.95%
–
–
4.13%
–
–
Plan Contributions
Defined Contribution Plans
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
2019:
(In millions)
U.S. pension plans
Int’l pension plans
U.S. postretirement health benefits
$65.2
10.7
.4
Future Benefit Payments
The future benefit payments shown below, which reflect expected
service periods for eligible participants, exclude estimates for the ADPP.
We expect to settle the future benefit payments for the ADPP in the first
half of 2019. These payments are estimated to be $792 million and have
been included in the projected benefit obligation table above.
(In millions)
2019
2020
2021
2022
2023
2024 - 2028
Pension Benefits
U.S.
Int’l
$ 8.5
7.4
7.7
6.4
6.3
27.5
$ 20.2
21.9
21.6
24.0
25.3
146.2
U.S. Postretirement
Health Benefits
$ .4
.4
.4
.3
.3
1.3
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 of $21.8 million, $20.2 million, and
$20 million in 2018, 2017, and 2016, 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 2018 and 2017, we had accrued $84.3 million and
$86.9 million, respectively, for our obligations under these plans. A
portion of the interest on certain of our contributions may be forfeited by
participants if their employment terminates before age 55 other than by
reason of death or disability.
Our Directors Deferred Equity Compensation Program allows our
non-employee directors to elect to receive their cash compensation in
deferred stock units (‘‘DSUs’’) issued under our equity plans.
Additionally, two legacy deferred compensation plans had DSUs that
were 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. DSUs are converted into shares
of our common stock upon his or her resignation or retirement.
Approximately .2 million and .2 million DSUs were outstanding as of
year-end 2018 and 2017, respectively, with an aggregate value of
$17 million and $20.9 million, respectively.
35
Avery Dennison Corporation
2018 Annual Report
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 $227.4 million and $243.5 million at year-end 2018 and
2017, 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
2019
2020
2021
2022
2023
2024 and thereafter
Total minimum lease payments
(In millions)
$ 47.7
38.9
29.4
18.8
12.9
37.1
$184.8
Rent expense for operating leases was approximately $66 million in
2018, $64 million in 2017, and $58 million in 2016. Operating leases
primarily relate to office and warehouse space and equipment for
information technology, machinery, and transportation. These leases do
not impose significant restrictions or unusual obligations.
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.
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.
Notes to Consolidated Financial Statements
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 29, 2018, 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
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 2018 and 2017 related to our environmental liabilities
was as follows:
(In millions)
Balance at beginning of year
Acquisitions
Charges, net of reversals
Payments
Balance at end of year
2018
2017
$21.1
–
3.9
(5.0)
$21.3
3.0
2.8
(6.0)
$20.0
$21.1
As of December 29, 2018 and December 30, 2017, approximately
$5 million and $5 million, respectively, of the balance was classified as
short-term and
the
in
Consolidated Balance Sheets.
‘‘Other accrued
liabilities’’
included
in
36
Notes to Consolidated Financial Statements
NOTE 9. FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The following table provides the assets and liabilities carried at fair value, measured on a recurring basis, as of December 29, 2018:
(In millions)
Assets
Trading securities
Derivative assets
Bank drafts
Liabilities
Derivative liabilities
Contingent consideration liabilities
Fair Value Measurements Using
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Unobservable
Inputs
(Level 3)
$21.5
.1
23.0
$
–
–
$4.8
3.5
–
$8.7
–
$ –
–
–
$ –
1.6
Total
$26.3
3.6
23.0
$ 8.7
1.6
The following table provides the assets and liabilities carried at fair value, measured on a recurring basis, as of December 30, 2017:
(In millions)
Assets
Trading securities
Derivative assets
Bank drafts
Liabilities
Derivative liabilities
Contingent consideration liabilities
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
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 29, 2018, trading securities of $.2 million
and $26.1 million were included in ‘‘Cash and cash equivalents’’ and
‘‘Other current assets,’’ respectively, in the Consolidated Balance
Sheets. As of December 31, 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.
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.
Contingent consideration
to estimated earn-out
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 29, 2018,
contingent consideration liabilities were included in ‘‘Other accrued
liabilities relate
liabilities’’ in the Consolidated Balance Sheets. As of December 30,
2017, contingent consideration liabilities of approximately $18 million
and $27 million were included in ‘‘Other accrued liabilities’’ and
‘‘Long-term retirement benefits and other liabilities,’’ respectively, in the
Consolidated Balance Sheets.
The following table presents a reconciliation of Level 3 contingent
consideration liabilities for the year ended December 29, 2018:
(In millions)
Balance at December 30, 2017
Payments
Adjustments(1)
Balance at December 29, 2018
Level 3 Liabilities
Contingent Consideration
$ 45.0
(17.3)
(26.1)
$ 1.6
(1) Adjustments primarily relate to measurement period adjustments. Refer to Note 3, ‘‘Goodwill
and Other Intangibles from Business Acquisitions,’’ for more information. Additional
adjustments were recorded in ‘‘Other expense, net’’ in the Consolidated Statements of
Income mainly as a result of Yongle Tape not achieving a certain performance objective within
the prescribed period.
Non-Recurring Fair Value Measurements
During the year ended December 29, 2018, long-lived assets with
carrying amounts totaling $18.1 million were written down to their fair
value of $10.6 million, resulting in an impairment charge of $7.5 million,
37
Avery Dennison Corporation
2018 Annual Report
which was included in ‘‘Other expense, net’’ in the Consolidated
Statements of Income. The fair value was based on the estimated sale
price of the assets, less estimated broker fees, which is primarily a
Level 3 input.
NOTE 10. NET INCOME PER COMMON SHARE
Net income per common share was computed as follows:
(In millions, except per share amounts)
2018
2017
2016
(A) Net income available to common
shareholders
$467.4 $281.8 $320.7
(B) Weighted average number of common
shares outstanding
87.3
88.3
89.1
Dilutive shares (additional common
shares issuable under stock-based
awards)
(C) Weighted average number of common
shares outstanding, assuming
dilution
1.3
1.8
1.6
Notes to Consolidated Financial Statements
our common stock at an aggregate cost of $392.9 million. In 2017, we
repurchased approximately 1.5 million shares of our common stock at
an aggregate cost of $129.7 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. Shares of our
common stock in the aggregate amount of $232.4 million and
$625.2 million as of December 29, 2018 and December 30, 2017,
respectively, remained authorized for repurchase under this Board
authorization.
Treasury Shares Reissuance
We fund a portion of our employee-related expenses using shares
of our common stock held in treasury. We record net gains or losses
associated with our use of treasury shares to retained earnings.
88.6
90.1
90.7
The changes in ‘‘Accumulated other comprehensive loss’’ (net of
Other Comprehensive Income
Net income per common share: (A) (cid:3) (B)
$ 5.35 $ 3.19 $ 3.60
tax) for 2018 and 2017 were as follows:
Net income per common share, assuming
dilution (A) (cid:3) (C)
$ 5.28 $ 3.13 $ 3.54
Foreign
Pension and
Other
Stock-based
the
computation of net income per common share, assuming dilution,
because they would not have had a dilutive effect were as follows:
compensation awards excluded
from
(In millions)
2018
2017
2016
Antidilutive shares excluded from
computation of net income per
common share, assuming dilution
–
–
.2
Net current-period other
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 no shares 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 2018, we repurchased approximately 4.0 million shares of
(In millions)
Balance as of
December 31, 2016
Other comprehensive
income (loss) before
reclassifications, net of
tax
Reclassifications to net
income, net of tax
comprehensive income
(loss), net of tax
Balance as of
December 30, 2017
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
Currency Postretirement Cash Flow
Hedges
Benefits
Translation
Total
$(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
$(156.2)
$(524.0)
$ (.3) $(680.5)
(91.2)
–
(4.1)
93.8
1.1
(94.2)
(1.1)
92.7
(91.2)
89.7
–
(1.5)
December 29, 2018
$(247.4)
$(434.3)
$ (.3) $(682.0)
38
(1.8)
(1.4)
.5
(.1) Interest expense
tax benefit were as follows:
(3.8) Total before tax
1.0 Provision for income taxes
(In millions)
(.9)
(2.8) Net of tax
Stock-based compensation expense
Tax benefit
2018
2017
2016
$34.3
4.7
$30.2
4.3
$27.2
8.5
Notes to Consolidated Financial Statements
The amounts reclassified from ‘‘Accumulated other comprehensive
loss’’ to increase (decrease) net income were as follows:
(In millions)
2018
2017
2016 Income is Presented
Affected Line Item in the
Statements Where Net
$
1.3 $
.2 $ (3.0) Cost of products sold
.2
(.7) Cost of products sold
Cash flow hedges:
Foreign exchange
contracts
Commodity
contracts
Interest rate
contracts
Pension and other
postretirement
benefits
.1
–
1.4
(.3)
1.1
(121.4)
27.6
(28.2)
8.9
(66.8) Other non-operating expense
22.6 Provision for income taxes
(93.8)
(19.3)
(44.2) Net of tax
Total reclassifications
for the period
$ (92.7) $(20.2) $(47.0) Total, net of tax
The following table sets forth the income tax expense (benefit)
allocated to each component of other comprehensive (loss) income:
(In millions)
2018
2017
2016
Foreign currency translation:
Translation (loss) gain
Pension and other postretirement benefits:
Net loss recognized from actuarial gain/
$ (9.1) $(25.1) $ (3.3)
loss and prior service cost/credit
Reclassifications to net income
(2.4)
27.6
.5
8.9
(24.2)
22.6
Cash flow hedges:
Gains (losses) recognized on cash flow
hedges
Reclassifications to net income
Income tax expense (benefit) related to
items of other comprehensive (loss)
income
.3
(.3)
(.6)
.5
.1
1.0
$16.1 $(15.8) $ (3.8)
NOTE 12. LONG-TERM INCENTIVE COMPENSATION
Stock-Based Awards
Stock-Based Compensation
We 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.
39
Avery Dennison Corporation
2018 Annual Report
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, RSUs,
PUs, and MSUs–or a combination of these and other awards. Under the
Equity Plan, 5.4 million shares are available for issuance, 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 RSUs, PUs,
and MSUs.
Stock-based compensation expense and the related recognized
This expense was
included
in
‘‘Marketing, general and
administrative expense’’ in the Consolidated Statements of Income.
As of December 29, 2018, we had approximately $39 million of
unrecognized compensation expense 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
input assumptions for our expected dividend yield, expected stock price
volatility, risk-free interest rate and the expected option term.
The following assumptions are used in estimating the fair value of
granted stock options:
Risk-free interest rate is based on the 52-week average of the
Treasury-Bond rate that has a term corresponding to the expected
option term.
Expected stock price volatility represents an average of the implied
and historical volatility.
Expected dividend yield is based on the current annual dividend
divided by the 12-month average of our monthly stock price prior to
grant.
Expected option term is determined based on historical experience
under our stock option and incentive plans.
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 2018 or 2017.
Risk-free interest rate
Expected stock price volatility
Expected dividend yield
Expected option term
2016
1.75%
24.58%
2.58%
6.5 years
The following table sets forth stock option information during 2018:
Outstanding at December 30, 2017
Exercised
Outstanding at December 29, 2018
Options vested and expected to vest at December 29, 2018
Options exercisable at December 29, 2018
The total intrinsic value of stock options exercised was $2.7 million
in 2018, $26.8 million in 2017, and $31.7 million in 2016. We received
approximately $1 million in 2018, $22 million in 2017, and $71 million in
2016 from the exercise of stock options. The tax benefit associated with
these exercised options was $.6 million in 2018, $10.1 million in 2017,
and $11.3 million in 2016. The intrinsic value of a stock option is based
on the amount by which the market value of the underlying stock
exceeds the exercise price of the option.
Performance Units (‘‘PUs’’)
PUs are performance-based awards granted to eligible employees
under our 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
weighted-average grant date fair value for PUs was $120.25, $82.15,
and $68.04 in 2018, 2017, and 2016, respectively.
The following table summarizes information related to awarded
PUs:
Number of
Weighted-
average
PUs grant-date
fair value
(in thousands)
Unvested at December 30, 2017
Granted at target
Adjustment for above-target performance(1)
Vested
Forfeited/cancelled
Unvested at December 29, 2018
485.1
121.6
112.9
(236.4)
(30.4)
$ 68.15
120.25
50.55
50.53
79.41
452.8
$ 86.20
(1) Reflects adjustments for the vesting of awards based on above-target performance for the
2015-2017 performance period.
The fair value of vested PUs was $11.9 million in 2018, $11.2 million
in 2017, and $13.8 million in 2016.
Market-Leveraged Stock Units (‘‘MSUs’’)
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
Notes to Consolidated Financial Statements
Number of
options Weighted-average
exercise price
(in thousands)
Weighted-average
remaining
contractual life
(in years)
Aggregate
intrinsic value
(in millions)
543.6
(32.0)
511.6
503.6
370.5
$44.22
30.69
$45.06
44.60
$34.06
4.94
4.00
3.95
2.70
$38.4
$22.4
22.3
$20.3
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
$117.75, $91.40, and $72.93 in 2018, 2017, and 2016, respectively.
The following table summarizes information related to awarded
MSUs:
Number of
Weighted-
average
MSUs grant-date
fair value
(in thousands)
Unvested at December 30, 2017
Granted at target
Adjustments for above-target performance(1)
Vested
Forfeited/cancelled
Unvested at December 29, 2018
403.6
118.0
177.9
(373.9)
(22.0)
$ 70.07
117.75
63.75
64.24
80.38
303.6
$ 90.33
(1) Reflects adjustments for the vesting of awards based on above-target performance for each
of the tranches of awards vesting in 2018.
The fair value of vested MSUs was $24.0 million in 2018,
$19.3 million in 2017, and $12.4 million in 2016.
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 $106.44, $82.77,
and $67.66 in 2018, 2017, and 2016, respectively.
40
Notes to Consolidated Financial Statements
The following table summarizes information related to awarded
NOTE 13. COST REDUCTION ACTIONS
RSUs:
Unvested at December 30, 2017
Granted
Vested
Forfeited/cancelled
Number of
RSUs
(in thousands)
140.4
22.9
(72.4)
(2.2)
Weighted-
average
grant-date
fair value
$ 72.62
106.44
69.80
68.41
Unvested at December 29, 2018
88.7
$ 83.72
Restructuring Charges
We have plans that provide eligible employees with severance in
the event of an involuntary termination. We calculate severance using
the applicable benefit formulas under 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.
The fair value of vested RSUs was $5.1 million, $2.7 million, and
2018/2019 Actions
$5.3 million in 2018, 2017, and 2016, 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 related to LTI Units was $12.4 million in
2018, $36.6 million in 2017, and $23.8 million in 2016. 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 $2.9 million in 2018, $8.3 million in 2017, and
$7.8 million in 2016.
In April 2018, we approved a restructuring plan (the ‘‘2018 Plan’’)
associated with the consolidation of the European footprint of our LGM
reportable segment, which is expected to result in a headcount
reduction of approximately 400 positions related to the closure of a
manufacturing facility. This reduction is expected to be partially offset by
headcount additions in other locations, resulting in a net reduction of
approximately 150 positions. During fiscal year 2018, we recorded
$55.2 million in restructuring charges, net of reversals, related to the
2018 Plan. These charges consisted of severance and related costs for
the reduction of approximately 345 positions, as well as asset
impairment charges. We expect the 2018 Plan to be substantially
complete by the end of 2019.
In addition to restructuring charges recorded under the 2018 Plan,
we recorded $4.2 million in restructuring charges in the fourth quarter
2018 related to our 2018/2019 Actions. These charges consisted of
severance and related costs for the reduction of approximately 85
positions, as well as asset impairment charges.
2015/2016 Actions
During fiscal year 2018, we recorded $14.3 million in restructuring
charges, net of reversals, related to restructuring actions initiated during
the third quarter of 2015. These charges consisted of severance and
related costs for the reduction of approximately 625 positions, lease
cancellation costs, and asset impairment charges.
During fiscal year 2017, we recorded $34.1 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 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.
The activities and related charges and payments for the 2015/2016
Actions were substantially completed in 2018.
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 were included in ‘‘Other expense, net’’ in the
Consolidated Statements of Income.
41
Avery Dennison Corporation
2018 Annual Report
Notes to Consolidated Financial Statements
During 2018, restructuring charges and payments were as follows:
(In millions)
2018/2019 Actions
Severance and related costs
Asset impairment charges
2015/2016 Actions
Severance and related costs
Lease cancellation costs
Asset impairment charges
Total
Accrual at
December 30,
2017
Charges,
Net of
Reversals
Cash
Payments
Non-cash
Impairment
Foreign
Currency
Translation
Accrual at
December 29,
2018
$ –
–
4.3
.6
–
$4.9
$51.8
7.6
$ (9.8)
–
$
–
(7.6)
$(1.3)
–
$40.7
–
11.2
.8
2.3
(15.2)
(1.0)
–
–
–
(2.3)
–
–
–
.3
.4
–
$73.7
$(26.0)
$(9.9)
$(1.3)
$41.4
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
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)
2018
2017
2016
Restructuring charges by reportable
segment and Corporate
Label and Graphic Materials
Retail Branding and Information Solutions
Industrial and Healthcare Materials
Corporate
Total
$57.8
11.9
4.0
–
$14.8
18.4
.2
–
$ 8.5
10.5
.9
–
$73.7
$33.4
$19.9
(In millions)
Current:
U.S. federal tax
State taxes
International taxes
Deferred:
U.S. federal tax
State taxes
International taxes
2018
2017
2016
$ (19.7)
.8
134.3
$ 47.0
.2
111.0
$ 10.1
.6
77.3
115.4
158.2
88.0
(6.3)
2.3
(26.0)
134.8
(3.7)
18.4
(30.0)
149.5
64.4
(3.0)
7.0
68.4
Provision for income taxes
$ 85.4
$307.7
$156.4
42
Notes to Consolidated Financial Statements
The principal items accounting for the difference between taxes
computed at the U.S. federal statutory rate and taxes recorded were as
follows:
(In millions)
2018
2017
2016
Computed tax provision at U.S. federal
statutory rate
$116.5
$206.7
$167.0
Increase (decrease) in taxes resulting
from:
State taxes, net of federal tax benefit
Tax Cuts and Jobs Act(1)
Foreign earnings taxed at different
3.9
(34.7)
(3.2)
172.0
2.2
–
rates(2)
13.0
(40.2)
27.0
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
(7.7)
10.7
(3.8)
(16.0)
(1.4)
(6.7)
–
(11.9)
(4.3)
(6.1)
(4.9)
(2.9)
(11.9)
5.5
(1.9)
3.3
(20.7)
–
Provision for income taxes
$ 85.4
$307.7
$156.4
(1) During 2018 and 2017, we recognized a net tax benefit of $34.7 million and a net tax charge of
$172 million, respectively, as a result of the TCJA. These amounts included the direct impacts
of the TCJA following the guidance of SAB 118, including items that would otherwise be
separately disclosed as state taxes, net of federal tax benefit, tax effects of foreign earnings
taxed at different rates, tax contingencies and audit settlements, and other items, net.
(2) Included in 2018 are certain U.S. international tax provisions imposed by the TCJA; all years
included foreign earnings taxed in the U.S., net of credits.
(3) During 2018 and 2017, we recognized tax benefits of $7.7 million and $16 million as a result of
our adoption in 2017 of the accounting guidance update related to stock-based payments.
We expect future excess tax benefits to vary based on our future stock-based payments.
These excess tax benefits may cause variability in our effective tax rate as they can fluctuate
based on vesting and exercise activity, as well as our stock price.
Income before taxes from our U.S. and international operations was
as follows:
(In millions)
U.S.
International
2018
2017
2016
$ (7.3)
562.1
$ 49.0
540.5
$ 17.9
459.2
Income before taxes
$554.8
$589.5
$477.1
The effective tax rate was 15.4%, 52.2%, and 32.8% for fiscal years
2018, 2017, and 2016, respectively.
tax rate
The 2018 effective
included: (i) $39.6 million
included measurement period
adjustments to our 2017 provisional amount related to the TCJA in
accordance with guidance provided under SEC Staff Accounting
Bulletin No. 118 (‘‘SAB 118’’). In 2018, we adjusted our 2017 provisional
amount by recognizing a net tax benefit of $34.7 million. This amount
primarily
the
remeasurement of the net deferred tax asset from cash contributions to
the ADPP and realized foreign currency loss, both of which resulted
from our decision to accelerate the related deductions on our 2017 U.S.
federal income tax return; (ii) $3.6 million of tax charges for changes in
our indefinite reinvestment assertions related to our investments in
certain foreign subsidiaries after information required to make such
determinations was obtained; (iii) $9.5 million of tax charge for
adjustments made to the one-time transition tax, primarily due to a
tax benefit related
to
43
Avery Dennison Corporation
2018 Annual Report
change in our filing position and to reflect regulatory and administrative
guidance subsequently issued by the Internal Revenue Service (‘‘IRS’’)
and certain state taxing authorities; and (iv) $9.4 million of tax benefit
from releasing a previously recorded uncertain tax position after the
position was not taken on our 2017 U.S. federal income tax return.
The 2018 effective tax rate also included net tax charges related to:
(i) the effects of certain U.S. international tax provisions imposed by the
TCJA, including $16 million of tax charge on Global Intangible
Low-taxed Income (‘‘GILTI’’) and $9 million of tax charge on Base
Erosion Antiabuse Tax (‘‘BEAT’’) partially offset by $2 million of tax
benefit on Foreign Derived Intangible Income (‘‘FDII’’); (ii) $7.9 million of
tax charges for foreign withholding taxes on our current year earnings;
(iii) $8.8 million of tax benefit, including previously accrued interest and
penalties, primarily from our changes in our judgment about tax filing
positions due to the effective settlement of our German tax audit for tax
years 2006-2010; and (iv) $8 million of tax benefit from decreases in
certain tax reserves, including interest and penalties, as a result of
closing tax years.
Additionally, the 2018 effective tax rate was not significantly
impacted by the $10.7 million increase in valuation allowance primarily
due to the offsetting effects from changes in deferred taxes and
uncertain tax positions.
During 2018, after our adoption of the accounting guidance update
related to intra-entity transfers of assets other than inventory, certain
foreign owned intellectual property was transferred between our foreign
subsidiaries. Refer to Note 1, ‘‘Summary of Significant Accounting
Policies,’’ for more information. Accordingly, we recognized a net
discrete tax benefit of $31 million primarily due to the recognition of a
deferred tax asset in a higher tax rate jurisdiction, partially offset by a
taxable gain recognized in a lower effective tax rate jurisdiction.
The 2017 effective tax rate included: (i) $172 million of net tax
charge related to the enactment of the TCJA; (ii) $5.1 million of tax
benefit from the release of valuation allowance on certain state deferred
tax assets; (iii) $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
(iv) $4.4 million of tax benefit from decreases in certain tax reserves,
including interest and penalties, as a result of closing tax years.
in
from changes
taxes resulting
The 2016 effective tax rate included: (i) $7.6 million of tax charge
associated with the cost to repatriate current earnings of certain foreign
subsidiaries; (ii) $46.3 million of tax charge related to U.S. income and
foreign withholding
indefinite
reinvestment assertions on certain foreign earnings and profits;
(iii) $16.8 million of tax benefit resulting from settlements of certain
foreign audits; (iv) $5.4 million of tax benefit resulting from expirations of
statutes of limitations; (v) $6.7 million of tax benefit 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; (vi) $3.6 million of tax benefit from the release of valuation
allowances on certain state deferred tax assets; and (vii) $8.4 million of
tax charge 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.
U.S. Tax Reform
The TCJA enacted in the U.S. in December 2017 significantly
changed U.S. corporate income taxation by, among other things,
reducing the federal corporate income tax rates to 21%, implementing a
modified territorial tax system prospectively by providing a dividend
received deduction on certain dividends from our foreign subsidiaries,
loss of domestic manufacturing deductions, and limitations on the
deductibility of our executive compensation and interest expense, and
imposing a one-time transition tax through a deemed repatriation of
accumulated untaxed earnings and profits of foreign subsidiaries.
In 2017, we included a provisional amount of $172 million as the
estimated impact of the TCJA in our results for the fourth quarter and full
year 2017. This provisional amount included 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 anticipated 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 considered
not to be indefinitely reinvested.
As of December 29, 2018, we have completed our accounting for
the income tax effects of the TCJA following the guidance of SAB 118.
Specifically, we have adjusted our provisional amount previously
recorded primarily related to (i) the transition tax, reflecting subsequent
regulatory and administrative guidance and the finalization of our
foreign earnings and profits as well as taxes, (ii) the remeasurement of
deferred taxes as a result of our decision to accelerate certain
deductions in conjunction with the completion of our 2017 U.S. federal
income tax return; and (iii) an incremental accrual for foreign
withholding
indefinite
reinvestment assertions after information required to make such
determination was obtained.
taxes associated with changes
in our
The FASB guidance states that an entity can make an accounting
policy election to either recognize deferred taxes for temporary basis
differences expected to reverse as GILTI in future years or provide for
the tax expense related to GILTI in the year the tax is incurred. We have
made an accounting policy election to account for taxes on GILTI as
period costs.
Additionally, we have
reevaluated our previous
indefinite
reinvestment assertions and, as of December 29, 2018, we no longer
considered any of our foreign earnings in our foreign subsidiaries to be
indefinitely reinvested. We recorded a tax charge of $3.6 million as a
result of this change in assertion, which was included in our adjustment
to our TCJA provisional amount.
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
Notes to Consolidated Financial Statements
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
Total deferred tax assets(2)
Depreciation and amortization
Repatriation accrual
Foreign operating loss recapture
Other liabilities
Total deferred tax liabilities(2)
Total net deferred tax assets
2018
2017
$ 18.4
166.4
69.0
12.4
81.3
6.7
–
11.8
(71.8)
$ 19.9
185.9
14.0
18.0
140.9
6.5
14.9
17.3
(63.4)
294.2
354.0
(38.7)
(21.3)
(56.5)
(9.5)
(95.3)
(27.7)
(65.9)
(8.8)
(126.0)
(197.7)
$ 168.2
$ 156.3
(1) Primarily reflect the unrealized foreign currency losses related to our net investment hedge
described in Note 5, ‘‘Financial Instruments.’’ There were no deferred taxes at the end of 2018
due to the conformity of the accounting treatment between financial reporting and tax after a
mark-to-market tax treatment was elected for certain fair value adjustments on our 2017 U.S.
federal income tax return filed in 2018.
(2) Reflect gross amounts before jurisdictional netting of deferred tax assets and liabilities.
Net operating loss carryforwards of foreign subsidiaries at
December 29, 2018 and December 30, 2017 were $538.4 million and
$633.7 million, respectively. Tax credit carryforwards of both domestic
and foreign subsidiaries at December 29, 2018 and December 30, 2017
totaled $69 million and $14 million, respectively. If unused, foreign net
operating losses and tax credit carryforwards will expire as follows:
(In millions)
Year of Expiry
2019
2020
2021
2022
2023
2024 - 2038
Indefinite life/no expiry
Total
Net Operating
Losses(1)
Tax Credits
$
4.9
5.2
3.9
9.0
6.2
6.3
502.9
$
.3
14.5
.4
9.7
5.0
30.4
8.7
$538.4
$69.0
(1) Net operating losses are presented before tax effect and valuation allowance.
Based on current projections, certain indefinite-lived foreign net
operating losses may take decades to be fully utilized.
At December 29, 2018, we had net operating loss carryforwards in
certain state jurisdictions of $634.6 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
$591.3 million of the carryforwards.
As of December 29, 2018, our provision for income taxes did not
materially benefit from applicable tax holidays in foreign jurisdictions.
44
Notes to Consolidated Financial Statements
Unrecognized Tax Benefits
As of December 29, 2018, our unrecognized tax benefits totaled
$80.8 million, $72.2 million of which, if recognized, would reduce our
annual effective income tax rate. 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.
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 $.5 million
of tax charge, $1.5 million of tax charge, and $3.1 million of tax benefit in
the Consolidated Statements of Income in 2018, 2017, and 2016,
respectively. We have accrued $25.0 million and $25.8 million for
interest and penalties, net of tax benefit, in the Consolidated Balance
Sheets at December 29, 2018 and December 30, 2017, respectively.
A reconciliation of the beginning and ending amounts of
tickets, tags and labels (including RFID inlays), and related
services, supplies and equipment; and
(cid:129) Industrial and Healthcare Materials – manufactures
performance tapes and other adhesive products for industrial,
medical and other applications as well as fastener solutions.
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 excluded from the computation of
income from operations for the segments.
We do not disclose total assets by reportable segment since we
neither generate nor review such information internally. As our reporting
structure is neither organized nor reviewed internally by country, results
by individual country are not provided.
unrecognized tax benefits is set forth below:
Disaggregated Revenue Information
(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
Balance at end of year
2018
2017
$108.7
11.5
$ 89.5
14.1
(23.1)
(6.6)
(5.9)
(3.8)
3.0
(1.6)
(2.7)
6.4
$ 80.8
$108.7
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 2018 Consolidated Financial
Statements are being issued, we and our U.S. subsidiaries have
completed the IRS’ Compliance Assurance Process Program through
2016. 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 2007.
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 $14 million, primarily as a result of audit
settlements and closing tax years.
Disaggregated revenue information is set forth below in the manner
that best depicts how the nature, amount, timing and uncertainty of our
revenue and cash flows are affected by economic factors. Revenue from
our LGM reportable segment is attributed to geographic areas based on
the location from which products are shipped. Revenue from our RBIS
reportable segment is shown by product group.
(In millions)
2018
2017
2016
Net sales to unaffiliated customers
Label and Graphic Materials:
U.S.
Europe
Asia
Latin America
Other international
$1,256.0 $1,198.4 $1,161.0
1,514.3
1,689.3
928.9
1,002.6
331.6
357.0
251.5
264.4
1,851.3
1,081.2
367.8
294.8
Total Label and Graphic Materials
4,851.1
4,511.7
4,187.3
Retail Branding and Information
Solutions:
Apparel
Printer Solutions
1,441.7
171.5
1,352.0
159.2
1,276.7
168.7
Total Retail Branding and Information
Solutions
1,613.2
1,511.2
1,445.4
Industrial and Healthcare Materials
694.7
590.9
453.8
Net sales to unaffiliated customers
$7,159.0 $6,613.8 $6,086.5
Revenue by geographic area is set forth below. Revenue is
attributed to geographic areas based on the location from which the
product is shipped.
NOTE 15. SEGMENT AND DISAGGREGATED REVENUE
(In millions)
2018
2017
2016
INFORMATION
Segment Reporting
We have the following reportable segments:
(cid:129) Label and Graphic Materials – manufactures and sells
pressure-sensitive labeling 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
Net sales to unaffiliated customers
U.S.
Europe
Asia
Latin America
Other international
$1,625.1 $1,557.8 $1,525.6
1,838.8
2,041.6
1,996.1
2,250.5
450.5
476.4
275.5
287.5
2,251.4
2,473.2
490.0
319.3
Net sales to unaffiliated customers
$7,159.0 $6,613.8 $6,086.5
45
Avery Dennison Corporation
2018 Annual Report
Net sales to unaffiliated customers in Asia included sales in China
(including Hong Kong) of $1.43 billion in 2018, $1.3 billion in 2017, and
$1.14 billion in 2016.
Property, plant and equipment, net, in our U.S. and international
operations were as follows:
(In millions)
2018
2017
2016
Notes to Consolidated Financial Statements
Additional Segment Information
Additional financial information by reportable segment is set forth
Property, plant and equipment, net
U.S.
International
$ 317.3 $ 286.4 $ 278.5
636.7
820.1
811.5
2018
2017
2016
Property, plant and equipment, net
$1,137.4 $1,097.9 $ 915.2
Intersegment sales
$ 92.2 $ 75.0 $ 73.5
below.
(In millions)
Intersegment sales
Label and Graphic Materials
Retail Branding and Information Solutions
Industrial and Healthcare Materials
Income before taxes
Label and Graphic Materials
Retail Branding and Information Solutions
Industrial and Healthcare Materials
Corporate expense
Interest expense
Other non-operating expense
Income before taxes
Capital expenditures
Label and Graphic Materials
Retail Branding and Information Solutions
Industrial and Healthcare Materials
$ 78.7 $ 64.1 $ 63.4
2.9
7.2
3.2
7.7
4.7
8.8
NOTE 16. SUPPLEMENTAL FINANCIAL INFORMATION
Inventories
Net inventories at year-end were as follows:
$ 568.2 $577.4 $522.0
105.0
126.7
56.1
52.6
(92.9)
(86.2)
(59.9)
(63.0)
(53.2)
(18.0)
170.4
62.9
(83.4)
(58.5)
(104.8)
$ 554.8 $589.5 $477.1
(In millions)
Raw materials
Work-in-progress
Finished goods
Inventories, net
2018
2017
$236.2
196.7
218.5
$214.6
179.8
215.2
$651.4
$609.6
Property, Plant and Equipment
Major classes of property, plant and equipment, stated at cost, at
$ 151.5 $125.5 $118.8
50.9
7.2
57.1
19.3
48.8
19.5
Capital expenditures
$ 227.9 $193.8 $176.9
Depreciation and amortization expense
Label and Graphic Materials
Retail Branding and Information Solutions
Industrial and Healthcare Materials
$ 104.7 $102.3 $103.1
64.3
12.7
49.0
27.3
56.4
20.0
year-end were as follows:
(In millions)
Land
Buildings and improvements
Machinery and equipment
Construction-in-progress
Property, plant and equipment
Accumulated depreciation
2018
2017
$
28.0
643.1
2,231.1
151.5
$
31.1
638.9
2,188.2
142.7
3,053.7
(1,916.3)
3,000.9
(1,903.0)
Depreciation and amortization expense
$ 181.0 $178.7 $180.1
Property, plant and equipment, net
$ 1,137.4
$ 1,097.9
Other expense, net by reportable
segment
Label and Graphic Materials
Retail Branding and Information Solutions
Industrial and Healthcare Materials
Corporate
$ 61.8 $ 14.5 $ 13.0
9.8
1.9
(.9)
11.4
(1.0)
(2.3)
18.1
3.7
.2
Other expense, net
$ 69.9 $ 36.5 $ 23.8
Other expense, net by type
Restructuring charges:
Severance and related costs
Asset impairment charges and lease
cancellation costs
Other items:
Argentine peso remeasurement transition
loss
Other restructuring-related charge
Transaction costs
Reversal of acquisition-related contingent
consideration
Net gain on sales of assets
$ 63.0 $ 31.2 $ 14.7
10.7
2.2
5.2
3.4
.5
–
–
–
5.2
–
–
5.0
(5.0)
(2.7)
–
(2.1)
–
(1.1)
Other expense, net
$ 69.9 $ 36.5 $ 23.8
Software
Capitalized software costs at year-end were as follows:
(In millions)
Cost
Accumulated amortization
Software, net
2018
2017
$ 452.4
(316.9)
$ 428.9
(301.8)
$ 135.5
$ 127.1
Software amortization expense was $20.2 million
in 2018,
$29.3 million in 2017, and $37.9 million in 2016.
Equity Method Investment
In October 2016, we acquired a 22.6% interest in PragmatIC
Printing Limited (‘‘PragmatIC’’), a company that develops flexible
electronics technology. PragmatIC’s primary assets are intangible
assets related to its technology. We used the equity method to account
for this investment. The carrying value of this investment was
$6.7 million and $9.1 million as of December 29, 2018 and
December 30, 2017, respectively, and was included in ‘‘Other assets’’ in
the Consolidated Balance Sheets.
46
Notes to Consolidated Financial Statements
Research and Development
Deferred Revenue
Research and development expense, which is included in
‘‘Marketing, general and administrative expense’’ in the Consolidated
Statements of Income, was as follows:
(In millions)
2018
2017
2016
Research and development expense
$ 98.2
$ 93.4
$ 89.7
Supplemental Cash Flow Information
Cash paid for interest and income taxes was as follows:
(In millions)
Interest
Income taxes, net of refunds
2018
2017
2016
$ 54.9
153.5
$ 57.7
125.6
$ 58.9
106.1
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
impacts, decreased net income by $13.4 million, $4.1 million, and
$1.6 million in 2018, 2017, and 2016, respectively.
NOTE 17. QUARTERLY FINANCIAL INFORMATION (Unaudited)
(In millions, except per share data)
2018
Net sales
Gross profit
Net income
Net income per common share
Net income per common share, assuming dilution
2017
Net sales
Gross profit
Net income (loss)(1)
Net income (loss) per common share
Net income (loss) per common share, assuming dilution
Deferred revenue primarily relates
to constrained variable
consideration on supply agreements for sales of products, as well as to
payments received in advance of performance under a contract.
Deferred revenue is recognized as revenue as or when we perform
under a contract.
The following table shows the amounts and balance sheet
locations of deferred revenue as of December 29, 2018 and
December 30, 2017:
(In millions)
Other current liabilities
Long-term retirement benefits and
other liabilities
Total deferred revenue
December 29,
2018
December 30,
2017
$11.5
.3
$11.8
$15.3
.4
$15.7
Revenue recognized from amounts included in deferred revenue as
of December 30, 2017 was $12.2 million in 2018, which was included in
‘‘Net sales’’ in the Consolidated Statements of Income.
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$1,776.4
483.4
125.2
1.42
1.40
$1,572.1
442.4
112.2
1.27
1.25
$1,854.2
501.4
95.6
1.09
1.07
$1,626.9
452.6
120.9
1.37
1.34
$1,759.7
459.2
149.5
1.71
1.69
$1,679.5
451.6
108.3
1.23
1.20
$1,768.7
471.5
97.1
1.13
1.11
$1,735.3
465.6
(59.6)
(.68)
(.66)
(1) During the fourth quarter of 2017, we recognized a net tax charge of $172 million as a result of the TCJA.
47
Avery Dennison Corporation
2018 Annual Report
‘‘Other expense (income), net’’ by type for each quarter is presented below.
Notes to Consolidated Financial Statements
(In millions)
2018
Restructuring charges:
Severance and related costs, net of reversals
Asset impairment charges and lease cancellation costs
Other items:
Argentine peso remeasurement transition loss
Other restructuring-related charge
Reversal of acquisition-related contingent consideration
Net gain on sales of assets
Other expense (income), net
2017
Restructuring charges:
Severance and related costs
Asset impairment charges and lease cancellation costs
Other items:
Net gain on sales of assets
Transaction costs
Other expense, net
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 4.3
8.4
$58.8
.6
$ (7.1)
.7
$ 7.0
1.0
–
.5
–
(.4)
–
–
–
(2.3)
3.4
–
–
–
–
–
(5.0)
–
$12.8
$57.1
$ (3.0)
$ 3.0
$ 5.7
–
$ 7.3
.3
$ 8.7
1.8
$ 9.5
.1
–
.8
–
2.6
–
.3
(2.1)
1.5
$ 6.5
$10.2
$10.8
$ 9.0
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 29, 2018. Management’s assessment of the effectiveness of internal control over financial reporting as of December 29,
2018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included herein.
21FEB201715482343
Mitchell R. Butier
President and
Chief Executive Officer
22FEB201821250323
Gregory S. Lovins
Senior Vice President and
Chief Financial Officer
49
Avery Dennison Corporation
2018 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 29, 2018 and December 30, 2017, 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 29, 2018 , 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 29, 2018, 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 29, 2018 and December 30, 2017, and the results of its operations and its cash flows for each of the three years in the
period ended December 29, 2018 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 29, 2018, based on criteria established
in Internal Control – Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for net periodic pension
and postretirement benefit costs in 2018.
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 accompanying 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.
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 27, 2019
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 been able to determine the specific year we began serving as auditor of the Company or a predecessor company.
50
Other
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 25, 2019 at 207 Goode 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.
Certification Information
We are including, as Exhibits 31.1 and 31.2 to our Annual Report on
Form 10-K for fiscal year 2018 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 27, 2018.
Annual Report on Form 10-K Requests
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 are also
available on our investor website at www.investors.averydennison.com.
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
Dividends per Common Share
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2018
2017
$
.45
.52
.52
.52
$
.41
.45
.45
.45
$ 2.01
$ 1.76
Number of shareholders of record as of year-end
4,606
4,854
51
Avery Dennison Corporation
2018 Annual Report
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Visit www.averydennison.com and follow
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how we are creating superior long-term,
sustainable value for our customers,
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improving the communities in which
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Investor Information
Available at
www.investors.averydennison.com
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In support of our commitment to
sustainability, the paper for this
annual report is Forest Stewardship
Council® (FSC®) certified, which
promotes environmentally
responsible, socially beneficial, and
economically viable management of
the world’s forests.
Avery Dennison Corporation
207 Goode Avenue
Glendale, California 91203
www.averydennison.com